Interim agreement between Federal Government of Iraq and Kurdistan Regional Government on oil exports, yet major differences and legal proceedings persist

3 December, 2014

These are challenging times for Iraq. The Islamic State or ISIS controls thousands of square miles of territory and major Iraqi cities such as Mosul, Tikrit and Falluja. While leading the offensive against ISIS and enjoying the support of international allies, the Kurdistan Region of Iraq is seeking to secure contracts with international energy companies and export oil in order to boost its strained economy, a situation exacerbated by the cost of supporting refugees from the fighting in Syria and northern Iraq, as well as unpaid revenues owed by the Federal Government of Iraq (FGI).

In mid-November, the FGI and the Kurdistan Regional Government (KRG) announced a deal to ease tensions over Kurdish oil exports and payments from Baghdad. Under the deal, which lasts for one month only, the KRG is to provide the FGI with 150,000 barrels of oil per day in exchange for US$500 million in immediate cash payments. This was paid in two instalments last week. The 150,000 barrels of oil per day represents about half of the KRG’s export capacity, the remainder of which is still being shipped independently. The deal was reached after talks between Iraqi Oil Minister Adil Abdul Mahdi and Kurdish Prime Minister Nechirvan Barzani. At the Atlantic Council summit in Istanbul, the oil ministers of the KRG and FGI welcomed the deal as the first step in a broader effort to bridge differences over hydrocarbons. Notably, Oil Minister Abdul Mahdi appeared to acknowledge that federal legislation for petroleum might have to provide for a decentralised system, striking a tone very different from that of his predecessor.

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Exxon Mobil is awarded US$1.6 billion in ICSID claim against Venezuela – to be set off against award in parallel contractual arbitration

16 October, 2014

On 9 October 2014, a tribunal of H.E. Judge Gilbert Guillaume (President), Professor Kaufmann-Kohler and Dr. Ahmed Sadek El-Kosheri rendered a final Award on the case Venezuela Holdings and others v. the Bolivarian Republic of Venezuela, ICSID Case NO. ARB/07/27.

Five subsidiaries of Mobil Corporation (the “Claimants”) initiated the arbitration in 2007 claiming compensation for Venezuela’s alleged breaches of the Netherlands-Venezuela BIT in relation to a series of state actions which affected the Claimants’ investments in the Cerro Negro Project in the Orinoco Belt and the La Ceiba Project adjacent to Lake Maracaibo.

After 7 years of proceedings the Tribunal ordered Venezuela to pay to the Claimants: (i) US$9,042,482 in compensation for the production and export curtailments imposed on the Cerro Negro Project; (ii) US$1,411.7 million in compensation for the expropriation of their investments in the Cerro Negro Project; and (iii) US$179.3 million in compensation for the expropriation of their investments in the La Ceiba Project. The compensation amount is much closer to the valuations put forward by Venezuela in the arbitration, than the US$ 16.6 billion requested by the Claimants.

Of particular note in the Award is the Tribunal’s finding that Venezuela’s expropriation of Claimants’ assets was lawful. Even when no compensation was paid, the Tribunal concluded that: the expropriation was conducted in accordance with due process; it was not carried out contrary to undertakings given to the Claimants; and the Claimants did not establish that the offers made by Venezuela were incompatible with the “just” compensation requirement of Article 6(c) of the BIT.

This approach contrasts with the decision of the majority of the tribunal hearing a similar claim against Venezuela brought by ConocoPhillips (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). In that case, the majority found that the expropriation was unlawful because Venezuela did not approach negotiations with ConocoPhillips in good faith and it only offered book-value, rather than fair market value compensation for the assets (Decision on Jurisdiction and Merits dated 3 September 2013).

There are a number of open questions about the level of compensation payable following an illegal expropriation as compared to a legal expropriation. In this case the Claimants submitted that the expropriation was unlawful and that, as a consequence, Venezuela was under the obligation to make full reparation for the damages caused, in conformity with international law. By contrast, Venezuela contended that even if the expropriation were deemed to be unlawful the indemnity to be paid to the Claimants must represent the market value of the investment at the date of the expropriation. The Tribunal decided that since it had found that the expropriation was lawful it did not need to consider the standard for compensation in case of unlawful expropriation or whether it would differ from the standard for compensation to be paid in case of lawful expropriation. It held that the compensation must be calculated in conformity with the requirements of the BIT which required “just compensation” and that “just compensation” should represent the market value of the investments affected immediately before the measures were taken. Therefore, it employed the date of the expropriation of Claimants’ assets (June 2007) as the valuation date, which had considerable significance in the amount of compensation since the market price of oil increased in the years that followed the expropriations.

The Tribunal also grappled with the parties’ respective cases on whether a risk of confiscation is part of the country risk that is taken into account in determining the discount rate for the purposes of valuing the assets using the Discounted Cash Flow Method. The Tribunal concluded that a confiscation risk remains part of the country risk and must be taken into account in the determination of the discount rate.

To avoid double-recovery, the Tribunal held that the amount already received by the Claimants under a parallel ICC Award should be discounted to the total compensation payable to the Claimants.

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Pakistan Supreme Court declares a contract – and the arbitration clause within that contract – void on public policy grounds

9 September, 2013

In a decision earlier this year the Pakistan Supreme Court declared that a joint venture agreement between a local development authority and BHP for the exploration of minerals was void on a number of public policy grounds. A subsequent novation of the agreement was also found to be void. Of particular interest to readers of this blog is that this decision included a finding that the arbitration clause in the agreement was also void, notwithstanding previous overtures from the Pakistani courts that it recognises the separability of an arbitration agreement.

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