The School of International Arbitration (SIA), Queen Mary University of London is delighted to launch the results of its thirteenth major empirical International Arbitration Survey, in partnership with Pinset Masons.

The survey looked at the principal causes and types of disputes and the main risks and challenges faced by the energy sector now and in the short to medium term. It considered whether arbitration will continue to be ‘fit for purpose’ as the main forum to resolve cross-border energy-related disputes and what alternatives may be suitable. It looked at what participants in energy-related arbitrations would like to see in order to make the process more economical and accessible.

View or download the 2022 Energy Arbitration Survey: Future of International Energy Arbitration Survey Report [PDF 20,455KB].

Executive summary of findings

Causes of Energy Disputes – both past and future

The results of the survey mirror to a large extent the geopolitical picture at the time of publication. This has influenced respondents’ views on the most likely causes of energy disputes, with the biggest change in the short to medium term expected to be a significant increase in disputes caused by the price volatility of raw materials and energy. In this regard, while only 14% of respondents saw it as the main cause over the past five years, 28% of respondents see price volatility as being the most likely cause of energy disputes over the next five years. The main issue facing the energy sector is the fluctuating cost of the necessary inputs (raw material costs and energy unit prices) to develop, operate and maintain energy projects, leading to commercial uncertainty and more disputes.

Issues arising from the construction of energy assets will continue to be a significant source of disputes in the sector. However, while 36% of respondents saw this as the main cause over the last five years, only 20% see it as the main cause over the next five years, which seems a remarkable change in perspective.

When respondents were asked to focus solely on energy infrastructure disputes, 48% selected procurement and supply chain issues as the most likely cause of disputes over the next five years. This was followed by changes to regulatory frameworks (44%), oil and gas – supply and demand (38%) and changes in technology (35%).

Almost three quarters of respondents (73%) chose Europe as a region most likely to see an acceleration in energy disputes. 36%, 29% and 27% of respondents selected Asia, the Middle East and Africa respectively.

Impact of the energy transition

The transition to cleaner sources of energy is also at the forefront of respondents’ agendas. Disputes relating to the energy transition are anticipated to arise significantly in the short to medium term. This may translate into forcing counterparties to grapple with the design and delivery of new technologies, with new players potentially entering the energy market, making it difficult for parties properly to allocate contractual risk, thereby increasing the likelihood of disputes occurring. When focusing on the strategic imperatives brought on by the energy transition, 84% of respondents indicated that they would be “reviewing contracts” (e.g., hardship clauses, force majeure, risk allocation, dispute resolution processes), while 69% of respondents stated that they would be “strengthening contract management/ supply chain scrutiny”.

Security of energy supply is seen as an increasing concern

Respondents also noted that energy supply and security issues triggered by Russia’s invasion of Ukraine may likely set back the timeframe for the global energy transition, leading to the re-start of previously abandoned fossil fuel projects and postponing the onset of energy transition disputes into the longer term. Changes to the investment environment and regulatory framework aimed at alleviating this in the short term may also lead to disputes between foreign investors and host States in the longer term when these policies are reversed in favour of cleaner energy.

This is reflected in the survey findings. When identifying changes brought on by the energy transition that will likely give rise to disputes, infrastructure (including construction) (51%) and price volatility (39%) scored relatively highly, but the highest percentage was captured by regulatory changes (including States’ implementation of treaties, notably the Paris Agreement (60%)). The International Atomic Energy Association has forecasted growth in the installed capacity of nuclear projects in the period up to 2040. It is therefore unsurprising, particularly in the current geopolitical environment, that nuclear projects are likely to increase in number. The vast cost and complexity of these projects provides fertile ground for disputes to arise, which is consistent in the survey’s finding where 47% of respondents singled out the cost of nuclear projects as the factor most likely to lead to disputes.

When considering security of energy supply, 47% of respondents chose supply chain risk as most likely leading to disputes. What stands out is that the logistical hurdles and supply chain risk brought on by COVID-19 have been sharply exacerbated by the current geopolitical environment. Many respondents noted that global supply chain issues have been exacerbated by international sanctions with follow-up interviews revealing that one of the most pressing issues caused by sanctions was the inability to get parts and raw materials at a commercially sensible price.

Sanctions having a significant impact on contractual performance

We asked about the impact of the Russia / Ukraine crisis on the global energy supply mix. One counsel/arbitrator respondent noted that: “[i]t is already having a profound impact on the European energy markets, with the [European] Commission pushing for a faster independence from Russiansupplied energy sources. With Europe seeking LNG from abroad, this will invariably impact other markets where that gas was traditionally supplied (e.g., Asia). Further, alternative fuels - including coal - will be utilised”. 

Most respondents (67%) thought that the impact of international sanctions on the ability to perform pre-existing contracts would cause a rise in force majeure and hardship claims. An equally high number (67%) noted that suspensions and terminations have been and will continue to be on the increase due to sanctions. One surprise was that only 21% of respondents identified an increase in bond calls as a result of the sanctions. This appears strange given that bond calls are a natural corollary to suspensions and terminations, although the effect of sanctions on the ability of banks to comply with bond calls and restrictions on access for Russian financial institutions to international payment systems may have led respondents to consider this a lower risk. However, despite this seemingly low percentage, interviews revealed that bond calls have been a major source of conflict in Russian-related projects.

Arbitration is seen as the most suitable forum for resolving energy disputes with London and Singapore the most popular seats of choice

From an end user’s perspective, arbitration is clearly seen as being very suitable for resolving energy disputes. 72% of respondents gave arbitration a score of at least 4 / 5 in terms of suitability. Only 4% of end users gave arbitration a score of less than 3 / 5, thereby deeming it less suitable. One in-house counsel noted: “[t]he only thing that keeps me from awarding a 5 is the prevalence of old school approach of onesize- fits all for all disputes, i.e., the tribunal will start from the same PO and timetable that the chair used in her or his last dozen arbitrations. Institutions, especially case management teams, can and should help nudge arbitrators away from old habits like this”.

When asked to rank their preferred dispute resolution method by sub-sector, arbitration scored highest in every instance. 40% of respondents saw arbitration as being their preferred choice for resolving energy infrastructure disputes. Arbitration is perceived as being least suitable to climate change disputes compared to the other sub-sectors, although even in this case arbitration was seen by the largest proportion of respondents (26%) as the most suitable forum for resolving disputes and was ahead of litigation (16%). Respondents noted the reason why arbitration scored comparatively low in this area as being due to the public interest element of holding corporates to account for so called ‘greenwashing’ which made climate change disputes more suitable for resolution by high level negotiation and court proceedings in the public domain.

Interestingly, dispute boards are relatively unpopular in the energy sector. This is notwithstanding their popularity in certain forms of engineering and construction contract. The nuclear sub-sector appears to be somewhat more receptive to using dispute boards than other energy sub-sectors because of the complexity, size, cost and duration of those projects, and the perceived inevitability that disputes will arise on them.

49% of respondents selected London as their first choice of arbitral seat. Reasons included “the stability of its commercial law”. In Europe, Paris and Geneva also scored well.

Singapore was the second most popular seat, receiving first place votes from 14% of respondents. Interviews shone light on the fact that Singapore is receiving a larger share of Asian disputes due to changing perceptions about Hong Kong as an international arbitral seat. Singapore also continues to be popular for parties resolving disputes related to the Indian subcontinent. The perception among respondents was that Singapore will be a leading seat for international energy arbitrations going forward, not least also because parties based in Australia, China, and SE Asia are all feeding their international disputes into Singapore.

Energy users like arbitration because they see it as neutral, enforceable and benefitting from the technical expertise of arbitrators, but they want to see innovation driving more efficiency and early decision-making

The features of arbitration considered to be the most important to the energy sector were neutrality (63%), choice of arbitrators / technical expertise (60%), and the enforceability of arbitral awards (60%). The opportunity to avoid a domestic court system is therefore of paramount importance in most cases. One respondent remarked that the majority of international energy disputes are not just technical but require a degree of legal and political finesse alongside technical specialism for which many domestic courts are simply unsuited.

After an arbitration has been commenced, respondents identified the most important procedural elements as being the technical expertise of the arbitrators (76%). Technical expertise in that context was understood by respondents broadly, to cover both an understanding of the underlying legal and technical facets of the case, and experience in shaping the dispute resolution process to the commercial needs of the parties.

Half of all respondents (and 66% of end users) selected expedited procedures (including faster constitution of arbitral tribunals and time limits for awards). This is consistent with a theme seen on a day-today basis by many of our international arbitration practitioners that all stakeholders of the arbitral process would like to see it become more efficient. Most respondents considered that the responsibility for expediting the process falls on arbitrators and they wanted to see arbitrators empowered to dispose of claims at an early stage. The main improvement sought by respondents relates to strengthening case management in the initial stages of the formal dispute process, e.g., by preventing mala fide delay tactics, encouraging narrow tailoring of arguments and providing avenues for summary disposal of claims. Other feedback focused on the perception that arbitration was overly legalistic and unnecessarily confrontational, and that practitioners and arbitrators are not making use of the flexibility afforded to them, resulting in a lack of commerciality. A desire for arbitral institutions to offer a package of dispute resolution tools on an equal footing with arbitration was also mentioned.

Although arbitrations are becoming ‘greener’, green credentials have only minimal influence on the choice of participants

According to respondents, the widespread adoption of virtual hearings and meetings brought on by the Covid-19 pandemic has changed the nature of international arbitration practice for the foreseeable future, and arguably allows for more diversified and global participation in international arbitration. It also shows consistent (and encouraging) support for innovation in making international arbitration more economical, efficient, and accessible.

Respondents’ priorities vis-à-vis green arbitration are the use of videoconferencing for meetings and hearings (81%), avoiding unnecessary travel, particularly flights (69%), and greater use of electronic bundles at hearings (66%). 52% of respondents said that green arbitration credentials would not impact their choice of arbitral service providers, considering the service itself to be the priority, although nearly all noted that, subject to all other things being equal, a provider with green credentials would be preferred.

The importance of third party funding is likely to increase

84% of respondents indicated they believe there will be an increase in third party funding of international energy disputes, citing large amounts in dispute, increasing turmoil in energy markets leading to parties needing funds/cashflow, and the lucrative nature of these disputes. 61% of respondents believe that energy infrastructure and 46% consider that investor-State disputes will have the highest reliance on third party funding. Some funders are also considering climate change disputes as a potential growth area, as these claims become more readily quantifiable.

ISDS is seen as an evolving landscape given the modernisation of the ECT and the EU proposals on the creation of a multilateral investment court

The fast-changing landscape of Investor-State Dispute Settlement (ISDS) reforms and the wider discussion about the legitimacy of investor-State arbitration form the backdrop to respondents’ answers. Many end users noted that they would only consider investor-State arbitration as a last resort or as part of a larger strategy to exit business operations in the host country in question. Nevertheless, 80% of respondents saw the fact that arbitration allows investors to avoid disputes being resolved by the local courts as a main benefit of investor-State arbitration and 70% cited the enforceability of awards as a main benefit, despite the continuing debate as to enforceability in intra-EU disputes in the wake of the Achmea and Komstroy decisions. Investor-State arbitration outside the EU does not appear to be subject to the same concerns about enforceability. ISDS faces challenges for resolving climate change related disputes: 41% of respondents and 50% of end user respondents said that arbitrator bias and issue conflicts would present a major challenge. A majority of respondents indicated they saw the modernisation of the ECT as the major development most likely to influence their view on the suitability of investor-State arbitration for energy disputes and the proposals by the EU to the UNCITRAL Working Group III on the creation of a multilateral investment court was the next most popular choice.

Methodology and demographics

The research for this study was conducted from May to October 2022 by Jason Czerwiec, J.D. and LLM, Pinsent Masons Research Fellow in International Arbitration at the School of International Arbitration, Queen Mary University of London,
together with Professor Loukas Mistelis, Clive M Schmitthoff Professor of Transnational Commercial Law and Arbitration, Director of the QMUL-UNIDROIT Institute of Transnational Commercial Law. They were assisted by Norah Gallagher, Director of the School of International Arbitration, Queen Mary University of London and Giammarco Rao, Ilse Schmitthoff Research Fellow in International Arbitration.

An external focus group comprised of senior in-house counsel, private practitioners, arbitrators, technical experts, representatives from arbitral institutions, academics, and third party funders provided valuable feedback on the draft questionnaire. The research was conducted in two phases: the first quantitative and the second qualitative.

In Phase 1 an online questionnaire of up to 45 questions (the number of questions varied depending on respondents’ roles and sectors) was accessed by more than 900 respondents. The survey aimed to capture a broad representation of those engaged in international energy transactions and projects and categorised the diversity of its respondents by their: (i) role in the arbitral process; (ii) location; (iii) energy subsector focus; and (iv) length of experience along with number of energy arbitrations conducted within the past five years. In Phase 2 we conducted extended interviews with over 50 individuals from a wide cross-section of these categories.

Contact

Further information can be obtained from:

Loukas Mistelis

Clive M Schmitthoff Professor of Transnational Commercial Law and Arbitration
School of International Arbitration
Centre for Commercial Law Studies
Queen Mary University of London

Tel: +44 20 7882 8075
Email: l.mistelis@qmul.ac.uk