Occidental Petroleum Corporation and Occidental Exploration and Production Company v. the Republic of Ecuador: US oil company passes jurisdictional hurdle in arbitration with Ecuador

By Damon Vis-Dunbar
22 September 2008

A tribunal has accepted jurisdiction in a dispute that pits two petroleum companies against the Government of Ecuador, allowing the case to proceed to the merits stage. The two claimants, Occidental Petroleum Company (OPC) and Occidental Exploration and Production Company (OEPC), are seeking more than US$ 3 billion after a contract to explore and exploit oil was severed by Ecuador.

The Occidental companies are alleging breaches of a contract with Ecuador and the Ecuador-United States bilateral investment treaty.

OEPC had transferred a portion of its stake in an Ecuadorian oil field to another foreign investor, a subsidiary of the Canadian company Encana, in exchange  for payments that would contribute to capital investments and operating costs. However, the move eventually spurred the Minister of Energy and Mines to terminate its contract with Occidental, on the grounds that the company had not received ministerial approval for the transfer, nor had it fulfilled the terms of its contract by, among other things, failing to invest adequately in the oil field.

The case was registered with the International Centre for the Settlement of Investment Disputes (ICSID) in 2006, but Ecuador argued that the tribunal lacked jurisdiction for two reasons: (i) that adjucation was governed by the contract, and the contract directed that disputes of this nature be settled under Ecuadorian law rather than international arbitration; (ii) that the Claimants failed to abide by a mandatory six-month waiting period before filing for arbitration.

The tribunal dismissed both arguments in its 9 September 2008 decision. On the first, it concluded that the contract in question did not explicitly bar disputes from entering international arbitration. On the second, the tribunal concluded that the dispute stretched back to 2004, and that “attempts at reaching a negotiated solution were indeed futile …” Thus, Ecuador could not argue that the Occidental companies had rushed to arbitrate.

This dispute is one of a string of recent arbitrations launched by foreign investors in the oil and gas sector against the government of Ecuador. Indeed, it is the second time that Occidental has sued Ecuador; in 2004, Ecuador was found liable to Occidental for more than US$ 75 million in damages in a separate arbitration.

Ecuador is currently defending itself in nine arbitrations at the Washington-based International Centre for the Settlement of Investment Disputes, an arbitration facility that operates under the auspices of the World Bank. Most of the claims relate to the 2006 “Ley 42”, which levied a 50% tax on oil company windfall profits.

A copy of decision on jurisdiction in Occidental Petroleum Corporation and Occidental Exploration and Production Company v. the Republic of Ecuador is available from the ICSID website by clicking here.