Arbitration Tribunal Order Favors Perenco in Ecuador Dispute

LONDON - Perenco Ecuador Limited (”Perenco”) announced today that on May 8, 2009, a three member international arbitration tribunal constituted under the auspices of the International Centre for the Settlement of Investment disputes (”ICSID”) unanimously ordered that the Republic of Ecuador and Empresa Estatal Petroleos del Ecuador (”Petroecuador”) were restrained from instituting or further pursuing any action to collect from Perenco any payments they claim are owed pursuant to Law 42.

Ecuador enacted Law 42 in April 2006. Law 42 and its implementing regulations provide that Ecuador shall receive 99% of the revenues from oil sales above certain reference prices, despite contractual terms that provide it with a much smaller participation share. In April 2008, Perenco commenced an ICSID arbitration against Ecuador and Petroecuador challenging the applicability of Law 42 to Perenco in light of specific contractual commitments and Perenco’s rights under a the France-Ecuador bilateral investment treaty. Perenco is represented in the arbitration by the international law firm Debevoise & Plimpton LLP.

On February 19, 2009, Ecuador and Petroecuador commenced a coercive process to collect from Perenco approximately US$327 million they claimed were due under Law 42. In March 2009, Petroecuador seized crude oil produced by Perenco and its consortium partner, Burlington Resources Oriente Ltd., from Blocks 7 and 21 in Ecuador, and has threatened to sell that crude oil at auction to satisfy alleged Law 42 debts. The tribunal’s May 8 order effectively prevents Petroecuador from conducting the announced auction of seized crude oil.

The tribunal issued its May 8 order after receiving extensive written submissions from the parties, and conducting an oral hearing in Paris on March 19, 2009. Ecuador actively participated in the process, and was represented by the Attorney General’s office and external legal counsel.

In its decision, the tribunal found that without provisional measures “Perenco’s business in Ecuador would be crippled, if not destroyed.” It held: “Having initiated the arbitration to challenge the recoverability of enhanced payments not provided for in the Participation Contracts but demanded pursuant to Law 42, Perenco should not, pending a final decision, be required to choose between making the very payments they dispute and suffering extensive seizure of its oil production or other assets.” The tribunal noted that its decision was “fully sanctioned by a long line of legal authority.” ICSID will soon publish on its website the tribunal’s decision, in English and Spanish. An excerpt from that decision is attached to this press release.

Rodrigo Marquez, Latin American Regional Manager for the Perenco Group, stated: “We are gratified by the international arbitration tribunal’s decision.” He added, “this decision not only protects Perenco against the loss of the crude oil already seized, but also allows the company to continue producing and selling oil in the future while the tribunal considers Perenco’s case. The decision is a strong signal to the market that so long as the tribunal’s order remains in place, only Perenco may sell Block 7 and 21 crude.”

Commenting on recent statements indicating that Petroecuador would carry out plans to auction crude seized from Blocks 7 and 21 despite the tribunal’s order, Mr. Marquez stated: “We have the deepest respect for Ecuador and Petroecuador and trust that they will honor their legal obligations, including complying with the provisional measures order. For Petroecuador to comply with the provisional measures order, it must cancel the auction and return the seized oil to Perenco.” He also pointed out that an auction of seized oil was impractical, as “no buyer could now have good title to the seized oil.” Should the auction proceed, “Perenco will consider asserting rights against buyers and cargoes,” Mr. Marquez elaborated.

While Perenco welcomed the tribunal’s decision, it continues to support a negotiated resolution of its dispute with Ecuador and Petroecuador. “We remain open to negotiations with the Government about fair terms for continued operations in Ecuador,” said Mr. Marquez. He noted, “Perenco has consistently made clear to the Government that we prefer to have an agreement rather than an arbitration. That remains true today.”

The Perenco Group is a privately held upstream oil and gas company. Perenco Ecuador Limited is the operator of Blocks 7 and 21 in Ecuador.

Excerpt from Tribunal’s May 8, 2009 Decision in Perenco Arbitration

79. The Tribunal considers that circumstances require it to recommend, and it does recommend, provisional measures restraining the Respondents from:

(1) demanding that Perenco pay any amounts allegedly due pursuant to Law 42; (2) instituting or further pursuing any action, judicial or otherwise, including the actions described in the notices dated 19 February and 3 March 2009, to collect from Perenco any payments Respondents claim are owed by Perenco or the Consortium pursuant to Law 42; (3) instituting or pursuing any action, judicial or otherwise, against Perenco or any of its officers or employees, arising from or in connection with the Participation Contracts; and (4) unilaterally amending, rescinding, terminating, or repudiating the Participation Contracts or engaging in any other conduct which may directly or indirectly affect or alter the legal situation under the Participation Contracts, as agreed upon by the parties.

As from the date of this Decision, the Tribunal’s communications of 24 February and 5 March (paragraphs 28 and 35 above) shall cease to have effect.

80. Since the Tribunal may, in a later decision, hold that it has no jurisdiction to entertain this dispute, or that the Respondents are entitled to claim and enforce the enhanced payments required by Law 42, the Tribunal considers that the Respondents should enjoy a measure of security in relation to sums accruing due to them from Perenco (not the Consortium) under Law 42 from the date of this decision forward until such later decision. It considers that such security is best provided by payment of the sums so accruing into an escrow account, from which sums will be disbursed on the direction of the Tribunal or by agreement of the parties. The Tribunal invites the parties to agree the terms and conditions on which such account may be established, and to establish it, within 120 days of the date of issuance of this Decision. If, at the end of that period, the parties fail to agree or act, either party may revert to the Tribunal.

Source: Perenco Group

Rodrigo Marquez of Perenco Group, +44-20-7901-8200