Globalized Americas
P U B L I C A T I O N S
Oil and Gas Investment Disputes
Jonathan C. Hamilton and Michelle Grando, Oil and Gas Investment Disputes in Latin America (2015)
Natural resources have been marked by waves of investment disputes in Latin America, including at least thirty cases involving the oil and gas sector in Argentina, Ecuador and Venezuela alone - a significant percentage of the total investment disputes in the region since the ratification of investment treaties. This article surveys the waves of cases related to those three countries.
Historically, natural resources cases comprising the oil, gas, and mining industry have represented 25.2% of the caseload at the International Centre for Settlement of Investment Disputes (ICSID), out of which, 33.8% involved oil, gas, and mining issues in Latin American countries. This means that out of the 505 cases registered at ICSID,[1] 43 cases concern oil, gas, and mining issues in Latin American countries, 27 of which concern oil and gas issues only. In other words, 5.4% of all cases registered at ICSID relate to oil and gas issues in Latin American countries and this 5.4% is composed almost entirely by the three countries mentioned above: Argentina (2.2%), Ecuador (1.6%) and Venezuela (1%), representing a total of 4.8% of all ICSID cases. These are significant numbers, and they comprise only ICSID administered cases.
This article focuses on the waves of oil and gas investment disputes that have arisen out of Argentina, Ecuador, and Venezuela in the last 15 years.
The Argentina Wave
The first big wave of oil and gas investment treaty arbitrations in Latin America emerged from the significant changes in Argentina, and reversal of its policies after 2001. This echoed broader circumstances: no state in the region had ratified more bilateral investment treaties (BITs) than Argentina during the 1990s, nor made such a significant change of course in macroeconomic policies in the early 2000s.
One of the particular segments affected was the gas transportation and distribution industry which had been privatized a decade earlier. In order to attract foreign investors to the privatization, Argentina had offered guarantees of stable remuneration in US dollars through the adoption of specific laws and regulations, promises in the context of the bidding rules, offering memoranda and the licenses granted to investors. During the crisis and continuing thereafter, Argentina dismantled guarantees given to investors by “pesifying” the economy so that tariffs could no longer be calculated in US dollars, cancelling readjustments according to the US PPI and suspending tariff reviews indefinitely.
This led to at least eleven investment treaty arbitrations concerning the oil and gas industry, as listed further below. In seven of those cases, the arbitral tribunals found that the measures adopted by Argentina violated the BITs in question. Out of those, two awards were later annulled for reasons unrelated to the main findings of violation, and the cases have since been resubmitted to the International Centre for Settlement of Investment Disputes (ICSID). The other four out of eleven cases are still pending or settled.
While in large part regulatory expropriation claims were not successful in such cases, there was more success for claims of violation of the fair and equitable treatment (FET). This reflects a comparably greater success rate of FET claims over expropriation claims under investment treaty claims in the region, albeit with an impact on the amount of compensation awarded. Arbitral tribunals such as CMS, BG Group, and LG&E found that Argentina had violated the FET standard by dismantling the specific arrangements contained in licenses, and specifically targeted laws and regulations in reliance on which the investments were made.
In a later decision, the Total tribunal added that in case of capital intensive and long-term investments in sectors such as natural resources exploration and exploitation a specific commitment towards an investor is not always necessary. In such cases, changes in the general regulatory framework sometimes are found to violate the FET when such changes are not reasonable or proportional to the prejudice caused to the foreign investor. This includes changes that do not allow the investors “to cover their costs and make a reasonable return in order to operate.”
The Ecuador Wave
An Ecuador wave of oil and gas investment treaty arbitrations emerged in reaction to measures that Ecuador adopted at a period of significant increase in oil prices, following two earlier cases regarding the denial of reimbursement of VAT taxes concerning oil for export and one case concerning the cancellation of a participation contract. Specifically, oil prices increased from US $15 a barrel in 2001 to US $60 a barrel in 2006. After failing to persuade foreign investors to renegotiate the terms of production sharing contracts that allowed them to keep the gains from high oil prices, Ecuador passed Law 42, which gave the state a participation in the extraordinary profits by creating a windfall profits tax that was set at 50% of the income from all sales of oil above the average prices in effect at the time of the execution of the contract. After the election of President Rafael Correa, the tax was increased in 2007 to 99%, which meant that the oil companies had to transfer to Ecuador practically all income derived from the higher prices.
The windfall profits tax gave rise to at least four different cases against Ecuador. Out of the four cases, one has settled, one is still pending and arbitral awards have been published in two of them: Perenco v. Ecuador and Burlington v. Ecuador. The most significant difference between Perenco and Burlington derives from the fact that the cases were brought pursuant to different BITs. Burlington brought its claims under the US-Ecuador BIT, which contains a provision that does not allow claims for breach of the FET based on taxation measures. This limited the Burlington tribunal’s jurisdiction to the expropriation claim, and it concluded that the windfall profits tax did not constitute an expropriation. It was only the later physical takeover of Blocks 7 and 21 by Ecuador that was found to constitute an expropriation.
In contrast, Perenco brought its claims under the France-Ecuador BIT, which does not contain a restriction on FET claims based on taxation measures. Therefore, the Perenco tribunal also examined the windfall tax under the FET standard. Similar to the Total tribunal in the case of Argentina, the Perenco tribunal made reference to the fact that capital-intensive investments, including in resource extraction, with substantial up-front costs must be able to withstand deviations in governmental policy. It noted that governments must be mindful of their contractual commitments. Against this background, the tribunal analyzed the windfall profits tax at 50% and concluded that it did not violate the FET because, based on industry practices, investors should have expected that substantive increases in oil prices would prompt the State to seek an adjustment of the economic bargain. The tribunal came to a different conclusion with respect to the 99% tax. It found that the 99% tax violated the FET because it fundamentally changed the bargain, so that the investor could have no participation in the upside of higher oil prices. This, in the opinion of the tribunal, had the result of transforming the production sharing contracts into service contracts without the agreement of the investor. In addition to this finding of violation of the FET, the Perenco tribunal also found that the termination of the contracts for Blocks 7 and 21 constituted an expropriation.
The Venezuela Wave
A Venezuela wave of oil and gas cases emerged after 2007, following Venezuela’s establishment of a program of nationalization pursuant to which it subjected all oil projects in Venezuela to the regime of the 2001 Hydrocarbons Law, which limited private parties’ participation to mixed enterprises in which the state owned more than 50% of the shares. The government sought to force major oil companies to reduce their participation to minority partners of the state-owned company PDVSA and surrender control of their projects. Companies that did not agree lost their interests in the projects. In May 2009, Venezuela adopted additional measures leading to seizures of oil assets, this time reserving for the State the assets and services related to primary activities of hydrocarbons (Reserve Law).
The wave of expropriations that started in 2007 gave rise to at least six oil and gas BIT cases against Venezuela. Out of those six cases, one has been settled and two are still pending. Awards have been published in the other three cases: Tidewater, ConocoPhillips, and Mobil. In all three cases, the tribunals found that an expropriation had taken place.
Tidewater concerned seizures undertaken pursuant to the Reserve Law, while ConocoPhillips and Mobil regarded the loss of ConocoPhillips’ and ExxonMobil’s participation in projects due to their unwillingness to accept a forced contractual modification. They each brought arbitrations under the Netherlands-Venezuela BIT through entities established in the Netherlands. Because they arise from similar circumstances and under the same BIT, it is interesting to compare ConocoPhillips and Mobil.
In the ConocoPhillips and Mobil cases, there had been a physical taking of the investments and the investors were no longer in control of them. The cases thus focused on when and how such expropriation had taken place and whether it was lawfully carried out under the BIT. In practical terms, the ConocoPhillips and Mobil entities had an interest in having the expropriations declared to be unlawful because this could allow the tribunal to calculate compensation at the time of the award, as opposed to the date of the expropriation, which was advantageous for both companies because of the rising prices of oil.
The tribunals in ConocoPhillips and Mobil came to different conclusions with respect to the lawfulness of the expropriations. The ConocoPhillips tribunal found the relevant expropriation to be unlawful and on this basis determined that the date of valuation would be the date of its award. In contrast, the Mobil tribunal found that the relevant expropriation was lawful, and, in light of this, calculated compensation at the date immediately before the expropriation, i.e., 27 June 2007. This had an impact on the elements of the valuation by the discounted cash flow (“DCF”) methodology. It also meant that the cash flow was discounted to its value in June 2007, resulting in a lower compensation than if the date of valuation were set at the time of the award. The exact consequences for the calculation of damages of the different conclusions reached by the ConocoPhillips and Mobil tribunals regarding the lawfulness of the expropriation remain to be seen because the ConocoPhillips tribunal has yet to issue its decision on damages.
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Among diverse issues arising from these waves of cases, it is evident that investment protections play a role in both promoting investment and managing risks when realized. In this context, disproportionate changes to regulatory frameworks applicable to industries which require capital intensive and long-term investments, such as the oil and gas sector, may constitute treaty violations. At the same time, investment treaties are not all the same, and this will only become more important as treaty language and practice continues to develop. Moreover, the timing and conditions of any violation may have an impact on the compensation awarded. States and investors alike should take heed - indeed, vigilance itself is a component of systems for the promotion and protection of investment.
Latin American Oil & Gas Investment Disputes
A non-exhaustive list of oil and gas investment treaty arbitrations related to Argentina, Ecuador and Venezuela since 2000
Argentina
1. BG Group Plc. v. Argentine Republic (UNCITRAL).
2. Camuzzi International S.A. v. Argentine Republic (ICSID Case No. ARB/03/2).
3. CMS Gas Transmission Company v. Argentine Republic (ICSID Case No. ARB/01/8).
4. El Paso Energy International Company v. Argentine Republic (ICSID Case No. ARB/03/15).
5. Enron Creditors Recovery Corporation (formerly Enron Corporation) and Ponderosa Assets, L.P. v. Argentine Republic (ICSID Case No. ARB/01/3).
6. Gas Natural SDG, S.A. v. Argentine Republic (ICSID Case No. ARB/03/10).
7. LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentine Republic (ICSID Case No. ARB/02/1).
8. Mobil Argentina S.A. v. Argentine Republic (ICSID Case No. ARB/99/1).
9. Mobil Exploration and Development Inc. Suc. Argentina and Mobil Argentina S.A. v. Argentine Republic (ICSID Case No. ARB/04/16).
10. Repsol, S.A. and Repsol Butano, S.A. v. Argentine Republic (ICSID Case No. ARB/12/38).
11. Sempra Energy International v. Argentine Republic (ICSID Case No. ARB/02/16).
12. Total S.A. v. Argentine Republic (ICSID Case No. ARB/04/1).
Ecuador
1. Burlington Resources, Inc. v. Republic of Ecuador (ICSID Case No. ARB/08/5).
2. Chevron Corporation and Texaco Petroleum Corporation v. The Republic of Ecuador (UNCITRAL, PCA Case No. 2009-23).
3. Chevron Corporation and Texaco Petroleum Company v. The Republic of Ecuador (UNCITRAL, PCA Case No. 34877).
4. City Oriente Limited v. Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador) (ICSID Case No. ARB/06/21).
5. EnCana Corporation v. Republic of Ecuador (UNCITRAL, LCIA Case No. UN3481).
6. Murphy Exploration and Production Company International v. Republic of Ecuador (ICSID Case No. ARB/08/4).
7. Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Republic of Ecuador (ICSID Case No. ARB/06/11).
8. Occidental Exploration and Production Company v. The Republic of Ecuador (LCIA Case No. UN3467).
9. Perenco Ecuador Limited v. Republic of Ecuador (ICSID Case No. ARB/08/6).
10. Repsol YPF Ecuador, S.A. and others v. Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador) (ICSID Case No. ARB/08/10).
11. Técnicas Reunidas, S.A. and Eurocontrol, S.A. v. Republic of Ecuador (ICSID Case No. ARB/06/17).
Venezuela
1. ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/07/30).
2. Eni Dación B.V. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/07/4).
3. OPIC Karimum Corporation v. The Bolivarian Republic of Venezuela (ICSID Case No. ARB/10/14).
4. The Williams Companies and others v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/11/10).
5. Tidewater Inc. and others v. The Bolivarian Republic of Venezuela (ICSID Case No. ARB/10/5).
6. Universal Compression International Holdings, S.L.U. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/10/9).
7. Venezuela Holdings B.V., Mobil Cerro Negro Holding Ltd. and others v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/07/27).
[1] The data compiled is current as of 2 April 2015.