Geopolitical factors to drive up arbitration in energy and mining sectors

The past a few years has seen a series of events cause massive economic disruption: oil price volatility, the Covid-19 pandemic, unprecedented modern inflation spikes, the war in Ukraine, climate risk, energy security, increasing reports of cyber attacks, Israeli military action in Gaza and China’s increased military presence in the South China Sea causing US-China relations to become more complex.

There have been particular concerns towards the end of last year as a result of increased tension in the Middle East caused by the conflict in Israel and Gaza. The potential disruption to oil and gas supplies that this will cause has led to volatility in global energy markets.

Geopolitical instability often causes a decrease in foreign investment and shifts trade alliances, due to sanctions and embargoes imposed by countries involved in such disputes.

These events have great potential to impact infrastructure and energy projects, including for example through force majeure (total impossibility), suspension of the works, increased cost of materials due to impact on trade barriers and disrupted supply chains, design changes, payment delays, delay and termination.

The risk is different across the geographies. For instance, in some Asian countries such as Korea, China and Japan, national infrastructure and energy projects are capable of being constructed using internal or local resources, labour, and materials. However, for regions such as the Middle East which depends on foreign investment to deliver its ambitious projects, such as the ‘giga projects’ currently ongoing in Saudi Arabia, the region is more susceptible to geopolitical risk.

In Europe, Brexit will continue to have an impact on the UK in 2024, through the creation of trade barriers, and a shortage of skilled labour.

Pressure on the global mining and commodities markets

The global mining and commodities markets, meanwhile, are being adversely affected by events such as the Russia-Ukraine war. The pressure faced by these industries is likely to grow in 2024, particularly as a result of increasing demands to accelerate the energy transition and the changing regulatory landscape targeting critical raw materials supply chains. New laws and regulations include the US Inflation Reduction Act; the EU Critical Raw Materials Act; the UK Critical Minerals Strategy (CMS); and the Canadian Critical Minerals Strategy.

The new EU Critical Raw Materials and the UK CMS are both designed to protect critical raw materials supply chains. There are also changes in regional mining laws, such as the ones in Mexico and Chile, and Canada's restrictions on investments by foreign state-owned companies in its critical minerals sector. They could all potentially result in an increase in disputes and arbitration for existing and new projects.

Rise in investor-state treaty arbitrations

As well as contractual claims and commercial disputes, geopolitics can give rise to investor-state treaty arbitrations, particularly when foreign investors have been impacted by macro governmental policy decisions.

For example, focusing on the CMS, the UK government is planning to review mineral rights-related barriers to exploration and extraction, and explore ways to expedite critical mineral mine development. Any changes related to the permitting of mining developments may lead to an increase in disputes regarding permits, public consultation requirements under local and international law, and environmental, social and governance (ESG) risks.

Lawyers have become skilled at analysing the legal consequences of these geopolitical factors on transactions, including considering contractual mechanisms such as force majeure and change in law, as well as the principle of ‘economic hardship’ in Civil Code countries such as the United Arab Emirates and Saudi Arabia. The Covid-19 pandemic prompted some countries’ courts and governments to take decisions on contractors’ entitlements in these circumstances, which could be relied on to assist other contractors in the supply chain of the infrastructure and energy sectors in respect of current and future geopolitical events.