In the extractive industries, production-sharing agreement (PSA) arbitration plays a central role in resolving disputes arising from long-term cooperation between foreign investors and host states in the oil and gas sector. Production-sharing agreements form the backbone of these relationships, and international arbitration is most commonly used to address disputes under such contracts.
First developed in Indonesia, PSAs have since become the global standard for petroleum exploration and production, gradually replacing traditional concession agreements that often involved extensive transfers of sovereign rights to private operators.[1]
Against this backdrop, it is important to understand what PSAs are, why arbitration is central to their viability, and which arbitral doctrines most frequently shape PSA disputes.
I. What Are PSAs?
PSAs are commonly defined as contracts between one or more investors and a host government under which rights to prospect, explore, and extract mineral resources within a defined area and for a specified period of time are granted.[2]
In practice, PSAs have a mixed and complex legal nature, combining elements of several contractual arrangements.[3] Their distinctive feature lies in the central role played by public law components, including licensing regimes, taxation, and accounting and reporting obligations. As a result, the implementation of a PSA gives rise to multiple legal relationships that operate simultaneously under private law and public law frameworks.[4]
Typically, under a standard PSA structure, the state appoints the investor as a contractor to carry out petroleum operations while retaining ownership of the natural resources.[5] In turn, the investor assumes all exploration and development risks and costs and, in return, is entitled to recover its expenses and receive a share of production in accordance with the contractual terms. At the production stage, the relationship between the state and the investor is governed by a financial mechanism that allocates production output between the parties.[6]
PSAs are long-term agreements and typically remain in force for periods of 30 to 40 years.[7]
II. The Need for International Arbitration
Given the multi-decade lifespan of PSAs, investors face significant sovereign risks.[8] Over time, governments may exercise their legislative and regulatory powers to modify tax regimes or increase regulatory constraints in ways that undermine the investor’s control over the venture. Such measures are commonly described as “creeping expropriation”.[9]
To address these risks, investors typically require the inclusion of an arbitration clause, as arbitration offers an alternative to bringing disputes before the national courts of the host state or the investor’s state of origin. In practice, few investors are willing to submit to the exclusive jurisdiction of the host state’s courts, which may be perceived as biased or as lacking the separation of powers necessary to rule against the government.[10]
Consequently, international arbitration has become the “ubiquitous” choice for resolving such disputes,[11] as it provides a neutral forum outside the host state’s jurisdiction. This neutrality, moreover, is commonly secured through model arbitration clauses developed by institutions such as the International Chamber of Commerce (ICC) or the International Centre for Settlement of Investment Disputes (ICSID).
III. Key Arbitral Principles in PSA Disputes in the Petroleum Industry
Disputes arising from PSAs frequently concern the petroleum industry, particularly in the upstream oil and gas sector. In this category of disputes, a number of commentators argue that a distinct body of transnational law has emerged, commonly referred to as lex petrolea.[12] Often described as a sector-specific expression of lex mercatoria, lex petrolea reflects harmonised contractual practices, established industry usages, and consistent arbitral approaches developed in response to the specific legal, technical, and commercial characteristics of petroleum operations.[13]
Against this backdrop, several core legal doctrines, well-known to international arbitration practitioners, play a central role in PSA disputes:
- Separability: The doctrine of separability ensures that an arbitration clause remains valid and enforceable even where the underlying PSA is alleged to be void, unlawful, or has been terminated by the state. This principle prevents states from avoiding arbitration by challenging the main contract.[14]
- Stabilization Clauses and Re-Balancing Clauses: Investors use stabilization clauses to protect PSA projects from adverse legislative or regulatory changes by seeking to preserve the legal and fiscal framework applicable at the time the contract is signed.[15] By contrast, re-balancing clauses do not prevent changes in the law but require the parties to adjust the contract if state measures materially affect the project’s economic equilibrium.[16] A clear example of a re-balancing clause enforced in a PSA arbitration is Burlington Resources v. Ecuador. In that case, the tribunal examined a tax modification clause providing that any increase in the fiscal burden would be absorbed through a correction factor applied to the production sharing percentages. Ultimately, the tribunal held that the clause imposed a binding obligation on the state to restore the contract’s economic equilibrium, leaving no discretion to refuse the adjustment following the tax changes.[17]
- Force Majeure: Force majeure disputes frequently arise when parties argue that acts of public authority, such as export bans or regulatory restrictions, excuse non-performance. However, arbitral tribunals have applied a restrictive approach. For instance, in NOC v. Sun Oil, the ICC tribunal rejected a force majeure defence on the basis that performance remained possible despite travel restrictions.[18]
Conclusion
Arbitration is a core feature of the production-sharing agreement model and a key tool for managing sovereign risk in long-term oil and gas projects. By providing a neutral forum and enforceable outcomes, international arbitration helps investors and host states preserve contractual predictability and maintain stable, long-term partnerships in the petroleum sector.
[1] M. Sornarajah, The Settlement of Foreign Investment Disputes (2000), p. 45.
[2] Central Bank of Russia, Production Sharing Agreements, October 2011, https://www.imf.org/external/pubs/ft/bop/2011/11-17.pdf (last accessed 16 January 2026), p. 3.
[3] Yukos Capital SARL v. The Russian Federation, PCA Case No. 2013-31, Second Expert Report of Professor Anton V. Asoskov, para. 83.
[4] Yukos Capital SARL v. The Russian Federation, PCA Case No. 2013-31, Second Expert Report of Professor Anton V. Asoskov, para. 83.
[5] Central Bank of Russia, Production Sharing Agreements, October 2011, https://www.imf.org/external/pubs/ft/bop/2011/11-17.pdf (last accessed 16 January 2026), p. 3.
[6] Central Bank of Russia, Production Sharing Agreements, October 2011, https://www.imf.org/external/pubs/ft/bop/2011/11-17.pdf (last accessed 16 January 2026), p. 3.
[7] D. R. Hesse, Business Guide to Trade and Investment – Volume 2: International Investment (2018), p. 57.
[8] D. R. Hesse, Business Guide to Trade and Investment – Volume 2: International Investment (2018), p. 57.
[9] R. Doak Bishop, International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea, 23 Y.B. Com. Arb. 1131, p. 1161.
[10] M. Sornarajah, The Settlement of Foreign Investment Disputes (2000), p. 51.
[11] J. Crawford, Foreign Investment Disputes: Cases, Materials and Commentary (2nd edn., 2013), p. 219.
[12] The American Independent Oil Company v. The Government of the State of Kuwait, Final Award, 24 March 1982; R. Doak Bishop, International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea, 23 Y.B. Com. Arb. 1131, p. 1133; D. Shirokova, The Fiction of ‘State Contract’ in the Energy Industry: The Empirical Gap Between the Intentions of the Parties and the Interpretation of Contracts by Arbitral Tribunals (2025), p. 27.
[13] The American Independent Oil Company v. The Government of the State of Kuwait, Final Award, 24 March 1982; R. Doak Bishop, International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea, 23 Y.B. Com. Arb. 1131, p. 1133; D. Shirokova, The Fiction of ‘State Contract’ in the Energy Industry: The Empirical Gap Between the Intentions of the Parties and the Interpretation of Contracts by Arbitral Tribunals (2025), p. 27.
[14] R. Doak Bishop, International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea, 23 Y.B. Com. Arb. 1131, p. 1137.
[15] D. R. Hesse, Business Guide to Trade and Investment – Volume 2: International Investment (2018), p. 59.
[16] D. R. Hesse, Business Guide to Trade and Investment – Volume 2: International Investment (2018), p. 60.
[17] Burlington Resources, Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability, 14 December 2012, para. 327; W. Reisman et al., Foreign Investment Disputes: Cases, Materials and Commentary (2nd edn., 2014), pp. 272-273.
[18] National Oil Corporation v. Libyan Sun Oil Company, ICC Case No. 4462/AS/JRI, First Award, 31 May 1985; R. Doak Bishop, International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea, 23 Y.B. Com. Arb. 1131, pp. 1186-1187.