Energy arbitration in Africa: Potential sources of energy and natural resources disputes

Phillipe Hameau, a partner in our Paris office, discusses the likely sources of arbitration in Africa over the coming years with two counsels in our international arbitration practice:

• Marc Robert in Paris, who frequently advises clients on disputes in Africa, particularly in the OHADA region; and
• Joseph Bentley in London, who represents clients in the energy and power sectors in arbitrations throughout the African continent.

Phillippe: Marc, let’s discuss climate change and how African states’ recent commitments are likely to influence their energy policies?

Marc: Thanks, Phillippe. Climate change is a crucial issue for Africa. At COP28 in December 2023, participants reached a landmark agreement to transition away from fossil fuels in a just, orderly and equitable manner, aiming for net-zero emissions by 2050. States have to submit their next round of climate action plans, known as nationally determined contributions (NDCs) by 2025, in time for COP30, and they must be aligned with the 1.5°C temperature limit set under the 2015 Paris Climate Agreement.

These ambitious targets are particularly challenging for African states who, despite being some of the most vulnerable to climate change, are dependent on fossil fuels and need to weigh up the benefits against more immediate energy poverty concerns.

Nonetheless, several African countries have initiated efforts to meet the COP28 objectives. Twelve states, including Burkina Faso, Chad, Ivory Coast, Ethiopia, Ghana, Kenya and Morocco, have joined the Coalition for High Ambition Multilevel Partnerships (CHAMP) for Climate Action, which aims to enhance the planning, financing and implementation of climate strategies to limit temperature increases to 1.5°C.

The difficulty, as highlighted by the International Energy Agency (IEA), is that, to achieve the Sustainable Africa Scenario, energy investment must double to over US$200 billion a year by 2030. Moreover, the UN Environment Programme’s Adaptation Gap Report indicates a significant shortfall in financing for developing countries to reach these goals, and the funds allocated to the loss and damage fund, a major achievement of COP28, are insufficient to cover Africa’s needs.

This is likely to cause major changes in African states’ energy policies, potentially including renewables incentives and stricter environmental impact assessments, taxation and reporting obligations. Changes to the political, regulatory and fiscal environment are likely to fuel disputes between investors and governments.

Phillippe: I understand that the investorstate landscape in Africa is also changing?

Marc: Recent developments, such as the Pan-African Investment Code (PAIC) and the Protocol to the Agreement Establishing the African Continental Free Trade Area on Investment (POI), may impact future investor-state disputes.

The PAIC, adopted by the African Union in 2016, aims to promote and protect investments fostering sustainable development. Notably, the PAIC omits the fair and equitable treatment standard, mposing direct obligations on investors concerning corporate governance, sociopolitical responsibilities, natural resource use, business ethics, and human rights – for example, to“not exploit or use local natural resources to the detriment of the rights and interests of the host State.”

The POI, adopted on February 19, 2023, follows the PAIC by imposing direct obligations on investors. It prohibits new bilateral investment treaties (BITs) and aims to replace existing BITs between AfCFTA member states within five years. The POI obligates investors to“support actions to mitigate greenhouse gas emissions and measures to adapt to the negative impacts of climate change” to ensure a fair and just energy transition, focusing on renewable and low-carbon sectors.

Incorporation of direct obligations on investors regarding climate change and broader ESG concerns represent a significant development. As well as broadening the range of disputes that may arise, it may lead to an increase in state counterclaims against investors.

Not exploit or use local natural resources to the detriment of the rights and interests of the host State.

We will see how arbitral tribunals deal with these developments, bearing in mind that new investor obligations should, in principle, only be enforceable prospectively. The extent to which these new obligations are compatible with existing investment agreements and contracts will require careful assessment as governments in Africa navigate the tension between treaty obligations and enacting the regulations required to combat climate change.

Phillippe: Thanks, Marc. I’d like to turn to resource nationalism. Joseph, perhaps you could begin by explaining what it is?

Joseph: Thanks, Phillipe. Resource nationalism is an important, albeit often controversial, issue. It is usually defined as a state’s assertion of control over the resources found within its sovereign territory.

While outright expropriation is one manifestation, it is more often indirect, and might include post-investment changes to the legislative, fiscal or regulatory environment, non-renewal of existing contracts or the introduction of local content and participation requirements. It is by no means exclusive to Africa, nor is it a new phenomenon, but there are signs of a growing trend towards this type of intervention in Africa.

Phillippe: Why do you think that is?

Joseph: The reasons are complex and specific to each state, but the following factors are likely to contribute:

• Political instability and civil unrest;
• The impacts of COVID-19 and Russia’s invasion of Ukraine;
• Inflation, commodity price volatility, global supply chain disruption and food insecurity;
• Competition for mineral resources, indirectly caused by netzero commitments – for example, so-called ‘battery metals’ such as cobalt, graphite and lithium; and
• Domestic constraints on public funding and demands for increased value from local resources.

It is probably a combination. Growing demand – driven by the green transition and energy security concerns – causes price volatility, incentivizing resource-rich countries to adopt measures aimed at bolstering public finances and domestic political goodwill.

While the reaction is understandable, the incentive is perverse. If mismanaged, conflict with multinationals becomes inevitable, foreign investment may be discouraged and economic conditions deteriorate, provoking a vicious cycle.

Phillippe: Why the recent attention on critical minerals?

Joseph: The energy transition, together with development of energy storage technologies, is driving an increased need for critical minerals. According to the IEA, mineral requirements are likely to double by 2040 and quadruple if we are to reach the Paris Agreement’s goals within that timeframe.

The consequence is a race for resources, exacerbating a tendency for mineral-rich countries to introduce protectionist measures when prices surge and the market is captive. Inevitably, as it holds around 30 percent of the world’s mineral reserves, that leads to Africa.

Recent examples such as the DRC’s forfeiture of mining rights in August 2023, Mali’s new mining legislation in September 2023, and the prohibition of raw mineral ore exports in Zimbabwe, Namibia and Ghana suggest resource nationalism in Africa is on the rise and likely to manifest in increasingly diverse ways in the coming years.

Phillippe: What is that likely to mean for arbitration in Africa?

Joseph: The mere threat of protectionism impacts investment conditions, particularly as a decision to invest involves upfront cost and long-term commitment. This makes these investments prone to contentious renegotiation. While the capital expenditure often makes investors more pragmatic, the more incentive to intervene, the more interests diverge and the more disputes (invariably decided by arbitration) arise.

Support actions to mitigate greenhouse gas emissions and measures to adapt to the negative impacts of climate change

The obvious protections on which investors can rely, aside from contractual and political risk insurance, are the nearly 1,000 BITs with African state parties. Changes to regulatory regimes, fiscal measures, amendments to ownership requirements and expropriation are a mainstay of treaty claims. It is likely, if resource competition continues its upwards trend, that commercial arbitrations and treaty claims involving African states will follow a similar pattern.