Renegotiation and Stabilization Clauses in Ghana's Model Petroleum Agreement

This paper evaluates the significance of renegotiation and stabilization clauses in Ghana's Model Petroleum Agreement and their limitations. It also explores alternative forms of drafting renegotiation clauses that benefit both investors and the host state.

Running head: COMMERCIAL AND OIL AND GAS LAW
Introduction
Ghana has selected the Production Sharing Agreement as the means to attract required
foreign investment in order to develop her petroleum industry while maintaining sovereignty
with respect to its resources1. It further entails the limitation and usefulness of both the
stabilization and renegotiation clauses and takes into account of the effectiveness of the
renegotiation clause over the stabilization clause as a means to maintain the above framework.
Further, it evaluates and highlights the way in which renegotiation clauses aim at striking a
balance between the interests of both the parties while adapting to the change in circumstances
associated with the contractual and regulatory regime2.
The stabilization clause aims at safeguarding the interests of both the contracting parties
to the agreement who are concerned about any modification or unilateral termination by either
party without obtaining prior mutual consent of the other party3. The stabilization clause further
safeguards the interest of the foreign investor who invests in a country with different legal
systems and socio-economic conditions prevailing within such country4. In order to avert any
risks, the investing country demands from the government country legal assurances. The
incorporation of stabilization clause as a contractual obligation acts as the solution for all forms
of risks that both the host country and the investing country fears while investing in the host
country5.
However, it is well established that oil and gas contracts are influenced by vibrant factors
like political stability of the nations, market conditions and economic-governance condition of
the country. The stabilization clause lacks efficacy in dealing with pressure of vibrant market
conditions. The investors conduct reward/risk assessment of the rigid and fiscal regime to
conclude whether to invest their capital in the potential host country.
In regards to the speculative market conditions, the host country may feel it is not gaining
benefits from exploitation of its non-renewable natural resources and hence, demand for
1 http://www.uklsa.co.uk/wp-content/uploads/2014/06/uklsr-volume-2-Issue-1-Article-3.pdf.
2 http://www.uklsa.co.uk/wp-content/uploads/2014/06/UKLSR-Volume-2-Issue-1-Article-3.pdf
3 http://shodhganga.inflibnet.ac.in/bitstream/10603/175169/22/17_chapter%208.pdf
4 https://academic.oup.com/jwelb/article/1/1/55/1005126
5 https://www.modernghana.com/news/564529/most-effective-legal-mechanisms-for-stabilising-petroleum-co.html

2COMMERCIAL AND OIL AND GAS LAW
adjustments with respect to the terms of the agreement. This necessitates the incorporation of
renegotiation clause within the contract that shall be considered as if they were present since the
formation of the contract. The renegotiation clause aims at striking a balance between the host
government and the investor6. The clause defends the interests of both the contracting parties by
leaving the sovereignty of the state as intact and safeguarding the investor against any
fundamental change in the law regulating the agreement. The incorporation of this renegotiation
clause in the contract provides flexibility the parties preventing them from terminating the
contract due to the dispute arising during the course of business. Thus, the renegotiation clause
benefits both the host country and the investors legally as well as economically by stabilizing
their relationship existing between them7.
Background of the research
Ghana being a developing nation has made an appropriate decision by adopting the
production sharing agreement for exploiting its newly discovered oil and gas resources. Due to
lack of technical and financial resources to develop a domestic petroleum industry, it made use
of the technical and financial resources of foreign oil companies8. This paper identifies the issue
pertaining to stability in the Ghana’s Model Petroleum Agreement and limits its scope of
argument to the renegotiation and stabilization clause set out in Article 26 of the Agreement9. It
also focuses on the fact that renegotiation clause endows the parties to the contract with more
flexibility for modifying their agreement. This will further reduce the possibility of any dispute
that may arise between the parties resulting from the failure of the stabilization clause
incorporated in the contract, which creates ambiguity if not carefully drafted.
Research Question
 What is the significance of renegotiation clauses in the Ghana’s Model Petroleum
Agreement between investor and host government?
 What is the alternative form of drafting renegotiation clauses that aims at benefiting both
the investors and the host state economically as well as legally?
6 http://www.uklsa.co.uk/wp-content/uploads/2014/06/UKLSR-Volume-2-Issue-1-Article-3.pdf
7 https://academic.oup.com/jwelb/article/1/1/55/1005126
8 http://www.uklsa.co.uk/wp-content/uploads/2014/06/UKLSR-Volume-2-Issue-1-Article-3.pdf
9 http://www.uklsa.co.uk/wp-content/uploads/2014/06/UKLSR-Volume-2-Issue-1-Article-3.pdf

3COMMERCIAL AND OIL AND GAS LAW
 What are the limitations of stabilization clauses in the Ghana’s Model Petroleum
Agreement?
 How the renegotiation clauses serve as a means of balancing the interests of the parties to
Ghana’s Model Petroleum Agreement?

4COMMERCIAL AND OIL AND GAS LAW
Bibliography
https://academic.oup.com/jwelb/article/1/1/55/1005126
https://www.lexology.com/library/detail.aspx?g=3b782458-96b2-4951-bb1e-9c22f39bb949
https://www.modernghana.com/news/564529/most-effective-legal-mechanisms-for-stabilising-
petroleum-co.html
http://www.uklsa.co.uk/wp-content/uploads/2014/06/UKLSR-Volume-2-Issue-1-Article-3.pdf