Law360, New York (February 8, 2017, 7:22 PM EST) — A ConocoPhillips Co. subsidiary on Tuesday was awarded $380 million by an international tribunal following nearly a decade of arbitration against Ecuador, the result of a dispute over the allocation of certain oil profits that culminated in the South American nation acquiring the subsidiary’s assets for a song.
An International Center for the Settlement of Investment Disputes tribunal, led by Gabrielle Kaufmann-Kohler, along with Stephen L. Drymer and Brigitte Stern, determined that Ecuador had unlawfully expropriated Burlington Resources Inc.’s investment in two oil exploration blocks in the country, violating a bilateral investment treaty with the U.S.
“The tribunal’s decision on damages sends a clear message that governments cannot expropriate investments without fair compensation,” said Janet Carrig, senior vice president and legal and general counsel for ConocoPhillips, in a statement on Wednesday. “ConocoPhillips sought to protect its interests to the fullest degree and the tribunal acknowledged our legal rights and the unlawful nature of Ecuador’s actions.”
Ecuador has already vowed to challenge the award, saying through its public news agency on Wednesday that it will request an annulment on the grounds that the tribunal exceeded its power and failed to state reasons for its decisions, as well as for certain procedural defects. The country noted that the tribunal awarded Burlington Resources only 22 percent of its initial $1.5 billion claim.
ConocoPhillips on Wednesday said that it believes any annulment bid would be meritless and said it would “strongly defend” against it.
The tribunal awarded Ecuador $42 million for certain environmental and infrastructure impacts associated with Burlington Resources’ operations in the country, which it had through a consortium with a French oil company called Perenco, according to the statements. A copy of the award wasn’t immediately available on Wednesday.
Attorneys for the parties could not immediately be reached for comment on Wednesday.
At issue in the dispute are production sharing contracts entered into between a Burlington Resources subsidiary called Burlington Oriente and Ecuador for certain oil exploration areas, called blocks, in the Ecuadorian Amazon region. The dispute arose as a result of an oil price spike that began in 2002, after which the parties began disputing how the economic benefits of the price spike would be distributed between them.
The production sharing contracts regulated the parties’ rights and obligations in relation to the exploration and exploitation of hydrocarbons in the blocks, including the participation formulas allocating the oil produced between the state and the contractors. The contracts also incorporated certain tax clauses.
The trouble began in 2005, when Ecuador attempted to renegotiate the production sharing contracts so that it would be allocated a higher portion of the ever increasing revenue coming from the blocks. Burlington Resources refused, saying that the allocation of oil production was independent of the price of oil.
Thereafter, Ecuador enacted legislation compelling oil companies to pay 50 percent of the amount by which the market price of oil exceeded the price of oil at the time the contracts were executed. That 50 percent tax rate was later increased to 99 percent, and in the years that followed, Ecuador and Burlington Resources continue trying to negotiate different allocations.
By mid-2008, the parties still had not resolved the dispute, and Burlington Resources stopped paying the tax. In 2009, Ecuador took enforcement action, ordering the seizure of crude production and cargo from the blocks that were later acquired by the country’s state-owned oil company, PetroEcuador. Some of the crude was bought for half its market value and other portions were acquired for around two-thirds of the value, according to a previous decision issued by the tribunal in 2012.
Thereafter, Burlington Resources ceased operations in the block.
Burlington Oriente owned an average of around 44 percent in the blocks along with Perenco, which held the remaining interests. They had formed a consortium to own and operate the blocks that provided for the joint payment of taxes.
Ecuador is represented by its attorney general’s office and by Dechert LLP.
The case is Burlington Resources Inc. v. Republic of Ecuador, case number ARB/08/5, in the International Center for the Settlement of Investment Disputes.