Ecuador ordered to pay Occidental $1.77 billion in damages


October 07, 2012

The World Bank’s arbitration centre (ICSID) has ordered Ecuador to pay nearly $1.77 billion in damages to US-based Occidental Petroleum for seizing the company’s assets in 2006, but the Andean country said it would appeal the decision. It also ordered Ecuador to pay pre-award interest on the amount at the rate of 4.188 percent per annum, compounded annually from 16 May 2006 until the date of the award.The ruling was posted on the International Center for Settlement of Investment Disputes (ICSID) website. The Ecuadorean government decided to terminate Occidental Petroleum’s contract in May 2006, arguing that the company had sold a stake in its operations without government consent.

Occidental Petroleum, also known as Oxy, filed a request for arbitration in July 2006. The ruling said that Ecuador’s seizure of an oil block operated by Occidental was “tantamount to expropriation”. Ecuador’s leftist President Rafael Correa, who took office in 2007, said the country would appeal the decision.

“We’ll ask for it to be declared null and void. We’re used to confronting these abuses, these obstacles, and we’ll continue defending the integrity of the country,” Correa told reporters. Correa has had tumultuous relations with foreign investors since revising oil contracts in 2010 to favour the government and defaulting on the country’s debt two years earlier.

Ecuador’s Attorney General Diego Garcia said this week that Occidental was seeking nearly $3.4 billion in damages from the Opec-member country. He said Ecuador was only willing to pay up to $417 million to Occidental. Ecuador is Opec’s smallest member and produces around 500,000 barrels of crude oil a day. Ecuador’s withdrawal from the ICSID in 2009 does not make the country exempt from the ruling because it was filed in 2006.

At the time, Occidental was Ecuador’s largest oil investor, extracting around 100,000 barrels of oil per day. The company’s operations are now controlled by state-run Petroamazonas. South America has been a tricky region this year for Occidental, the fourth-largest US oil company, with insurgent attacks in Colombia leading to reduced production of 7,000 barrels per day in the first quarter.

A US appeals court also ruled in May that Oxy must defend against a class-action lawsuit brought by Peruvians accusing the company of polluting the rainforest there. California oil company Chevron Corp has been embroiled for two decades in similar litigation with indigenous Ecuadoreans over pollution in the Amazon. Ecuador has two other cases pending at the ICSID: one filed by Burlington Resources, a subsidiary of US energy company ConocoPhillips, and another by French oil company Perenco. The companies are seeking compensation related to confiscation of assets by the Ecuadorean government in 2009.

Investors often see arbitration as the only way to ensure fair legal proceedings in disputes with foreign countries where courts are often under the control of political leaders. Venezuela and Bolivia, whose leftist governments have nationalised foreign assets in recent years, have renounced the ICSID convention. The arbitration tribunal is still considering claims filed by foreign investors seeking large awards from other Latin American countries, including Mexico and Argentina. Occidental shares rose as much as 0.4 percent to $85.32 after hours on Friday following the ruling. The award is well above the $1.3 billion in profits earned by the Los Angeles-based company in the second quarter.