Ecuador vs Burlington Expropriation

The Republic of Ecuador gained ground in an arbitration case against U.S. oil company Burlington Resources at the World Bank tribunal The International Centre for the Settlement of Investment Disputes (ICSID) when a judge ruled that the company's appointed arbitrator should be exchanged, due to a perceived lack of impartiality.

Burlington's appointed arbitrator was Chilean-born Professor Francisco Orrega Vicuna, Professor of Law at the Heidelberg University Centre of Law for Latin America. He has presided over numerous ICSID arbitration tribunals and has been a member of the dispute settlement panel at the World Trade Organisation.

Windfall tax dispute

  

The case was first brought to ICSID by Burlington Resources in 2008. The company charged that taxation changes that had been introduced by the Ecuadorian government in 2006 had violated the Bilateral Investment Treaty (BIT) between Ecuador and the United States and had effectively expropriated Burlington from its oil exploration licences in Ecuador.

Burlington first signed a contract in 2001 with the Government of Ecuador to explore for oil in the country. Like other foreign oil companies in Ecuador, it had been subjected to a campaign from indigenous organisations that objected to oil exploration over what they claimed are their traditional territories. Lawyers representing the Shuar, Achuar and Kichwa peoples of Ecuador delivered letters and formal eviction notices to Burlington CEO Booby Shakouls. These charged that oil exploration had contaminated their territories.

Oil price rise

Matters changed for the company when world prices started to rise from 2002. The government of Ecuador attempted to renegotiate the fiscal conditions of the contracts it had signed with Burlington with the intention of imposing a windfall tax on the company's profits. After unsuccessful negotiations, Burlington suspended operations on the grounds that the investment had become unprofitable. In response, Ecuador took control of the company's acreage and ended the contracts.

ConocoPhillips takeover

Burlington Resources was taken over by ConocoPhillips in 2005, whose CEO James Mulva said the acquisition was part of his company's hopes to bolster oil reserves. The Ecuadorian expropriation of Burlington occurred in 2006, after this takeover. In 2008, Burlington, as a division of ComocoPhillips, filed a claim against Ecuador at the ICSID tribunal.

In December 2012, an ICSID tribunal ruled that Ecuador had expropriated the U.S. oil company in violation of the US-Ecuador bilateral investment treaty. A decision on pecuniary damages was postponed.

Dissenting opinions

The successful challenge by Ecuador on Orrega Vicuna's impartiality is unprecedented and based on the arbitrator dissenting opinions in rulings so far issued during this case. Although each side in an arbitration case appoints their own counsel, the appointed lawyers are expected to remain impartial.

The dispute is now suspended until Burlington appoints another arbitrator.

A decade on: where the Yukos affair stands now

The case of the Yukos Oil Company’s dismantling has become synonymous worldwide with expropriation. The famed Russian corporation’s case has reached the ten year milestone, with the situation still considered to be unfairly settled by some. The case has been lauded as a typical example of expropriation by a governmental authority. 

As the Yukos Oil Company stands now, it is in the process of undergoing appeals to the expropriation in the Amsterdam district courts, after its consideration by the European Court of Human Rights. The case has drawn attention from prolific figures on a global scale, with political individuals, academic scholars and journalists all lending their support to Yukos Oil.

For example, a 2013 review by the Houses of Parliament in the United Kingdom produced the following opinions of the case:

Lord Judd stated that he found criminalisation of businesses to be a “routine” tactic for law enforcers in Russia. Entrepreneurship was punished, in his opinion, with the courts of law producing biased verdicts due to “external pressure”. This pressure also influenced other decisions made regarding Yukos Oil and its affiliates. Lord Trimble added to the discussion, opining that the Yukos Oil case had essentially become the “turning point in the development of the regime”.

Lord Alderdice, a prominent figure, commented that the European Court of Human Rights was subjected to delays due to the repeated replacement of Russian officials in the court’s consideration of the Yukos Oil case of Vasily Aleksanyan. 

Lord Hylton stated outright that “the fate of Yukos Oil was also most unsatisfactory.” In his opinion, the assets of the company were redistributed without full consideration of its proper value. The general consensus from the discussion seems to have fallen of the side of Yukos Oil and its managing partners, with human rights cited as a main cause for concern for the United Kingdom’s government figures.

Argentina sets out laws on Falklands oil exploration

Amended hydrocarbons legislation passed by the Argentine Congress in November 2013 introduces sanctions against any company exploration for oil in and offshore of the disputed Falklands Islands without the authorization of the government of Argentina.

The law sets out judicial sentences of up to 15 years, fines that equal the price of 15 million barrels of oil. It applies to all those who engage directly or indirectly with hydrocarbon activity such as exploration, production, transportation and storage within the area that Argentina regards as its continental shelf.

The British Foreign and Commonwealth Office sent a formal protest to the Argentine Charge d'Affaires in London against the law. The protest was not accepted by Argentine deputy foreign minister, Eduardo Zuian.

Sovereignty dispute

This is the latest development in the long running discussion over the Falkland Islands between Britain and Argentina. Britain classes the islands as an Overseas Territory so they are self governing but remain under British rule. Argentina claims the islands (known in Argentina as the Malvinas) belong to Argentina and officials have called on the UK to have talks over their sovereignty. In early 2013, 99.8 percent of Falkland Islanders voted in a referendum to remain under British rule.

Exploration continues

Four oil companies are currently exploring offshore of the Falkland Islands. London-based Rockhopper Exploration found the first oil in 2010 – Sea Lion containing about 350 million barrels in place - in the northern Falklands Basin. In September 2013, the company signed a farm-out agreement with London-based Falklands Oil and Gas Limited (FOGL) that has acreage in the southern Falklands Basin, and Premier Oil, another London-based oil exploration company. For its part, FOGL took over the licences held in the North Falklands Basin by London-based Desire Petroleum. London-based oil company Borders and Southern is exploring in Eastern Falklands Basin and is planning to drill a second exploration well. The company's first well in 2011 discovered some traces of gas.

Investor interest

There is continuing interest in British companies' exploration programmes. Premier Oil raised £150 million with a December 2013 bond issue. CEO Simon Lockett says the bond will help the company to diversify its sources of debt funding.

For its part, Rockhopper Exploration has been concerned about its capital gains tax liability to the Falklands Islands Government (FIG) following its farm out to Premier Oil. The company reached an agreement with FIG to pay US$146 million in capital gains tax over 2014 in two tranches. Company CEO Sam Moody commented that Rockhopper is now able to drive forward its Sea Lion discovery development.

Rompetrol freezes investments in Romania after court ruling

Rompetrol, a Romanian oil company wholly owned by KazMunayGaz, the state-owned oil and gas company of Kazakhstan, has frozen a planned 350 million euro (US$480 million) investment programme after Romania's Constotitional Court ruled that a memorandum of understanding (MOU) between the oil group and the State was unconstitutional. The agreement was intended to settle a 516 million euro (US$660 million) claim by the State against the company.

Investments that have been put on ice include the building of a co-generation power plant at the Vega oil refinery in Ploiesti on the Black Sea coast and the development of a retail fuel network, said Rompetrol VP Azamat Zhangulov. In answer to concerns expressed by Prime Minister Victor Ponta that the company may file for insolvency, Zhangulov said that this will not be the case. However, he did blame President Traian Basescu for challenging the settlement that had been agreed in February 2013.

Zhangulov was also concerned about a new 1.5 per cent tax to be levied on special industrial assets from January 2014.

Ownership changes

KazMunayGaz acquired the Rompetrol Group in August 2007 by buying 75 per cent in the company from its them owner, Dinu Patriciu. The company had oil refining and marketing operations in 12 countries. Originally established in 1974 as the state oil company of Romania, it was bought in 1998 by Dinu Patriciu, a billionaire Romanian businessman, and a group of local investors. They established the Rompetrol Group, a Netherlands-based holding company. This group owned Rompetrol Rafinare, the holding company of the Petromidia Refinery in Navodari on the Black Sea.

Details of the memorandum of understanding

In 2010, Rompetrol Rafinare converted bonds issued in 2003 into shares in favour of the Romanian State so giving it a 44.69 per cent share in the refining company. Negotiations on the status of the State as a shareholder continued with KazMunayGaz until February 2013 when the sides arrived at what was believed to be an amiable solution. The Rompetrol Group was to buy the 26.6 per cent share in Rompetro Rafinare from the State for US$200 million, giving it full control over the company.

The State was to remain an 18 per cent shareholder in the Petromidia refinery for three years. In addition, Rompetrol planned a significant capital investment programme in Romania. The two sides would establish a US$1 billion investment fund. Rompetrol would contribute 80 per cent of the fund's holdings and the Romanian State would add a further 20 per cent.

Challenge to validating law

A law validating the agreement was passed by the Romanian legislature but was severely criticised by President Basescu. He claimed that the settlement is not in favour of Romania and challenged it in court.

Rompetrol and the Romanian government have been involved in several disputes. World Bank's tribunal, International Centre for the Settlement of Investment Disputes (ICSID) ruled in May 2013 that Rompetrol's former director, Dinu Patriciu, had been subject to State-sponsored harassment during a criminal investigation that amounted to a breach of investment guarantees under the Netherlands – Romanian Bilateral Investment Treaty. However, the ICSID did not award any damages to the company.