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International Arbitration in the Energy Sector edited by Scherer, Maxi (22nd February 2018)

Part II Investor-State Arbitration in the Energy Sector, 13 Energy Investor-State Disputes in Latin America

Eduardo Silva Romero

From: International Arbitration in the Energy Sector

Edited By: Maxi Scherer

Subject(s):
International courts and tribunals — Arbitration

(p. 293) 13  Energy Investor-State Disputes in Latin America

I.  Introduction

13.01  A major source of energy investor-state disputes in Latin America has been what some authors have called ‘the resurgence of resource nationalism’.1 Resource nationalism refers to a shift in the political and economic control of the energy sector, from foreign and private interests to domestic and state-controlled companies. It is, in short, ‘nations wanting to make the most of their endowment’.2 Resource nationalism presents itself in cycles, mainly as a by-product of high commodity prices, coupled with changes in political views on the state’s role in the economy, and poor contract drafting unable to adapt to fluctuating market conditions.3

(p. 294) 13.02  During the mid-2000s, episodes of resource nationalism took place around the globe, triggered by the surge in crude oil prices, which increased from US$20 per barrel in 2002 to nearly US$120 per barrel in 2008. These episodes materialized in two different legal forms. First, and as the most common response worldwide, were fiscal measures that the states considered to be a legitimate exercise of their sovereign power to impose taxes in their territories.4 Secondly, and less common, was outright nationalization of assets. In Latin America, some states—namely, Ecuador—responded to the oil boom solely with fiscal measures, while others—such as Argentina, Bolivia and Venezuela—responded with a combination of fiscal measures and nationalizations. Even though these nationalizations naturally targeted projects for the exploration and exploitation of crude oil, they affected the energy industry at large, as it was considered by some governments to be a ‘strategic sector’ of the economy.

13.03  This chapter focuses on Latin American investor-state arbitration claims rooted in resource nationalism, specifically concerning the exploration and exploitation of crude oil.5 It presents an overview of the most relevant strategies used by investors and states to defend their standpoint on resource nationalism, identifying which ones proved most successful. Section II offers a brief account of the historical background of energy investor-state arbitration in Latin America, followed by a presentation of the strategies adopted by the contending parties concerning, in sections III and IV, respectively, fiscal measures and nationalizations. Section V addresses the issue of corporate restructuring as a strategy used by foreign companies to challenge resource nationalism measures before investment tribunals, and section VI provides some concluding remarks.

(p. 295) II.  Historical Background of Energy Investor-State Arbitration in Latin America

13.04  The recent history of energy investor-state arbitration in Latin America reveals three consecutive phases.6 The first phase occurred during the 1990s, when virtually all Latin American states abandoned the ‘Calvo Doctrine’.7 During this phase, which was characterized by a wave of privatization of their industrial assets,8 several Latin American states entered into agreements for the protection and encouragement of foreign investment (and which contained investor-state arbitration clauses), and ratified the 1965 ICSID Convention.9

13.05  In Latin America, states did not enter into energy-specific treaties, such as the ECT. Their relationship with foreign investors in the energy sector would be governed, instead, by a plethora of (mostly bilateral) investment protection treaties.10

13.06  The second phase unfolded during most of the 2000s, and was marked by the Latin American states’ debut as respondents in a series of claims brought under the investment protection agreements signed in the 1990s.11 Latin America quickly became the region accounting for a very large number of registered ICSID arbitration claims,12 the majority concerning the energy (p. 296) sector.13 The causes of those disputes were quite diverse, and while the 2000 Argentine economic crisis gained considerable notoriety,14 there were also disputes, against other states, rooted in tax refund entitlements,15 customs duties,16 contract terminations,17 public utilities’ tariff review processes,18 and, as discussed,19 resource nationalism.20

(p. 297) 13.07  Finally, at the end of the 2000s, the third—and current—phase commenced, wherein some Latin American states have advanced claims that investment tribunals have rendered inconsistent decisions that have unjustifiably challenged their sovereign determinations, paving the way for the return of Dr Carlos Calvo’s ghost in investment arbitration in Latin America.21

III.  Assessing Fiscal Measures under Investment Protection Agreements

13.08  This section covers cases commenced against Ecuador and Venezuela, concerning alleged breaches of the fair and equitable treatment (FET) standard and unlawful expropriations resulting from the enactment and enforcement of fiscal measures. As will be seen,22 the awards rendered in the Ecuadorian cases offer a more comprehensive view of the issue of fiscal measures compared to the Venezuelan cases, where measures of nationalization were at the heart of the disputes.

13.09  In the Ecuadorian cases, four different investment tribunals23 were tasked with determining whether Ecuador was liable as a consequence of the enactment and enforcement of Law 42, which regulated the Ecuador’s ‘participation in the surplus of oil sale prices, which ha[d] not been agreed upon or foreseen’,24 and imposed a 50 per cent windfall levy—which was later increased to 99 per cent—over the extraordinary income obtained by companies operating under ‘participation contracts’ for the exploration and exploitation of crude oil.

13.10  In the Venezuelan cases, two different investment tribunals25 scrutinized the state’s decision to discontinue an existing exceptional tax regime instituted during the Apertura Petrolera for oil projects in the Orinoco Belt, which effectively increased their royalty rate from one per cent to 30 per cent, and their income tax from 34 per cent to 50 per cent.

13.11  As described,26 the parties’ success in those cases largely depended on whether the conformity of the fiscal measures to the FET standard was under the tribunal’s purview. In fact, when states succeeded in carving out the fiscal measures from (p. 298) that standard, claimants failed to characterize them as tantamount to expropriation. When states failed to do so, claimants succeeded in characterizing the fiscal measures as breaches of the FET standard.

A.  Fiscal measures vis-à-vis the FET standard

13.12  In most of the cases under study, before assessing the fiscal measures’ conformity with the relevant treaties’ FET standard (described in section III.A.2), the tribunals had to determine whether the treaty excluded the fiscal measures from scrutiny under such a standard (discussed in section III.A.1).27

1.  Excluding the fiscal measures from assessment under the FET standard

13.13  Ecuador’s and Venezuela’s strategies to defend the legality of their fiscal measures included arguing that such measures could not be scrutinized under the FET standard. On the one hand, the debate in the Ecuadorian cases focused on whether Ecuador’s measures constituted ‘matters of taxation’ excluded from arbitral jurisdiction by virtue of a tax carve-out provision contained in art X(2) of the US-Ecuador BIT.28 On the other hand, in the Venezuelan disputes, the debate focused on whether the Dutch-Venezuela BIT similarly exempted fiscal measures from evaluation against the FET standard.29 For the most part, Venezuela obtained better results than Ecuador, which may be partly attributed to the different wording of the relevant treaty provisions at stake.

13.14  In Burlington, Murphy II, and Occidental II, the claimants’ strategy—to circumvent the tax carve-out provision of the US-Ecuador BIT—focused on establishing that their claims did not give rise to ‘matters of taxation’,30 based on two alternative arguments. First, they asserted that Law 42, which had been enacted as an amendment to the Ecuadorian Hydrocarbons Law, did not impose a tax under Ecuadorian law. Second, they contended that their claims did not concern the legality of Law 42, but rather Ecuador’s obligation to indemnify claimants for its effects pursuant to the terms of the participation contracts.

13.15  Under the same treaty, premised on similar contentions and with a comparable set of facts, the claimants’ strategy did not yield identical results in these cases. On the one hand, the strategy was unsuccessful in Burlington, where the tribunal (p. 299) declined jurisdiction to hear all non-expropriatory Law 42 claims pursuant to the tax carve-out provision. On the other hand, it proved successful in Murphy II and Occidental II, where the tribunals held that jurisdiction existed to hear all Law 42 claims, including those related to an alleged breached of the FET standard.

13.16  At first glance, one may be tempted to think that the claimants’ success was linked to the finding on whether Law 42 imposed a tax, as illustrated in Table 13.1.

Table 13.1  Tribunals’ application of Law 42

Does Law 42 impose a tax for purposes of the tax carve-out provision of the US-Ecuador BIT?

Are non-expropriatory claims barred by the tax carve-out provision?

Burlington

Yes, under international law,a as per the criteria established by the tribunals in Encana and Duke – ie it is a ‘law [which] imposed a liability on classes of persons to pay money to the State for public purposes’.b

Yes

Occidental II and Murphy II

No, under domestic law,c which ‘provides a strong indication of the measure’s proper characterisation’.d

No

a  Burlington (n 20) Decision on Jurisdiction, para 162.

b  ibid para 164–65.

c  These findings are contrary to the conclusion reached by the tribunal in Perenco. The Perenco tribunal, when analysing the participation contract under Ecuadorian law, found that Law 42 imposed a tax. Perenco (n 20) Decision on Remaining Issues of Jurisdiction and on Liability, para 377.

d  Murphy II (n 20) para 185. See also Occidental II (n 17) paras 492, 495, and 509.

13.17  However, a closer look into the tribunals’ decisions shows that what seems to matter most for the purposes of the application of a tax carve-out provision referring to ‘matters of taxation’31 is not the nature of the challenged measure, but the formulation of the claim. In other words, a tax-related claim may or may not give rise to ‘matters of taxation’.

13.18  The tribunal in Burlington made that clear. It explained that, even though Law 42 imposed a tax, some of claimant’s Law 42 claims did not raise ‘matters of taxation’ because they concerned Ecuador’s purported obligation to indemnify claimants for Law 42’s effects over the economy of participation contracts.32 In turn, the (p. 300) breach of that obligation could give rise to potential breaches of the US-Ecuador BIT’s umbrella clause which, in principle, were not excluded from the tribunal’s jurisdiction.33

13.19  As a matter of fact, in Burlington the question before the tribunal was, in a second phase, limited to the question whether the umbrella clause protection applied to obligations entered into between the state and an affiliate of the investor. The Burlington tribunal declined jurisdiction to hear non-expropriatory Law 42 claims not because Law 42 imposed a tax or because it found that the claimant’s claims gave rise to ‘matters of taxation’, but rather, it found that, as argued by Ecuador, ‘Burlington [could] not rely on the Treaty’s umbrella clause to enforce against Ecuador its subsidiary’s contract rights under the [participation contracts]’.34

13.20  Under that line of reasoning, it seems unlikely that, in the absence of alternative jurisdictional objections, a similarly drafted tax carve-out provision could end up excluding any tax-related non-expropriatory claims.35 In fact, it seems unlikely that an investor would formulate a claim based on any kind of tax other than one with adverse economic effects over its investment.

13.21  In the Venezuelan cases, as opposed to the Ecuadorian cases, debating the nature of the measures or the formulation of the claims was not part of the parties’ strategy. In Mobil and ConocoPhillips, Venezuela’s strategy focused on establishing that the Venezuelan tax reforms were not governed by art 3 of the Dutch-Venezuela BIT, which contained the FET standard. Venezuela claimed that they were governed, instead, by art 4, a more specific provision concerning guarantees of treatment in relation to ‘taxes, fees, charges, and to fiscal deductions and exemptions’,36 under which only discriminatory measures could constitute a breach of the BIT. By thwarting the application of the FET standard contained in art 3 of the Dutch-Venezuela BIT to the Venezuelan tax reforms, Venezuela (p. 301) was essentially preventing the tribunals from examining whether the Venezuelan tax reforms breached the claimants’ legitimate expectations.

13.22  Claimants, on their part, did not argue that the fiscal measures were discriminatory nor that they were not taxes, but focused instead on establishing that art 4 regulated some—but not all—aspects of the fiscal measures, for which art 3 still applied.37 Venezuela argued that the claimants’ interpretation rendered art 4 superfluous,38 while the claimants argued that Venezuela’s interpretation would have required specific language in art 4 excluding the application of art 3.39

13.23  Venezuela’s strategy proved successful in both cases. Relying mainly on the principle of effective interpretation, both tribunals sided with Venezuela’s interpretation of the Dutch-Venezuela BIT.40 The tribunals thus concluded that they did not have to consider whether the Venezuelan tax reforms breached the FET standard of art 3, but only whether they were discriminatory under art 4, which was undisputedly not the case.41

13.24  Besides the legal implications, the economic impact of this finding is not negligible. In Mobil, the tribunal deducted the Venezuelan tax reforms from the net cash flow calculation for purposes of compensation. This may also be the case in ConocoPhillips, where a decision on quantum is still pending.42

2.  Assessing the fiscal measures’ compliance with the FET standard

13.25  Ecuador’s Law 42 was the only Fiscal Measure tested against the FET standard. The tribunals in Murphy II, Perenco, and Occidental II were tasked with determining whether Law 42 constituted a breach of Ecuador’s international obligations and, in particular, its obligation to respect the claimants’ legitimate expectations under the FET standard.

13.26  On this issue, the claimants used a two-fold strategy which proved quite successful. First, they characterized the participation contracts as the basis of their legitimate expectations, claiming that the Contracts gave them the right to obtain any benefit accruing from high oil prices. Second, they contended that, by enacting (p. 302) Law 42, the state had unilaterally changed key contractual provisions, thereby flouting their legitimate expectations.

13.27  As to the first issue, the tribunals found that the participation contracts indeed underpinned the claimants’ legitimate expectations, giving great weight to the contractual provisions when assessing the alleged treaty breaches.43 In fact, echoing Paushok,44 they recognized that ‘States retain flexibility to respond to changing circumstances unless they have stabilized their relationship with an investor’,45 and stressed that ‘any changes to the policy framework must still be made mindful of the State’s contractual commitments’.46 Essentially, the tribunals found that the claimants had the right to expect that their participation contracts would not be unilaterally changed, and that, under said Contracts, claimants were entitled to any benefit accruing from high oil prices, in exchange for assuming the risk of the exploration activities.47

13.28  The tribunals then focused on determining whether Law 42 had unilaterally and substantially changed the operation of the participation contracts, undermining the claimants’ legitimate expectations. Law 42 initially imposed a 50 per cent windfall levy, which was later increased to 99 per cent. Hence, the tribunals performed a separate analysis for Law 42 at the 50 per cent tax rate and at the 99 per cent tax rate.48 The conclusion of the tribunals was that Law 42 at a 50 per cent rate had not changed the operation of the participation contracts.49 In fact, the claimants were still earning more revenue with Law 42 at 50 per cent than they did before the oil price rose.50 Conversely, Law 42 at a 99 per cent rate ‘rendered the participation contract essentially the same as a service contract’,51 where the ‘costs were covered but their ability to participate in the upside of high oil prices was severely limited’.52

13.29  Along with Law 42’s effect over the operation of the participation contracts, the tribunals also took into account other, more subjective factors when ascertaining (p. 303) the existence of a treaty breach. For instance, when referring to Law 42 at a 50 per cent tax rate, the tribunals found that, as experienced oil players, the claimants should have expected that the state would respond to such dramatic market conditions.53 Conversely, Law 42 at a 99 per cent tax rate was categorized as a coercion tactic to force contractors to move to a contract model resembling the service contracts existing in the Ecuadorian oil industry prior to 1993.54

13.30  In sum, one may conclude that, in terms of liability and quantum, excluding from the tribunal’s purview the conformity of the fiscal measures with the FET standard translated into better results for the states.

B.  Fiscal measures vis-à-vis expropriation

13.31  As mentioned,55 the claimants failed in all cases where they characterized the fiscal measures as tantamount to expropriation. Given that the nationalizations were at the heart of the Venezuelan disputes in Mobil and ConocoPhillips, the analysis of this issue was rather brief.56 Conversely, the Ecuadorian cases, Perenco and Burlington, offered a detailed analysis of the matter.57

13.32  In Perenco and Burlington, the strategy that proved most successful for Ecuador was claiming that the measures did not have the required economic effect to be deemed indirect expropriation, showing that, even during the application of Law 42 at a 99 per cent tax rate, the claimants had maintained positive cash-flows.58

(p. 304) 13.33  The tribunals considered that the presence of positive cash-flows were enough proof of an absence of expropriation. The Perenco tribunal found that ‘the central focus on expropriation is not on whether claimant’s business was optimal, but rather on whether it was effectively taken away from it’.59 Similarly, the Burlington tribunal considered that, ‘on the assumption that its effects are in line with its name, a windfall profits tax is … unlikely to result in the expropriation of an investment’,60 and explained that, for expropriation to be found, it had to be shown ‘that the investment’s continuing capacity to generate a return ha[d] been virtually extinguished’.61

13.34  Moreover, the claimants’ strategy—to invoke the state’s intent in enacting, or the proportionality of, the fiscal measures—failed to show the existence of an expropriation. In Perenco, the tribunal found that a measure’s proportionality could be relevant for an FET analysis, but not for proving expropriation.62 Similarly, the tribunal in Burlington concluded that ‘evidence of [confiscatory] intent may serve to confirm the outcome of the effects test, but does not replace it’.63

IV.  Assessing Nationalizations under Investment Protection Agreements

13.35  As mentioned,64 nationalizations were less common than fiscal measures during the resource nationalism episodes that took place during the last decade. In Latin America, where nationalizations occurred, they sometimes triggered investor-state arbitrations. From the decisions rendered in those arbitrations, one may draw two main conclusions. First, states have the sovereign power to nationalize, and tribunals will generally give deference to their determination of the public policy reasons underlying the nationalization.65 Second, the mere fact that an investor has not received compensation does not render a nationalization unlawful, but the lawfulness may still be affected by the terms of the offer of compensation.66

13.36  This section addresses compensation as a condition for the legality of nationalization, focusing on the nationalizations of the Orinoco Belt oil projects as assessed by the tribunals in Mobil and ConocoPhillips. Under the same applicable treaty (p. 305) and with a comparable set of facts, the Mobil tribunal found that Venezuela’s nationalization was lawful, while the ConocoPhillips tribunal found that it was unlawful.

13.37  In 2001, Venezuela enacted a new Law of Hydrocarbons, under which private companies were only allowed to participate in oil projects through mixed enterprises in which the state held a majority stake. In 2007, President Hugo Chavez announced that all projects in the Orinoco Belt would be nationalized, and issued Decree-Law 5200 ordering that those projects (which were operating outside the legal framework of the 2001 law) be ‘migrated’ into the new mixed companies (in which the state would hold at least a 60% participation interest). Companies operating in the Orinoco Oil Belt had four months (the ‘negotiation period’) to reach agreement regarding their participation in the new mixed companies and, if no agreement was reached, ‘the Republic, through Petróleos de Venezuela S.A. or any of its affiliates … [would] directly assume the activities of the [companies]’.67 Venezuela reached an agreement with various operators during the negotiation period, but not with ConocoPhillips and Mobil, leading to the seizure of these companies’ oil projects.

13.38  The parties’ debate during the arbitration focused on whether Venezuela had acted in good faith during the negotiation period, and on the consequences that its conduct had on the lawfulness of the nationalization. Venezuela’s purported lack of good faith during the negotiation period was evidenced, among other things, by the fact that it had only offered to compensate the claimants for the book value of their investment.

13.39  Venezuela’s strategy focused on claiming that it had acted in good faith during the negotiation period, showing that it had reached successful agreements with other companies, and claiming that Mobil and ConocoPhillips were the exception because their demands were unreasonable.68

13.40  Venezuela’s strategy was effective in Mobil for establishing that it had not violated the claimants’ due process by offering only a compensation based on the book value during the negotiations. The tribunal dismissed allegations of violation of due process,69 noticing that the fact that an agreement had been reached with other companies showed that the process enabled the companies to ‘weigh their interest and make decisions during a reasonable period of time’.70

13.41  Conversely, in ConocoPhillips, the tribunal found that the ‘just compensation’ under the Dutch-Venezuela BIT requirement called for good faith negotiations to fix the (p. 306) compensation in terms of the standard set in the BIT,71 and that by negotiating exclusively on the basis of the book value of the investment, Venezuela ‘was not negotiating in good faith by reference to the standard of “market value” set out in the BIT’.72

13.42  The fact that the Mobil tribunal did not find that offering the book value of the investment rendered the expropriation unlawful may be due to a matter of evidence, rather than law. Even though the claimants presented press releases in which the government stated that it would pay book value of the investments, the tribunal concluded that ‘evidence submitted [did] not demonstrate that the proposals made by Venezuela were incompatible with the requirement of “just” compensation’, and thus the tribunal rejected the unlawful expropriation claim.73

13.43  It is worth noting that the ConocoPhillips approach is contrary to the approach adopted in Tidewater,74 another case concerning the Venezuelan energy sector where Venezuela offered to cover the investments’ book value. There, the tribunal considered that even a treaty standard of ‘market value’ does not denote a particular method of valuation, concluding that Venezuela’s expropriation in that case was lawful.75 In light of these cases alone, the requirements that an offer of compensation should meet to render a nationalization lawful remain unclear.

V.  Gaining Access to Investor-State Arbitration through Corporate Restructuring

13.44  This section focuses on a strategy adopted by some companies to challenge Venezuela’s measures through investment arbitration, as opposed to other forums. In Mobil and ConocoPhillips, the claimants’ strategy to incorporate companies in the Netherlands between 2005 and 2006, with the sole purpose of contesting Venezuela’s measures under the Dutch-Venezuela BIT,76 proved successful. In fact, for the most part, Venezuela failed in its attempt to challenge the tribunals’ jurisdiction in those arbitrations, claiming ‘an abusive manipulation [by the claimants] of the system of international protection under the ICSID Convention and the BITs’.77

13.45  For both tribunals, corporate restructuring with the sole purpose of gaining access to investor-state arbitration is a ‘perfectly legitimate goal’78 for future disputes, but (p. 307) not for existing disputes.79 To determine whether a dispute over a particular measure already existed at the time of the corporate restructuring, the Mobil tribunal considered whether complaints had been lodged with state authorities,80 and whether the relevant measure had been implemented.81 The ConocoPhillips tribunal, for its part, took into account whether a previous complaint had been withdrawn (which was the case in accordance with the evidence submitted before the tribunal).82 Interestingly, based on the same treaty, and similar contentions and facts, the Mobil tribunal excluded certain disputes from its jurisdiction, while the tribunal in ConocoPhillips upheld its jurisdiction to resolve all claims presented by the claimants.

13.46  Beyond any criticism concerning the fact that these tribunals did not take issue with the practice of ‘treaty shopping’,83 it should be noted that neither of these tribunals included as part of their analyses the disputes’ foreseeability at the time when the corporate restructuring took place.84 This was a key point of analysis for a number of other tribunals in determining the existence of an ‘abuse of right’,85 including in Tidewater.86

(p. 308) 13.47  One cannot help but wonder whether the results would have been different, had the foreseeability of the dispute been taken into account. For instance, in Mobil, the tribunal upheld its jurisdiction over disputes concerning the nationalization because Venezuela had not taken any nationalization measures at the time of the corporate restructuring.87 However, prior to the corporate restructuring, the claimant had sent a letter to Venezuela expressly consenting to investor-state arbitration over ‘any dispute arising out of any expropriation or confiscation of all or part of the investment’,88 evidencing that the dispute had been foreseen. Likewise, in Mobil, the tribunal upheld jurisdiction over all of the claimants’ claims, even though some of the measures giving rise to those claims had been unequivocally announced by the Venezuelan government prior to the corporate restructuring.89

VI.  Conclusion

13.48  This chapter has sought to provide an overview of the outstanding strategies used by states and foreign investors in Latin America to defend their stance on resource nationalism, one of the major sources of investor-state disputes.

13.49  Resource nationalism is a cyclical phenomenon, and it is unlikely that we have witnessed the last of its episodes. Also, given that it is not confined only to a particular region, there is a possibility that it will occur elsewhere in the future. Hence, identifying the strategies that proved successful in arbitration to tackle fiscal measures and nationalizations may provide helpful tools both for investors and states to anticipate the legality of their conduct and, if need be, defend their interests in investor-state arbitration.

13.50  There is, however, a notable obstacle to this goal. As shown,90 in some cases, investors and states did not obtain identical results, even when challenging the same measures, based on the same treaties, with similar contentions and sets of facts. The issue of inconsistency of arbitral decisions is not new in investor-state arbitration and, as discussed,91 has been a relevant factor in the backlash against investor-state arbitration in some Latin American countries. There seems to be few feasible solutions in the short term to solve the issue of inconsistency. As such, one might be better served by factoring uncertainty into one’s strategy from the outset.

Footnotes:

1  Mapungubwe Institute for Strategic Reflection (MISTRA), Resurgent Resource Nationalism? A Study into the Global Phenomenon (Real African Publishers 2016). See also Sangwani Patrick Ng’ambi, Resource Nationalism in International Investment Law (Routledge 2016) 30, 32–34. For a discussion of resource nationalism in Africa see paras 15.48, 15.51–15.52, and 15.57.

2  Paul Stevens, ‘National Oil Companies and International Oil Companies in the Middle East: Under the Shadow of Government and the Resource Nationalism Cycle’ (2008) 1 J World Energy L & Business 5, citing (2006) 49 Middle East Economic Survey 39.

3  Ng’ambi, Resource Nationalism (n 1) 30: ‘Resource nationalization often occurs in cyclical patterns, hence the term “resource nationalism cycle” ’. For a discussion on resource nationalism see Vlado Vivoda, ‘Resource Nationalism, Bargaining and International Oil Companies: Challenges and Change in the New Millennium’ (2009) 14(4) New Political Economy 517–34: ‘[I]t is natural that during a period of high prices the phenomenon of resource nationalism comes to the surface, as it is a by-product of high prices’. See also F Robert Buchanan and Syed Taqir Anwar, ‘Resource Nationalism and the Changing Business Model for Global Oil’ (2009) 10 J World Investment & Trade 241; Ian Bremmer and Robert Johnston, ‘The Rise and Fall of Resource Nationalism’ (2009) 51(2) Survival 149–58; Jeffrey Wilson, ‘Understanding Resource Nationalism: Economic Dynamics and Political Institutions’ (2015) 21(4) Contemporary Politics 399–416.

4  This phenomenon was described as a ‘fiscal storm’, and occurred in countries such as Algeria, Angola, Argentina, Bolivia, China, Ecuador, India, Kazakhstan, Libya, Nigeria, Russia, the United Kingdom, the United States (in Alaska), and Venezuela. See Carole Nakhle, ‘How Oil Prices Impact Fiscal Regimes’ (Carnegie Endowment for International Peace, 28 June 2016) http://carnegieendowment.org/2016/06/28/how-oil-prices-impact-fiscal-regimes-pub-63940; Mark Clarke and Tom Cummins, ‘Resource Nationalism: A Gathering Storm?’ (2012) 6 Intl Energy L Rev 220.

5  Latin American states’ measures ignited several investor-state arbitration claims in the energy sector, unlike in any other region in the world. However, not all of them resulted in final awards, as many were settled. See eg City Oriente Ltd v Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador) [I], ICSID Case No ARB/06/21 (2008); Gas Trans Boliviano v Plurinational State of Bolivia, UNCITRAL (2008); Eni Dación BV v Bolivarian Republic of Venezuela, ICSID Case No ARB/07/4 (2008); Oiltanking v Plurinational State of Bolivia, UNCITRAL/PCA Case (2010); Repsol YPF Ecuador, SA and Others v Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador) ICSID Case No ARB/08/10 (2011); Repsol, SA and Repsol Butano SA v Argentine Republic, ICSID Case No ARB/12/38 (2014); Red Eléctrica Internacional SAU v Plurinational State of Bolivia, UNCITRAL (2014); Pan American Energy LLC v Plurinational State of Bolivia, ICSID Case No ARB/10/8 (2015).

6  For a historical approach to investor-state disputes in Latin America see Nigel Blackaby, ‘Energy Disputes in Latin America: A Historical Perspective’ in Arthur W Rovine (ed), VII Contemporary Issues in International Arbitration and Mediation: The Fordham Papers 2014 (Brill 2014).

7  At the core of the Calvo Doctrine is the proposition that aliens should not be entitled to treatment that is not accorded to nationals. Hence, as explained by Professors Dolzer and Schreuer, ‘the doctrine is based on the view that foreigners must assert their rights before domestic courts and that they have no right of diplomatic protection by their home state or access to international tribunals. Calvo’s theory was conceived against the background of gunboat diplomacy by capital-exporting countries and other practices through which these countries imposed their view of international law on foreign governments’. See Rudolph Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd edn, Oxford University Press 2012) 2.

8  Argentina, Mexico, Venezuela and Ecuador are some of the countries where aggressive privatization programs were implemented see Jay Martin, ‘Privatization of Latin American Energy’ (1999) 14 Natural Resources & Environment 103.

9  Argentina, Peru and Chile, for example, all signed the ICSID Convention in 1991. Brazil, a major player in the Latin American energy industry, is a notable exception. It did not ratify the ICSID Convention and, while it signed fourteen BITs during the 1990s, none was ever ratified. In 2015, Brazil entered into six BITs – with Mexico, Mozambique, Malawi, Chile, Colombia and Angola – but unlike traditional BITs, these agreements do not provide for investor-state arbitration.

10  To access the full list and text of the over 400 publicly-available treaties see UNCTAD, ‘International Investment Agreements Navigator’ http://investmentpolicyhub.unctad.org/IIA.

11  See eg CMS Gas Transmission Co v Republic of Argentina, ICSID Case No. ARB/01/8 (2001); Occidental Exploration & Production Co v Republic of Ecuador, LCIA Case No UN3467 (2002) (hereafter Occidental I); Inceysa Vallisoletana S.L. v Republic of El Salvador, ICSID Case No ARB/03/26 (2003); EnCana Corp v Republic of Ecuador, LCIA Case No UN3481 (2003).

12  As of 31 December 2009, 37 per cent of registered cases at ICSID involved Latin American states. See ICSID ‘The ICSID Caseload – Statistics’ (2010, Issue 1) https://icsid.worldbank.org/en/Documents/resources/2010-1%20English.pdf.

13  Cases against Mexico, another major player in the Latin American energy industry, are a notable exception. While Mexico is a party to over 40 investment protection agreements and has been a respondent in more than a dozen investment arbitrations, none of those cases directly involved the energy industry, which may be due to two overlapping reasons. First, before a constitutional reform, which took place in December 2013, private parties and foreign investors were not allowed to enter into certain areas of the Mexican hydrocarbons market which were reserved to the state. Second, when Mexico originally signed on to the NAFTA in 1994, it expressly ‘reserve[d] to itself [certain] strategic activities, including investment in such activities and the provision of services in such activities’, including, but not limited to: (i) the exploration and exploitation of crude oil and natural gas; refining or processing of crude oil and natural gas; and production of artificial gas, basic petrochemicals and their feedstocks and pipelines; (ii) foreign trade; transportation, storage and distribution, up to and including the first hand sales of the following goods: crude oil, natural and artificial gas, and others; and (iii) the supply of electricity as a public service in Mexico, including, the generation, transmission, transformation, distribution and sale of electricity. See NAFTA, Annex 602.3. The effects of the 2013 constitutional reform vis-à-vis the NAFTA reservation still remain to be seen.

14  Over 20 claims concerning public utilities (gas and electricity) were submitted against Argentina following the enactment of laws and regulations aimed at conjuring a solution to the economic crisis. For a discussion on the investment cases arising out of the Argentine crisis, particularly regarding the approach to the ‘state of necessity defense’ in investment arbitrations. See Jose Alvarez, The Public International Law Regime Governing International Investment (Hague Academy of International Law 2011) Chapter IV; Esther Kentin, ‘Economic Crisis and Investment Arbitration: The Argentine Cases’ in Phillipe Kahn and Thomas Walde (eds), New Aspects of International Investment Law (Brill 2007).

15  See eg Occidental I (n 11), Award (1 July 2004); EnCana Corp v Republic of Ecuador, LCIA Case No UN3481, Award (3 February 2006).

16  See eg Duke Energy Electroquil Partners and Electroquil SA v Republic of Ecuador, ICSID Case No ARB/04/19, Award (18 August 2008).

17  See eg Nova Scotia Power Incorporated [II] v Republic of Venezuela, ICSID Case No ARB(AF)/11/1, Award (30 April 2014); M.C.I. Power Group, L.C. and New Turbine, Inc v Republic of Ecuador, ICSID Case No ARB/03/6, Award (2007); Occidental Petroleum Corp and Occidental Exploration & Production Co v Republic of Ecuador, ICSID Case No ARB/06/11, Award (2012) (hereafter Occidental II).

18  See eg Iberdrola Energía SA v Republic of Guatemala, ICSID Case No ARB/09/5, Award (2012); Teco Guatemala Holdings, LLC (USA) v Guatemala, ICSID Case No ARB/10/17, Award (2013); Cervin Investissements SA and Rhone Investissements SA v Republic of Costa Rica, ICSID Case No ARB/13/2, Decision on Jurisdiction (2014).

19  See paras 13.01–13.03.

20  Venezuela Holdings BV and Others (formerly Mobil Corp) v Bolivarian Republic of Venezuela, ICSID Case No ARB/07/27; ConocoPhillips Co and Others v Bolivarian Republic of Venezuela, ICSID Case No ARB/07/30, Decision on Jurisdiction and the Merits (2013); Burlington Resources Inc v Republic of Ecuador, ICSID Case No ARB/08/5; Perenco Ecuador Ltd v Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador), ICSID Case No ARB/08/6; Murphy Exploration & Production Co International v Republic of Ecuador, PCA Case No 2012-16, Partial Final Award (2016) (hereafter Murphy II). Murphy had brought a previous claim against Ecuador, which gave rise to the case known as Murphy I, where the tribunal dismissed all claims for lack of jurisdiction, based on Murphy’s failure to comply with the treaty’s cooling-off period. See Murphy Exploration & Production Co International v Republic of Ecuador, ICSID Case No ARB/08/4, Award on Jurisdiction (2010).

21  For an overview of the measures taken by Latin American states that evidence the backlash against investor-state arbitration see David Ma, ‘BIT Unfair: An Illustration of the Backlash against International Arbitration in Latin America’ [2012] 2 J Dispute Resolution 571–89.

22  See paras 13.09–13.43.

23  Burlington (n 20); Perenco (n 20); Murphy II (n 20); Occidental II (n 17). Even though the dispute in Occidental II was not based on enactment or enforcement of Law No 2006-42 (Law 42), the tribunal scrutinized Law 42’s conformity with international law for purposes of damages calculation. See Occidental II (n 17), Award, para 484.

24  Murphy II (n 20), Partial Final Award, para 83.

25  Mobil (n 20); ConocoPhillips (n 20).

26  See paras 13.12–13.30.

27  See paras 13.13–13.24.

28  US-Ecuador BIT (signed 27 August 1993, entered into force 11 May 1997).

29  Dutch-Venezuela BIT (signed 22 October 1991, entered into force 1 November 1993, terminated 1 November 2008).

30  Article X(2) of the US-Ecuador BIT provides that ‘the provisions of this Treaty, and in particular Article VI and VII, shall apply to matters of taxation only with respect to the following: (a) expropriation, pursuant to Article III; (b) transfers, pursuant to Article IV; or (c) the observance and enforcement of terms of an investment Agreement or authorization as referred to in Article VI (1) (a) or (b), to the extent they are not subject to the dispute settlement provisions of a Convention for the avoidance of double taxation between the two Parties, or have been raised under such settlement provisions and are not resolved within a reasonable period of time’.

31  Other treaties contain different language to restrict their application to fiscal measures, which would produce different results. For instance, art 21 ECT provides that ‘nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties’ (emphasis added).

32  The tribunal considered that Ecuador’s ‘indemnification obligation under the [participation contracts was] unrelated to its taxing powers as a sovereign State’. Burlington (n 20), Decision on Jurisdiction, para 182. Likewise, while not making that distinction, the Murphy II tribunal found that the proper characterization of Law 42 was ‘a unilateral change by the State to the terms of the participation contracts’, and the Occidental II tribunal found that Law 42 was ‘a unilateral decision of the Ecuadorian Congress to allocate to the Ecuadorian State a defined percentage of the revenues earned by contractor companies [under the] participation contract[s]’. Murphy II (n 20) para 189; Occidental II (n 17) para 510.

33  Burlington (n 20), Decision on Jurisdiction, para 182.

34  Burlington (n 20), Decision on Liability, para 220.

35  This is the more so taking into account the Occidental I’s tribunal interpretation of art X of the US-Ecuador BIT. The tribunal found that paragraph 1 of art X, which provides that ‘with respect to its tax policies, each Party should strive to accord fairness and equity in the treatment of investment of nationals and companies of the other Part’, implied a commitment by the states that, although drafted in less mandatory terms, could not be ignored. Occidental I (n 11) para 70.

36  Dutch-Venezuela BIT (n 29). Article 4 provided: ‘With respect to taxes, fees, charges, and to fiscal deductions and exemptions, each Contracting Party shall accord to nationals of the other Contracting Party with respect to their investments in its territory treatment not less favourable than that accorded to its own nationals or to those of any third State, whichever is more favourable to the nationals concerned. For this purpose, however, there shall not be taken into account any special fiscal advantages accorded by that Party; (a) Under an agreement for the avoidance of double taxation; or (b) by virtue of its participation in a customs union, economic union, or similar institutions; or (c) on the basis of reciprocity with a third State’. See Mobil (n 20), Award, para 230; ConocoPhillips (n 20) para 297.

37  Mobil (n 20), Award, para 235; ConocoPhillips (n 20) para 307.

38  Mobil (n 20), Award, para 233; ConocoPhillips (n 20) para 306: ‘What role could the specific provision play if the matters that it regulates were also to fall within the broader terms of Article 3(1) with its more extensive obligations, notable the obligation to ensure fair and equitable treatment?’

39  Mobil (n 20), Award, para 236; ConocoPhillips (n 20) para 305.

40  Mobil (n 20), Award, paras 244–45: ‘If claimant’s argument were followed, namely that Article 3(1) operates in parallel with Article 4 regarding fiscal measures, the exceptions in Article 4 that do not appear in Article 3(3) would be rendered meaningless, as they could be circumvented by relying on the broader provisions of Article 3(1) of the BIT. Conversely, the one exception covered by both Article 4 and Article 3(3) would be duplicated and therefore redundant’; ConocoPhillips (n 20) para 309.

41  Mobil (n 20), Award, paras 247–48; ConocoPhillips (n 20) para 332.

42  Mobil (n 20), Award, para 335.

43  Murphy II (n 20), para 248. Perenco (n 20), Decision on Liability, para 561. Notably, the Murphy II tribunal found that, even though the investor’s original investment in Ecuador was from 1987, the relevant moment to assess the claimant’s legitimate expectations was 1997, when the claimant entered into the participation contract, because ‘the nature of its investment changed in a fundamental way’. Murphy II (n 20) para 251.

44  Sergej Paushok, CJSC Golden East Co and CJSC Vostokneftegaz Co v Government of Mongolia, UNCITRAL, Award (2011), para 305.

45  Murphy II (n 20), para 276. See also Perenco (n 20), Decision on Liability, para 586.

46  Perenco (n 20), Decision on Liability para 562.

47  Murphy II (n 20) para 273.

48  In Occidental II (n 17), however, the tribunal found that Law 42 was in breach of FET, without the aforementioned distinction.

49  Murphy II (n 20) para 278: ‘Following the enactment of Law 42 de Consortium was then entitled to only 50% of the extraordinary revenue generated from the sales of its production sales. The tribunal does not consider that this fundamentally changes the operation of the Participation Contract for the Consortium … What is important is that the basic structure of the agreement remained in place’.

50  ibid.

51  Perenco (n 20), Decision on Liability, para 606. See also Murphy II (n 20) para 282.

52  Murphy II (n 20) para 282.

53  ‘[I]t would have not been reasonable for the contractors to expect that the contractual terms or Ecuadorian law would not change at all in the face of such exceptional prices rises. This is all the more given that the consortium knew that the interest of the State had been a key factor in the overhaul of the hydrocarbons industry in the 1990s and a key qualifier to certain State guarantees’. ibid para 276. ‘[I]t would be unsurprising to an experienced oil company that given its access to the State’s exhaustible natural resources, with the substantial increase in world oil prices, there was a chance that the State would wish to revisit the economic bargain underlying the contracts’. Perenco (n 20) para 588. The tribunals reinforced this conclusion by acknowledging that similar measures had been taken around the globe, which confirmed that Ecuador’s conduct was ‘not per se arbitrary, unreasonable or idiosyncratic’. ibid. (n 20), Decision on Liability, para 591.

54  Murphy II (n 20), paras 281–82. Perenco (n 20), Decision on Liability, para 606.

55  See para 13.11.

56  The Mobil tribunal simply concluded that confiscatory fiscal measures required ‘total loss of the investment’s value or a total loss of control by the investor of its investment, both of a permanent nature … [T]hose conditions [were] not fulfilled in the present case’. Mobil (n 20) Award, paras 286–87. In ConocoPhillips, the claimants contended that the Venezuelan tax reforms were progressive steps ‘interconnected by design’ as a ‘single taking’ which culminated in a nationalization and that, as such, claimants were entitled to compensation. As the tribunal had found that the Venezuelan tax reforms were not in breach of the BIT, ‘the single taking contention, insofar as it would characterize those changes as unlawful and make then relevant to the calculation of quantum, … fail[ed]’. ConocoPhillips (n 20) 359.

57  The Murphy II tribunal deemed that, having found a breach of the FET standard, it was not necessary to determine Ecuador’s liability for expropriation, because it had no impact on the calculation of damages. Murphy II (n 20) para 294.

58  Perenco (n 20), Decision on Liability, para 678.

59  ibid para 687.

60  Burlington (n 20), Decision on Liability, para 404.

61  ibid para 399.

62  Perenco (n 20) Decision on Liability, para 689.

63  Burlington (n 20) Decision on Liability, para 401.

64  See para 13.02.

65  Guaracachi America, Inc and Rurelec plc v Plurinational State of Bolivia, PCA Case No 2011-17, UNCITRAL, Award (2014) paras 436–37.

66  Mobil (n 20) Award, para 301; ConocoPhillips (n 20) para 362; Rurelec (n 65) para 441. ‘[I]f the Tribunal finds the valuation to be “manifestly inadequate”, this is Bolivia’s responsibility … [T]his is in fact the case and the expropriation was therefore illegal’. Rurelec (n 65) para 441.

67  Decree-Law 5200 on the Migration to Mixed Companies of the Association Agreements of the Orinoco Oil Belt, as well as the Risk and Profit Sharing Exploration Agreements of 26 February 2007, art 5.

68  Mobil (n 20) Award, para 292; ConocoPhillips (n 20) paras 372–76.

69  Mobil (n 20) Award, para 297.

70  ibid.

71  ConocoPhillips (n 20) para 362.

72  ibid para 394.

73  Mobil (n 20) Award, paras 305–06.

74  Tidewater Inc and Others v Bolivarian Republic of Venezuela, ICSID Case No ARB/10/5, Award (2013).

75  ibid para 145.

76  Dutch-Venezuela BIT (n 29); ConocoPhillips (n 20) para 279; Mobil (n 20) Decision on Jurisdiction, para 190.

77  Mobil (n 20) Decision on Jurisdiction, para 188. See also ConocoPhillips (n 20) para 268.

78  Mobil (n 20), Decision on Jurisdiction, para 204; ConocoPhillips (n 20) para 279.

79  In the tribunals’ opinion, ‘to restructure investments only in order to gain jurisdiction under a BIT for [pre-existing] disputes would constitute, to take the words of the Phoenix Tribunal, “an abusive manipulation of the system of international investment protection under the ICSID Convention and the BITs” ’. Mobil (n 20) Decision on Jurisdiction, para 205 (emphasis added).

80  The tribunal declined jurisdiction to hear certain disputes concerning the fiscal measures. ibid para 199.

81  The tribunal assumed jurisdiction to hear disputes concerning the nationalization. ibid para 203.

82  ConocoPhillips (n 20) para 278. The tribunal found that, at the time of the corporate restructuring, the claimants had withdrawn a complaint that they had previously lodged with the Venezuelan authorities.

83  Treaty shopping through the Dutch investment protection agreements was addressed by the Saluka tribunal. There, the tribunal expressed ‘some sympathy for the argument that a company which has no real connection with a State party to a BIT, and which is in reality a mere shell company controlled by another company which is not constituted under the laws of that State, should not be entitled to invoke the provisions of that treaty. Such a possibility lends itself to abuses of the arbitral procedure, and to practices of “treaty shopping” which can share many of the disadvantages of the widely criticized practice of “forum shopping” ’. Saluka Investments BV v Czech Republic, UNCITRAL, Partial Award (2006) para 240. This practice may very well be the reason why Venezuela communicated to the Netherlands, in 2008, its intention to terminate their BIT.

84  The dispute’s foreseeability seems to have been raised by Venezuela in Mobil. Venezuela claimed that the corporate restructuring took place to gain access to ICSID jurisdiction in respect to disputes ‘that were not only foreseeable, but had actually been identified and notified to [Venezuela] before the Dutch company was even created’. Mobil (n 20), Decision on Jurisdiction, para 188.

85  Philip Morris Asia Ltd v Commonwealth of Australia, PCA Case No 2012-12, Award on Jurisdiction and Admissibility (2015), paras 566–67, 569: ‘For the tribunal, the key question is whether the dispute about plain packaging was reasonably foreseeable … [T]he length of time it takes to legislate is not a decisive factor in determining whether legislation is foreseeable … [A]t the time of the restructuring, the dispute that materialised subsequently was foreseeable to the Claimant’. See also Pac Rim Cayman LLC v Republic of El Salvador, ICSID Case No ARB/09/12, Decision on the Respondents Jurisdictional Objections (1 June 2012): ‘In the Tribunal’s view, the dividing-line occurs when the relevant party can see an actual dispute or can foresee a specific future dispute as a very high probability and not merely as a possible controversy. In the Tribunal’s view, before that dividing-line is reached, there will be ordinarily no abuse of process; but after that dividing-line is passed, there ordinarily will be’. ibid para 2.99.

86  Tidewater (n 74) Decision on Jurisdiction: ‘At the heart, therefore, of this issue is a question of fact as to the nature of the dispute between the parties, and a question of timing as to when the dispute that is the subject of the present proceedings arose or could reasonably have been foreseen … [T]he Tribunal will consider whether “the objective purpose of the restructuring was to facilitate access to an investment treaty tribunal with respect to a claim that was within the reasonable contemplation of the investor” ’. ibid paras 145–50. In this case, under the Venezuela-Barbados BIT, the claimants’ strategy focused on showing that the ‘existing disputes’ were different from the claims brought before the tribunal; the tribunal relied on the Lucchetti test to determine that it had jurisdiction over the acts of expropriation which were not foreseeable. ibid para 197. The so-called ‘Lucchetti test’ asserts that, in order to determine if several disputes have arisen from different facts, the tribunal has to determine if the facts that gave rise to the earlier dispute continue to be central to the later dispute.

87  Mobil (n 20) Decision on Jurisdiction, para 203.

88  ibid para 201.

89  ConocoPhillips (n 20) paras 276–81.

90  See paras 13.15–13.20 and 13.40–13.42.

91  See para 13.07.