Global Dispute of the Year, Investment Arbitration: Occidental v. Ecuador
Honorees: Covington & Burling, Debevoise & Plimpton, Occidental Petroleum
Arguably, this massive arbitration win for oil giant Oxy is the second chapter in a long-running feud with the government of Ecuador. In 2004, Occidental won $177 million from Ecuador in an initial arbitration over value-added tax. On May 15th, 2006, Ecuador struck back—seizing Oxy’s oil concession. Oxy, it said, had broken the terms of its deal with Ecuador by entering into a farm-out agreement. Two days later, Oxy filed for arbitration. In October 2012, ICSID, the International Centre for the Settlement of Investment Disputes, agreed that the farm-out was a breach, but nonetheless awarded Oxy $1.7 billion.
At the heart of the matter was the issue of proportionality. Oxy had been active in Ecuador since the mid-1980s, and entered into a participation contract with Ecuador (the world’s smallest member of OPEC) to a patch of rainforest (block 15) for hydrocarbons in 1999. In 2000, however, it did a deal with Canada’s Alberta Energy Corporation—now Encana—giving up a 40 percent interest in block 15 in return for capital contribution.
In 2006, the Ecuadorian public got wind of Oxy and AEC’s farm-out agreement, which was not well received. Street demonstrations ensued. Under substantial political pressure, the government terminated the participation agreement, seized Oxy’s property at its Quito offices, and then its oil fields. A request from Oxy for arbitration under the U.S.–Ecuadorian Bilateral Investment Treaty (BIT) by ICSID quickly ensued.
It took ICSID six years to make its ruling. In the event it found that Oxy was indeed in breach of Ecuadorian law for failing to seek ministerial approval of the farm-out, but that the government’s response, termination of the participation contract, was disproportionate given that other remedies were available. Hence the award, and a ruling that some have described as “the most important jurisprudential development of the year,” underscoring the importance of the proportionality principle as an element of the fair and equitable treatment standard under BITs.
A coda to the story: Ecuador lodged a petition for annulment with ICSID shortly after the ruling, arguing that the tribunal didn’t have jurisdiction, so another bout of this long-running arbitration is on the horizon. But there’s little doubt that Oxy, advised by Debevoise and Covington & Burling, conclusively won Round One.