Legal Status of Stabilisation Clauses vis-à-vis Legislative Actions: The Implications in the Current and Future Investment in the Petroleum Industry in Tanzania

Abstract

Stabilisation clauses are one of the key protection tools for investors in the petroleum industry. The clauses protect investors from unilateral Government legislative action of changing the agreed terms of the agreement. The clauses are useful in attracting foreign capital investment as through the Government commitments, investors get confidence in their projects. The confidence extends to bankers. Most of Tanzania's Production Sharing Agreements (PSAs) contain stabilisation clauses.
The Natural Wealth and Resources Contract (Review and Re-negotiation of Unconscionable Terms) Act, 2017, declares unconscionable all existing PSAs with stabilisation clauses. Those provisions in the PSAs are in danger of being expunged in case investors are unwilling or re-negotiation fails with the Government. Expunging a term of the PSA amounts to a unilateral amendment of the agreement by the Government, which is contrary to its commitment guaranteed through stabilisation and renegotiation clauses that require mutual consent. This amounts to a fundamental breach of an agreement that entitles the innocent party (an investor) to damages since the breach of stabilisation clauses constitutes a violation of international law.
Stabilisation clauses are regarded as tools for attracting investment in the petroleum industry. By removing stabilisation clauses, the Government has opted to remove one of the key attractions to investments in the petroleum industry in Tanzania. Hence, the future investment in the petroleum Industry in Tanzania is shaken. Stabilisation clauses are key for the bankability of petroleum projects.