Investor compensation costs

The cornerstone of an investor's activity in production sharing agreements is the problem of determining compensatory costs, since production sharing agreements determine the types of such costs without specifying their urgency.

Of course, it is possible to negotiate and make changes to the production sharing agreement, but in practice this is a rather significant and long bureaucratic process, given that one of the parties to the production sharing agreement is the state represented by a certain authorized higher state or political authority.

In addition, it is not possible to adjust to the category of each expense, or to fully determine their list in advance, especially when during drilling one has to bear the costs of overhauling wells. That is why the nature of compensation is of priority importance for the investor.

Compensation costs under a production sharing agreement shall be recognized equally as all costs, expenses and contributions of the investor incurred from the date of entry into force of the production sharing agreement, the performance of works envisaged by it, other activities carried out under the production sharing agreement and the performance of other obligations, with the exception of costs that are not subject to reimbursement.

Despite the broad interpretation of «compensatory» costs in production sharing agreements, the arbitration approach to resolving investment disputes has developed a kind of Hull formula regarding the issue of compensation to the investor.

The investor is not subject to compensation for any costs, but only for amounts equal to the total value of his expropriated investments.

Thus, at one time the International Law Commission noted that «the payment of agreed compensation inevitably depends on the circumstances and the resources of the State and its actual ability to pay».

Even in the case of «partial» compensation, very few states were in practice in a sufficiently strong economic and financial position to be able to pay the agreed compensation immediately and in full».

For example, in the Case of the Norwegian Claims Against the United States (1922), 1 U.N. Rep. Int'l Arb. Awards 307 (1922) written that «just compensation» must be equal to the value of the property, which cannot not exceed fair market value or include speculative prices.

Assuming that the inherent difficulties of «full» or «adequate» compensation are not insurmountable, it would again not be unduly burdensome for the depriving State to justify compensation by limited deprivations» (Case, P.C.I.J., ser. A., No. 13, at 47 (1928).

The deprivation of private foreign wealth was limited to limited deprivations, in comparison with the total wealth owned by foreigners in the state, depriving much of anything (Fourth United Nations Report on International Responsibility (U.-N. Doc. No. A/CN.4/119, at 27 (1959).

Thus, disputes related to the forced seizure of investor property are of more interest to arbitration than disagreements over the content of uncoordinated compensation costs.

Given that the state's policy of not recognizing investor costs is based on accounting procedures and the work program under production sharing agreements, the investor's expectations should consider partial reimbursement of costs incurred by the state.