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Overview of stabilization clauses

“Concerned of any future policy reversal measure that may put at risk the terms of investment agreements, investors in the oil sector often seek guarantee, contractual or otherwise. The need to address such fears thus saw the proliferation of stabilisation clauses in oil and gas contracts. These clauses are believed to maintain the stability of the terms that were originally agreed upon. In particular, the fiscal regime aspect of the agreement is at the heart of such clauses.”

Whenever an organization plans to work on a long-term project, they have to be concerned about the security o the project. The project can be harmed by many things both internal and external. One of the issues that usually the organization or the investors of the project faces is a political risk. As a long term project, it can anytime be affected by any political changes. The only way to get rid of these kinds of issues is the stabilization clauses. Stabilization clause is nothing but a legal legislation or permits for the project lenders or the organization to secure the whole project from any political risks.

Stabilization clauses are something that can determine the future of any long term project as well the future of the organization, working on that particular project. There are many examples which show that lots of companies have faced severe downfall because of the lack of stabilization clause. Thus to run a long term project successfully it must for an organization to get the proper legal permits or the stabilization clauses. There are various kinds of clauses, each and every clause is equally important. They have their value to the business of the organization and mainly to the project.

There are many kinds of stabilization clauses. Every clause has its importance and value and serves to the security of the long-term project. The clauses which are mainly used by the investors of the project are freezing clauses, hybrid clauses, and economic equilibrium clauses. The freezing clauses freeze or fix the domestic regulation or legislation of the project.  The economic stability clauses mainly help the project or the investor economically. The hybrid clause is a mixture of the freezing clause and the economic equilibrium clause. The motif of all of these clauses is the same, which is to secure the long-term project from any political risks as a whole. 

In the above passages the importance and the work of the stabilization, clauses are already briefly mentioned. Now it is time to analyze the goal of the stabilization clauses. The prime aim of the stabilization clause is to secure the organization or the long term project from any political risks. To be more précised it can also be referred as one of the many integral parts or aspects of running a long term project successfully (Assaf Alfadly 2011). For example, these clauses are mainly used in various oil producing countries. Oil producing projects are obviously a long term project or assignment. If any organization or investor does not pay attention to the importance of the stabilization clause, they would surely have to suffer due to the political issues or risks in the future. Whenever a political change occurs, it also changes some other sects of society as well as business. Sometimes these changes can even cause harmful to the projects and the investors themselves.  Oil producing projects are very expensive to handle. Thus the investors of the projects must be very careful towards the investments. Foreign investors invest lots of money for these kinds of projects. So if any political change or factor harms them, it would be a great loss. That means it is the responsibility of the stabilization clauses to secure their investments also. The investors can feel very safe with the help of these clauses, and they can be free to invest in long-term projects like these (Steingold 2004). There is another contribution of the stabilization clauses that should be mentioned. Because of the risk factors to be more précised the political risk factors, many investors are backing out. They are refusing to invest in any long-term projects which are ultimately harming the world of business. Thus, in this case, the stabilization clauses are playing a very vital role. They are not only securing the projects or the investments of the foreign investors, similarly, but they are also ensuring the whole world of business. The investors are feeling safer to invest in any long term projects. That is why more long term projects are taking place which is turning beneficial for the entire community or nation. Thus from the above passages, it is evident that the stabilization clauses are playing one of the most vital roles in the success of the long-term contracts(Millen and Pruitt 2011). Thus it main aims is to secure the project taking place, to ensure the investments of the foreign investors and last but not the least, to secure the economy of a community or nation. Without these clauses, no organization would be able to avoid the political risks and to run the project successfully. In one word it can also be stated that the stabilization clauses help to build a healthy and legal relationship between the host government and the foreign investors(Between Fair and Equitable Treatment and Stabilization Clause: 2011). Stabilization clauses in respect not only affect only an organization but a whole nation in the process of implementation of latest laws during the contract of the project.

Types of stabilization clause

The primary purpose behind the behind the stabilization clauses is to render and preclude the agreements from the adverse action of the government. It may be legislative or administrative. In such a clause typical provisions preclude the application to the approval of any subsequent statutory or regulatory act which is issued by the government that may cause an impact on the contractual regime that is already entered into by different parties. During the duration of the project to tie hands of the state party under a natural source development and international energy contract is the primary purpose of the clause so that the state party is unable to interfere with the investor's interests. Behind the negotiation, there are some driving clauses included. That results in the growing and continuous fear of the host government. Behind the concernedness of the interest of the government, it also attracts much more and more investors who force them to submit to such prospective demands of the investors(Patnaik, Shah and Singh 2013).  This type of clauses also assures the investors about all the future actions that may be taken by the government and also promises about any laws of the host government which can affect the contracting agreement's terms and conditions. Stabilization clause wants to protect the agreement from any action of the government in future which may be legislative or regulatory. It can be said more accurately that stabilization clause is an explicit commitment to the foreign country that by legislation or any other means the agreements must not be altered without the willingness or permission of the other contracting party(Conscience clause concern 2013).  There are many categories of stabilization clauses. Such as Intangibility clause which says that the government cannot modify or change the contract in a single way. Another variety means that the governing law of the contract will be the part of the contracting state when the contract is executed. Thus it prevents the application of subsequent changes which is in the contracting state's law. The other variety says that the agreement should be performed by good faith that will preclude the single way of any modification or termination of the agreement. There is another type of clause which is known as the allocation of burden.  These types of clauses try to allocate the related burdens and fiscal which are created by the unilateral change in the law. These types of clauses are common for the relative weight which is to be supported by the state or the National Oil Company. Another type of clauses like Balancing Clauses commonly dubs the economic stabilization clauses which provide for automatic negotiations or adjustments that help to restate the initial economic balance. Thus the limited scope of stabilization clauses to the developing countries is much more appealing as it does not limit the legislative powers. These are the prime and essential functions of the stabilization clause. From the above-mentioned aspect, it can easily be understood that how much important and valuable the stabilization clauses are for the betterment as well as the security of any long-term projects, here the oil producing projects(FENTIMAN 2015).

Aims of stabilization clause

The various types of stabilization clauses are mentioned and discussed in the above passages and also their working process and objectivity is well explained. Now it is the time to see if they are meeting their objectivities. In other words, what the stabilization clauses are achieving and how they are achieving that. For that is needed to have a stronger and concrete knowledge about the practical outcomes of the stabilization clause. The oil contracts are usually long-term and very expensive. Thus they are always affected by various dynamic factors such as the current position of the market, the state of politics and the state of the economy of the nation. These social and political factors are complimentary to each other and directly related to the contracts along with the investors and the project lenders. So if any of these aspects change, the project as a whole will undoubtedly be affected. However, it is in a negative way as well as in a positive way.  Mostly the change of these factors cause suffers and downfall to the organizations and the projects they are working. In these cases, the stabilization shows their capabilities to make the money of the investors and the allover project secure. Thus it is quite clear that the answer to the question if the stabilization clauses are reaching their objectives, is obviously yes. Since few decades the stabilization clauses have proved themselves to be one of the main and most important parts of the long-term contracts(KBR partners with Azerbaijan's national oil company 2015). Foreign investors are very much dependent on these clauses as the stabilization clause makes them feel safe with their investments in the project. Otherwise as mentioned earlier many investors were backing out due to these social and political risk factors.  Nowadays many of the countries such as China, Algeria, Bolivia, Venezuela, and Ecuador are investing money and getting into long term oil contracts, and more foreign investors are coming forward to invest in these projects. These show the value and the success of the stabilization clauses. The success of the long term oil contracts is the evidence of the stability of these clauses. Thus all that is happening all over the world related to the long-term projects and the investors along with the stabilization clauses are obviously beneficial for the economy of any particular nation or community.

Conclusion

To conclude the essay it must be admitted that the stabilization clauses have contributed a lot to the economy as well to the world of business. The stabilization clauses are the reason for which the investors nowadays feel much safer to invest their money in any long term project like oil producing. Without the help of these mentioned clauses investors and also the project, lenders would have never been able to do their job or project properly. Political risks are something that can cause much harm to any organization or the project. Thus these kinds of risks should be avoided by the group or the investors to run their project successfully. For that, they have to get some permit from the hosting government of that particular state or nation. Stabilization clause gives the organizations along with the foreign investors these kinds of facilities to get rid of any political change or political risks and allows the company to do their jobs with ease. In the oil producing countries stabilization clauses can also be defined as an integral part of the oil producing projects. The above essay deals with the importance, aim and the working process of the stabilization clauses and also their value to the projects as well as to the whole organization. The mentioned aspects of the stabilization clauses are enough to understand what importance these stabilization clauses holds to run a long term project successfully. Finally to end the essay a strong statement should be made in the support of the stabilization clause itself and its huge contribution to the economy and business of many nations.

References

Assaf Alfadly, A. (2011). Kuwait National Petroleum Company (KNPC) Marketing Strategy in Oil Sector. IJMS, 3(1).

Between Fair and Equitable Treatment and Stabilization Clause:. (2011). The Journal of World Investment & Trade, 12(6), p.vii-806.

Conscience clause concern. (2013). The Pharmaceutical Journal.

FENTIMAN, R. (2015). International commercial litigation. Oxford: Oxford University Press.

KBR partners with Azerbaijan's national oil company. (2015). Pump Industry Analyst, 2015(3), p.4.

Millen, R. and Pruitt, C. (2011). The government assistance center. Carlisle, PA: Peacekeeping and Stability Operations Institute, U.S. Army War College.

Patnaik, I., Shah, A. and Singh, N. (2013). Foreign Investors under Stress: Evidence From India. International Finance, 16(2), pp.213-244.

Steingold, F. (2004). Legal forms for starting & running a small business. Berkeley, CA: Nolo.

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