Base Document

INTERNATIONAL CENTRE FOR SETTLEMENT

OF INVESTMENT DISPUTES

BURLINGTON RESOURCES INC.,

BURLINGTON RESOURCES ORIENTE LIMITED,

BURLINGTON RESOURCES ANDEAN LIMITED,

AND

BURLINGTON RESOURCES ECUADOR LIMITED,

CLAIMANTS

-V-

THE REPUBLIC OF ECUADOR

AND

EMPRESA ESTATAL PETRÓLEOS DEL ECUADOR, PETROECUADOR,

RESPONDENTS

MEMORIAL

520 Madison Avenue New York, NY 10022 United States of America

Ave. República de El Salvador No.1082 Edif. Mansión Blanca Quito, Ecuador

TABLE OF CONTENTS

I. INTRODUCTION...... 2

II. THE FACTS...... 9

A. Early Progress In The Development Of Ecuador’s Hydrocarbons Sector Was Undermined By Nationalization...... 9

B. In The 1990s, Ecuador Adopted A New Legal Framework Applicable To Its Hydrocarbons Sector That Sought To Induce Foreign Investment By Allowing Investors To Receive A Share Of The Upside That Would Come From Price Increases And, Simultaneously, Insulate Them From Future Changes In The Legal Regime...... 19

C. Based On The Terms Of The PSCs And The Guarantees Set Forth Therein, Burlington Invested In Ecuador...... 69

D. Ecuador And Petroecuador Breached The PSCs And Dismantled The Legal Framework Upon Which Burlington Invested In Order To Take For Themselves The Benefits Of Increased Oil Prices...... 108

III. JURISDICTION...... 140

A. This Tribunal Has Jurisdiction Over The Claims Of The Burlington Subsidiaries Under The PSCs...... 140

B. This Tribunal Has Jurisdiction Over The Claims Of Burlington Arising Under The Treaty ...... 153

IV. ECUADOR AND PETROECUADOR BREACHED THEIR OBLIGATIONS UNDER THE PRODUCTION SHARING CONTRACTS...... 161

A. Ecuador And PetroEcuador Breached Their Unequivocal Obligation Under The PSCs To Agree To Amendments Of The PSCs Necessary To Effect Economic Stabilization Following The Adoption Of Law No. 2006- 42...... 162

B. Alternatively, Ecuador And Petroecuador Breached Their Obligation To Exempt The Block 7 & 21 Tax Consortium From The Effects Of Law No. 2006-42...... 170

C. Alternatively, Ecuador And PetroEcuador Breached Their Obligations Under The PSCs By Taking Amounts From The Burlington Subsidiaries In Excess Of Their Defined Participations...... 175

D. Ecuadorian Law Provides No Applicable Exception That Would Exempt Ecuador And PetroEcuador From Their Obligations ...... 178

E. Ecuador And PetroEcuador Breached Their Obligation Under The PSCs To Provide Security To Blocks 23 And 24 ...... 189

F. As A Result Of Respondents’ Breaches Of The PSCs, The Burlington Subsidiaries Are Entitled To Specific Performance And Damages...... 192

V. ECUADOR BREACHED ITS OBLIGATIONS TO BURLINGTON UNDER THE TREATY...... 194

A. Ecuador Failed To Observe The Obligations It Had With Respect To The Investments Of Burlington ...... 195

B. Ecuador Failed To Afford Burlington’s Investments Fair And Equitable Treatment ...... 208

C. Ecuador’s Treatment Of Burlington’s Investments Is Tantamount To Expropriation In Violation Of The Treaty ...... 224

D. Ecuador Failed To Provide Full Protection And Security To The Investments Of Burlington ...... 239

E. Burlington Is Entitled To Damages As A Result Of Ecuador’s Breaches Of The Treaty...... 247

VI. THE CLAIMANTS’ REQUEST FOR RELIEF ...... 250

iii

1. Burlington Resources Inc. (Burlington), a corporation existing under the laws of the State of Delaware, United States of America, and its wholly owned subsidiaries, Burlington Resources Oriente Limited (Burlington Oriente), Burlington Resources Andean Limited (Burlington Andean) and Burlington Resources Ecuador Limited (Burlington Ecuador, and, together with Burlington Oriente and Burlington Andean, the Burlington Subsidiaries), corporations formed and existing under the laws of Bermuda (collectively, the Claimants), submit this Memorial in support of their claims against the Republic of Ecuador (Ecuador) and its wholly owned national oil company, Empresa Estatal Petróleos del Ecuador, PetroEcuador (PetroEcuador) (collectively, Respondents).

2. This Memorial is submitted pursuant to Rule 31(1) of the ICSID Rules of Procedure for Arbitration Proceedings and the Tribunal’s Order dated January 20, 2009. It is accompanied by eight volumes of documentary exhibits, seven volumes of legal authorities and three statements by witnesses of fact.

3. This case arises out of a tax imposed by Ecuador upon Burlington’s investments, beginning in 2006 and 2007, that ultimately confiscated 99 percent of the revenue the Burlington Subsidiaries received, or would receive, for the sale of crude produced in Ecuador exceeding the revenue it would have received pursuant to an artificially low reference oil price arbitrarily set by the State, and the subsequent refusal of Ecuador and PetroEcuador to either “absorb” the effects of the tax or otherwise exempt Burlington Oriente from that obligation, as required under production sharing contracts that Ecuador and PetroEcuador had signed with Burlington Oriente (PSCs). Ecuador’s measures also violated specific undertakings it had made to Burlington, were adopted in bad faith in an effort to compel Burlington to waive its rights under the PSCs and were obviously confiscatory. Thus, Ecuador is in breach of the Treaty between the United States and the

Republic of Ecuador Concerning the Encouragement and Reciprocal Protection of Investment (the Treaty).1

I. INTRODUCTION

4. Ecuador has been struggling to harness its substantial oil reserves for the better part of five decades. In the 1960s, when it was a literal “green field,” Ecuador opened the country up to investment based on the concession contract model. Texaco made some substantial initial discoveries at that time, precipitating an early rush of foreign investment to find more. The system worked: numerous exploratory wells yielded success and by the early 1970s, Ecuador was poised to become a significant oil producing nation and was offered membership in the Organization of the Petroleum Exporting Countries (OPEC).

5. However, following the 1972 oil shocks, Ecuador grew impatient with the revenues produced by the concession contract system, which allowed the State to benefit from price increases exclusively through taxes and royalties. In the greater geopolitical context, nationalization of hydrocarbons reserves had visited Latin America. Venezuela was in the process of nationalizing its oil industry and Ecuador elected to follow suit, terminating all existing concession contracts in the process and placing all existing projects in the hands of Corporación Estatal Petrolera Ecuatoriana (CEPE), the newly formed State oil company. This yielded initial benefits to the State as revenues spiked and a number of wells, poised for production as a result of foreign investment, bore fruit.

6. However, over time, the Ecuadorian hydrocarbons industry stagnated and then declined precipitously. Part of this was due to a political failure: much of the surplus realized in the 1970s

1 Exhibit C-6, signed in Washington, D.C. on August 27, 1993, entered into force on May 11, 1997.

was not reinvested in the sector. Part, however, was due to a technological disadvantage: CEPE did not have the expertise to develop new opportunities.

7. By the early 1990s, following a decade of low oil prices, a wave of privatization of national hydrocarbons industries swept across Latin America. Venezuela declared an “oil opening” (Apertura Petrolera), and Ecuador determined to bring back foreign investment and liberalize its economy to turn its own situation around. The World Bank encouraged this change in policy. However, it offered some advice: foreign investors would be reluctant to invest, irrespective of the new policies adopted by Ecuador, due to the “retroactive actions of prior Governments in the early 1970s.” Therefore, Ecuador would have to take steps to guarantee investors that they would be treated “fairly” and would be insulated from future shifts in the political winds.2

8. Ecuador was ready to follow the advice of the World Bank and try to induce substantial foreign investment. As a result, it adopted a comprehensive new legal framework for the hydrocarbons industry. The cornerstone of that legal framework was the production sharing contract. The production sharing contracts allowed Ecuador to guarantee to foreign investors that they would be able to participate not only in the risk but also the upside of projects. As Ecuadorian President Durán Ballén explained at the time, the production sharing contract was developed, unabashedly, to “allow Ecuador to position itself at an internationally competitive level for attracting venture capital […].”3

2 Exhibit C-81, The World Bank, Ecuador: An Agenda for Recovery and Sustained Growth, WORLD BANK COUNTRY STUDIES (1984) at 92.

3 Exhibit C-78, Letter from President Durán Ballén to Samuel Bellettini Zedeño enclosing draft law modifying the Hydrocarbons Law, October 29, 1993 at 4. Unofficial English translation.

9. In particular, the production sharing contracts guaranteed the following:

• The legal regime in place at the time of the parties’ signature of the production sharing contracts would be incorporated into the contract and, therefore, “frozen”;

• Foreign investors would receive a fixed participation in the production from certain blocks, based on an agreed formula;

• That participation would be subject to an agreed set of taxes and no royalties;

• If the Government increased taxes or created new taxes, PetroEcuador, the successor in interest to CEPE, would “absorb” the economic effects of the new taxes;

• The State would provide conditions of reasonable security for the operation of the blocks; and

• In the event of disputes, the foreign investors could bring arbitrations against Ecuador and PetroEcuador under the ICSID Convention.

10. However, one open question was subject to negotiation: how would the parties address future increases in the price of oil? Some contracts with investors, including the contracts at issue in this arbitration, included a higher State participation formula (meaning more revenue guaranteed to the State) that in return allowed investors to capture the benefits of future increases in oil prices. Other contracts, including the 1995 Tarapoa contract, featured a lower guaranteed State participation formula in return for which the State’s participation increased as oil prices rose.

11. Either way, to bolster the guarantees set out in the PSCs, Ecuador signed the ICSID Convention and entered into a

number of bilateral investment treaties with significant trading partners, including the United States.

12. Burlington invested in Ecuador based on the foregoing guarantees and inducements. In particular, between 2001 and 2006, Burlington acquired increasing interests in four blocks in Ecuador through the Burlington Subsidiaries: Blocks 7, 21, 23 and 24. Burlington also acquired an interest in the new pipeline developed to transport crude in Ecuador: Oleoducto de Crudos Pesados (OCP).

13. Nevertheless, investing in Ecuador was not without risks: (a) there was no guarantee as to the future price of oil; (b) Ecuadorian crude was heavier than the crude preferred by most refineries; and (c) there was opposition from indigenous peoples to the development of Blocks 23 and 24. Despite these risks, Burlington had confidence in the contracts it had signed and the treaty entered into between the United States and Ecuador and proceeded to invest hundreds of millions of dollars in the Ecuadorian hydrocarbons sector.

14. In September 2005, however, relations with the Government changed as oil prices again spiked and resource nationalism spread across Venezuela and Bolivia. Ecuador demanded that Burlington agree to the renegotiation of the PSCs in order to increase the Government’s participation in the projects (not including revenue from taxes) from less than 20 percent to 50 percent. At the same time, the Government promptly withdrew its support for Burlington’s initiatives to settle differences with the indigenous peoples in Blocks 23 and 24.

15. However, before Burlington and its partner in Blocks 7 and 21 Perenco Ecuador Limited (Perenco) had even responded to this initiative, in April 2006, the Government adopted Law No. 2006-42.4 The overt purpose of this law was twofold: (a) to

4 Exhibit C-7, Law No. 2006-42, Official Register No. 257, published April 20, 2006.

take from PSC participants without the need for contract negotiations; and (b) to compel them to agree to a negotiated settlement. Both elements were crucial. Ecuador wanted the money, but knew that it was acting in breach of the PSCs (and its international law obligations) by taking it outright.

16. The unlawfulness of Law No. 2006-42 was apparent to the Ecuadorian Congress. In deliberating Law No. 2006-42, one representative noted that the question before the Congress was “whether or not we can by law unilaterally amend oil contracts with retroactive effect. That and nothing else is the legal discussion.”5 In fact, the Law would force upon all production sharing contracts the participation regime included in those PSCs that provided for an adjustment for the State’s participation based on increases in the price of oil, such as the aforementioned 1995 Tarapoa contract. Referring to the formula in that contract, one representative noted:

Look, it’s as if it were copied, that is the proposal that the Government is making, what is already envisaged in one contract, and we want that this, which is already envisaged in one contract, be incorporated in the rest of the contracts.6

17. Law No. 2006-42 set out to achieve its dual goals by creating the notion of a “reference price” applicable to each PSC based on the price of crude at the time the PSC was signed, then declaring all revenue earned above that price to be surplus, and granting the State a “participation” in such surplus revenue of 50 percent. Although never termed a “tax,” Law 42 functions

5 Exhibit C-177, Second Debate of the Project of the Reformatory Law of the Law of Hydrocarbons, Minutes No. 25-227, Special Evening Session, National Congress of Ecuador, March 29, 2006 at 103. Unofficial English translation.

6 Id. at 73. Unofficial English translation.

as a tax and Burlington was required to pay the “participation” through a tax consortium that Ecuador had required Burlington Oriente and Perenco to establish in Ecuador.

18. The new law was successful in that it increased the State’s revenues. However, it did not succeed in compelling renegotiated contracts with investors like Burlington, who paid the tax under protest and demanded that PetroEcuador absorb its effects as required by the PSCs (this request was ignored). As a result, in October 2007, President Correa adopted a new administrative measure, Decree 662, which increased the State’s “participation” from 50 to 99 percent.

19. Decree 662 again was successful in that it increased the State’s revenues, but a failure in that Burlington and other investors again paid only under protest and demanded that PetroEcuador absorb the effects of the new taxes, which it never did.

20. Frustrated, the Government then used Law 2006-42 to extract concessions from the investors in its contractual renegotiations. President Correa mandated three options for the oil companies: (a) “comply with the 99-1 Decree […] 99 percent for the State and 1 percent for the company because the resource is ours”; (b) “renegotiate the contract into a services contact. […] Because if the oil is ours we hire somebody to take the oil out, right? We pay for the job, $10 for each barrel of oil extracted, but the rest is for us”; or (c) “if they are not happy, no problem. We don’t want to rip-off anybody here. How much have they spent in investments? $200 million? Here, have your $200 million and have a nice day, and PetroEcuador will exploit that field.”7

7 Exhibit C-183, Rafael Correa, 53rd National Address of President Rafael Correa (January 26, 2008) (relevant excerpts). Unofficial English translation.

21. In April 2008, Burlington filed this arbitration in an effort to compel Ecuador to observe its obligations under the PSCs and international law. Burlington also proposed to put the money it was paying under protest pursuant to Law No. 2006-42 in escrow, pending the resolution of this arbitration. Ecuador refused, so Burlington instead paid the tax into a segregated account, pending the resolution of the arbitration.

22. Ecuador did not object to this new arrangement until the market for oil collapsed amidst a global financial crisis. Suddenly in need of the funds, in March 2009, Ecuador seized all of the crude produced by Burlington Oriente and made clear it would continue to do so until it had repatriated all of the money that Burlington had paid into the segregated account.

23. In sum, Ecuador and PetroEcuador have breached the PSCs by instituting Law No. 2006-42 – a new tax – and refusing either to absorb its effects with respect to the Burlington Subsidiaries or exempt the Subsidiaries from the application of the law. Ecuador and PetroEcuador have also breached the PSCs by failing to protect the interests of the Burlington Subsidiaries with respect to Blocks 23 and 24.

24. At the same time, Ecuador breached the Treaty by: (a) failing to abide by the specific undertakings it had made with respect to the investments of Burlington in Ecuador; (b) its attempt to use the tax power as a weapon to induce settlement and waiver; (c) its outright confiscation of the assets of Burlington in Ecuador; and, again, (d) its persistent failure to protect the investments of Burlington in the country.

25. It is axiomatic that the power to tax is a sovereign prerogative. It is also axiomatic that that “the power to tax involves the power to destroy.”8 In order to induce investment and revitalize its oil industry, Ecuador deliberately obligated itself,

8 CL-22, McCulloch v. Maryland, 17 U.S. 316, 431 (1819).

through the PSCs and the Treaty, to compensate investors if it ever chose to use such power. Ecuador must now honor its obligations.

II. THE FACTS

A. EARLY PROGRESS IN THE DEVELOPMENT OF ECUADOR’S HYDROCARBONS SECTOR WAS UNDERMINED BY NATIONALIZATION

1. Within The Context Of A Legal Framework For Hydrocarbons Investment Based On The Concession Contract, Ecuador Developed Into A Significant Hydrocarbons Producer

26. Commercial crude oil was first discovered in Ecuador in the early 1900s, both on and offshore on the Santa Elena Peninsula, west of Guayaquil.9 During the six decades that followed this discovery, Ecuador’s oil production was severely limited due to the discovery of only small deposits, minimal exploration activities and the use of outdated equipment.10

27. However, there was an abrupt change in 1967, when the Texaco Petroleum-Gulf Oil consortium (the Texaco Consortium) discovered significant oil reserves in the Oriente Region in Ecuador.11 Ecuador’s Oriente Region is at the center of a

9 Exhibit C-69, Edmundo Flores and Tim Merrill, The Economy: Natural Resources and Energy, LIBRARY OF CONGRESS COUNTRY STUDIES: ECUADOR (1991) at 1.

10 Id.; see also Exhibit C-70, Joan Anderson, Ecuador, in Laura Randall, ed., THE POLITICAL ECONOMY OF LATIN AMERICA IN THE POSTWAR PERIOD (1997) at 252; Exhibit C-71, John Martz, POLITICS AND PETROLEUM IN ECUADOR (1987) at 53.

11 Exhibit C-70, Joan Anderson, Ecuador, in Laura Randall, ed., THE POLITICAL ECONOMY OF LATIN AMERICA IN THE POSTWAR PERIOD

corridor extending from southern Colombia through Ecuador to northeastern Peru12 that was considered by many to be the richest oil-bearing area in the Western Hemisphere.13

28. As a result of the Texaco Consortium’s discovery, other oil companies were attracted to the region. These companies sought and obtained concession contracts from the Ecuadorian Ministry of Hydrocarbons. Under these concession contracts, private investors paid the Government for the right to explore and exploit a particular block of land – assuming all risk of failure and variations in the crude price – in exchange for a share of the crude and a promise to pay the Government a royalty on crude produced and taxes on profits earned.14

29. The Ministry was eager to take advantage of private investment in exploration and production in the hopes of transforming Ecuador into a major hydrocarbons producer – similar in capacity to Venezuela – and recognized the concession contract as the most effective tool in achieving that result.15 Ecuador’s use of concession contracts was initially successful, inasmuch as it led to significant exploration efforts and, eventually,

(1997) at 237. See also Exhibit C-71, John Martz, POLITICS AND PETROLEUM IN ECUADOR (1987) at 55.

12 See Exhibit C-72, Map of the Oriente Basin.

13 Exhibit C-69, Edmundo Flores and Tim Merrill, The Economy: Natural Resources and Energy, LIBRARY OF CONGRESS COUNTRY STUDIES: ECUADOR (1991) at 2.

14 Exhibit C-71, John Martz, POLITICS AND PETROLEUM IN ECUADOR (1987) at 54-56; Exhibit C-70, Joan Anderson, Ecuador, in Laura Randall, ed., THE POLITICAL ECONOMY OF LATIN AMERICA IN THE POSTWAR PERIOD (1997) at 252.

15 Exhibit C-71, John Martz, POLITICS AND PETROLEUM IN ECUADOR (1987) at 55-58.

production from several dozen new wells.16 Although the crude produced in these wells was heavier than the light crude preferred by most refineries at that time, it was marketable.17

2. In Response To Dramatic Increases In Oil Prices, Ecuador Abandoned The Concession Contract And Nationalized Production

30. In the early 1970s, oil prices rose sharply as a result of the formation of OPEC and political instability in the Middle East and Persian Gulf.18 In response to the perceived “windfall” this price increase would provide to concession holders, the Ecuadorian Government decided to increase control over its oil industry.19 First, Ecuador created the State-owned oil company, CEPE. CEPE assumed, on behalf of the State, most of the functions previously entrusted to foreign companies, including exploration, storage, transportation, refining and commercialization of oil and its derivatives.20

16 Exhibit C-69, Edmundo Flores and Tim Merrill, The Economy: Natural Resources and Energy, LIBRARY OF CONGRESS COUNTRY STUDIES: ECUADOR (1991) at 2.

17 Exhibit C-73, United States Department of Energy, Energy Information Administration, Ecuador, COUNTRY ANALYSIS BRIEFS (April 2008) at 3, 5.

18 Exhibit C-74, James Williams, Oil Price History and Analysis, WTRG ECONOMICS (2007) at 3-6; Exhibit C-71, John Martz, POLITICS AND PETROLEUM IN ECUADOR (1987) at 112.

19 Exhibit C-70, Joan Anderson, Ecuador, in Laura Randall, ed., THE POLITICAL ECONOMY OF LATIN AMERICA IN THE POSTWAR PERIOD (1997) at 237.

20 Exhibit C-75, Eleodoro Mayorga, Petroleum Policy, in Vicente Fretes- Cilis et al., eds., ECUADOR: AN ECONOMIC AND SOCIAL AGENDA IN THE NEW MILLENNIUM (2003) at 144.

31. Second, in October 1971, Ecuador passed a new law on hydrocarbons (the Hydrocarbons Law), designed to increase substantially State involvement in all phases of exploration and production of crude oil.21 Venezuela had adopted similar measures in July 1971, mandating that no new concession contract would be issued or old concession contract extended.22

32. In particular, the Hydrocarbons Law provided that all hydrocarbon exploration and exploitation functions would be performed directly by the State, or via the State entering into association contracts or specific work contracts with private investors.23 Pursuant to these association contracts, a joint Administration Committee, consisting of an equal number of representatives from the Government and the private investor, would manage exploration and exploitation activities, and the State had the option of receiving a percentage of the production or a cash payment that increased in percentage as production increased.24 In either case, the State acquired the right to all reserves and a greater share of the benefit obtained from price and production increases.25

33. Thus, the Hydrocarbons Law abolished the use of concession contracts for the future exploration or exploitation of hydrocarbons and mandated that all existing concession contracts be terminated and replaced with association

21 Exhibit C-76, Supreme Decree No. 1459 – Hydrocarbons Law, Official Register No. 322, published October 1, 1971.

22 Exhibit C-77, Law on Assets Subject to Reversion in Hydrocarbons Concessions, Official Register No. 29,577, published August 6, 1971.

23 Exhibit C-76, Supreme Decree No. 1459 – Hydrocarbons Law, Official Register No. 322, published October 1, 1971 at Article 2.

24 Id. at Articles 12-13, 46-47.

25 Id. at Articles 1-2, 46-47.

contracts.26 The Government also instituted a draconian tax on exports based on a “reference price” established by the Government without regard to actual sales receipts.27 As a result of this legislation, Ecuador took control over four million hectares of oil holdings previously exploited by private investors under concession contracts.28 The effect of this legislation was the “deliberate discouraging” of foreign investment in Ecuador.29

34. Third, in 1972, Ecuador built the Trans-Ecuadorian Pipeline (SOTE) to carry crude oil from the Oriente fields across the Andes to the Pacific coast for processing.30 Shortly thereafter, Ecuador began constructing a refinery in Esmeraldas, on Ecuador’s west coast at the end of the SOTE pipeline. The refinery commenced operations in 1977 with a capacity of 55,000 barrels per day.31

26 Id. at First Transitory Disposition. See also Exhibit C-78, Letter from President Durán Ballén to Samuel Bellettini Zedeño enclosing draft law modifying the Hydrocarbons Law, October 29, 1993 at 3-4 (discussing the historical transition to the association contract).

27 Exhibit C-76, Supreme Decree No. 1459 – Hydrocarbons Law, Official Register No. 322, published October 1, 1971 at Articles 65-67.

28 Exhibit C-70, Joan Anderson, Ecuador, in Laura Randall, ed., THE POLITICAL ECONOMY OF LATIN AMERICA IN THE POSTWAR PERIOD (1997) at 237.

29 Exhibit C-79, Christopher Brogan, THE RETREAT FROM OIL NATIONALISM IN ECUADOR, 1976-1983 (1984) at 1.

30 Exhibit C-73, United States Department of Energy, Energy Information Administration, Ecuador, COUNTRY ANALYSIS BRIEFS (April 2008) at 4.

31 Exhibit C-80, PetroEcuador, Crude Oil Refinement, STATISTICAL REPORT (2005) at 59; see also Exhibit C-71, John Martz, POLITICS AND PETROLEUM IN ECUADOR (1987) at 114-115.

35. Finally, Ecuador, like Venezuela, became a member of OPEC in 1973.32

36. Following the adoption of these measures, CEPE and the Ecuadorian State assumed control of fields providing 3,700 barrels per day.33 Because of the large number of fields poised to begin commercial production at the time of the nationalization, this number increased to more than 208,800 barrels per day by 1973.34 During this period (i.e., 1971-1973), world oil prices quadrupled and the State briefly enjoyed a surplus in its budget.

3. Nationalization Led To A Decline In Ecuador’s Reserves

37. The surplus was short-lived.35 After assuming production, Ecuador and CEPE failed to invest in new exploration and enhanced recovery techniques. Further, private investors, whose concession contracts had been terminated and were forced to enter into contracts that virtually eliminated all incentives to make additional investments, did not step in to fill the void.36

32 Exhibit C-81, The World Bank, Ecuador: An Agenda for Recovery and Sustained Growth, WORLD BANK COUNTRY STUDIES (1984) at xiii.

33 Id. at 89.

34 Id.

35 Exhibit C-82, Law No. 101 – Changes to the Hydrocarbons Law, Official Gazette No. 306, published August 13, 1982 at Preamble; Exhibit C-81, The World Bank, Ecuador: An Agenda for Recovery and Sustained Growth, WORLD BANK COUNTRY STUDIES (1984) at 89.

36 Exhibit C-81, The World Bank, Ecuador: An Agenda for Recovery and Sustained Growth, WORLD BANK COUNTRY STUDIES (1984) at 89.

38. Thus, between 1973 and 1980, oil production in Ecuador stagnated. By 1980, the country was producing fewer than 211,000 barrels per day and national oil reserves were significantly depleted.37 In addition, the absence of a pipeline linking Esmeraldas to Quito limited the country’s principal refinery to operating at less than fifty percent of its output capacity for several years.38

39. In an attempt to reverse this situation, CEPE launched an intensive drilling program in 1980 and 1981.39 This program, however, yielded no significant new oil field discoveries, in large part because CEPE lacked the requisite technical expertise.40

40. Recognizing that existing legislation was damaging Ecuador’s hydrocarbons sector, Government officials consulted political and industrial leaders to ascertain their interest in reintroducing foreign investment. As a result of overwhelming support for the opening of Ecuador’s oil sector to foreign investment, the Government launched a series of reforms to encourage investment in oil exploration activities.41

41. First, in late 1982, Ecuador modified its Hydrocarbons Law to permit CEPE to enter into service contracts for the exploration and exploitation of hydrocarbons. Under this form of contract,

37 Exhibit C-71, John Martz, POLITICS AND PETROLEUM IN ECUADOR (1987) at 271-72.

38 Id. at 173-176.

39 Id. at 277-78.

40 Id. at 272, 277-78.

41 Id. at 347-48; see also Exhibit C-79, Christopher Brogan, THE RETREAT FROM OIL NATIONALISM IN ECUADOR, 1976-1983 (1984) at 31.

the Government awarded exploration areas to private companies through a bidding process. If investors discovered commercial reserves within these areas, the Government agreed to reimburse the investors for their costs and pay a monthly fee for their services.42 CEPE, however, remained the sole owner of the reserves found in the exploration areas.

42. Second, Ecuador modified its tax law. In particular, Ecuador eliminated the severe income tax regulations formerly imposed on hydrocarbons-producing activities.43 Thus, following the revisions to its tax law, the tax increment – the rate exceeding the maximum income tax rate – was tied to the volume of production rather, as was previously the case, than to the size of reserves. Also, the tax increment rates were reduced, and oil of 15º API or less was exempted from the production tax.44

42 Exhibit C-82, Law No. 101 – Changes to the Hydrocarbons Law, Official Gazette No. 306, published August 13, 1982 at Article 4; Exhibit C-81, The World Bank, Ecuador: An Agenda for Recovery and Sustained Growth, WORLD BANK COUNTRY STUDIES (1984) at 91. In practice, the contractor for a particular block agreed to risk a minimum amount of capital for a four-year exploration period. After this period, the contract was terminated and the exploration investments were written off if no commercial hydrocarbons were found. If commercial reserves were discovered, the contractor had the right to make the necessary investments to develop the field for a period of twenty years. The contractor was in turn entitled to the reimbursement by CEPE of all costs and expenses, and a fee.

43 Exhibit C-79, Christopher Brogan, THE RETREAT FROM OIL NATIONALISM IN ECUADOR, 1976-1983 (1984) at 31-32.

44 Id. at 32. Crude oil can be classified depending on its gravity, which is measured by degrees on a scale developed by the American Petroleum Institute (API). The higher the API, the lighter – and hence, more valuable – the crude becomes.

43. In an effort to capitalize on these reforms, between 1983 and 1993, Ecuador launched six rounds of bidding for the granting of service contracts to private investors.45

44. Over the course of these six bidding rounds, however, only a few bids were submitted.46 Indeed, between 1989 and 1993, no new service contracts were awarded and a third of the service contracts signed as result of the first five bidding rounds either expired or terminated.47

45. Observers identified four reasons for this lack of interest in Ecuador’s service contract regime. First, there was little enthusiasm for the service contract model offered by Ecuador. Investors preferred a share of the risk, together with the prospect of higher returns if oil prices increased, to a steady income without substantial opportunity for upside.48

46. Second, the lack of excess capacity on the SOTE pipeline meant that additional investment in Ecuador could well prove futile.49

45 Exhibit C-78, Letter from President Durán Ballén to Samuel Bellettini Zedeño enclosing draft law modifying the Hydrocarbons Law, October 29, 1993 at 2.

46 Exhibit C-81, The World Bank, Ecuador: An Agenda for Recovery and Sustained Growth, WORLD BANK COUNTRY STUDIES (1984) at 92.

47 Exhibit C-78, Letter from President Durán Ballén to Samuel Bellettini Zedeño enclosing draft law modifying the Hydrocarbons Law, October 29, 1993 at 2.

48 Id. at 4.

49 Id. at 2. See also Exhibit C-75, Eleodoro Mayorga, Petroleum Policy, in Vicente Fretes-Cilis et al., eds., ECUADOR: AN ECONOMIC AND SOCIAL AGENDA IN THE NEW MILLENNIUM (2003) at 117.

47. Third, the relatively small degree of interest in Ecuador’s oil fields was attributed in part to the depressed world oil market.50

48. Finally, the World Bank noted that investors had not regained confidence in Ecuador following the “retroactive actions of prior Governments in the early 1970s.”51

49. The World Bank thus advised Ecuador that, to obtain more investment, it would have to create real incentives for foreign investment and guarantee that the events of the early 1970s would not be repeated: “The Ecuadorian Government’s credibility can improve with time and demonstration that those foreign companies now active in Ecuador […] are being treated fairly.”52

50. By the early 1990s, Ecuador was finally prepared to heed the advice of the World Bank. This decision was facilitated by the fact that, in the context of the low oil prices then prevailing, the service contract modality was not profitable for Ecuador. To the contrary, the combined effect of the mandatory reimbursement of contractors’ investment costs and expenses, and the payment of a service fee to contractors, caused Ecuador’s income from oil to decrease dramatically, especially in relation to small and medium-size oil fields.53 In addition,

50 Exhibit C-81, The World Bank, Ecuador: An Agenda for Recovery and Sustained Growth, WORLD BANK COUNTRY STUDIES (1984) at 92.

51 Id. at 92. See also Exhibit C-71, John Martz, POLITICS AND PETROLEUM IN ECUADOR (1987) at 354; Exhibit C-79, Christopher Brogan, THE RETREAT FROM OIL NATIONALISM IN ECUADOR, 1976-1983 (1984) at 33-34.

52 Exhibit C-81, The World Bank, Ecuador: An Agenda for Recovery and Sustained Growth, WORLD BANK COUNTRY STUDIES (1984) at 92.

53 Exhibit C-78, Letter from President Durán Ballén to Samuel Bellettini Zedeño enclosing draft law modifying the Hydrocarbons Law, October

the need for investment in capacity was no longer optional, as in 1987, a landslide caused by a severe earthquake destroyed a 65 kilometer stretch of the SOTE.54

B. IN THE 1990S, ECUADOR ADOPTED A NEW LEGAL FRAMEWORK APPLICABLE TO ITS HYDROCARBONS SECTOR THAT SOUGHT TO INDUCE FOREIGN INVESTMENT BY ALLOWING INVESTORS TO RECEIVE A SHARE OF THE UPSIDE THAT WOULD COME FROM PRICE INCREASES AND, SIMULTANEOUSLY, INSULATE THEM FROM FUTURE CHANGES IN THE LEGAL REGIME

1. Beginning In 1992, Ecuador Took Steps To Liberalize Its Economy And Insulate Foreign Investors From Future Legal Or Political Instability

51. Upon taking office on August 10, 1992, President Durán Ballén promised to undertake the types of long-term reforms necessary to achieve economic stability in Ecuador.55 Shortly after his election, President Durán Ballén launched an ambitious economic liberalization program aimed at expanding the role of

29, 1993 at 3; Exhibit C-79, Christopher Brogan, THE RETREAT FROM OIL NATIONALISM IN ECUADOR, 1976-1983 (1984) at 35.

54 Exhibit C-73, United States Department of Energy, Energy Information Administration, Ecuador, COUNTRY ANALYSIS BRIEFS (April 2008) at 4. The earthquake hit Ecuador at a particularly bad time. Ecuador’s real GDP declined by six percent in 1987. Exhibit C-83, Economist Intelligence Unit, Ecuador: Country Report No. 4, 1992, November 11, 1992 at 3. Meanwhile, prices increased at an average of 58 percent in 1988 and 76 percent in 1989. Exhibit C-84, Fidel Jaramillo, Fabio Schiantarelli and Andrew Weiss, The Effect of Financial Liberalization on the Allocation of Credit: Panel Data Evidence for Ecuador, WORLD BANK POLICY RESEARCH PAPERS (1993) at 7.

55 Exhibit C-83, Economist Intelligence Unit, Ecuador: Country Report No. 4, 1992, November 11, 1992 at 16.

the private sector and reducing the size of the public administration. The thrust of the new program was to repudiate the nationalist policies of the 1970s and 1980s and, instead, to restructure, modernize and privatize State-owned companies.56 As stated by the Ecuadorian Government in 1994:

The strategy to achieve these ends [of economic liberalization] includes a dramatic change relative to the policies in force during the 1970’s and 1980’s. The new strategy is based on the promotion of and interaction with the private sector in a competitive environment, jointly with State actions to facilitate development and to promote private sector activities.57

52. As the World Bank had advised, however, a mere repudiation of past policies would be insufficient to induce substantial foreign investment. The Durán Ballén administration understood that Ecuador would also need to take steps to insulate investors from future political and legal instability. Thus, in 1994, Ecuador introduced sweeping reforms to its Constitution that were designed to attract and protect investment in Ecuador.58 The

56 Exhibit C-85, Government of Ecuador, Institutional Restructuring Guidelines, November 18, 1994 at 5; Exhibit C-86, Modernization of the State Law, Official Gazette No. 349, published December 31, 1993.

57 Exhibit C-85, Government of Ecuador, Institutional Restructuring Guidelines, November 18, 1994 at 5 (emphasis added).

58 Stemming from an August 28, 1994 referendum, President Durán Ballén was authorized to send a bill of constitutional reforms to Congress, to be approved or rejected within a 100-day deadline. The bill was sent to Congress on October 4, 1994, but the deadline could not be met given the bill’s scope. As a result, Congress, for methodological as well as political reasons, dealt with the constitutional reforms by dividing them into parts. The first reform was enacted in Official Register No. 863 of January 16, 1996. The National Constituent Assembly, in session from December 20, 1997, subsequently issued the Political Constitution of the

foundation of this initiative was Article 244 of the new Ecuadorian Constitution, in which Ecuador committed to provide a stable and reliable legal and institutional framework to promote the development of all economic activities:

Art. 244. – Within the social economic market system, it shall be the State’s responsibility to:

1. Guarantee the development of economic activities, through a juridical order and institutions that promote, foment and generate confidence. […]59

53. More specifically, Article 271 of the revised Ecuadorian Constitution provided two key investment protections. First, it guaranteed domestic and foreign investment in Ecuador’s production and export sectors:

The State shall guarantee national and foreign capital that is invested in production, especially

Republic on June 5, 1998, which preserved almost in its entirety the text approved in 1996. See Exhibit C-87, What Is the Constitutional Court, extract from the Ecuadorian Constitutional Court website, current as of November 19, 2008 at ¶¶1-4.

59 Exhibit C-88, Political Constitution of the Republic of Ecuador, Official Register No. 1 (Constitutional Court), published August 11, 1998 at Article 244 (emphasis added). Unofficial English translation. In its original Spanish version it reads: Art. 244.- Dentro del sistema de economía social de mercado al Estado le corresponderá: 1. Garantizar el desarrollo de las actividades económicas, mediante un orden jurídico e instituciones que las promuevan, fomenten y generen confianza. […] See also id. at Article 245.

that which is destined for domestic consumption and exportation. […]60

54. Second, it expressly authorized the State to incorporate specific stabilization guarantees into contracts with investors to ensure that the terms of those contracts would not be affected by subsequent laws or regulations:

The State, in contracts signed with investors, shall be able to establish special guarantees and protections, so that the agreements are not modified by laws or other provisions of any type that affect their clauses.61

55. These same guarantees and stabilization provisions were likewise implemented in legislation applicable to foreign investment. In particular, in December 1997, Ecuador passed the Investment Promotion and Guarantee Law (the Investment Law).62 This law was specifically designed to provide foreign

60 Id. at Article 271 (emphasis added). Unofficial English translation. In its original Spanish version it reads: El Estado garantizará los capitales nacionales y extranjeros que se inviertan en la producción, destinada especialmente al consumo interno y a la exportación. […]

61 Id. (emphasis added). Unofficial English translation. In its original Spanish version it reads: El Estado, en contratos celebrados con inversionistas, podrá establecer garantías y seguridades especiales, a fin de que los convenios no sean modificados por leyes u otras disposiciones de cualquier clase que afecten sus cláusulas.”

62 Exhibit C-13, Law No. 46, Official Register No. 219, published December 19, 1997.

investors with: (a) legal stability; and (b) the governmental support and legal transparency necessary for the development of economically viable projects. As explained in the Preamble to the Investment Law:

Whereas it is the obligation of the State to give all its support, assistance and clear regulations so that investors can develop investment initiatives that lead to technically and economically viable projects that are important for and of interest to the country.

Whereas [the State] must bring about and promote the entry of foreign investment so that, in addition to domestic investment, it contributes to the process of economic development, guaranteeing the legal security required for adequate development, based on a stable legal and institutional framework.63

63 Id. at Preamble (emphasis added). Unofficial English translation. In its original Spanish version it reads: Que es obligación del Estado dar todo su apoyo, asistencia y normas claras para que los inversionistas puedan desarrollar sus iniciativas de inversión conduciéndolas hacia proyectos técnica y económicamente viables y de importancia e interés para el país. Que se debe propiciar y promover el ingreso de inversión extranjera para que, sumada a la inversión nacional, coadyuve al proceso de desarrollo económico, garantizándole la seguridad jurídica requerida para un adecuado desenvolvimiento, basada en un marco legal e institucional estable.

Id. at Article 1.

56. In the Investment Law, the Government declared investment in the hydrocarbon production and service sectors a “national priority.”64 Further, in keeping with the constitutional protections, the Investment Law guaranteed foreign investors that their property rights would be respected without limitation, except for those legal restrictions imposed by the laws in force:

Guarantees for Foreign Investment

Art. 17.- Direct foreign investment, sub-regional or neutral investment, duly registered, will have the following guarantees:

[…]

(g) Right of ownership without limitations other than those provided under the laws in force.65

57. Moreover, Ecuador committed to ensure, through its agencies and subdivisions, that all constitutional guarantees would apply to foreign investors:

Art. 21. – The State, through all agencies and other entities of the public sector, shall see to it

64 Id. at Article 2.

65 Id. at Article 17(g). Unofficial English translation. In its original Spanish version it reads: De las Garantías a la Inversión Extranjera Art. 17: La inversión extranjera directa, subregional o neutra, debidamente registrada, gozará de las siguientes garantías: […] (g) Derecho de propiedad, sin otras limitaciones que las establecidas por las disposiciones legales vigentes.

that domestic and foreign investment develop with all the liberties and guarantees established in the Political Constitution of the Republic […] any discriminatory or anomalous situation may be brought before the Ministry of Foreign Trade, Industrialization and Fishing, which, directly or through COMEXI, must take immediate action before the competent agency in order to correct the situation.66

58. The Investment Law also provided that Ecuador would respect and comply with all treaties that it had signed relating to the promotion and protection of foreign investments and that it would endeavor to sign new treaties to broaden the guarantees provided to foreign investors:

Ecuador fully respects the Treaties and Conventions on Promotion and Protection of Investment, including those referring to avoiding double taxation, which it has signed and ratified with other countries or within the framework of its participation in international agencies.

[…]

66 Id. at Article 21 (emphasis added). Unofficial English translation. In its original Spanish version it reads: Art. 21.- El Estado, a través de todos los organismos y más entidades del sector público, velará para que la inversión nacional y extranjera se desarrolle con toda la libertad y garantías establecidas en la Constitución Política de la República […] [c]ualquier situación discriminatoria o anómala podrá ser denunciada ante el Ministerio de Comercio Exterior, Industrialización y Pesca, que, directamente o a través del COMEXI, deberá tomar acción inmediata ante el organismo competente para que se corrija la situación.

The Ministry of Foreign Trade, Industrialization, and Fishing in conjunction with the Ministry of Foreign Relations will encourage the signing of and compliance with international agreements that set forth the mechanisms for protection of investments […] and will work to expand the framework of guarantees for investors.67

59. Finally, Ecuador agreed to submit any dispute arising out of the Investment Law to international tribunals constituted in accordance with the international treaties entered into by Ecuador:

The State and foreign investors may submit any disputes that arise under this Law to the Arbitral Tribunals constituted under International Treaties to which Ecuador is a party or the procedures specifically agreed on or stipulated in bilateral or

67 Id. at Articles 31 and 33 (emphasis added). Unofficial English translation. In its original Spanish version it reads: El Ecuador respeta plenamente los Tratados y Convenios que en materia de Promoción y Protección de Inversiones, incluyendo los referidos a evitar la doble tributación, ha firmado y ratificado con otros países o en el marco de su participación en organismos internacionales. […] El Ministerio de Comercio Exterior, Industrialización y Pesca con el Ministerio de Relaciones Exteriores, propenderán a la suscripción y adhesión de convenios internacionales que consagren mecanismos de protección de las inversiones contra riesgos […] buscando ampliar el marco de las garantías para los inversionistas.

multilateral agreements signed and ratified by the country.68

2. Ecuador Signed Bilateral Investment Treaties, Further Reassuring Investors

60. Consistent with the terms and objectives of the Investment Law, and the hope of inducing foreign investment, Ecuador signed a significant number of bilateral investment treaties between 1994 and 2001. These treaties granted investors from a number of targeted jurisdictions, including the United States, with enhanced investment protections.69

61. In particular, these treaties broadly guaranteed foreign investors that they would be treated in a fair and equitable manner, that their investments would be granted full protection and security,

68 Id. at Article 32. Unofficial English translation. In its original Spanish version it reads: El Estado y los inversionistas extranjeros podrán someter las controversias que se suscitaren por la aplicación de esta Ley a Tribunales Arbitrales constituidos en virtud de Tratados Internacionales de los cuales sea parte Ecuador o a los procedimientos específicamente acordados o estipulados en los convenios bilaterales o multilaterales firmados y ratificados por el país. 69 Between 1994 and 2001, Ecuador signed at least 15 bilateral investment treaties, including treaties with Argentina (February 18, 1994); Bolivia (May 25, 1995); Canada (April 29, 1996); Chile (October 27, 1993); Costa Rica (December 6, 2001); Dominican Republic (June 26, 1998); El Salvador (May 16, 1994); France (September 7, 1994); Germany (March 21, 1996); Honduras (July 26, 2000); Nicaragua (June 2, 2000); Paraguay (January 28, 1994); Peru (April 7, 1999); Romania (March 21, 1996); Spain (June 26, 1996); Sweden (May 31, 2001); United Kingdom (May 10, 1994); United States (August 27, 1993); and Venezuela (November 18, 1993).

that they would not be subject to expropriation without prompt, adequate and effective compensation, and that, in case of breach, investors would enjoy the right to arbitrate against Ecuador in a neutral forum.70

3. Ecuador Guaranteed Investors In Its Hydrocarbons Sector A Stable Legal Regime, Including The Right To Tax Stabilization, Royalty Exemption And A Fixed Participation In Crude Production

a. Ecuador amended its Hydrocarbons Law to allow PetroEcuador and foreign investors to sign long-term production sharing contracts

62. As explained above at paragraphs 43 to 50, the service contract proved to be ineffectual for Ecuador. Investors showed little enthusiasm for service contracts because they could not book reserves or participate in the upside of the projects. At the same time, given the low oil prices in the late 1980s and 1990s, the contracts were also unprofitable for Ecuador, as in some cases Ecuador was paying investors more for their services than it was receiving for the oil. As a result, the Ministry of Hydrocarbons developed a contractual form that was similar to the concession contract model, known as the production sharing contract. Like concession contracts, a production sharing contract allowed investors to participate in the long-term upside of projects and book a fixed share of the reserves found in a particular block. In addition, the State received revenue through a stable and fixed tax regime and a participation in the production based on an agreed-upon formula.71

63. The economic necessity of returning to a system analogous to the concession contract abdicated in the 1970s was explained by

70 See, e.g., Exhibit C-6.

71 See below ¶¶99-120.

President Durán Ballén when presenting the reforms to the Congress in October 1993:

[T]he limited financial resources that the country has […] do not justify PetroEcuador’s assumption of all the risk involved in exploration activities; such risk must be shared with international petroleum companies. […] [T]he stipulation for mandatory reimbursement of the contractor’s investments, costs and expenditures has significantly reduced the participation of the State in the economic benefits of oil exploration and production in medium and small fields.72

64. Ecuador also hoped that this contractual form would increase its global competitiveness in attracting foreign investment to the country’s declining oil industry. The Government recognized that long-term production sharing contracts, like concession contracts, would be more attractive to foreign investors because they gave investors the ability to participate in a share of the oil produced and book reserves, and enabled them to sell their participation share in the international markets:

72 Exhibit C-78, Letter from President Durán Ballén to Samuel Bellettini Zedeño enclosing draft law modifying the Hydrocarbons Law, October 29, 1993 at 2-4. Unofficial English translation. In its original Spanish version it reads: [L]os escasos recursos financieros con los que cuenta el país […] no justifican que PetroEcuador asuma la totalidad del riesgo involucrado en la actividad exploratoria, debiendo compartir dicho riesgo con empresas petroleras internacionales. […] la estipulación de reembolsos obligatorios de las inversiones costos y gastos a la contratista, ha reducido significativamente la participación del Estado en los beneficios económicos de la exploración y producción de petróleo en campos medianos y pequeños.

[T]he Service Contract does not permit the contracting company to have a production flow of its own. This characteristic goes against the interest and raison d’être of international petroleum companies, for the majority of whom the availability of production is an essential aspect of marketing in international markets. […] The new contract […] will allow Ecuador to position itself at an internationally competitive level for attracting venture capital […].73

65. Accordingly, on November 29, 1993, the Congress passed an amendment to the Hydrocarbons Law. This amendment authorized the State to execute production sharing contracts with private companies through PetroEcuador, the State oil company that replaced CEPE.74 When it passed the amendment, the Congress again stressed Ecuador’s need for foreign investment in oil exploration activities, and the importance of using a long-term contract that would promote the exploration and exploitation of hydrocarbons in the country:

73 Id. at 4. Unofficial English translation. In its original Spanish version it reads: [E]l contrato de Prestación de Servicios no permite que la empresa contratista pueda disponer de un flujo de producción de su propiedad. Esta característica desnaturaliza el interés y la razón de ser de las empresas petroleras internacionales, para la mayoría de las cuales la disponibilidad de la producción para comercializarla en los mercados internacionales es un aspecto esencial. […] El nuevo contrato […] permitirá al Ecuador situarse a un nivel competitivo internacional respecto a la atracción al capital de riesgo […].

74 Exhibit C-15, Law No. 1993-44, Official Register No. 326, published November 29, 1993 at Article 1.

Whereas for the search for and development of new hydrocarbons reserves that guarantee the energy future of the country, greater investment is required in the exploration and exploitation of hydrocarbons. […] [To this end] it is indispensable to introduce in the Ecuadorian legislature contractual models that make the exploration and exploitation of hydrocarbons competitive.75

66. Thus, the model production sharing contract set out in implementing regulations provided that private investors would bear at their own risk the full cost of exploration and long-term exploitation activities in the awarded areas, including seismic studies, drilling costs, personnel and facilities. Similarly, investors would receive no guaranteed income for the operation of the fields.76

67. In exchange for the risks and obligations assumed, investors would receive a share of the oil produced (the Contractor Production Participation) calculated in accordance with a formula established in each of the contracts. An investor’s revenue over the long-term was therefore subject to major risks,

75 Id. at Preamble. Unofficial English translation. In its original Spanish version it reads: Que para la búsqueda y desarrollo de nuevas reservas hidrocarburíferas que garanticen el futuro energético del país, se requiere de mayor inversión para la exploración y explotación de hidrocarburos. […] [Para ello] es indispensable introducir en la legislación ecuatoriana modalidades contractuales, que hagan competitiva la exploración y explotación de hidrocarburos.

76 Exhibit C-17, Executive Decree No. 1416, Official Register No. 364, published January 21, 1994 at Articles 1, 3.1, 5.1.4 and 34.

including: (a) the quantity and quality of the commercial oil discovered; (b) operating efficiency; and (c) oil price fluctuations.77

68. As mandated by the Hydrocarbons Law, on November 29, 1993, Ecuador issued the implementing regulation of the Hydrocarbons Law, Decree No. 1417 (Decree 1417). Decree 1417 regulated in detail the scope of the parties’ rights and obligations under the Hydrocarbons Law (together with the Hydrocarbons Law, the Hydrocarbons Legal Framework).78

b. Ecuador’s Hydrocarbons Legal Framework insulated foreign investors against future changes in Ecuadorian law

69. The guarantee of legal stabilization and, in particular, tax stabilization was crucial to the success of the production sharing contract as an inducement to long-term investment; that is, investors needed an assurance that if a tax measure enacted after the signing of the contract affected the economics of the contract, the Contractor Production Participation would be adjusted to absorb the effect of that measure. Otherwise, as the World Bank had warned Ecuador, investors would remain fearful of future changes in the political or social climate in Ecuador and therefore would have no confidence in their ability to realize long-term benefits from their investments.79

70. As a result, Ecuador’s Hydrocarbons Legal Framework provided that the financial equilibrium of the parties’ agreement would be maintained throughout the term of the contract. In

77 Id. at Articles 1, 15 and 23.

78 Exhibit C-89, Executive Decree No. 1417 – Regulation of the Hydrocarbons Law, Official Register No. 364, published January 21, 1994.

79 See above ¶¶48-49.

particular, Article 16 of Decree 1417 set out the stabilization clause in the following terms:

Art. 16. – Economic Stability. – The percentages of the parties in each production area of the contract shall be adjusted when the tax system applicable to the contract has been modified, in order to restore the economics of the contract in place before the tax modification.80

71. Ecuador’s Hydrocarbons Legal Framework also guaranteed that parties to production sharing contracts would be exempted from the payment of any royalty or other related payments otherwise payable under Article 44 of the Hydrocarbons Law. In particular, Article 54 of the Hydrocarbons Law provided as follows:

[Art. 54. – Exemptions for service contracts and specific service contracts. –] […] Contractors that had specific service contracts for the additional exploration and exploitation of marginal fields, or participation contracts for the exploration and exploitation of hydrocarbons, are exempt from the payment of royalties, entry fees, surface tariffs, contributions to compensation programs and

80 Exhibit C-89, Executive Decree No. 1417 – Regulation of the Hydrocarbons Law, Official Register No. 364, published January 21, 1994 at Article 16. Unofficial English translation. In its original Spanish version it reads: Art. 16. Estabilidad Económica: Los porcentajes de las partes en la producción del área del contrato serán ajustados cuando el sistema tributario aplicable al contrato haya sido modificado, para restablecer la economía del contrato, vigente antes de la modificación tributaria.

contributions provided for in the preceding subsection.81

72. The Hydrocarbons Legal Framework further guaranteed investors that if their exploration efforts led to the successful production of crude oil, they would have a right to receive a fixed participation in the crude produced. The investor’s share would be calculated according to a formula to be included in each production sharing contract, on the basis of the quantity and quality of the oil produced. As stated in the Hydrocarbons Law:

[Art. 12-A]: […] The contractor, once the production is initiated, will have the right to a participation in the production of the contract area, which will be calculated based on the percentages offered and calculated in that

81 Exhibit C-15, Law No. 1993-44, Official Register No. 326, published November 29, 1993 at Article 12 (emphasis added). Unofficial English translation. In its original Spanish version it reads: [Art. 54.- Exenciones por contratos de prestación de servicios y de servicios específicos.-] […] Las contratistas que tuvieren contratos de servicios específicos de exploración y explotación adicional de campos marginales o contratos de participación para la exploración y explotación de hidrocarburos, están exentos del pago de regalías, primas de entrada, derechos superficiarios, aportes en obras de compensación y la contribución prevista en el inciso anterior. See also Exhibit C-89, Executive Decree No. 1417 – Regulation of the Hydrocarbons Law, Official Register No. 364, published January 21, 1994 at Article 9.

[contract], based on the volume of hydrocarbons produced.82

73. Finally, the Hydrocarbons Legal Framework authorized the State to enter into contracts with private investors for the expansion of existing hydrocarbons transportation capacity, including the construction of new pipelines to transport crude oil from the Amazon Region to the country’s refineries.83

4. Ecuador Touted The Benefits Of Its Hydrocarbons Legal Framework To Induce Investment

74. Once the Hydrocarbons Legal Framework was in place, Ecuador launched international bidding rounds, where it invited foreign investors to bid for the new hydrocarbons blocks it was offering. Ecuador passed Decree No. 1415 (Decree No. 1415) to regulate the special bidding process. Decree No. 1415, which was expected to “promote foreign investment in the Country and expand the hydrocarbons reserves,”84 established a special

82 Exhibit C-15, Law No. 1993-44, Official Register No. 326, published November 29, 1993 at Article 4. Unofficial English translation. In its original Spanish version it reads: [Art. 12-A]: […] La contratista, una vez iniciada la producción tendrá derecho a una participación en la producción del área del contrato, la cual se calculará a base de los porcentajes ofertados y convenidos en el mismo, en función del volumen de hidrocarburos producidos.

83 Id. at Article 6; Exhibit C-78, Letter from President Durán Ballén to Samuel Bellettini Zedeño enclosing draft law modifying the Hydrocarbons Law, October 29, 1993 at 5.

84 Exhibit C-90, Decree No. 1415 – Regulation of the Special Bidding Process for Participation Sharing Contracts, Official Register No. 364, published January 21, 1994 at ¶4 of the Preamble. Unofficial English translation. In its original Spanish version it reads: “estimular la inversión extranjera en el País y ampliar las reservas de hidrocarburos.”

committee, composed of the Ministry of Energy and Mines, the Ministry of Defense, the Ministry of Financing and Credit and the Comptroller General of the State, which would be in charge of awarding the production sharing contracts to private investors (the Bidding Committee).85

75. In January 1994, Ecuador opened Round Seven for the awarding of contracts for Blocks 3, 11, 12, 18, 19, 21, 22, 27 and 28 in the Amazon Region and 4 and 5 on the Pacific Coast. In June 1995, Ecuador launched Round Eight for the awarding of contracts for Blocks 22, 23, 24, 25, 26, 29, 30 and 31 in the Amazon Region.

76. Investors were invited to bid based on the Production Sharing Contracts Contractual Basis, approved by Decree No. 1416,86 and the Production Sharing Contract Pro-Forma.87 Essentially, Ecuador reiterated in these documents the promises set out in the Hydrocarbons Legal Framework, including the following key guarantees: • legal stabilization, including tax stabilization, and a ceiling on applicable taxes;88

85 Id. at Article 6.

86 Exhibit C-17, Executive Decree No. 1416, Official Register No. 364, published January 21, 1994. A similar set of Contractual Bases were later issued for the Eighth Round incorporating some amendments introduced to Executive Decree No. 1416. See Exhibit C-29, Executive Decree No. 2845 – Issuing the Contractual Basis for the Eighth Bidding Round of Participation Contracts for the Exploration and Exploitation of Hydrocarbons, Official Register No. 729, published July 3, 1995.

87 Exhibit C-90, Decree No. 1415 – Regulation of the Special Bidding Process for Participation Sharing Contracts, Official Register No. 364, published January 21, 1994 at Article 23.

88 Exhibit C-17, Executive Decree No. 1416, Official Register No. 364, published January 21, 1994 at Articles 24.1.4 and 24.2; Exhibit C-91,

• royalty exemption;89 • a ratable share of crude production;90 and • the right to submit disputes to international arbitration.91

77. Ecuador publicized Rounds Seven and Eight in local newspapers and in the Ecuadorian Official Register.92 In addition, in order to reach foreign investors, Ecuador communicated the bidding processes to Ecuador’s embassies abroad and organized road shows with investors.93 To that end, Ecuador issued information memoranda, which were drafted in both English and Spanish and contained information on

PETROECUADOR – U.C.P. – Hydrocarbons Bidding – Seventh Round Documents, January 1994 at 189-190 (11.2.4 and Clauses 11.9).

89 Exhibit C-17, Executive Decree No. 1416, Official Register No. 364, January 21, 1994 at Article 19.2; Exhibit C-91, PETROECUADOR – U.C.P. – Hydrocarbons Bidding – Seventh Round Documents, January 1994 at 190 (Clause 11.8).

90 Exhibit C-17, Executive Decree No. 1416, Official Register No. 364, January 21, 1994 at Articles 15; 17 and 23; Exhibit C-91, PETROECUADOR – U.C.P. – Hydrocarbons Bidding – Seventh Round Documents, January 1994 at 170-171, 182 (Clauses 5.3.2. and 8.1).

91 Exhibit C-17, Executive Decree No. 1416, Official Register No. 364, January 21, 1994 at Article 45.2; Exhibit C-91, PETROECUADOR – U.C.P. – Hydrocarbons Bidding – Seventh Round Documents, January 1994 at page 203 (Clause 22.2).

92 Exhibit C-92, International Call for the First Round of Special Bidding for Contracts of Oil Exploitation and Additional Exploration in Marginal Fields (1994).

93 Exhibit C-90, Decree No. 1415 – Regulation of the Special Bidding Process for Participation Sharing Contracts, Official Register No. 364, published January 21, 1994 at Articles 24-25.

Ecuador, its hydrocarbons sector and the general terms of the production sharing contracts (the Information Memoranda).94 The Information Memoranda attached, inter alia, copies of the Hydrocarbons Law, the Production Sharing Contracts Contractual Basis and a Production Sharing Contract Pro- Forma.95 The Information Memoranda were distributed during the road shows organized by the Government in Calgary, Tokyo, Seoul, Paris and London.96

78. In the Information Memoranda, Ecuador provided a detailed description of its newly introduced economic liberalization plan. It highlighted the country’s shift from a State-driven economy to an economy that promoted private investment, and in particular private foreign investment, as its primary engine for growth. As expressed in the Information Memoranda:

Since August of 1992, the National Government has fostered a change in the country’s strategy for development. From an economy in which the public sector was the driving force for development, a different economy has been

94 Exhibit C-16, Extracts from Information Memorandum (1994), including Ministry of Energy and Mines and PetroEcuador, Seventh Round of International Petroleum Bidding, and Petroleum Contracts Unit, Documents and Basic Information for Special Bids: Production Sharing Contracts for Exploration and Exploitation of Hydrocarbons, Sections I and II.

95 Exhibit C-91, PETROECUADOR – U.C.P. – Hydrocarbons Bidding – Seventh Round Documents, January 1994 at 61, 103 and 158; Exhibit C-29, Executive Decree No. 2845 – Issuing the Contractual Basis for the Eighth Bidding Round of Participation Contracts for the Exploration and Exploitation of Hydrocarbons, Official Register No. 729, published July 3, 1995.

96 Exhibit C-91, PETROECUADOR – U.C.P. – Hydrocarbons Bidding – Seventh Round Documents, January 1994 at 27-28.

proposed in which the private sector would be its prime mover. This new strategy is based on transferring producing activities from the public sector to the private sector, on reducing the size of the State, on strengthening free market competition by means of deregulations, on strengthening and developing the financial markets, on joining and opening up to international markets, on attracting and encouraging foreign investment, and on renegotiating and paying our foreign debt.97

79. As if answering the advice of the World Bank, the Information Memoranda stated that Ecuador’s initial success in stabilizing its economy had generated “trust […] [from] the national and foreign private sector.”98

80. Ecuador also marketed to foreign investors the “structural” reforms introduced in the Hydrocarbons Legal Framework and stressed the Government’s desire to strengthen its economy through the encouragement of long-term foreign investment in the oil sector.99 In particular, Ecuador explained to potential investors that investment opportunities in Ecuador had never been better and that the country’s laws had been amended to

97 Exhibit C-16, Extracts from Information Memorandum (1994), including Ministry of Energy and Mines and PetroEcuador, Seventh Round of International Petroleum Bidding, and Petroleum Contracts Unit, Documents and Basic Information for Special Bids: Production Sharing Contracts for Exploration and Exploitation of Hydrocarbons, Sections I and II at 3 (emphasis added).

98 Id., Sections I and II at 3.

99 Id., Sections I and II at 4.

adjust to “current demands in order to obtain the capital required for substantial investments in the oil industry.”100

81. Importantly, Ecuador highlighted that under the production sharing contracts, investors would be entitled to receive a fair share of the crude produced:

The Ecuadorian State believes that fair sharing should be provided in the contracts, because they are the only ones that survive.101

82. The Information Memoranda also included a detailed description of the guarantees that would be included in the production sharing contracts to be awarded through bidding processes, including long-term tax stability, royalty exemption and the right to a fixed share of the oil production.102

83. Further, the Information Memoranda also touted the Government’s commitment to build a pipeline to increase transportation capacity:

The Ecuadorian State has retained engineering for the construction of a pipeline running parallel to the existing one, and Ecuadorian law has been amended in order to make private investment possible […] This pipeline will result in a 450,000 bbl/day capacity to transport the hydrocarbons produced in Ecuador’s Oriente.103

100 Id.

101 Id.

102 Id., Sections I and II at 7and 13.

103 Id., Sections I and II at 6.

84. Finally, with the country in the process of signing a number of bilateral investment treaties, the Investment Memoranda foreshadowed Ecuador’s intention to subject the production sharing contracts to the jurisdiction of international arbitral tribunals.104

5. Ecuador Awarded Foreign Investors Production Sharing Contracts To Explore and Exploit Blocks 7, 21, 23 And 24, All Of Which Guaranteed A Right To Tax Stabilization, Royalty Exemption And A Ratable Share Of Crude Production

85. On the basis of the terms set out in its Hydrocarbons Legal Framework, Ecuador awarded several production sharing contracts to foreign investors for the exploration and exploitation of blocks in the Oriente basin, including contracts for Blocks 7, 21, 23 and 24.

a. In March 1995, Ecuador awarded the Production Sharing Contract for the exploration and exploitation of Block 21 to foreign investors

86. Block 21 comprises 200,000 hectares and is located in the west- central Oriente basin, at the eastern foothills of the Andes mountains and 240 kilometers by road southeast of Quito.105 In the Seventh Bidding Round, Ecuador awarded a production sharing contract for the exploration and exploitation of Block 21 to Oryx Ecuador Energy Company (Oryx) (50 percent); Santa Fe Minerals (17.50 percent); Sociedad Internacional Petrolera,

104 Id., Sections I and II at 14.

105 See Exhibit C-21, Map of Burlington’s Interests in the Amazon Region of Ecuador.

Sipetrol S.A. (Sipetrol) (17.50 percent); and Compañía Latinoamericana Petrolera (Clapsa) (15 percent).106

87. On March 20, 1995, Oryx, Santa Fe Minerals, Sipetrol and Clapsa on the one hand, and Ecuador, contracting on its own behalf and through PetroEcuador, on the other, executed a Production Sharing Contract For The Exploration And Production Of Hydrocarbons (Crude Oil) In Block 21 Of The Amazon Region (the Block 21 PSC).107

b. In July 1996, Ecuador awarded the Production Sharing Contract for the exploration and exploitation of Block 23 to foreign investors

88. Block 23 comprises a 200,000 hectare area located to the south of Block 21, in the southwestern corner of the Oriente basin.108 As part of the Eighth Bidding Round, on July 24, 1996, Ecuador awarded a production sharing contract for the exploration and exploitation of Block 23 to the Argentine companies Compañía General de Combustibles S.A. (CGC) and Petrolera Argentina San Jorge S.A.109

89. On July 26, 1996, CGC and Petrolera Argentina San Jorge S.A. on the one hand, and Ecuador, contracting on its own behalf and through PetroEcuador, on the other, executed the Production Sharing Contract For Hydrocarbon Exploration And Crude Oil

106 Exhibit C-2 at Clauses 1 and 2.

107 See Exhibit C-2 with Block 21 Authorizations and Annexes.

108 Exhibit C-21, Map of Burlington’s Interests in the Amazon Region of Ecuador.

109 PetroEcuador’s Board of Directors authorized execution of the Production Sharing Contract for Block 23 on July 24, 1996. Exhibit C- 3 at Clause 2.5.

Production In Block Number Twenty-Three (23) of the Amazon Region of Ecuador (the Block 23 PSC).110

c. In April 1998, Ecuador awarded a Production Sharing Contract for the exploration and exploitation of Block 24 to foreign investors

90. Block 24 comprises a 200,000 hectare area located in the Ecuadorian Amazon Region of the Oriente basin, directly to the south of Block 23.111 Ecuador awarded a Production Sharing Contract for the exploration and exploitation of Block 24 to Arco Oriente Inc. (Arco) in the Eighth Bidding Round.112

91. On April 27, 1998, Arco and Ecuador, contracting on its own behalf and through PetroEcuador, executed the Production Sharing Contract For Exploration Of Hydrocarbons And Exploitation Of Crude Oil Between The Ecuadorian Government Through The Ecuador State Petroleum Company, PetroEcuador, And Arco Oriente Inc. In Block 24 Of The Amazon Region (the Block 24 PSC).113

110 See Exhibit C-3 with Block 23 Authorizations and Annexes. Subsequently, Petrolera Argentina San Jorge S.A. changed its name to Chevron San Jorge S.A.

111 See Exhibit C-21, Map of Burlington’s Interests in the Amazon Region of Ecuador.

112 PetroEcuador’s Board of Directors authorized execution of the Production Sharing Contract for Block 24 on April 22, 1998. Exhibit C-4 at Clause 2.5.

113 See Exhibit C-4 with Block 24 Authorizations and Annexes.

d. In March 2000, Ecuador converted the existing service contract for Block 7 into a Production Sharing Contract

92. Block 7 comprises a 200,000 hectare area located in north- central Ecuador, approximately 100 miles east of Quito. Block 7 is located adjacent to and immediately north of Block 21.114

93. Operations in Block 7 began on January 17, 1986, under a service contract entered into by B.P. Petroleum Development Limited (BP) and CEPE.115

94. Ownership of the rights under the Block 7 service contract changed a number of times in the following years.116 By June 1995, parties to the Block 7 service contract were Oryx, later renamed Kerr McGee Ecuador Energy Corporation (Kerr McGee)117 (50 percent), Preussag Energie Gmbh (Preussag)

114 See Exhibit C-21, Map of Burlington’s Interests in the Amazon Region of Ecuador.

115 Exhibit C-93, Legal, Economic and Technical Report Regarding the Negotiations for the Transformation of the Service Contract for the Exploration and Exploitation of Block 7 into a Participation Contract, November 3, 1999 at 164v.

116 On September 13, 1990, BP transferred 100 percent of its rights and obligations to Oryx. On January 11, 1993, the Ministry of Energy and Mines authorized Oryx to transfer 50 percent of its rights and obligations under the service contracts to other investors: 25 percent to Santa Fe Minerals, 15 percent to Sigdoil S.A. (which on May 27, 1993, became Clapsa II) and 10 percent to Sipetrol. On June 7, 1995, the Ministry of Energy and Mines authorized Santa Fe Minerals to transfer all its rights and obligations under the contracts to Preussag Energie Gmbh. See id. at 164-165.

117 On August 3, 1999, Oryx changed its name to Kerr McGee following a merger between the two companies. Exhibit C-1 at Clause 2.9.

(25 percent), Compañía Latinoamericana Petrolera Número Dos (Clapsa II) (15 percent) and Sipetrol (10 percent).

95. In accordance with the terms of the Hydrocarbons Law, which permitted the conversion of existing service contracts into production sharing contracts,118 on April 4, 1995, the parties to the Block 7 service contract communicated to PetroEcuador and the Ministry of Energy and Mines their desire to transform the existing service contract into a production sharing contract.119

96. On January 7, 1997, PetroEcuador agreed to start negotiating the transformation of the Block 7 service contract into a production sharing contract.120 Ecuador established a special committee for this purpose,121 which was tasked with analyzing Ecuador’s interests in converting the contract into a production sharing contract.122

118 Exhibit C-15, Law 1993-44, Official Register No. 326, published November 29, 1993 at Article 10. Migration to a participation contract was subject to the prior approval of the Bidding Committee and favorable reports from Ecuador’s Attorney General, the Army, PetroEcuador and the Ministry of Energy and Mines. Investors willing to convert their service contracts into production sharing contracts were guaranteed the full panoply of rights contained in the production sharing contracts.

119 Exhibit C-93, Legal, Economic and Technical Report Regarding the Negotiations for the Transformation of the Service Contract for the Exploration and Exploitation of Block 7 into a Participation Contract, November 3, 1999 at 165.

120 Id.

121 Id.

122 Exhibit C-15, Law No. 1993-44, Official Register No. 326, published November 29, 1993 at Article 10.

97. Ecuador ultimately concluded that the migration was in its best interests, citing the following key reasons for its decision: (a) PetroEcuador’s lack of resources to finance the investment needed to exploit Block 7;123 (b) PetroEcuador’s belief that private investment would result in the discovery of new reserves;124 and (c) PetroEcuador’s desire to shift exploration

123 Exhibit C-93, Legal, Economic and Technical Report Regarding the Negotiations for the Transformation of the Service Contract for the Exploration and Exploitation of Block 7 into a Participation Contract, November 3, 1999 at 174v. In particular, PetroEcuador explained the situation as follows: By not giving them this contractual modification, Petroproducción would have to contribute resources that it does not have, and even if they did exist their best opportunity cost would have to be found, because PETROECUADOR has limited resources for investment […]. Unofficial English translation. In its original Spanish version it reads as follows: De no darse esta modificación contractual Petroproducción debería aportar […] recursos que por un lado no se dispone y que si existieran debería buscársele su mejor costo de oportunidad porque PETROECUADOR tiene limitados recursos para la inversión […].

124 Id. at 174v. In particular, PetroEcuador explained that: [The conversion] will promote the discovery of new petroleum reserves for the country in Block 7, with future investment in exploration and development of this Block, pursuant to the stipulations of the Participation Contracts. Unofficial English translation. In its original Spanish version it reads as follows: [La conversión] potencia el descubrimiento de nuevas reservas petroleras del país en el Bloque 7, con futura

costs and risks to private investors, while at the same time ensuring that it would receive a participation in the field’s production.125

inversión en exploración y desarrollo de este Bloque, conforme se estipula en el Contrato de Participación.

125 Id. at 173, 174v and 175. In particular, at pages 174v-175 PetroEcuador explained: The conditions of the Participation Contract model provide that the investments, as well as the operations of the Coca-Payamino fields and of the rest of the Block, become the responsibility of the Oryx Company, which consequently also assumes the risks involved, [risks] which the State had assumed under the conditions of the Service Contracts […] [I]t should also be stated that in 1998 and 1999 [the State] did not receive any direct participation in the production of petroleum exploited in 46 percent of the Coca- Payamino field and in the rest of the Block 7 fields, and to the contrary generated a contingency debt of US$14.9 million. Unofficial English translation. In its original Spanish version it reads as follows: Las condiciones de la modalidad contractual de Participación hacen que tanto las inversiones, como las operaciones de los campos Coca-Payamino y del resto del Bloque pasen a responsabilidad de la Compañía Oryx, asumiendo consecuentemente los riesgos que esto conlleva y que el Estado los ha asumido bajo las condiciones del contrato de Prestación de Servicios […] [D]ebe mencionarse que en los años 1998 y 1999 [el Estado] no ha recibido ninguna participación directa en la producción del petróleo que se explotó del 46% del campo Coca-Payamino y de los campos del resto del Bloque 7 y al contrario se le generó una deuda contingente de US$14,9 millones.

98. Accordingly, following negotiations and after having obtained all the approvals required by the Hydrocarbons Law, including approvals from PetroEcuador, Ecuador’s Attorney General, the Armed Forces Joint Command and the Ministry of Energy and Mines, on March 23, 2000, Kerr McGee, Preussag, Sipetrol, Clapsa II, and Ecuador, through PetroEcuador, executed amendments to the original Services Agreement to transform it into the Production Sharing Contract For The Exploration And The Exploitation Of Block 7 (the Block 7 PSC).126

e. The terms of the Production Sharing Contracts for Blocks 7, 21, 23 and 24 reflected the guarantees contained in the Hydrocarbons Legal Framework and promoted in the Bidding Rounds

(i) Risk allocation and the mechanics of the PSCs

99. Under the PSCs applicable to Blocks 7, 21, 23 and 24, exploration and exploitation activities are to be carried out by the contractors at their own risk. Thus, investors are contractually bound to cover all costs associated with the operation of the blocks, provide all necessary financing, and operate the blocks using state of the art technology.127

100. If exploration is successful and the production plans are approved by the Ministry of Energy and Mines, contractors have the right to start producing crude oil from the respective fields.128 The crude produced in each of the fields is transported

126 See Exhibit C-1 with Block 7 Authorizations and Annexes.

127 Exhibit C-1 at Clauses 5.1.5-5.1.8; Exhibit C-2 at Clauses 5.1.4-5.1.7; Exhibit C-3 at Clauses 5.1.5-5.1.8; Exhibit C-4 at Clauses 5.1.6-5.1.9.

128 See Exhibit C-1 at Clause 6.1; Exhibit C-2 at Clause 6.2.5; Exhibit C- 3 at Clause 6.2.6 and Exhibit C-4 at Clauses 6.2 and 6.3.

by the contractors to the Inspection and Delivery Center (IDC) through secondary pipelines built by the contractors at their own expense or through primary pipelines subject to a tariff.129 At the IDC, the crude production is measured in order to determine its volume and specific quality.130 Once volumes and qualities are determined, a percentage of the crude production is allocated to the State, through PetroEcuador (the State Production Participation), and to the contractor in accordance with the production sharing formula established in the PSC.131

101. Under the formula in each PSC, the State Production Participation increases with the increasing volume of oil produced. However, all of the PSCs signed by Ecuador and PetroEcuador treat the relationship between the State Production Participation and the price of oil differently. In some contracts signed by Ecuador and PetroEcuador, such as the contracts for the Palo Azúl Unified Field and the Tarapoa field, the State Production Participation increases with increasing oil prices.132

129 Exhibit C-1 at Clauses 7.1 and 7.3.1; Exhibits C-2 and C-3 at Clauses 7.1 and 7.3; Exhibit C-4 at Clauses 7.1 and 7.2.

130 Exhibits C-1, C-3 and C-4 at Clause 3.3.5; Exhibit C-2 at Clause 3.3.4.

131 For example, the formula in Clause 8.1 of the Block 7 PSC for the Contractor’s Production Participation is as follows: PC = X • Q 100 Where: PC = Contractor’s Production Participation; Q = Measured Production; X = Average sharing factor percentage (average daily inspected production)

132 Ecuador, PetroEcuador and Petroproducción’s production sharing contracts for the Palo Azúl Unified Field and the Tarapoa field contain provisions whereby the production share of each of the parties is adjusted in accordance with changes in the price of oil. Exhibit C-95, Modification of the Contract for the Exploration and Exploitation of Hydrocarbons (Crude Oil) Between PetroEcuador and City Investing

In those contracts, the State began with a lower State Production Participation, but included a provision that would allow the State Production Participation to increase as crude price increased.

102. In contrast, the PSCs for Blocks 7, 21, 23 and 24 each start with a higher base State Production Participation but include no adjustment whatsoever in the event of crude price increases. To the contrary, in the context of the negotiations for the conversion of the Block 7 service contract into a PSC, Ecuador did propose a State Production Participation formula based on the 1995 Tarapoa contract. In that proposal, the Block 7 PSC would set a base price (or reference price) of US$17 per barrel, with the State Production Participation increasing steadily as crude prices increase from that point.133 This proposal was rejected by the contracting parties and Ecuador and PetroEcuador conceded the point.134 Accordingly, the Block 7 PSC followed the Block 21 PSC, which provided for no adjustment to the State Production Participation based on fluctuations in the price of crude. As explained in the report of the negotiations prepared by Ecuador:

Company Ltd., July 25, 1995 at Clause 8.1; Exhibit C-94, Unified Operation Agreement for the Exploration and Exploitation of Common Field Palo Azúl, August 7, 2002 at Clause 8.2 and Annex 7. Moreover, in October 2002, Ecuador issued the Contract Basis for its Ninth Bidding Round, in which the model participation contract provided that a contractor’s participation would reduce as oil prices increased. Exhibit C-96, Model Production Sharing Contract for the Exploration of Hydrocarbons and the Exploitation of Crude Oil (October 2002) at Clause 10.1.

133 Exhibit C-93, Legal, Economic and Technical Report Regarding the Negotiations for the Transformation of the Service Contract for the Exploration and Exploitation of Block 7 into a Participation Contract, November 3, 1999 at 162v.

134 Id.

As an alternative, it was proposed that an average of US$17 per barrel be set, with the parties equitably sharing the surplus at 50% each. This proposal was also rejected by the company […].135

103. Thus, the production participation allocated to the contractor in accordance with Clause 8.1 of each of the PSCs is as follows:

Block 7

Daily average production Contractor’s per year (barrels) Participation136

< 5,000 76.2%

5,000 – 10,000 74.2%

> 10,000 65%

136

135 Id. Unofficial English translation. In its original Spanish version it reads: Como una forma alternativa se planteó que se fije un promedio de US$ 17 por barril, a partir del cual las partes compartirán el excedente en forma equitativa al 50% para cada una. Este planteamiento tampoco fue aceptado por la compañía […].

136 Exhibit C-1 at Clause 8.1. These values are for production existing at the time the Block 7 PSC was signed. For new commercial discoveries in the Block, the Contractor’s Participation scale is modified as follows: (i) less than 9,000 barrels of crude per day, 76 percent; (ii) greater than or equal to 9,000 but less than or equal to 15,000 barrels of crude per day, 72 percent; and (iii) greater than 15,000 barrels of crude per day, 68 percent. Exhibit C-1 at Clause 8.1.1. These percentages are based on a standard oil quality of 23º API. The Contractor’s Participation in new commercial discoveries decreases by one percentage point (up to a maximum of ten percentage points) for each API degree between 23°

Block 21

Daily average production Contractor’s per year (barrels) Participation137

< 30,000 67.5%

30,000 – 60,000 60%

> 60,000 60%

137

and 35° and conversely increases by two percentage points for each API degree between 15° and 23°. For the Coca-Payamino field, the Contractor’s Share is as follows: (i) less than 9,000 barrels of crude per day, 70 percent; (ii) greater than or equal to 9,000 but less than or equal to 15,000 barrels of crude per day, 65 percent; and (iii) greater than 15,000 barrels of crude per day, 62 percent. Exhibit C-97, Agreement for the Unified Exploration and Exploitation of the Coca-Payamino Fields, May 2000 at Clause 9.2. Notwithstanding the above, the Contractor’s Participation in Block 7 is limited to 87.5 percent (for current production less than 5,000 barrels of crude per day, and new production less than 9,000 barrels of crude per day), 86 percent (for current production greater than or equal to 5,000 barrels of crude per day but less than or equal to 10,000 barrels of crude per day, or for new production greater than or equal to 9,000 barrels of crude per day but less than or equal to 15,000 barrels of crude per day) or 81.5 percent (for current production greater than 10,000 barrels of crude per day, and new production greater than 15,000 barrels of crude per day). Exhibit C-1 at Clause 8.1.1. The Contractor’s Participation in the Coca-Payamino field has no such limitation.

137 Exhibit C-2 at Clause 8.1. These percentages are based on a standard oil quality of API 25º. The Contractor’s Participation in new commercial discoveries decreases by one percentage point (up to a maximum of ten percentage points) for each API degree between 25°

Block 23

Daily average production Contractor’s 138 per year (barrels) Participation

< 30,000 81%

30,000 – 50,000 79%

> 50,000 60%

and 35° and conversely increases by two percentage points for each API degree between 15° and 25°. Notwithstanding the above, the Contractor’s Participation in Block 21 is limited to 87.5 percent (for production less than 30,000 barrels of crude per day), 86 percent (for production greater than or equal to 30,000 barrels of crude per day but less than or equal to 60,000 barrels of crude per day) or 81.5 percent (for production greater than 60,000 barrels of crude per day).

138 Exhibit C-3 at Clause 8.1. These percentages are based on a standard oil quality of API 25º. The Contractor’s Participation in new commercial discoveries decreases by one percentage point (up to a maximum of ten percentage points) for each API degree between 25° and 35° and conversely increases by two percentage points for each API degree between 15° and 25°. Notwithstanding the above, the Contractor’s Participation in Block 23 is limited to 87.5 percent (for production less than 30,000 barrels of crude per day), 86 percent (for production greater than or equal to 30,000 barrels of crude per day but less than or equal to 60,000 barrels of crude per day) or 81.5 percent (for production greater than 60,000 barrels of crude per day).

Block 24

Daily average production Contractor’s 139 per year (barrels) Participation

< 30,000 87.5%

30,000–60,000 86%

> 60,000 81.5%

104. The difference in the production participations applicable to each PSC reflects the different risks involved in each of the Blocks, the investments and commitments made in each bid, the costs of exploration and production, and each Block’s potential.140 Importantly, there is no provision in the PSCs permitting Ecuador or PetroEcuador to modify unilaterally

139 Exhibit C-4 at Clause 8.1. These percentages are based on a standard oil quality of API 25º. The Contractor’s Participation in new commercial discoveries decreases by one percentage point (up to a maximum of ten percentage points) for each API degree between 25° and 35° and conversely increases by two percentage points for each API degree between 15° and 25°. Notwithstanding the above, the Contractor’s Participation in Block 24 is limited to 87.5 percent (for production less than 30,000 barrels of crude per day), 86 percent (for production greater than or equal to 30,000 barrels of crude per day but less than or equal to 60,000 barrels of crude per day) or 81.5 percent (for production greater than 60,000 barrels of crude per day).

140 Witness Statement of Mr. Taylor Reid submitted herewith, referred to throughout this Memorial as Reid WS, at ¶14.

either the production participation formula or the Contractor Production Participation.141

105. After the production participations are calculated at the IDC, title to the crude passes to the respective owners, i.e., PetroEcuador and the contractor. At that point, the contractor becomes the exclusive owner of the participation allocated to it and has the right to dispose of the crude freely, subject to the payment of income and other taxes provided for in the PSCs.142

106. Schematically, the process can be illustrated as follows:

Primary or Secondary Pipeline CRUDE PRODUCTION INSPECTION AND DELIVERY CENTER

PSC Formula

Contractor State Participation Participation (PetroEcuador)

Sale in the Market

Revenue Taxed According to PSC

141 The PSCs are capable of amendment under certain circumstances. However, any amendment requires the agreement of all parties to the PSC and the circumstances permitting an amendment do not include a change in oil prices or the perceived inequity of the production participations to which the parties agreed. Exhibits C-1, C-2, C-3 and C-4 at Clause 15.2.

142 Exhibit C-1 at Clause 3.3.5; Exhibit C-2 at Clauses 3.3.4 and 5.3.3; Exhibits C-3 and C-4 at Clauses 3.3.5 and 5.3.2.

107. To ensure Ecuador’s production capacity in the long-term, in addition to the investments included in the investment plans, contractors must re-invest at least 10 percent of their annual revenues in the development of the Ecuadorian hydrocarbons industry, or in State owned companies or government bonds.143 Crucially, at the termination of any PSC, the Ecuadorian Government retains – at no cost – all investments made by the contractors during the contract term, including wells, equipment and other goods and infrastructure works.144

(ii) Ecuador and PetroEcuador agree to maintain the economic equilibrium of the PSCs through clauses guaranteeing long- term tax stabilization and an exemption from royalties

108. In accordance with the State’s power to provide specific stabilization guarantees in contracts entered into with foreign investors – a power ratified by Article 271 of the then- applicable Constitution145 – Ecuador and PetroEcuador agree in

143 Exhibits C-1 and C-3 at Clause 5.1.24; Exhibits C-2 and C-4 at Clause 5.1.23.

144 Exhibit C-1 at Clauses 5.1.22 and 18.6; Exhibit C-2 at Clauses 5.1.21 and 18.6; Exhibit C-3 at Clauses 5.1.22, 18.6 and 18.7; Exhibit C-4 at Clauses 5.1.21, 18.6 and 18.7.

145 See above ¶¶53-54 and Exhibit C-88, Political Constitution of the Republic of Ecuador, Official Register No. 1 (Constitutional Court), published August 11, 1998 at Article 271. The State shall guarantee national and foreign capital that is invested in production, especially that which is destined for domestic consumption and exportation. […] The State, in contracts signed with investors, shall be able to establish special guarantees and protections, so that the agreements are not modified by laws or other provisions of any type that affect their clauses.

the PSCs to protect the economic equilibrium of an investor’s agreement through tax stabilization clauses. This protection had three parts.

109. First, investors were guaranteed the following limits on the taxes applicable to each PSC:

• Income tax: 25 percent for Blocks 7, 21 and 23; and 20 percent for Block 24;146

• Employment contribution: 15 percent for all Blocks;147 and

• Asset Tax: 0.15 percent for Blocks 7, 23 and 24.148

110. Second, Ecuador and PetroEcuador agreed to absorb the effect of any tax measure enacted after the execution of the PSCs that may have consequences on the economics of the PSCs, including increases in the tax rates set forth in the PSCs and the

Unofficial English translation. In its original Spanish version it reads: El Estado garantizará los capitales nacionales y extranjeros que se inviertan en la producción, destinada especialmente al consumo interno y a la exportación. […] El Estado, en contratos celebrados con inversionistas, podrá establecer garantías y seguridades especiales, a fin de que los convenios no sean modificados por leyes u otras disposiciones de cualquier clase que afecten sus cláusulas.

146 Exhibits C-1 and C-3 at Clauses 11.2.3 and 11.2.4; Exhibit C-2 at Clauses 11.2.1 and 11.2.2; Exhibit C-4 at Clause 11.2.3.

147 Exhibits C-1 and C-3 at Clauses 11.2.2 and 11.2.4; Exhibit C-2 at Clauses 11.2.1 and 11.2.2; Exhibit C-4 at Clause 11.2.2.

148 Exhibits C-1, C-3 and C-4 at Clause 11.5. Other applicable taxes and contributions were listed at Clause 11 of the PSCs.

introduction of new taxes not contemplated in the PSCs.149 The language in Clause 11.12 of the Block 7 PSC exemplifies the guarantee provided in all of the PSCs:

Modification to the tax system: In the event of a modification to the tax system or the creation or elimination of new taxes not foreseen in this Contract […], which have an impact on the economics of this Contract, a correction factor will be included in the production sharing percentages to absorb the impact of the increase or decrease in the tax […]. This correction factor will be calculated by agreement of the Parties and will be subject to the procedure set forth in Article thirty- one (31) of the Regulations for Application of the Law Reforming the Hydrocarbons Law.150

149 Exhibit C-1 at Clause 11.12; Exhibit C-2 at Clause 11.7; Exhibits C-3 and C-4 at Clause 11.10.

150 Exhibit C-1 at Clause 11.12. Unofficial English translation. In its original Spanish version it reads: En caso de modificación del régimen tributario o de creación de nuevos tributos […] no previstos en este Contrato o de la participación laboral, vigentes a la fecha de suscripción de este Contrato y según están descritos en esta Cláusula, o de su interpretación, que tengan consecuencias en la economía de este Contrato, se incluirá un factor de corrección en los porcentajes de participación que absorba el incremento o disminución de la carga tributaria […]. Este factor de corrección será calculado entre las Partes y se observará el procedimiento establecido en el artículo treinta y uno (31) del Reglamento para la Aplicación de la Ley Reformatoria a la Ley de Hidrocarburos.

111. The Block 7 PSC further reinforces the agreement by Ecuador and PetroEcuador to remedy the effects of any taxation measure on the economics of the contract in the following terms:

Economic stability: If, due to acts of the Ecuadorian Government or PETROECUADOR, any of the events described below occurs, with consequences on the economics of this Contract, a correction factor will be applied to the production sharing percentages in order to absorb the increase or decrease in the economic burden: (a) Modification of the tax system, as defined in Clause eleven point twelve (11.12) […].151

112. Third, Ecuador undertook in the Hydrocarbons Law to exempt investors from paying any royalties and specified this royalty- exempt status in the PSCs. In each of the PSCs, Ecuador and PetroEcuador agree to provide investors the following protection against the imposition of royalties and other related payments:

Exemptions: The Contractor, pursuant to the provisions of the revised Article fifty-four (54) of the Hydrocarbons Law, is exempt from the payment of entry fees, surface rights, royalties,

151 Id. at Clause 8.6. Unofficial English translation. In its original Spanish version it reads: Estabilidad económica: En caso de que por acción del Estado Ecuatoriano o PETROECUADOR, ocurriere cualquiera de los eventos que se describen a continuación, que tengan consecuencias en la economía de este Contrato, se incluirá un factor de corrección en los porcentajes de participación, que absorba el incremento o disminución de la carga económica: a. Modificación del régimen tributario según se describe en la cláusula once punto doce […].

contributions to compensation projects and contributions to technological research.152

113. Accordingly, Ecuador could not use the royalty mechanism to effect changes in the production sharing formula otherwise prohibited in the PSCs.

(iii) Ecuador and PetroEcuador agree to provide contractors with a fixed participation in crude production and the right to freely dispose of their participation

114. Under the terms of the PSCs, once the State Production Participation is delivered at the IDC, the contractor is the exclusive owner of the remaining crude and has the right to freely dispose of its production participation. Clauses 3.3.5 and 10.1 of the PSCs provide as follows:

When the production leaves the Inspection and Delivery Center, each Party will be the sole and exclusive owner and responsible party for its share of the production.

[…]

152 Exhibits C-1 and C-4 at Clause 11.9 (emphasis added). Unofficial English translation. In its original Spanish version it reads: Exenciones: La Contratista, según el artículo cincuenta y cuatro (54) reformado de la Ley de Hidrocarburos, está exenta del pago de primas de entrada, derechos superficiarios, regalías y aportes en obras de compensación y de la contribución a la investigación tecnológica. See also Exhibit C-2 at Clause 11.6.

Once the State’s Participation is delivered, the Contractor may freely use the Crude Oil to which it is entitled.153

(iv) Ecuador and PetroEcuador agree to provide contractors with reasonably secure conditions for the performance of the PSCs

115. In the PSCs, Ecuador and PetroEcuador commit to ensure that contractors will be able to carry out their operations, and enjoy their rights, in reasonably secure conditions. For example, Clause 5.2.6 of the Block 23 PSC provides as follows:

In addition to the other obligations set forth in this Contract, PetroEcuador shall: […] Provide conditions of reasonable security for the performance of the operations of this Contract.154

153 Exhibit C-1 at Clauses 3.3.5 and 10.1. Unofficial English translation. In their original Spanish version they read: A partir del Centro de Fiscalización y Entrega, cada una de las partes, será propietaria exclusiva y única responsable de la producción que le corresponda. and La Contratista, una vez entregada la Participación del Estado, dispondrá libremente del Petróleo Crudo que le corresponde. See also Exhibits C-2, C-3 and C-4 at Clause 10.1.

154 Exhibit C-3 at Clause 5.2.6. Unofficial English translation. In its original Spanish version it reads: Además de las otras obligaciones estipuladas en este Contrato, PETROECUADOR se obliga a […] [p]roporcionar condiciones razonables de seguridad para la realización de las operaciones de este Contrato.

116. To that end, Ecuador and PetroEcuador undertake, for example, to promptly address and resolve all impediments or requirements relating to the contractor’s ability to perform under its contract. As stated in Clause 5.2.1 of the Block 23 PSC:

In addition to the other obligations set forth in this Contract, PetroEcuador shall: […] in coordination with the Ministry of Energy and Mines, respond to the Contractor's requests or requirements in a timely manner […] so that the Contractor can comply with its obligations within the terms and time periods specified in this Contract.155

(v) Ecuador and PetroEcuador agree generally to provide contractors with long- term legal and contractual stability

117. Additionally, Ecuador and PetroEcuador agree to provide investors in the PSCs with legal stability by incorporating into each PSC the relevant legislation in force at the time the contract was executed. For example, Clause 22.1 of the Block 7 and 24 PSCs provides:

See also Exhibit C-4 at Clause 5.2.6; Exhibit C-1 at Clause 5.2.5; and Exhibit C-2 at Clause 5.6.1.

155 Exhibit C-3 at Clause 5.2.1. Unofficial English translation. In its original Spanish version it reads: Además de las otras obligaciones estipuladas en este Contrato, PETROECUADOR se obliga a […] [de] ser el caso, y en coordinación con el Ministerio del Ramo atender oportunamente las solicitudes o requerimientos de la Contratista […] con el fin de que la Contratista pueda cumplirlo dentro de los términos y plazos establecidos. See also Exhibits C-1 and C-2 at Clause 5.2.1.

Applicable Legislation: This Contract is governed exclusively by Ecuadorian legislation, and laws in force at the time of its signature are understood to be incorporated by reference.156

118. Under this clause, all relevant provisions of the Hydrocarbons Legal Framework described at Section II.B.3 above became specific terms of each of the PSCs.

119. Further, following the principles established in the Hydrocarbons Law,157 Ecuador and PetroEcuador commit not to modify the PSCs except with the agreement of the contractor.158

(vi) Ecuador and PetroEcuador agree to submit disputes to ICSID arbitration

120. Finally, Ecuador and PetroEcuador agree to submit any nontechnical dispute related to or arising from performance under the PSCs to arbitration and, from the date of Ecuador’s ratification of the ICSID Convention, to ICSID arbitration. For example, Clause 20.3 of the Block 7 and 23 PSCs provides:

Notwithstanding the foregoing, from the date the Congress of Ecuador approves the Convention on

156 Exhibits C-1 and C-4 at Clause 22.1 (emphasis added). Unofficial English translation. In its original Spanish version it reads: Este Contrato se rige exclusivamente por la legislación ecuatoriana y en él se entienden incorporadas las leyes vigentes al tiempo de su celebración. The PSCs for Blocks 21 and 23 have similar language. Exhibits C-2 and C-3 at Clause 22.1.

157 Exhibit C-15, Law No. 1993-44, Official Register No. 326, published November 29, 1993 at Article 10.

158 Exhibits C-1, C-2, C-3 and C-4 at Clause 15.2.

the Settlement of Investment Disputes between States and Nationals of other States (hereinafter referred to as the “Convention”) signed by the Republic of Ecuador as a Member State of the International Bank for Reconstruction and Development, on January fifteenth (15), nineteen eighty-six (1986) and published in Official Registry number three hundred eighty-six (386) on March third (3), nineteen eighty-six (1986), the Parties shall submit disputes or disagreements relating to or arising from performance of this Production Sharing Contract to the jurisdiction and competence of the International Center for Settlement of Investment Disputes (hereinafter referred to as “ICSID”) for settlement and resolution under the terms of that Convention.159

159 Exhibits C-1 and C-3 at Clause 20.3 (emphasis added). Unofficial English translation. In its original Spanish version it reads: No obstante lo dispuesto anteriormente, desde la fecha en que el Convenio sobre Arreglo de Diferencias Relativas a Inversiones entre Estados y Nacionales de otros Estados (el “Convenio”) suscrito por la República del Ecuador, como Estado Miembro del Banco Internacional de Reconstrucción y Fomento, el quince de enero de mil novecientos ochenta y seis y publicado en el Registro Oficial número trescientos ochenta y seis del tres de marzo de mil novecientos ochenta y seis, sea aprobado por el Congreso Ecuatoriano, las Partes se obligan a someter las controversias o divergencias que tengan relación o surjan de la ejecución de este Contrato de Participación, a la jurisdicción y competencia del Centro Internacional de Arreglo de Diferencias Relativas a Inversiones (el “CIADI”) para que sean arregladas y resueltas en conformidad con lo dispuesto en dicho Convenio.

6. In 2000, Ecuador Followed Through With Several Promises To Foreign Investors By Expanding Transportation Capacity, Liberalizing The Economy And Ratifying The ICSID Convention

121. In the late 1990s, Ecuador’s economy continued to suffer. In particular, the combination of natural disasters160 and a sharp decline in world petroleum prices161 led to a rapid contraction in Ecuador’s economy.162 These problems were exacerbated by the lack of international capital available following the Asian, Russian and Brazilian financial crises. This period in Ecuador was characterized by bank failures, hyperinflation, double-digit

The Block 21 PSC has a similar ICSID provision, while the Block 24 PSC refers to the dispute resolution provisions in the Treaty. Exhibit C-2 at Clause 20.2.19; Exhibit C-4 at Clause 20.3.

160 In 1998 the El Niño rains caused an estimated US$2.6 billion worth of crop damage, and white spot disease hit the shrimp industry. Exhibit C- 98, Clare Ribando, Ecuador: Political and Economic Situation and U.S. Relations, CRS REPORT FOR CONGRESS (2005) at 4.

161 The oil price decreased from US$18 per barrel in 1996 to US$9.2 per barrel in 1998. Given that oil prices were (and are) the main drivers of the country’s revenue, the impact of plummeting oil prices on the Ecuadorian economy was substantial. The country’s economy, already heavily affected by natural disasters, was in a difficult condition. Exhibit C-99, Mark Weisbrot, Luis Sandoval and Belén Cadena, Ecuador’s Presidential Election: Background and Economic Issues, CENTER FOR ECONOMIC AND POLICY RESEARCH ISSUE BRIEF, November 2006 at 5-6.

162 Real GDP stagnated in 1998 and fell by 8 percent in 1999, driven mainly by reductions in private consumption and investment. Exhibit C-100 IMF Approves Stand-By Credit for Ecuador, INTERNATIONAL MONETARY FUND PRESS RELEASE, April 19, 2000 at 2.

unemployment163 and Ecuador’s default on its externally held bonds, worth approximately US$6.5 billion.164

122. Notwithstanding this crisis, Ecuador remained committed to the liberalization of its economy and the expansion of its hydrocarbons sector through foreign investment. Thus, in March 2000, Ecuador passed the Law for the Economic Transformation of Ecuador (Ley Fundamental Para la Transformación Económica del Ecuador) (Law 4), which “adopt[ed] radical measures to overcome the economic crisis the country endures.”165 The key innovation of this law was the “dollarization” of Ecuador’s economy (i.e., the replacement of the local currency with US Dollars).

123. At the same time, Law 4 amended the Hydrocarbons Law to allow for the construction of the OCP.166 Because the State did not have the resources to fund the construction of the pipeline, Law 4 provided that the construction would be outsourced to foreign investors, who would recover their investment through

163 Exhibit C-98, Clare Ribando, Ecuador: Political and Economic Situation and U.S. Relations, CRS REPORT FOR CONGRESS (2005) at 4.

164 Exhibit C-101, Paul Beckerman, Dollarization and Semi-Dollarization in Ecuador, WORLD BANK POLICY RESEARCH WORKING PAPER (July 2001) at 23.

165 Exhibit C-19, Law 4, Supplement to Official Register No. 33, published March 13, 2000 at Preamble. Unofficial English translation. In its original Spanish version it reads: “adopt[ó] medidas radicales para superar la crisis económica que soporta el país.”

166 The OCP was designed to transport crudes of 18° to 24° API. Exhibit C-102, Where the OCP Goes, Good Things Happen, OCP ECUADOR, S.A. INFORMATION BULLETIN (undated) at 6. See also Exhibit C-102, Where the OCP Goes, Good Things Happen, OCP ECUADOR, S.A. INFORMATION BULLETIN (undated) at 3 (map of the OCP and processing stations) and 4 (topographical map of the OCP).

tariffs charged by the pipeline.167 Based on this legislation, on February 15, 2001, a group of seven foreign investors entered into an agreement with Ecuador to design, develop, construct, commission, maintain, operate, finance and own the OCP.168

124. Law 4 also eased capital investment burdens on foreign investors by introducing a general exemption of import duties on machinery related to the development of the hydrocarbons sector during the period of exploration, and for a period of 10 years during exploitation, if the machinery was imported by a company with a government contract.169

125. In January 2001, shortly after the passage of Law 4, Ecuador passed Decree No. 1132, which amended the implementing regulation of the Investment Law.170 Decree No. 1132 reinforced the principle of legal stability in investment contracts.171

126. Finally, on April 19, 2001, in order to promote foreign investment in Ecuador and to reinforce the guarantees made to

167 Exhibit C-19, Law 4, Supplement to Official Register No. 33, published March 13, 2000 at Articles 46-47.

168 These foreign investors – AEC OCP Holdings Ltd, Agip Oleoducto de Crudos Pesados B.V., KM Holdings, Occidental Del Ecuador, Inc., Pérez Companc International S.A., Repsol YPF OCP de Ecuador, S.A. and Techint International Construction Corp – incorporated a local company to carry out the investment, Oleoducto de Crudos Pesados (OCP) Ecuador S.A.

169 Exhibit C-19, Law 4, Supplement to Official Register No. 33, published March 13, 2000 at Article 99.

170 CL-60, Substitute Regulations of the Law of Promotion and Guarantee of Investments, Decree No. 1132, Official Gazette No. 252, published January 25, 2001. 171 Id. at Article 9.

investors in the Constitution, 172 Ecuador ratified the ICSID Convention.173 In doing so, Ecuador honored its promise to give investors direct access to a neutral forum for the resolution of their disputes. As explained at paragraphs 59 to 61, in the Block 7, 21, 23 and 24 PSCs, as well as in Ecuador’s BITs, Ecuador consented to the jurisdiction of ICSID to resolve, respectively, contractual and investment-related claims brought against it. However, at the time that it signed these contracts and treaties, Ecuador had signed, but not ratified, the ICSID Convention. Thus, Ecuador’s ratification of the ICSID Convention signaled to investors like Burlington Ecuador’s genuine commitment to the reforms it had initiated.

127. In its June 2001 Report, the United Nations Conference on Trade and Development outlined Ecuador’s efforts to increase foreign investment in its hydrocarbons sector, describing these efforts as Ecuador’s “Oil Opening 2000.”174 According to the Report, this “Oil Opening” was part of Ecuador’s “plan to lure foreign investors.”175 Such sentiments were echoed by Lucio Gutierrez, Ecuador’s soon-to-be President, who, during Presidential debates in November 2002, stated “that oil contracts must be honored come what may.”176

172 Exhibit C-103, Ecuadorian National Congress, Acta No. 49, February 7, 2001 at 20; Exhibit C-104, Ecuadorian National Congress, Acta No. 47, February 1, 2001 at 54-58.

173 Exhibit C-105, Decree No. 1417-B, Official Register No. 309, published April 19, 2001. Ecuador had signed the ICSID Convention in 1986.

174 Exhibit C-106, United Nations Conference on Trade and Development, Investment Policy Review: Ecuador (June 2001) at 22.

175 Id.

176 Exhibit C-107, Gutiérrez and Noboa: Say Yes To Foreign Capital, EL COMERCIO, November 5, 2002.

C. BASED ON THE TERMS OF THE PSCS AND THE GUARANTEES SET FORTH THEREIN, BURLINGTON INVESTED IN ECUADOR

1. By The End Of The 1990s, Burlington Decided To Expand Its Operations Internationally And Assessed The Suitability Of Several Countries As Potential Investment Locations

128. Founded in 1988 as a stand-alone natural resources company, Burlington was by the late 1990s one of the largest independent oil and natural gas exploration and production companies in the world. Prior to its investment in Ecuador, Burlington’s operations were concentrated in North America.177

129. In the late 1990s, Burlington began to explore the possibility of expanding its operations internationally. Burlington established an internal team to evaluate opportunities then available in the world-wide hydrocarbons market.178 Burlington assessed potential investments in Latin America (including Argentina, Peru, Colombia, Venezuela and Ecuador), Africa (including Angola, Gabon and Nigeria), and China.179

177 Burlington’s principal oil and natural gas properties were located in the San Juan Basin in northwest New Mexico, the Willston Basin in North Dakota, the Permian Basin in Texas and New Mexico, and on the Gulf Coast of Texas and Louisiana. Exhibit C-108, Burlington Resources Inc. 10-K (relevant extracts)¸ December 12, 1997 at 3-6.

178 Reid WS at ¶7.

179 Id.

2. Based On The Guarantees Set Forth In The PSCs, Burlington Invested In Ecuador

130. Among the countries in Latin America that it considered, Burlington concluded that Ecuador, and particularly the Oriente basin in the Ecuadorian Amazon Region, most suitably matched its investment profile.180

131. First, the geology of the mountain front presented great potential.181 Indeed, the Andean mountain front and its Sub- Andean trend of basins, which span the entire length of South America from Venezuela to southern Argentina,182 were believed to contain 93 percent of the continent’s oil reserves, presenting considerable exploration and production potential.183

132. Second, the Oriente basin had been largely under-explored and under-exploited for many decades.184

133. Third, few foreign oil companies had established a presence in Ecuador and none had developed a dominant position in the

180 Exhibit C-72, Map of the Oriente Basin; Reid WS at ¶7.

181 Exhibit C-91, PETROECUADOR – U.C.P. – Hydrocarbons Bidding – Seventh Round Documents, January 1994 at 54-57; Exhibit C-109, Jeremy M.P. Mathalone, The Petroleum Geology of the Sub-Andean Basin, AAPG BULLETIN Vol. 80 (1996); Reid WS at ¶8.

182 Exhibit C-72, Map of the Oriente Basin.

183 Exhibit C-109, Jeremy M.P. Mathalone, The Petroleum Geology of the Sub-Andean Basin, AAPG Bulletin, Volume 80 (1996).

184 Exhibit C-110, DNH – Petroproducción – ADC – UCP, Oil Reserves to December 31, 1997 and Oil Production Projections for the Fields of the Amazon Region 1998-2017, dated March 1998 at 8 and 10; Reid WS at ¶¶9-10.

market. Thus, Ecuador was a market in which Burlington could, potentially, expand its investment over the long-term.185

134. While the favorable historical and geographical profile of a potential investment in Ecuador was important, Burlington “would not have invested in Ecuador without the comprehensive legal guarantees offered by the Government” in the PSCs.186

135. In particular, Burlington relied on the terms of the PSCs providing for: (a) tax stabilization, thereby guaranteeing that any modification of the tax burden set out in the contract would be compensated by an adjustment of the Contractor Production Participation; (b) an exemption from all royalties otherwise (or potentially) payable to the Government; (c) the right to receive and freely dispose of a participation in the crude oil produced; (d) a guarantee that the blocks would enjoy conditions of reasonable security – a particularly important guarantee in the context of Blocks 23 and 24, where the incumbent investor had met with some resistance from the indigenous populations;187 (e) that Ecuador was a signatory to the contract, with the result that the contractual promises are made directly by the Government to the foreign investor; and (f) Ecuador’s and PetroEcuador’s consent to the submission of disputes to an international arbitration forum specialized in investment disputes.188

136. Similarly, the fact that Ecuador had signed the Treaty and ratified the ICSID Convention further assured Burlington that

185 Reid WS at ¶11.

186 Id. at ¶12.

187 See below ¶¶138, 146.

188 See above Section II.B.5.e; Reid WS at ¶¶12-16.

Ecuador would stand by the guarantees set out in the PSCs and its Hydrocarbons Legal Framework.189

137. These guarantees were buttressed by direct representations from the “Government, including successive Energy Ministries,” that Ecuador “was interested in aggressively increasing the country’s oil production and wanted to attract foreign investment to achieve these objectives. The Government made it clear that it welcomed foreign investment in the sector.”190

a. In reliance on the guarantees provided by Ecuador, Burlington first acquired an interest in the Block 24 PSC

138. Block 24 was a particularly attractive investment for Burlington on a geological level because it exhibited the same structural trends as other high producing fields.191 However, from the date Arco executed the Block 24 PSC, it had encountered resistance from indigenous communities that were opposed to hydrocarbons exploration and development activities in the Block. Consequently, Arco was unable to complete its Environmental Impact Study within the timeframe set forth in the Block 24 PSC.192

139. To ensure that it did not breach its obligation to complete the Environmental Impact Study within the timeframe established in the Block 24 PSC, Arco requested the Government’s consent

189 Reid WS at ¶¶16-17, 19.

190 Id. at ¶18.

191 Id. at ¶10.

192 Exhibit C-32, Ministerial Decree 197, Official Register No. 175, published April 23, 1999 at ¶4 of the Preamble.

to declare the Block to be in force majeure.193 Instead of agreeing to this declaration of force majeure, on April 9, 1999, the Ministry of Energy and Mines – acknowledging Arco’s inability to access the block and reaffirming Ecuador’s continuing obligation to protect foreign investments – granted Arco a one-year suspension of its obligations under the PSC.194

140. Ecuador preferred a suspension of obligations to a declaration of force majeure to avoid frightening other investors in Ecuador or deterring potential investors from entering the market at all. Ecuador feared that a declaration of force majeure would “reflect an image of conflicts to foreign investors, who, after bidding and being awarded contracts, would not receive the guarantees which will allow them to carry out their activities.”195 This would have been particularly harmful for Ecuador at a time when it was trying to attract additional foreign investment into the country.

141. According to the Ministry, a one-year suspension would provide the maximum “time needed to return to normality.”196 Importantly, in its resolution, the Ministry guaranteed that it would “coordinate and carry out the necessary policies and

193 Force majeure was the only contractual remedy available to Arco in order not to breach its obligations under the PSC and avoid the call of its performance guarantee. Exhibit C-4 at Clause 3.3.16.

194 Exhibit C-32, Ministerial Decree 197, Official Register No. 175, published April 23, 1999 at ¶¶1 and 4 of the Preamble and Article 3.

195 Exhibit C-33, Directive 083-UCP-99, from Miguel Montalvo R., General Coordinator, Petroleum Contracts Unit, Ministry of Energy and Mines to Mr. Rene Ortiz Duran, Minister of Energy and Mines, April 8, 1999 at ¶3.

196 Exhibit C-32, Ministerial Ministerial Decree 197, Official Register No. 175, published April 23, 1999 at Article 3.

actions in order that the petroleum industry […] may perform its activities normally.”197

142. In addition to this undertaking, Ecuador promised in the Block 24 PSC to provide conditions of reasonable security for the operation of the Block:

5.2 PETROECUADOR’s Obligations: Without prejudice to the other obligations specified hereunder, PETROECUADOR shall:

5.2.1 In coordination with the Ministry of Energy and Mines, attend in a timely manner as applicable to the Contractor’s requests, proposals or petitions; to make observations; and to issue approvals as relevant with respect to this Contract.

[…]

5.2.6 To provide the Contractor with conditions of reasonable security for the performance of operations hereunder.198

197 Id. at Article 1 (emphasis added). Unofficial English translation. In its original Spanish version it reads: “coordinará y efectuará las políticas y acciones que sean necesarias para que la industria petrolera […] pueda desarrollarse con normalidad.”

198 Exhibit C-4 at Clauses 5.2.1 and 5.2.6. Unofficial English translation. In their original Spanish versions they read as follows: 5.2. Obligaciones de PETROECUADOR: Sin perjuicio de las demás obligaciones estipuladas en este Contrato, PETROECUADOR se obliga a: 5.2.1. Atender oportunamente, y en coordinación con el Ministerio de Energía y Minas, cuando sea pertinente, las solicitudes, propuestas o requerimientos de la Contratista relacionadas con el objeto de este Contrato;

143. As a result, Burlington concluded that Block 24 presented a good investment opportunity. Indeed, the Government had already taken some measures to address the indigenous issues, and it was expected that, with the Government’s promise of continuing assistance, operations could begin before the end of the extension granted by Ecuador.199

144. Thus, in July 1999, Burlington began negotiations with Arco to acquire certain of its assets in Ecuador, including Block 24. As a result of these negotiations, on November 8, 1999, Burlington Ecuador and Arco requested Ecuador’s authorization to transfer Arco’s 100 percent participation in Block 24 to Burlington Ecuador.200 On February 4, 2000, Ecuador’s Ministry of Energy and Mines granted authorization,201 and the parties executed the assignment agreement on April 17, 2000. Burlington Ecuador’s acquisition of the Block 24 PSC became effective on May 9, 2000, when it was registered in Ecuador’s Hydrocarbons Register.202

efectuar las observaciones y otorgar las aprobaciones que le corresponda [...] 5.2.6. Proporcionar a la Contratista condiciones razonables de seguridad para la realización de las operaciones de este Contrato.

199 Witness Statement of Mr. Herb Vickers, Jr., submitted herewith, referred to throughout this Memorial as Vickers WS, at ¶13.

200 Arco had acquired its 100 percent participation in the Eighth Bidding Round and had entered into the Block 24 PSC on April 27, 1998. See above at Section II.B.5.c and Exhibit C-31, Approval of Ministry of Energy and Mines No. 004, February 4, 2000.

201 Exhibit C-31, Approval of Ministry of Energy and Mines No. 004 dated February 4, 2000

202 Exhibit C-111, Certification by the Ministry of Energy and Mines of the Registration on the Hydrocarbons Register of the Assignment

145. Under the Block 24 PSC, Burlington Ecuador has a right to a four-year exploration period, with a possibility of a two-year extension, and to a twenty-year exploitation period.203 Burlington Ecuador’s twenty-year exploitation right may be extended, with the consent of PetroEcuador, in the following circumstances: (a) if Burlington Ecuador wishes to exploit an area located at a remote distance from existing petroleum infrastructure, in which case the extension would be for up to five years; (b) if new discoveries are made as a result of additional exploration, in which case the extension would only apply to the newly discovered fields; and (c) if Burlington Ecuador proposes new investments that will significantly increase production in the area during the last five years of the original contractual term.204

b. In reliance on the guarantees provided by Ecuador, Burlington next acquired an interest in the Block 23 PSC

146. Block 23 is located north of and adjacent to Block 24 and contains the same structural trends and presents similar prospects.205 Although Block 23 has high upside potential,206 the operator, CGC, had also encountered resistance from indigenous communities opposed to the exploration and exploitation of the Block. As a result of this opposition, CGC

Agreement between Arco Oriente, Inc. and Burlington Resources Ecuador Limited, May 9, 2000.

203 Exhibit C-4 at Clauses 6.1 and 6.4.

204 Id. at Clause 6.4.

205 Reid WS at ¶10; Exhibit C-112, Map Showing Southwest Oriente Structural Framework, Including Leads of Blocks 23, 24 and 10.

206 Reid WS at ¶10.

had not been able to complete the Minimum Exploration Program and had requested a declaration of force majeure in order not to breach its obligations under the PSC.207

147. As had been the case with Block 24, Ecuador recognized that a declaration of force majeure would have a deleterious effect on foreign investment in Ecuador.208 As a result, Ecuador chose instead to grant CGC a one-year suspension of its obligations under the PSC, which the Government considered sufficient time for the conditions in Block 23 “to return to normality.”209 When it granted the suspension, the Ministry of Energy and Mines also promised to coordinate and carry out all necessary actions to address the impediments to CGC’s operations in the Block:

The Government of Ecuador, through the Ministry of Energy and Mines, shall coordinate and carry out the necessary policies and actions in order that the petroleum industry, declared to be necessary to the public interest, may perform its activities normally.210

207 Exhibit C-33, Directive 083-UCP-99 from Miguel Montalvo R., General Coordinator, Petroleum Contracts Unit, Ministry of Energy and Mines to Mr. Rene Ortiz Duran, Minister of Energy and Mines, April 8, 1999.

208 Id.

209 Exhibit C-32, Ministerial Decree 197, Official Register No. 175, published April 23, 1999 at Article 3.

210 Id. at Article 1. Unofficial English translation. In its original Spanish version it reads: El Estado Ecuatoriano a través del Ministerio de Energía y Minas, coordinará y efectuará las políticas y acciones que sean necesarias para que la industria

148. Despite frequent meetings between Ecuadorian authorities, CGC and the representatives of the indigenous communities, the one-year suspension expired without resolution of the conflict. Accordingly, in an effort to avoid a breach of its obligations under the PSC, on October 30, 2000, CGC requested that PetroEcuador declare a situation of force majeure in the Block.211

149. Although Block 23 was in force majeure when Burlington was considering its investment, Burlington relied on the guarantees provided in the PSC and on the Government’s explicit commitment to take all necessary actions to resolve the conflict with the indigenous populations.212 In particular, Burlington relied on Clauses 5.2.1 and 5.2.6 of the Block 23 PSC:

5.2 PETROECUADOR’s Obligations: In addition to the other obligations set forth in this Contract, PETROECUADOR shall:

5.2.1 If applicable, and in coordination with the Ministry of Energy and Mines, respond to the Contractor’s requests or requirements in a timely manner; to make the comments and grant the corresponding approvals as provided this Contract, so that the Contractor can comply with its obligations within the terms and time periods specified in this Contract.

[…]

petrolera, declarada de utilidad pública, pueda desarrollarse con normalidad.

211 Exhibit C-113, Letter from Oscar Anibal Morales to Rodolfo Barniol Z., November 20, 2000 at 7.

212 See ¶147 above.

5.2.6 Provide conditions of reasonable security for the performance of the operations of this Contract.213

150. Burlington’s decision to invest in Block 23 was based on the Government’s express commitment – in the PSC and in the Decree granting the extension – to address the concerns of the indigenous populations. Moreover, Burlington believed that its existing efforts to resolve the Block 24 difficulties could likewise be applied successfully to the resolution of indigenous issues in Block 23.214

151. Thus, in early 2001, Burlington began negotiations with Chevron San Jorge S.A.215 (Chevron) to acquire Chevron’s participation in the Block 23 PSC. As a result of these negotiations, on April 25, 2002, Burlington Andean and Chevron requested Ecuador to authorize the transfer of

213 Exhibit C-3 at Clauses 5.2.1 and 5.2.6. Unofficial English translation. In their original Spanish versions they read: 5.2 Obligaciones de PETROECUADOR: Además de las otras obligaciones estipuladas en este Contrato, PETROECUADOR se obliga a: 5.2.1. De ser el caso, y en coordinación con el Ministerio del Ramo, atender oportunamente las solicitudes o requerimientos de la Contratista; efectuar las observaciones y otorgar las aprobaciones que le corresponda según lo previsto en este Contrato, con el fin de que la Contratista pueda cumplirlo dentro de los términos y plazos establecidos. […] 5.2.6. Proporcionar condiciones razonables de seguridad para la realización de las operaciones de este Contrato.

214 Vickers WS at ¶25.

215 Formerly Petrolera Argentina San Jorge S.A.

Chevron’s 50 percent interest in Block 23 to Burlington.216 This authorization was granted by Ecuador’s Ministry of Energy and Mines on November 22, 2002, and the assignment agreement was executed on February 5, 2003.217 Burlington Andean’s acquisition became effective when it was entered onto Ecuador’s Hydrocarbons Register on February 26, 2003.218 CGC holds the remaining 50 percent interest in Block 23 and is the operator of the Block.

152. Under the Block 23 PSC, Burlington Andean has the right to explore the area for the remaining one year, 9 months and 5 days of the exploration period, with the possibility of a two-year extension.219 Following exploration, Burlington Andean has the

216 Exhibit C-30, Approval of Ministry of Energy and Mines No. 408, November 22, 2002.

217 Id.

218 Exhibit C-114, Certification by the Ministry of Energy and Mines of the Registration on the Hydrocarbons Register of the Assignment Agreement between Chevron San Jorge, S.R.L. and Burlington Resources Andean Limited, February 26, 2003.

219 The Environmental Impact Study was completed on August 26, 1997, at which time the exploration phase began. After a period of 1 year, 7 months and 5 days, a one-year suspension was authorized by Ministry Decree No. 197. Exhibit C-32, Ministerial Decree 197, Official Register No. 175, published April 23, 1999. The term of the PSC continued running from the expiration of the one-year suspension in April 2000 until the request for a declaration of force majeure by the Ministry on November 20, 2000. Exhibit C-113, Letter from Oscar Anibal Morales to Rodolfo Barniol Z., November 20, 2000. The Council of Administration of Ecuador decided to permit suspension of activities in Block 23 on January 9, 2001 and official authorization was confirmed on January 12, 2001. Exhibit C-34, Memorandum No. 044- SCA-2001, January 12, 2001, communicating Resolution No. 028- CAD-2001-01-09. Notification was given to CGC on January 25, 2001. Exhibit C-115, Letter from Jefe de la Unidad de Administracion de Contrator Petroleros to Oscar Morales, January 25, 2001.

right to exploit the area for a period of twenty years. Burlington’s twenty-year exploitation right may be extended under circumstances similar to those governing the possible extension of the Block 24 PSC.220

c. In reliance on the guarantees provided by Ecuador, Burlington acquired an interest in the Block 21 PSC and in the OCP

153. Since the execution of the Block 21 PSC on March 20, 1995, by Ecuador and PetroEcuador on one side, and Oryx, Santa Fe Minerals, Sipetrol and Clapsa on the other, transfers of interests under the Block 21 PSC have occurred as follows:

(a) on September 2, 1995, Kuwait Oil Petroleum Corporation caused its subsidiary, Santa Fe Minerals, to transfer its 17.5 percent interest in Block 21 to Preussag; and

(b) on February 26, 1999, Kerr McGee assumed Oryx’s 50 percent interest in Block 21 following the merger of Kerr McGee Oil and Oryx Energy Company.

154. As a result of these transfers of ownership, by mid-2001, interests in the Block 21 PSC were distributed as follows: Kerr McGee (50 percent), Preussag (17.5 percent), Sipetrol (17.5 percent) and Clapsa (15 percent).

155. In mid-2001, Burlington sought to acquire an interest in Blocks 7 and 21. After negotiations with the incumbent owners, Burlington Oriente decided in September 2001 to acquire: (a) a 17.5 percent interest in the Block 21 PSC from Sipetrol, and (b)

The remaining exploration period is calculated by subtracting the total of four years granted for exploration under Clause 6.1 of the Block 23 PSC from the periods when Block 23 has been in force majeure.

220 Exhibit C-3 at Clause 6.3.

a 15 percent interest from Clapsa.221 These transactions were authorized by the Ministry of Energy and Mines on January 8, 2002,222 the assignment agreement was executed on February 8, 2002, and Burlington Oriente’s acquisition was registered in Ecuador’s Hydrocarbons Register on February 28, 2002.223

156. Thereafter, on December 7, 2001, Burlington Oriente and Perenco decided to acquire Kerr McGee’s 50 percent interest in Block 21, with Perenco acquiring 45 percent and Burlington Oriente acquiring 5 percent.224 These transactions were authorized by the Ministry of Energy and Mines on May 9, 2002,225 the assignment agreement was executed on September 4, 2002,226 and Burlington Oriente’s interest was registered in

221 Authorizations for such transactions were requested from Ecuador on November 8, 2001. Exhibit C-116, Approval of Ministry of Energy and Mines No. 242, January 8, 2002.

222 Exhibit C-116, Approval of Ministry of Energy and Mines No. 242, January 8, 2002.

223 Exhibit C-117, Certification by the Ministry of Energy and Mines of the Registration on the Hydrocarbons Register of the Assignment Agreement between Sociedad Internacional Petrolera S.A., Compañía Latinoamericana Petrolera S.A. (Clapsa) and Burlington Resources Oriente Limited, February 28, 2002.

224 The parties requested Ecuador’s authorization for the transactions on January 25, 2002. Exhibit C-27, Approval of the Ministry of Energy and Mines No. 343, May 9, 2002.

225 Exhibit C-27, Approval of the Ministry of Energy and Mines No. 343, May 9, 2002.

226 Exhibit C-118, Assignment Agreement between Kerr-McGee Ecuador Energy Corporation, Perenco Ecuador Limited and Burlington Resources Oriente Limited (Block 21), September 4, 2002.

Ecuador’s Hydrocarbons Register on September 13, 2002.227 Given its greater ownership interest, Perenco assumed the role of operator of the Block.228

157. Finally, on September 7, 2005, Perenco and Burlington acquired Preussag’s 17.5 percent interest in Block 21, with each party acquiring an 8.75 percent interest.229 However, Ecuador’s delayed authorization230 prevented this transaction from closing until mid-2006,231 and Burlington’s and Perenco’s interests

227 Exhibit C-119, Certification by the Ministry of Energy and Mines of the Registration on the Hydrocarbons Register of the Assignment Agreement between Kerr-McGee Ecuador Energy Corporation, Perenco Ecuador Limited and Burlington Resources Oriente Limited, September 13, 2002.

228 Exhibit C-23, Operating Agreement Covering: The Participation Contract for Exploration and Exploitation of Hydrocarbons in Block 21, Amazon Region, Ecuador dated February 9, 1995 (designating Kerr- McGee Ecuador Energy Corporation as Operator); Exhibit C-24, Novation of Joint Operating Agreement in respect of Block 7, Oriente Basin, Ecuador, 12 December 2002 and Novation of Joint Operating Agreement in respect of Block 21, Amazon Region, Ecuador, 12 December 2002.

229 The parties requested Ecuador’s authorization for the transactions on September 7, 2005. Exhibit C-120, Approval of the Ministry of Energy and Mines No. 55, August 2, 2006.

230 Exhibit C-120, Approval of the Ministry of Energy and Mines No. 55, August 2, 2006.

231 Exhibit C-121, Assignment Agreement for the Production Sharing Contract for the Exploration and Exploitation of Hydrocarbons (Crude Oil) in Block No. 7, September 26, 2006.

were only registered in Ecuador’s Hydrocarbons Register on October 2, 2006.232

158. As a result of these transactions, the current ownership structure of the Block 21 PSC is as follows: Perenco owns a 53.75 percent interest and Burlington Oriente owns a 46.25 percent interest. Perenco remains the operator of Block 21.

159. In the course of the transactions by which Burlington Oriente acquired its 46.25 percent interest in the Block 21 PSC, Burlington Oriente also acquired a 46.25 percent interest in Kerr McGee Ecuador OCP Holdings Ltd. (now Ecuador Pipeline Holdings, Ltd.), which in turn held a 4.02 percent interest in Oleoducto de Crudos Pesados (OCP) Ltd., the owner of the OCP holding company, Oleoducto de Crudos Pesados (OCP) Ecuador S.A.233 As a result of these transactions, Burlington Oriente now owns an indirect 1.86 percent interest in the OCP.234

232 Exhibit C-122, Certification by the Ministry of Energy and Mines of the Registration on the Hydrocarbons Register of the Assignment Agreement for Block 21 between Preussag Energie International GMBH, Perenco Ecuador Limited and Burlington Resources Oriente Limited, October 2, 2006.

233 Exhibit C-23, Operating Agreement Covering: The Participation Contract for Exploration and Exploitation of Hydrocarbons in Block 21, Amazon Region, Ecuador, February 9, 1995 at § 3.1; Exhibit C-123, Offtake and Marketing Agreement, Block 7 and 21, Ecuador, between Kerr-McGee Ecuador OCP Holdings Ltd., Compañía Latinoamericana Petrolera Número Dos S.A. (Clapsa II), Kerr-McGee Ecuador Energy Corporation, Preussag Energie GMBH, Sociedad Internacional Petrolera S.A. and Compañía Latinoamericana Petrolera S.A. (Clapsa), January 30, 2001 at ¶12.

234 Exhibit C-124, Amended and Restated Owners Agreement among AEC OCP Holdings Ltd., Agip Oleoducto de Crudos Pesados B.V., Kerr- McGee Ecuador OCP Holdings Ltd., Occidental del Ecuador, Inc., Perez

(i) Block 21 is a highly productive Block and has significant future exploration and production potential

160. At the time of Burlington Oriente’s acquisition of its first interest in the Block 21 PSC, the Yuralpa field was the only active field in the Block. The exploration phase had been successful and the field contained approximately 53 million barrels of proven oil reserves and 18 million barrels of estimated remaining reserves.235

161. Production in Block 21 began in 2003. During 2002 and 2003, six development wells were drilled, development facilities and a secondary pipeline were constructed, and a pump station was

Companc International S.A., Repsol YPF OCP de Ecuador, S.A., Techint International Construction Corp (TENCO) and Oleoducto de Crudos Pesados (OCP) Ltd., dated January 30, 2001 and amended and restated as of May 15, 2001 at § 2.03 The original OCP owners were AEC OCP Holdings Ltd., Agip Oleoducto de Crudos Pesados B.V., Kerr-McGee Ecuador OCP Holdings Ltd., Occidental del Ecuador, Inc., Perez Companc International S.A., Repsol YPF OCP de Ecuador, S.A., Techint International Construction Corp (TENCO) and Oleoducto de Crudos Pesados (OCP) Ltd. Burlington’s 46.25 percent interest in Block 21 meant a 46.25 percent interest in Kerr-McGee Ecuador OCP Holdings Ltd., which held in turn a 4.02 percent interest in Oleoducto de Crudos Pesados (OCP) Ltd. Thus, Burlington’s total interest in OCP is 1.86 percent.

235 Exhibit C-125, Letter from Consortium Block 7 and 21 to the Ministry of Energy and Mines enclosing the 2005 Annual Report of Activities in Block 21, January 31, 2006 at 4.

installed.236 The crude produced in Block 21 is known as Napo crude and has a 17º–19º API.237

162. After 2003, the Yuralpa field underwent significant development through exploitation drilling, with 21 wells drilled between 2005 and 2007.238 By the end of 2008, the Yuralpa field contained 33 producing wells.239 Block 21 also showed several promising exploration opportunities in its southwestern and northern areas.240

(ii) Under the Block 21 PSC, Burlington Oriente has the right to exploit the area for at least twenty years

163. When Burlington Oriente acquired its initial interest in the Block 21 PSC, the exploration period had expired and the Block

236 Exhibit C-126, Letter from Lauro Mora to Laurent Combe, enclosing a 2003 Government Audit Report for Block 21, February 1, 2005 at 13- 14.

237 First Supplemental Witness Statement of Alex Martinez submitted herewith, referred to throughout this Memorial as Martinez Supp. WS, at ¶12.

238 Exhibit C-125, Letter from Consortium Block 7 and 21 to the Ministry of Energy and Mines enclosing the 2005 Annual Report of Activities in Block 21, January 31, 2006 at 3; Exhibit C-127, Letter from Consortium Block 7 and 21 to the Ministry of Energy and Mines enclosing the 2006 Annual Report of Activities in Block 21, January 31, 2007 at 15; Exhibit C-128, 2007 Annual Report of Activities in Block 21 at 11.

239 Martinez Supp. WS at ¶8.

240 Id. at ¶20.

was in its production phase.241 The Block 21 PSC expires in 2021. The terms of the PSC may be extended under circumstances similar to those applying to extensions of the Block 23 and 24 PSCs.242 Additionally, the Block 21 PSC provides for an extension if the construction of a principal pipeline obstructs the transportation of the oil from the Block, or for any other reason proposed by the contractor that is in the interest of the State.243

(iii) In reliance on Ecuador’s guarantees, Burlington Oriente assumed long-term obligations with respect to the Block 21 Ship-or-Pay obligation

164. The crude oil produced in Block 21 must be transported from the Yuralpa field to the IDC in Lago Agrio, which is located in the north of the Oriente basin, and then on to the west coast of Ecuador for export.

165. In order to ensure transportation capacity for the crude oil produced in Block 21 – and given the inadequacy of the State- owned SOTE pipeline – on January 30, 2001, the initial operator of Block 21 (Kerr McGee) entered into an Initial Shipper Transportation Agreement with OCP Ecuador S.A. (the ISTA).244 Under the terms of the ISTA, OCP Ecuador S.A. was

241 The original exploration period expired on November 1, 1999, but was extended by the Ministry of Energy and Mines for 12 additional months to November 1, 2000. Block 21 had an exploration work commitment totaling six exploratory wells, personnel training and environmental programs.

242 Exhibit C-2 at Clause 6.3(a) - (c). See also ¶¶145 and 152 above.

243 Exhibit C-2 at Clause 6.3(d) - (e).

244 Exhibit C-28, Second Amended and Restated Initial Shipper Transportation Agreement between Oleoducto de Crudos Pesados (OCP) Ecuador S.A. and Kerr-McGee Ecuador Energy Corporation

responsible for building, maintaining and managing the OCP.245 The Initial Shipper (Kerr McGee) was guaranteed the right to a certain transportation capacity on the OCP for 15 years.246 For such transportation capacity, the Initial Shipper was required to pay a monthly tariff to OCP Ecuador S.A., regardless of whether it used the capacity (the Ship-or-Pay Commitment).247 Additionally, the ISTA provided that the Initial Shipper was required to continue honoring its Ship-or-Pay Commitments even in the event of force majeure.248 In the event of a whole or partial expropriation of the Initial Shipper’s rights in the block – defined as an Upstream Expropriatory Action – OCP Ecuador S.A. can still require the Initial Shipper to satisfy its Ship-or- Pay Commitment to the extent needed to cover the payment of debt incurred by OCP Ecuador S.A. in financing the OCP project.249

dated as of January 30, 2001 and amended and restated as of May 29, 2001 and July 31, 2001.

245 Id. at Section 2.02. See also Exhibit C-102, Where the OCP Goes, Good Things Happen, OCP ECUADOR, S.A. INFORMATION BULLETIN (undated) at 3 (map of the OCP and processing stations) and 4 (topographical map of the OCP).

246 Exhibit C-28, Second Amended and Restated Initial Shipper Transportation Agreement between Oleoducto de Crudos Pesados (OCP) Ecuador S.A. and Kerr-McGee Ecuador Energy Corporation dated as of January 30, 2001 and amended and restated as of May 29, 2001 and July 31, 2001 at Section 15.01.

247 Id. at Section 7.01.

248 Id. at Sections 8.01 and 8.04.

249 Id. at Sections 8.01, 8.04 and 8.07. “Upstream Expropriatory Event” is defined in this contract (at A-22) as: [A]ny action or series of actions taken, authorized, ratified or acquiesced in by Ecuador or a governing

166. The investors in Block 21 also executed an Offtake & Marketing Agreement (O&M Agreement) under which Kerr- McGee, as operator of the Block, was solely responsible for transporting the crude from Block 21 via the OCP and paying the Ship-or-Pay Commitment under the ISTA. Kerr-McGee was then tasked with collecting from the other investors their pro rata share of the Ship-or-Pay Commitment pursuant to their participation interest in the Block.250

167. On December 12, 2002, following Burlington Oriente’s and Perenco’s acquisition of their interests in Block 21, the investors in Block 21 executed a Novation of Offtake and Marketing Agreement (the Novation).251 The Novation provides that Burlington Oriente and Perenco are made parties to the O&M Agreement and assume all duties, liabilities and obligations of Kerr-McGee under the O&M Agreement, except that Perenco alone is responsible for the transportation of all crude oil

authority (including any governing authority which is in de facto control of part of Ecuador) resulting in the appropriation, confiscation, expropriation or nationalization (by intervention, condemnation or other form of taking), whether with or without compensation and whether under color of law or otherwise (including through confiscatory taxation or imposition of confiscatory charges) of in excess of 50% in the aggregate of the rights of the Initial Shipper (or its Affiliates, as the case may be) under its upstream participation, risk services or similar agreement through which it participates in the fields to be evacuated through the OCP or its respective direct or indirect interest in the fields or the Crude Oil produced therefrom. 250 Exhibit C-123, Offtake and Marketing Agreement, Block 7 and 21, Ecuador, January 30, 2001 at Clauses 8-12.

251 Exhibit C-129, Novation of Offtake and Marketing Agreement, Blocks 7 and 21, Ecuador, December 12, 2002.

produced in the Block and the payment of all Ship-or-Pay Commitments (with a right to recover from Burlington its pro rata share).252

d. In reliance on the guarantees provided by Ecuador, Burlington acquired a participation in the Block 7 PSC

168. On September 25, 2001, Burlington Oriente decided to acquire Sipetrol’s 10 percent interest in the Block 7 PSC and Clapsa II’s 15 percent interest in the Block 7 PSC.253 These transactions were authorized by the Ministry of Energy and Mines on January 8, 2002,254 the respective assignments were executed on February 8, 2002, and Burlington Oriente’s acquisitions were effective upon their registration in Ecuador’s Hydrocarbons Register on February 28, 2002.255

169. Later, on December 13, 2001, Burlington Oriente and Perenco decided to acquire Kerr-McGee’s 50 percent interest in the Block 7 PSC, with Perenco acquiring a 45 percent interest and

252 Id. at Clause 1.2.

253 The parties requested Ecuador’s authorization for the transactions on November 8, 2001. Exhibit C-130, Approval of Ministry of Energy and Mines No. 243, January 8, 2002.

254 Exhibit C-130, Approval of Ministry of Energy and Mines No. 243, January 8, 2002.

255 Exhibit C-131, Certification by the Ministry of Energy and Mines of the Registration on the Hydrocarbons Register of the Assignment Agreement between Sociedad Internacional Petrolera S.A., Compañía Latinoamericana Petrolera Número Dos S.A. (Clapsa II) and Burlington Resources Oriente Limited, February 28, 2002.

Burlington Oriente acquiring a 5 percent interest.256 These transactions were authorized by the Ministry of Energy and Mines on May 9, 2002,257 the assignment was executed on September 4, 2002, and Burlington Oriente’s and Perenco’s acquisitions were effective upon their registration in Ecuador’s Hydrocarbons Register on September 13, 2002.258

170. Given its greater ownership interest, Perenco became operator of Block 7.259

171. Finally, in September 2005, Burlington Oriente acquired Preussag’s 12.5 percent interest in the Block 7 PSC.260

256 Authorizations for such transactions were requested from Ecuador on January 25, 2002. Exhibit C-26, Approval of the Ministry of Energy and Mines No. 342, May 9, 2002.

257 Exhibit C-26, Approval of the Ministry of Energy and Mines No. 342, May 9, 2002.

258 Exhibit C-132, Certification by the Ministry of Energy and Mines of the Registration on the Hydrocarbons Register of the Assignment Agreement between Kerr-McGee Ecuador Energy Corp., Perenco Ecuador Limited and Burlington Resources Oriente Limited, September 13, 2002.

259 Exhibit C-23, Operating Agreement Covering: The Participation Contract for Exploration and Exploitation of Hydrocarbons in Block 21, Amazon Region, Ecuador dated February 9, 1995 (designating Kerr- McGee Ecuador Energy Corporation as Operator); Exhibit C-24, Novation of Joint Operating Agreement in respect of Block 7, Oriente Basin, Ecuador, December 12, 2002 and Novation of Joint Operating Agreement in Respect of Block 21, Amazon Region, Ecuador, December 12, 2002.

260 The parties requested Ecuador’s authorization for the transactions on September 7, 2005. Exhibit C-133, Approval of the Ministry of Energy and Mines No. 56, August 2, 2006.

However, Ecuador’s delayed authorization261 prevented this transaction from closing until mid-2006, and Burlington Oriente’s acquisition only became effective upon its registration in Ecuador’s Hydrocarbons Register on October 2, 2006.262

172. Presently, Perenco holds a 57.5 percent interest in the Block 7 PSC, and Burlington holds a 42.5 percent interest.263

(i) Block 7 is one of the most productive and valuable oil fields in Ecuador’s Oriente Basin

173. Block 7 is one of the most valuable oil fields in Ecuador’s Oriente basin. The crude produced in the Block is known as Oriente crude and has a 26º–29º API. During the exploration phase, which took place under a service contract (see above paragraph 93), all six exploration wells drilled in the block – Coca-Payamino,264 Gacela, Jaguar, Mono, Lobo and Oso –

261 Exhibit C-133, Approval of the Ministry of Energy and Mines No. 56, August 2, 2006.

262 Exhibit C-134, Certification by the Ministry of Energy and Mines of the Registration on the Hydrocarbons Register of the Assignment Agreement for Block 7 between Preussag Energie International GMBH, Perenco Ecuador Limited and Burlington Resources Oriente Limited, October 2, 2006.

263 Exhibit C-22, Joint Operating Agreement and Accounting Procedure Block 7 - Ecuador dated July 14, 1993; Exhibit C-24, Novation of Joint Operating Agreement in respect of Block 7, Oriente Basin, Ecuador dated December 12, 2002 and Novation of Joint Operating Agreement in respect of Block 21, Amazon Region, Ecuador dated December 12, 2002.

264 The Payamino field in Block 7 was found to be connected to the Coca field, which is located outside the Block 7 area. In compliance with Article 85 of the Hydrocarbons Law and Clause 6.4 of the Block 7 PSC, the Coca-Payamino field is operated under the terms of a joint operating

proved successful.265 However, due to capacity constraints in the SOTE Pipeline (which transports the Block 7 crude), the drilling activity was initially very limited. Drilling increased in 2000 when the service contract was transformed into a PSC and transportation capacity in the SOTE became available due to the construction of the OCP. At that time, the reserves in Block 7 were estimated at 45.3 million barrels.266

174. A number of significant discoveries followed. In 2002, the partners in the Block launched a successful exploration program in the Oso field and further reserves were discovered in 2005 and 2006. As a result, the Oso field became the largest field in Block 7 and the center of the Block’s development plans.267

175. By December 2007, Burlington’s reserves in Block 7 were estimated at 8.14 million barrels, in addition to the 4.6 million

agreement entered into by the contractors of Block 7 and Petroproducción (a wholly-owned subsidiary of PetroEcuador) (the Coca-Payamino Operating Contract). Exhibit C-97, Agreement for the Unified Exploration and Exploitation of the Coca-Payamino Fields, May 2000. Except for the percentage of the ratable share of crude allocated to each of the parties, all the other rights and obligations set out in the Block 7 PSC apply to the Coca-Payamino Operating Contract. See id. at Clause 4.4. The administration and financing aspects of this field are processed jointly with the rest of the fields in Block 7. See id. at Clauses 4.2 and 4.3.

265 See Exhibit C-135, Map of the Block 7 Fields.

266 Exhibit C-93, Legal, Economic and Technical Report Regarding the Negotiations for the Transformation of the Service Contract for the Exploration and Exploitation of Block 7 into a Participation Contract, November 3, 1999 at 168.

267 Exhibit C-136, Ministry of Energy and Mines Decree No. 40 – Reformation of the Additional Development Plan for the Oso Field, March 9, 2007.

barrels in the Coca-Payamino field.268 Moreover, further drilling programs in Block 7, which were scheduled for 2007 and 2008 but were abandoned due to the effects of Law No. 2006-42, were expected to add approximately 3.4 million stock tank barrels of net reserves.269

176. The partners in the Block planned to implement a waterflood technique in the Lobo fields to enhance the oil recovery in two proven well locations (Lobo-8 and Lobo-9).270 In the Payamino field, the same technique resulted in enhanced recovery (estimated to add up to 20 percent more production), increased reservoir pressure, and extended the life of the field.271

268 Exhibit C-137, Letter from Perenco to the Ministry of Mines and Oil, January 31, 2008, attaching Block 7 2007 Annual Report (relevant extracts) at 14-15.

269 Exhibit C-138, Letter from Consortium Blocks 7 and 21 to the National Hydrocarbons Director enclosing Five-Year Development Plan for Block 7 and the Coca-Payamino Field, January 31, 2007 at 14; Martinez Supp. WS at ¶20.

270 Exhibit C-138, Letter from Consortium Blocks 7 and 21 to the National Hydrocarbons Director enclosing Five-Year Development Plan for Block 7 and the Coca-Payamino Field, January 31, 2007 at 14. Waterflood is a method of secondary recovery in which water is injected into the reservoir formation to displace residual oil. The water from injection wells physically sweeps the displaced oil to adjacent production wells.

271 Exhibit C-139, 2007 Annual Activities Report for the Coca-Payamino Field, at point 5.3.

(ii) Under the Block 7 PSC, Burlington Oriente has the right to exploit the area until 2010

177. The Block 7 PSC expires on August 16, 2010.272 This term can be extended under circumstances similar to those applying to extensions of the Block 21, 23 and 24 PSCs, including: (a) the parties in the Block propose significant new investments during the last five years of the original contractual term and prior approval is obtained from PetroEcuador; and (b) new discoveries are made as a consequence of additional exploration.273

178. Given the Block’s significant prospects, Burlington Oriente and Perenco expected to make substantial investments in the Block and thereby obtain an extension of the contractual term.274

3. As Mandated By Ecuadorian Tax Law, Burlington Oriente And Perenco Established A Tax Consortium For Blocks 7 And 21 Responsible For The Tax Obligations Under The Block 7 And 21 PSCs

179. On September 23, 2005, pursuant to the Implementing Regulation to the Tax Regime Law, the Internal Revenue Service (IRS) issued Resolution No. NAC-DGER2005-0437, requiring partners in contracts for exploration and exploitation of hydrocarbons in Ecuador to create a consortium for the joint

272 Exhibit C-1 at Clause 6.2.

273 Exhibit C-1 at Clause 6.2. Clause 6.2 is also applicable to the Coca- Payamino PSC.

274 Martinez Supp. WS at ¶21.

payment of taxes.275 Accordingly, in late 2005, Perenco and Burlington Oriente created a consortium for the Block 7 and Block 21 PSCs (the Block 7 & 21 Tax Consortium), effective as of January 1, 2006. The Block 7 & 21 Tax Consortium is responsible for filing and paying the annual tax return for the Blocks.276

180. As operator of the Block 7 and 21 PSCs, Perenco also became the Operator of the Block 7 & 21 Tax Consortium.277

4. By Early 2006, Burlington’s Investments In Ecuador Were Substantial

181. As a result of the transactions described above, and in reliance on the guarantees provided in Ecuador’s legal and contractual framework, by early 2006 Burlington owned the following investments in Ecuador:

275 Exhibit C-140, Implementing Regulation to the Tax Regime Law, Internal Revenue Service Resolution No. NAC-DGER2005-0437, Official Register No. 110, published September 23, 2005.

276 Exhibit C-25, Addendum to Joint Operations Agreement, executed in December 2005 and effective as of January 1, 2006.

277 Id. at 1-2.

Block Burlington’s Entity through Operator of Expiration of PSC Ownership which Block (without extension) Interest Burlington Owns Interest

7 42.5% Burlington Perenco 2010 Oriente

21 46.25% Burlington Perenco 2021 Oriente

23 50% Burlington CGC Currently in force Andean majeure

(20-year exploitation right)

24 100% Burlington Burlington Currently in force Ecuador Ecuador majeure

(20-year exploitation right)

182. As of the beginning of 2006, Burlington had invested hundreds of millions of dollars in Blocks 7, 21, 23 and 24.278

5. After Its Acquisition, Burlington Faced Intensified Opposition From Indigenous Groups In Blocks 23 And 24

183. During the time that Arco owned Block 24, Arco attempted to engage indigenous communities residing within the Block in

278 Martinez Supp. WS at ¶26.

negotiations with the aim of reaching an agreement that would benefit both Arco and the indigenous communities. However, when Arco sought to talk directly with all communities in the contract area, including communities within the Federación Independiente del Pueblo Shuar del Ecuador (FIPSE) – a political body that purports to represent indigenous communities living in Block 24 – litigation ensued and Arco was enjoined from negotiating with any communities without the knowledge and approval of the FIPSE.279 The FIPSE opposed any deal with Arco and, as a result, Arco was unable to complete its Environmental Impact Study on time.280

184. When Burlington Ecuador acquired its interests in Block 24, the contractor’s obligations under the PSC were still suspended and the exploration period under the PSC had not begun due to resistance from the indigenous communities in the Block.281 Accordingly, Burlington Ecuador attempted to resolve the situation by trying to negotiate agreements with the indigenous communities.282 Despite Burlington’s efforts, however, FIPSE representatives took the same absolute position with Burlington Ecuador as they had with Arco, and resistance, including violent attacks, intensified.283 With time expiring on the one-year suspension granted by the Government, on October 6, 2000, Burlington Ecuador formally requested a declaration of force majeure in order to protect its performance under the Block 24

279 Vickers WS at ¶10.

280 Id.

281 Exhibit C-4 at Clauses 3.3.24, 5.1.27.7 and 3.3.25.

282 Vickers WS at ¶¶15-17.

283 Id.; see also Exhibit C-141, Letter from Michael J. Frampton to Rodolfo Barniol Zerga, January 26, 2001 at 4-5.

PSC.284 A declaration of force majeure was the only contractual remedy available to Burlington Ecuador to: (a) avoid a breach of its obligation to timely perform the exploration plan under the PSC; (b) suspend the term of the contract; and (c) prevent the execution by Ecuador of its Performance Guarantee.285

284 Exhibit C-142, Letter from José María Rumazo Arcos and Hernán Santacruz to Pablo Terán and Rodolfo Barniol, October 6, 2000.

285 Exhibit C-4 at 5.1.5. and 9.1.1 Article 9.1.1 provides as follows: Exploration Period Guarantee: Upon the signature of this Contract, the Contractor will provide, payable to PETROECUADOR, an unconditional, irrevocable, and immediately payable bank guarantee in Dollars pursuant to Article 27 of the Hydrocarbons Law for an amount equal to twenty percent of the estimated exploration investments that it agrees to make during the Exploration Period in order to perform the exploration activities stipulated under the Minimum Exploration Plan that is included in Exhibit VI. (Emphasis added.) Unofficial English translation. In its original Spanish version it reads: Garantía del Período de Exploración: A la suscripción de este Contrato, la Contratista rinde a favor de Petroecuador una garantía bancaria incondicional, irrevocable y de cobro inmediato, en Dólares, de conformidad con el artículo 27 de la Ley de Hidrocarburos, por un valor equivalente al veinte por ciento de las inversiones de exploración estimadas, que se comprometa a realizar durante el Período de Exploración, para ejecutar las actividades exploratorias comprometidas en el Plan Exploratorio Mínimo, y que consta en el anexo VI.

See also Exhibit C-143, Performance Guaranty of Burlington Resources Inc. in favor of Burlington Resources Ecuador Limited, January 19, 2000. In compliance with the terms of the Block 24 PSC, Burlington

185. On October 30, 2000, Burlington Ecuador wrote again to PetroEcuador and to the Ministry of Energy and Mines explaining that any activities in Block 24 were impossible given the protests of the indigenous communities.286 On May 15, 2001, PetroEcuador finally accepted Burlington Ecuador’s request and declared Block 24 to be in force majeure.287 Burlington’s performance under the Block 24 PSC was therefore suspended.

186. In a further attempt to resolve the conflict with the indigenous communities, on January 19, 2001, Burlington Ecuador developed and submitted a community program to Ecuador and PetroEcuador.288 This program focused on: (a) providing information to the communities on the impact and benefits of the hydrocarbon activities in the region; and (b) supporting the national and local governments in their efforts to reach agreements with the communities. In its community program submission, Burlington Ecuador made it clear that “given the strong political component of the conflict, the Community Program needed even more the cooperation of the National Government, through the use of resources that only it

Resources Inc. guaranteed the total performance of Burlington Ecuador of the Minimum Exploration Plan established in the Block 24 PSC.

286 Exhibit C-144, Letter from Robbin Clark to Pablo Terán and Rodolfo Barniol, October 30, 2000.

287 Exhibit C-36, Official Letter No. 511-ACP-2001 from Econ. Francisco Rendón P., Head, Unit of Administration of Petroleum Contracts, to Herb Vickers Jr., General Manager, Burlington Resources Ecuador Limited, Acceptance of Force M., May 30, 2001 (confirming Board Resolution No. 251-CAD-2001-05-09 dated May 15, 2001).

288 Exhibit C-145, Letter from Michael J. Frampton to Rodolfo Barniol Zerga, January 19, 2001.

100

possesse[d].”289 In October 2001, Burlington reiterated the importance of the support of the Ministry of Energy and Mines and PetroEcuador to the resolution of the conflict.290

187. Moreover, Burlington Ecuador requested assistance from the Government in negotiations with the indigenous communities.291 Military intervention was unnecessary.292 However, the intransigence of the FIPSE in negotiations needed to be mediated and the Government was ideally suited to break the deadlock. The Government was initially reluctant to assist because it was inevitable that negotiations would require the Government to commit to divert a larger percentage of the ECORAE Tax or the Amazon Development Tax for use by the communities (whom these taxes were designed to protect).293

188. While some progress was made in negotiations with the communities, violent attacks and death threats persisted against Burlington Ecuador’s representatives and against the indigenous communities that supported Burlington Ecuador’s activities in

289 Id. at 5. Unofficial English translation. In its original Spanish version it reads “Por las especiales características de los obstáculos encontrados; que tienen fuerte componente político, el Programa de Relaciones Comunitarias precisa aún más la cooperación del Gobierno Nacional, mediante el manejo de las capacidades que únicamente son propias de él.” See also Vickers WS at ¶16.

290 Exhibit C-146, Letter from Robbin Clark to Pablo Terán and Rodolfo Barniol, October 30, 2001 at 2.

291 Vickers WS at ¶16.

292 Exhibit C-147, Letter from Herb Vickers to Eduardo López and Hugo Bonilla, January 31, 2005 at 12; Vickers WS at ¶16.

293 Vickers WS at ¶16.

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Block 24.294 In a letter to the Ministry of Energy and Mines and PetroEcuador dated January 31, 2003, Burlington Ecuador stressed that the Government’s provision of protection and security – which had been promised but so far had not materialized – was vital to any resolution with the indigenous groups:

Official support in dealing with the indigenous communities, together with the validity and advantages of both Burlington’s proposal and the oil activity itself, would be very important in giving comfort and security to the base communities, and could stimulate favorable decisions on their part. The absence of this type of assistance from public sector institutions and authorities may leave room for the positions of the non-governmental sector opposed to oil investment.295

189. Nevertheless, Burlington Ecuador continued to work closely with the indigenous communities in the hope of reaching a

294 Exhibit C-148, Letter from Herb Vickers to Carlos Arboleda and Guillermo Rosero, January 31, 2003 at 6-7.

295 Id. at 11. Unofficial English translation. In its original Spanish version it reads: Un apoyo oficial frente a las comunidades indígenas, coincidiendo con la validez y ventajas de la propuesta de Burlington y de la propia actividad petrolera, sería muy importante para dar tranquilidad y seguridad a las comunidades de base y podría estimular decisiones favorables por parte de éstas. La ausencia de esta clase de ayuda desde las instituciones y autoridades del sector público puede ofrecer el espacio para las posiciones del sector no gubernamental opuestas a la inversión petrolera.

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resolution. Through its negotiations, Burlington Ecuador learned that high on the list of indigenous priorities was the desire for a greater share of returns from Ecuador’s oil industry.296 Accordingly, in 2004 and 2005, Burlington Ecuador proposed to: (a) co-finance community property; (b) provide medical and educational programs; (c) create a “sustainable development fund” to which Burlington Ecuador would contribute a percentage of its Production Participation to finance specific projects for the indigenous groups in the Block; and (d) redirect 25 percent of its income tax to the indigenous communities (the Block 24 Settlement). Burlington Ecuador also proposed that other measures, such as tax law reform, be adopted in order to direct tax funds that the Government collected to the communities.297 These proposals were especially important to the indigenous groups, because although the Government imposed additional taxes on Burlington Ecuador (and other hydrocarbons investors) ostensibly for the benefit of the indigenous populations (e.g., the ECORAE Tax and the Amazon Development Tax), the Government failed to direct these benefits to them.298

190. The Block 24 Settlement was unprecedented in the oil industry and would have been implemented at Burlington’s expense, and at no cost to the Government.299 However, as stressed by Burlington Ecuador, it “require[d] a substantial effort by the Government” – indeed, Burlington Ecuador acknowledged that

296 Vickers WS at ¶17.

297 Exhibit C-149, Letter from Herb Vickers to Carlos Arboleda and Pedro Espín, January 30, 2004 at 5; Exhibit C-147, Letter from Herb Vickers to Eduardo López and Hugo Bonilla, January 31, 2005 at 13-14; Vickers WS at ¶17.

298 Vickers WS at ¶17.

299 Id. at ¶18.

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its “continued work and effort with the indigenous peoples would be of little effect absent such governmental assistance.”300

191. Finally, in early 2005, the Government – through the Sub- Secretary of Hydrocarbons, Mr. Sevilla – signaled its support for Burlington Ecuador’s initiatives. As a result of this critical support, substantial progress was made: Burlington Ecuador and the Ministry of Energy and Mines were able to reach an initial agreement with almost all of the indigenous communities in the Block, and thereafter began negotiating a broader agreement that would include all the communities involved. The Block 24 Settlement was therefore poised to secure conditions for exploration activities in Block 24.301 Several meetings followed this initial agreement.302

300 Exhibit C-150, Letter from Herb Vickers to Eduardo López and Luis Camacho, October 29, 2004 at 2. Unofficial English translation. In its original Spanish version it reads: Si es claro que este asunto se ha politizado por completo y se requerirá de un esfuerzo sustancial por parte del Gobierno para resolverlo. En este caso, sería probable que Burlington no vea un camino claro para continuar su apoyo al Gobierno para resolver este asunto ahora político. Así mismo, consideramos que dicha resolución requerirá de un cambio sustancial en las políticas gubernamentales y sus alcances y también un tiempo considerable. Consecuentemente, el continuo trabajo y esfuerzo de Burlington con los indígenas serviría de muy poco, hasta que el panorama principal de estos temas sea resuelto.

301 Exhibit C-151, Letter from Herb Vickers to Iván Rodríguez and Luis Román, January 31, 2006 at 2; Vickers WS at ¶19.

302 Exhibit C-151, Letter from Herb Vickers to Iván Rodríguez and Luis Román, January 31, 2006 at 2.

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192. Similarly, at the time that Burlington Andean acquired its interest in Block 23, the exploration period under the PSC had begun but was suspended due to force majeure. Following the acquisition, Burlington Andean and CGC, its partner in the Block 23 PSC, attempted to reach agreements with the indigenous communities in the Block. These negotiations were partially successful. In fact, in 2002, CGC and Burlington Andean reached agreements with several communities, whereby CGC and Burlington Andean committed to finance educational, health, agriculture, communication and social programs in the area, and the communities agreed to permit CGC and Burlington Andean to undertake a seismic program (the Block 23 Settlement). The proposed Block 23 Settlement was discussed in public hearings and approved by the Ministry of Energy and Mines and the Ministry of Environment.303

193. However, when CGC and Burlington Andean attempted to run the seismic program mandated by the Block 23 PSC,304 approximately 80 armed members of an indigenous group attacked the seismic study base, destroying the base and kidnapping eight employees. CGC, as operator of the Block, requested that the Government provide conditions of security for the contractors and their employees.305 CGC also wrote to the Governor of Pastaza (where FINAE, one of the most active indigenous groups, was located) and requested the Governor’s

303 See, e.g., Exhibit C-152, General Agreement for the Development of the Seismic 2D in Block 23 of the Ecuadorian Amazon Region between CGC and the Pacayacu Association, August 7, 2002. Similar agreements were reached with the Independent Communities of Sarayaku, Shiwuacocha, Cali Cali, Chonta Yacu, Fenash-P, FENAQUIPA, AIEPRA and SHAIMI.

304 Exhibit C-3 at Clause 5.1.21.6.

305 Exhibit C-153, Letter from Ricardo Nicolás to Gustavo Gutiérrez, December 4, 2002.

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assistance.306 A similar request was also made to PetroEcuador on December 9, 2002.307

194. The kidnapped employees were ultimately released. Shortly thereafter, however, an indigenous group broke into the camp erected for seismic studies, set fire to the camp and kidnapped 24 more employees.308 Notwithstanding the gravity of the situation, the local authorities refused to provide any protection to the Block, citing a lack of instructions from the national government and military authorities.309 CGC, as operator of the Block, therefore requested immediate assistance from the national authorities to ensure secure conditions for its operations in the area.310 No meaningful assistance was given. After evaluating the risks involved in operations in Block 23, CGC and Burlington Andean suspended their activities in the area.311

195. CGC and Burlington Andean continued their efforts to reach a resolution with the communities, pending any effective action from Ecuador or PetroEcuador. By the end of 2004, CGC and Burlington Andean had the support of 28 of the 29 indigenous communities in the area.312 The only remaining opposition at

306 Exhibit C-154, Letter from Ricardo Nicolás to José Jácome, December 8, 2002.

307 Exhibit C-155, Letter from Ricardo Nicolás to Gustavo Gutiérrez, December 9, 2002.

308 Exhibit C-156, Letter from Diego Garzón to Executive President, PetroEcuador, December 21, 2002 at 3.

309 Id.

310 Id. at 4.

311 Vickers WS at ¶24.

312 Id. at ¶28.

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that stage was that of the Sarayaku community.313 The absolute need to procure the consent of the Sarayaku community through a negotiated solution was underscored by a decision of the Inter- American Court of Human Rights in July 2004, ordering Ecuador to ensure the protection of the Sarayaku community in the Block 23 region.314

196. Finally, in early 2005, and at CGC’s and Burlington Andean’s repeated requests, the Government, under the Presidency of Lucio Gutierrez and through the Sub-Secretary of Hydrocarbons, showed some support for CGC’s and Burlington Andean’s initiatives, and substantial progress was made with the Sarayaku community.315

313 Id. at ¶28. See also Exhibit C-157, Letter from Ricardo Nicolás to Iván Nieto Guerrero, May 3, 2005.

314 Exhibit C-158, Matter of Pueblo Indígena Sarayaku (Int. Am. Ct. Human Rights), Order on Provisional Measures Regarding Ecuador dated July 6, 2004 at 10.

315 Exhibit C-159, Letter from Ricardo Nicolás to Rubén Dario Andrade V, March 18, 2005.

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D. ECUADOR AND PETROECUADOR BREACHED THE PSCS AND DISMANTLED THE LEGAL FRAMEWORK UPON WHICH BURLINGTON INVESTED IN ORDER TO TAKE FOR THEMSELVES THE BENEFITS OF INCREASED OIL PRICES

1. As Oil Prices Increased, Politicians In Latin America Called For A Return To The Resource Nationalism Implemented In The 1970s

197. Oil prices increased dramatically in the 2000s, as demonstrated by the following graph:316

316 Source: WTRG Economics, http://www.wtrg.com/prices.htm.

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198. As a result of those oil price increases, an “Andean oil neo- nationalism” movement, similar to the “nationalism reaction” movement of the 1970s, emerged in Latin America, led by Venezuela and followed by Bolivia and Ecuador.317

199. In August 2004, Venezuelan President Hugo Chávez, whose key political platforms included reclaiming state ownership of Venezuela’s natural resources, prevailed in a referendum brought in an attempt to prematurely terminate his presidency. Emboldened by this victory and motivated by the steady increase in global oil prices, President Chávez set about systematically dismantling the legal framework that had been guaranteed by previous governments to stimulate foreign investment and fuel Venezuela’s plans for the rapid expansion of its hydrocarbons sector.

200. Between 2004 and 2006, President Chávez implemented a number of measures aimed at nationalizing the country’s hydrocarbon sector. In late 2004, Venezuela increased the royalty rate on extra-heavy oil projects from 1 percent to 16⅔ percent.318 Shortly thereafter, President Chávez announced that all operating service contracts signed in the 1990s would be terminated and investors would have to sign different contracts, giving them a minority interest in a “mixed enterprise,” or leave the country.319

317 Exhibit C-160, Guillaume Fontaine, OIL NEO-NATIONALISM IN THE ANDES (February 2008) at 1-3.

318 Exhibit C-161, Peter Wilson, Chavez Risks $1.6 Billion Bond Default in Oil Venture Takeovers, BLOOMBERG, October 19, 2006.

319 Exhibit C-162, Steve Ixer, Venezuela Takes Over Eni and Total Fields; Lawsuit Threatened as Ramirez Plants Venezuela’s Flag, PLATTS OILGRAM NEWS, April 4, 2006.

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201. In early 2006, President Chávez announced an “Extraction Tax” of one-third of the value of all extra-heavy oil extracted, which had the effect of further raising the effective royalty rate on extra-heavy oil projects from 16⅔ percent to 33⅓ percent.320 This measure was quickly followed by an increase in the income tax rate applicable to extra-heavy oil projects from 34 percent to 50 percent.321

202. Not satisfied with these measures, President Chávez announced in early 2007 that all contracts relating to extra-heavy oil projects would be cancelled altogether and investors instead would need to accept minority interests in “mixed enterprises” run by the state or leave the country.322

203. Venezuela’s so-called “Bolivarian Revolution” quickly spread to Bolivia. In May 2005, Bolivia passed a new Hydrocarbons Law that reclaimed hydrocarbon resources as state property, implemented substantial limitations to the investors’ rights to commercialize their production and imposed new royalties. The new Hydrocarbons Law gave companies 180 days to migrate to new contracts, with the investors’ new production share

320 Exhibit C-163, Chávez Squeezes the Oil Firms, THE ECONOMIST, November 10, 2005.

321 Exhibit C-164, Venezuela Will Raise the Income Tax in the Orinoco Belt from 34% to 50%: The Companies Affected Are ExxonMobil, Statoil, ConocoPhillips, Chevron and BP, REPORTE, June 16, 2005.

322 Exhibit C-165, Nationalization Without Agreement: Oil and Energy Minister Rafael Ramírez Said There Is No “Negotiation Possible” With Foreign Oil Companies, REPORTE DIARIO DE LA ECONOMÍA, January 16, 2007; Exhibit C-166, Decree with Rank, Value and Force of Law of Migration to Mixed Companies of the Association Agreements of the Orinoco Oil Belt, as Well as the Risk and Profit Sharing Exploration Agreements, Official Gazette No. 38,632, published February 26, 2007.

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determined unilaterally by the state.323 Soon after, on December 18, 2005, Evo Morales Ayma was elected President of Bolivia. President Morales is the leader of Movimiento al Socialismo (Movement for Socialism), a political party committed to land reform and the redistribution of natural resources, and closely aligned with President Chávez.324

204. On May 1, 2006, in the midst of Venezuela’s nationalization movement, President Morales announced his intention to nationalize Bolivia’s hydrocarbons resources. To that end, he passed the “Heroes of Chaco” decree.325 The decree provided, inter alia, for the nationalization of foreign investors’ controlling interests in hydrocarbons companies.326

205. Encouraged by these regional developments, in 2005, Ecuadorian President Alfredo Palacio González began to dismantle the legal and contractual frameworks that had served to attract foreign investors to the Ecuadorian hydrocarbon sector.

323 Exhibit C-167, Hydrocarbons Law No. 3058, Official Gazette No. 2749, published May 19, 2005 at Articles 5, 16-17.

324 Exhibit C-168, David Rieff, Che’s Second Coming?, N.Y. TIMES, November 20, 2005.

325 Exhibit C-169, Supreme Decree 28,701, Official Gazette No. 2883, published May 1, 2005.

326 Id. at Article 7.

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2. In 2005, Ecuador Announced Its Intention To Revise All Production Sharing Contracts And, After Failing To Obtain The Agreement Of Investors, Unilaterally Imposed A 50 Percent “Participation” On “Extra” Oil Revenues

206. In 2005, President Palacio González disclosed plans to revise all production sharing contracts with foreign investors by increasing the State’s participation in the profits directly generated by the increases in oil prices to 50 percent.327 Indeed, Ecuador claimed that investors had made US$731 million in profits due to increased oil prices between 2003 and 2005 and hoped that, with continuing oil price increases, the revised contracts could net the treasury as much as US$500 million.328 Accordingly, Ecuador and PetroEcuador hired the French organization Institut National de Pétrole to assist it in reviewing all 30 contracts existing at that time.329

207. On November 17, 2005, Ecuador invited Burlington Oriente to participate in contract renegotiation meetings for the Block 7 and 21 PSCs. These meetings occurred on November 23, 2005.330 The Government proposed an increase in

327 Exhibit C-170, Ecuador Will Modify Petroleum Contracts, DIARIO HOY, September 8, 2005.

328 Exhibit C-171, Ecuador Lawmakers Pass 60% Tax on Petroleum Company Profits, GREENWIRE, March 31, 2006. Of course, Ecuador’s analysis failed to take into account the effect of income and payroll taxes on its overall “take.” As Ecuador’s own participation in production increased, its tax revenue would decline. Since the effective tax rate on Burlington exceeded 37 percent, every dollar shifted away from investors would net the State less than 63 cents.

329 Exhibit C-172, Ecuador Will Renegotiate Its Oil Contracts with the Help of France, XINHUA NEWS AGENCY, September 21, 2005.

330 Exhibit C-173, Letter from Luis Román Laza to Herb Vickers, November 17, 2005.

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PetroEcuador’s share of the oil produced from Blocks 7 and 21 from less than 22 percent to 50 percent. This proposal was rejected.331

208. In response, the Palacio González regime announced a plan to take from Burlington and other investors that which they had refused to give voluntarily. In the words of President Palacio González:

[We] invited the oil companies that ha[d] contracts with the Ecuadorian State to begin processes of reaching an understanding for the equitable distribution of the extraordinary earnings. Nonetheless, those invitations ha[d] not been responded to. The situation further justifies the reforms proposed […]332

209. At the same time, Ecuador discontinued its support for the Block 23 Settlement and Block 24 Settlement, and actively withdrew the constructive measures already in place.333 Further, Ecuador ignored an order by the Audit Body of the State requesting that PetroEcuador, the Ministry of Energy and

331 Martinez Supp. WS at ¶14.

332 Exhibit C-174, Letter from Alfredo Palacio Gonzalez to Wilfredo Lucero Bolaños, March 1, 2006 at 5 (emphasis added). Unofficial English translation. In its original Spanish version it reads as follows: [E]n reiteradas ocasiones he invitado a la[s] compañías petroleras que tienen contratos con el Estado Ecuatoriano a iniciar procesos de entendimiento para la distribución equitativa de las ganancias extraordinarias, sin embargo tales invitaciones no han sido atendidas, situación que justifica aún más las reformas planteadas […].

333 Vickers WS at ¶¶20-21, 29-30.

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Mines and Burlington Ecuador urgently define an action plan aiming to reach an agreement with the communities.334

210. In response to this policy change, on December 21, 2005, CGC (on behalf of Block 23) requested that PetroEcuador adopt measures to compensate the Block 23 investors for the damage caused by Ecuador’s failure to protect their investment.335 PetroEcuador did not respond to this request.

211. At the same time, the Government of President Palacio González continued with its plan forcibly to modify existing oil contracts. On March 1, 2006, it submitted a bill to Congress proposing an amendment to the Hydrocarbons Law.336 The bill restated the Government’s intention to capture the value of the oil price increases the country had witnessed between 2003 and 2005 and cited, as additional support, the measures already taken in Venezuela.337

212. Congress realized that the amendments were an attempt to achieve by fiat what the Government could not achieve through negotiations. For example, one representative noted that the question before the Congress was “whether or not we can by law unilaterally amend oil contracts with retroactive effect.

334 Exhibit C-175, Special Review of the Participation Contract for the Exploration and Exploitation of Hydrocarbons, Block 24, from April 27, 1998 to August 17, 2004, Audit Body of the State of Ecuador, July 29, 2005 at 22.

335 Exhibit C-176, Letter from Ricardo Nicolás to Luís Román, December 21, 2005.

336 Exhibit C-174, Letter from Alfredo Palacio Gonzalez to Wilfredo Lucero Bolaños, March 1, 2006.

337 Id. at 4.

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That and nothing else is the legal discussion.”338 Congress understood that the amendments would in effect subject all production sharing contracts to a participation regime included in only some.339 Referring to the price variable method adopted in the 1995 Tarapoa contract, one representative noted:

213. On the basis of President Palacio’s proposal, on April 19, 2006, the Congress enacted Law No. 2006-42.

338 Exhibit C-177, Second Debate of the Project of the Reformatory Law of the Law of Hydrocarbons, Minutes No. 25-227, Special Evening Session, National Congress of Ecuador, March 29, 2006 at 103. Unofficial English translation. In its original Spanish it reads: [F]rente al proyecto enviado por el Presidente de la República […] si mediante ley podemos o no modificar, unilateralmente, contratos petroleros con efecto retroactivo. Esa y no otra es la discusión jurídica.

339 See above ¶¶101-102.

340 Exhibit C-177, Second Debate of the Project of the Reformatory Law of the Law of Hydrocarbons, Minutes No. 25-227, Special Evening Session, National Congress of Ecuador, March 29, 2006 at 73. Unofficial English translation. In its original Spanish it reads: Vea, como que parece copiado, esa es la difusión que está planteando el Gobierno, lo que ya está contemplado en un contrato y queremos que esto que está contemplado en un contrato, se incorpore en el resto de contratos.

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214. Law No. 2006-42 imposed an additional participation of at least 50 percent on “non agreed or unforeseen surpluses from oil selling prices” related to the exploration and exploitation of oilfields in Ecuador.341 Paradoxically, while imposing these extra-contractual obligations on investors, Ecuador cited in the preamble to Law No. 2006-42, paragraph three of Article 217 of the Ecuadorian Constitution, which at the time provided that “[t]he State, in agreements subscribed with investors, may establish guarantees and special compromises in order that agreements are not modified by laws or any other dispositions which may affect the clauses thereof.”342 The preamble to Law No. 2006-42 also notes the importance of maintaining “legal certainty” for parties to investment contracts.343

215. The additional participation imposed by Law No. 2006-42 would apply whenever the actual monthly average sale price of oil exceeded the monthly average selling price in force on the date of execution of the relevant PSC. As provided in Article 2 of the Law:

Participation of the State over non agreed or unforeseen surpluses from oil selling prices. Contracting companies having Hydrocarbons

341 Exhibit C-7, Law No. 2006-42, Official Register No. 257, published April 20, 2006 at Article 2.

342 Id. at Preamble. Unofficial English translation. In its original Spanish version it reads: El Estado, en contractos celebrados con inversionistas, podrá establecer garantías y seguridades especiales, a fin de que los convenios no sean modificados por leyes u otras disposiciones de cualquier clase que afecten sus cláusulas.

343 Id. Unofficial English translation. In its original Spanish version it reads: […] y de seguridad jurídica para las partes.

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exploration and exploitation participation agreements in force with the Ecuadorian State pursuant to the Law, without prejudice to the volume of crude oil which may correspond thereto according to their participation, in the event the actual monthly average price for the FOB sale of Ecuadorian crude oil exceeds the monthly average selling price in force at the date of subscription of the agreement expressed at constant rates for the month of payment, shall grant the Ecuadorian State a participation of at least 50% over the extraordinary revenues caused by such price difference. For purposes of this Article, extraordinary revenues shall be understood as the price difference described multiplied by the number of barrels produced.344

344 Id. at Article 2. Unofficial English translation. In its original Spanish version it reads: Participación del Estado en los excedentes de los precios de venta de petróleo no pactados o no previstos. Las compañias contratistas que mantienen contratos de participación para la exploración y explotación de hidrocarburos vigentes con el Estado ecuatoriano de acuerdo con esta Ley, sin perjuicio del volumen de petróleo crudo de participación que les corresponde, cuando el precio promedio mensual efectivo de venta FOB de petróleo crudo ecuatoriano supere el precio promedio mensual de venta vigente a la fecha de suscripción del contrato y expresado a valores constantes del mes de la liquidación, reconocerán a favor del Estado ecuatoriano una participación de al menos el 50% de los ingresos extraordinarios que se generen por la diferencia de precios. Para los propósitos del presente artículo, se entenderá como ingresos extraordinarios la diferencia de precio descrita multiplicada por el número de barriles producidos.

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216. In accordance with Law No. 2006-42 and its subsequent regulations,345 the State’s additional participation is to be calculated as follows:

(a) first, by calculating the gross number of oil barrels produced per month (i.e., not the number of barrels sold, meaning that investors are still liable to pay the additional participation even if no sales are made during the month) and ascribing a value to that production based on the actual monthly average oil spot price;346

(b) second, by calculating the value of the production in (a), above, at the time the relevant production sharing contract was entered into. This is done by taking the monthly average spot price of Oriente or Napo crude at the time the relevant production sharing contract was signed and adjusting that price by (i) discounting for variations in the crude’s quality, and (ii) factoring in increases in the U.S. Consumer Price Index, without any adjustment or deduction for services or increases in operating or investment costs (the Initial Price);347

(d) finally, by allocating at least 50 percent of that value differential to the State.

345 In the months following the enactment of Law No. 2006-42, Ecuador issued two regulatory decrees, the first, Decree No. 1583 (Exhibit C-38) was replaced by Decree No. 1672 (Exhibit C-8).

346 Exhibit C-8, Decree No. 1672, Official Register No. 312, published July 13, 2006 at Article 2.

347 Exhibit C-7, Law No. 2006-42, Official Register No. 257, published April 20, 2006 at Article 2; Exhibit C-8, Decree No. 1672, Official Register No. 312, published July 13, 2006 at Article 4.

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217. Simply represented, the process works as follows:348

Primary or Secondary Pipeline CRUDE INSPECTION AND PRODUCTION DELIVERY CENTER

PSC Formula

Contractor State Participation Participation (PetroEcuador) Sale in the Additional Market participation collected by Ecuador irrespective of Revenue Taxed whether oil is sold According to PSC

218. Law No. 2006-42 requires the oil companies to provide to PetroEcuador and the National Directorate of Hydrocarbons, an agency of the Ministry of Mines and Petroleum, all information related to oil production in the Blocks.349 With this information, PetroEcuador calculates Ecuador’s additional participation in additional revenues and notifies the oil producers, including the Block 7 & 21 Tax Consortium, of the amount due on a monthly basis. Payments are to be made within 30 days of PetroEcuador’s notification to the State.

348 For a comparison of how the PSCs operated prior to Law 2006-42, see figure at ¶106, above.

349 Exhibit C-8, Decree No. 1672, Official Register No. 312, published July 13, 2006 at Article 5.

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219. By letter of July 6, 2006, the Ministry of Energy and Mines notified the Block 7 & 21 Tax Consortium that the prices in effect when the Block 7 and 21 PSCs were executed were US$25.111383 and US$15.358274, respectively.350 These prices (with a modest periodic inflation factor based on the U.S. consumer price index) became the “Initial Price.” Law No. 2006-42 purported to give the Government an additional participation in revenues from all sales above these Initial Prices. Because of cost increases that accompanied inflation and rises in oil prices, the practical effect of Law 2006-42 was to cut profits of Burlington Oriente in half.351

220. On behalf of the Block 7 and 21 partners, including Burlington Oriente, the Block 7 & 21 Tax Consortium paid the 50 percent contribution on the additional oil revenues under protest.352

3. In October 2007, Ecuador Adopted Decree 662, Forcing The Block 7 & 21 Tax Consortium To Pay To The Government 99 Percent Of All Revenues Earned In Excess Of The Price Of Oil At The Time The PSCs Were Signed

221. In November 2006, Rafael Correa won the presidential election, replacing President Palacio González. In January 2007, President Correa announced to oil investors that his administration was planning once again to review existing oil

350 Exhibit C-178, Letter from Stalin Napoleón Salgado L. to Laurent Combe and related correspondence, July 6, 2006.

351 Martinez Supp. WS at ¶15.

352 Exhibit C-9, Letter from Laurent Combe to Señor Ing. Marcelo Sevilla, May 19, 2006; Letter from Laurent Combe to Banco Central del Ecuador, July 26, 2006 with accompanying checks of payment under protest for April, May and June 2006 pursuant to Law No. 2006-42 for Blocks 7 and 21.

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contracts.353 In particular, Correa wanted all investors to agree to replace their existing PSCs with service contracts (such as the service contract for Block 7 that the Block 7 PSC replaced). He tacitly acknowledged, however, that the investors would not accept such a change unless forced to do it.354

222. Thus, on October 18, 2007, Ecuador published Decree No. 662.355 Purporting to regulate the revenues of the companies in a more “equitable manner,” Decree 662 increased the State’s additional participation from 50 percent to 99 percent.356 Contemporaneously, Ecuador threatened to take the outstanding one percent from those companies that opposed this measure, for a 100 percent take of all “extra” oil revenues.357

223. President Correa had repeatedly acknowledged that the purpose of such draconian measures was to compel all parties to production sharing contracts to “voluntarily” relinquish their rights and accept a service contract model in its place. Correa admitted that in passing Decree No. 662, “they accused us of

353 Exhibit C-39, Alonso Soto and Alexandra Valencia, Ecuador's Leftist Government Open to Oil Investment, REUTER’S U.K., January 19, 2007.

354 Exhibit C-40, Correa Warns that If Oil Companies Protest, He Will Take Away One Percent of Their Surplus, EL COMERCIO, October 6, 2007; Correa Warns the Contracting Oil Companies, EL UNIVERSO, October 23, 2007.

355 Exhibit C-10, Decree No. 662, Official Register No. 193, published October 18, 2007.

356 Id. at ¶3 of the Preamble.

357 Exhibit C-40, Correa Warns that If Oil Companies Protest, He Will Take Away One Percent of Their Surplus, EL COMERCIO, October 6, 2007; Correa Warns the Contracting Oil Companies, EL UNIVERSO, October 23, 2007.

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threatening rule of law, of committing an exaggeration, and they were probably right […].”358

224. By June 2008, it was estimated that Law No. 2006-42 and Decree No. 662 had brought approximately US$2.18 billion of additional funds into the State.359

225. The Block 7 & 21 Tax Consortium paid (and continues to pay) the 99 percent contribution under protest.360

226. At the same time, the Correa administration endorsed the prior regime’s refusal to provide secure conditions for the operation of Blocks 23 and 24. By letter of January 31, 2007, the Ministry confirmed that no measures would be taken to resolve the conflict with the communities and that all responsibility for the Blocks was solely in the hands of the investors. The Ministry stated that

no new exploration [would] take place in the south of the Oriente region of Ecuador and that Blocks 23 and 24 should completely review their plans considering the indigenous and environmental

358 Exhibit C-179, Mandatory Dialogue with the Oil Companies, EL TELÉGRAFO, August 10, 2008. Unofficial English translation. In its original Spanish version it reads: “nos acusaron de atentar contra la seguridad jurídica, de cometer una exageración, probablemente tengan razón […].”

359 Exhibit C-180, Ecuador Receives 2,180 Million of "Extra" Oil Benefits, EL TELÉGRAFO, November 11, 2008.

360 See, e.g., Exhibit C-42, Letter from Christophe Delepine to Señor Capitán de Navío Fernando Zurita, December 14, 2007. See also below at ¶229 .

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issues in order to determine if exploration activities [were] to be commenced.361

4. Ecuador and PetroEcuador Have Refused To Either Absorb The Adverse Economic Impact Of Law No. 2006-42 And Decree 662 Or Exempt Burlington’s Investments From Their Effects

227. In response to Ecuador’s measures, on December 18, 2006, the Block 7 & 21 Tax Consortium formally objected to Law No. 2006-42 and requested that PetroEcuador correct the effects of the Law on the economics of Perenco’s and Burlington’s investments, as required by the tax stabilization provisions of the PSCs.362 Additionally, on November 28, 2007, Burlington requested that Ecuador provide a written statement of its intent to abide by its obligations in the PSCs to absorb the effects of any tax measure on the economics of the PSCs.363

361 Exhibit C-181, Letter from Herb Vickers to Alberto Acosta and Carlos Pareja Yanuzzelli, January 31, 2007 at 6 (Annex 2). Unofficial English translation. In its original Spanish version it reads: El Ministerio ha indicado eso no habrá ninguna nueva exploración en el sur oriente del Ecuador y que los Bloques 23 y 24 deben revisar [sus planes] completamente considerando las preocupaciones medioambientales e indígenas para determinar si la exploración puede seguirse.

362 Exhibit C-11, Letter from Laurent Combe to Dr. Galo Chiriboga, December 18, 2006 (Request of adjustment of “X” Factors. Participation Contract for Block 21); Exhibit C-12, Letter from Laurent Combe to Dr. Galo Chiriboga, December 18, 2006 (Request of adjustment of “X” Factors. Participation Contract for Block 7).

363 Exhibit C-43, Letters from A. Roy Lyons to Procurador General del Estado and Empresa Estatal Petroleos del Ecuador, November 28, 2007 concerning Blocks 7, 21, 23 and 24. Similarly, the Consortium

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228. Neither Ecuador nor PetroEcuador has responded to Burlington’s letters or offered any compensation. As a result, on April 21, 2008, the Claimants commenced this arbitration.

229. By June 2008, when the Law No. 2006-42 payment for April came due, the Block 7 & 21 Tax Consortium already had made Law No. 2006-42 payments in excess of US$396.5 million.364 However, concerned about the exponential increase in the amounts in dispute and the lack of “a clear path to reach a negotiated solution,” the Consortium asked Ecuador to allow it to transfer the disputed amounts to an escrow account.365 The proposed escrow account would be maintained by an independent escrow agent in a neutral location pending resolution of the present dispute and the parallel dispute filed by Perenco at ICSID. This mechanism would have ensured that the disputed funds would be available for disposition in accordance with the ultimate resolution by an impartial tribunal. The Consortium’s request, however, has gone unanswered. Since June 2008, Burlington has been paying all amounts under Law No. 2006-42 into a segregated account. To date, Burlington has deposited more than US$147.5 million into its segregated account.366 Ecuador did not attempt to enforce the collection of any amount under Law No. 2006-42 until March 2009.

requested that Ecuador and PetroEcuador reimburse payments made pursuant to the “ECORAE tax.” Exhibit C-11; Exhibit C-12.

364 Payments due in June 2008 correspond to oil production from April 2008.

365 Exhibit C-48, Letter from Rodrigo Márquez-Pacanins and Alex Martinez to Galo Chiriboga and Luis Jaramillo, June 19, 2008.

366 This figure corresponds to crude sales through December 2008.

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5. Ecuador Used The 99 Percent Participation As A Tool For Renegotiating The PSCs

230. As announced in 2005 and confirmed by President Correa, Ecuador’s real intention behind Law No. 2006-42 was to force investors to renegotiate their production sharing contracts and to transform them into service contracts. As reported in the Ecuadorian press:

In September of this year, the president stated that the Decree, which increased to 99% the participation of the State in the extra revenues, was only a “pressuring measure” for the parties to sit down to negotiate and assured that 70% was a middle ground […].367

231. The Government’s intention to use Law 2006-42 as a lever to force contractual renegotiations was made clear when, in a public radio address in January 2008, President Correa gave the oil companies three options: (a) “comply with the 99-1 Decree […] 99 percent for the State and 1 percent for the company because the resource is ours”; (b) “renegotiate the contract into a services contact. […] Because if the oil is ours we hire somebody to take the oil out, right? We pay for the job, $10 for each barrel of oil extracted, but the rest is for us”; or (c) “if they are not happy, no problem. We don’t want to rip-off anybody here. How much have they spent in investments? $200

367 Exhibit C-182, Decree Increases to 99% the Participation of the State in the Extra Oil Revenues “Only to Sit to Negotiate”, HOY.COM.EC, December 22, 2008 (emphasis added). Unofficial English translation. In its original Spanish version it reads: En septiembre de este año, el presidente dijo que el decreto que subía al 99% la participación del Estado en los excedentes solo fue una “medida de presión” para que las compañías se sienten a negociar […].

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million? Here, have your $200 million and have a nice day, and PetroEcuador will exploit that field.”368

232. President Correa told the oil companies that they had 45 days to make this choice.369 Following the expiration of the 45-day period, President Correa announced that all existing production sharing contracts would be terminated unilaterally and new contracts signed.370

233. It was in this context that Burlington and its subsidiaries filed a Request for Arbitration. Shortly thereafter, and consistent with President Correa’s announcements, in May 2008, Ecuador informed Burlington that it intended to replace the Block 7 and 21 PSCs with service contracts.371 The transition to service

368 Exhibit C-183, Rafael Correa, 53rd National Address of President Rafael Correa (January 26, 2008) (relevant excerpts). Unofficial English translation. In its original Spanish version it reads: [o] se acogen al decreto 99-1 […] 99 por ciento para el Estado, 1 por ciento para la empresa porque el recurso es nuestro […] Si el petróleo es nuestro, nosotros contratamos a alguien para que saque nuestro petróleo, verdad? Le pagamos por el trabajo, 10 dólares por cada barril extraído pero el resto es para nosotros […] [S]i no están contentos, no hay problema. Aquí no queremos estafar a nadie. Cuánto han gastado en inversiones? 200 millones? Tengan sus 200 millones que les vaya bonito y Petroecuador explotará ese campo.

369 Id.; see also Exhibit C-184, Correa Proposes “Single Model” for Contracts with Foreign Oil Companies, EL DIARIO, April 14, 2008.

370 Exhibit C-184, Correa Proposes “Single Model” for Contracts with Foreign Oil Companies, EL DIARIO, April 14, 2008.

371 Exhibit C-48, Letter from Rodrigo Márquez-Pacanins and Alex Martinez to Galo Chiriboga and Luis Jaramillo, June 19, 2008.

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contracts meant that Ecuador would reap the benefits of Burlington’s substantial investment in and development of the Blocks, and at the same time would be the sole beneficiary of then-existing high oil prices and any future oil price increases. Confirming the President’s announcements, Ecuador’s proposals included a 70 percent tax on “extra” revenues. Burlington refused Ecuador’s proposals.372

234. As a result, on December 23, 2008, the Ministry of Mines and Petroleum informed Perenco (as the operator of Blocks 7 and 21) of its intention unilaterally to terminate the Block 7 and 21 PSCs early due to “the impossibility of reaching a final agreement between the parties, due to the invariable position of […] Burlington Resources.”373

235. Burlington rejected these allegations and requested that Ecuador compensate it for the expropriation of its investments in Blocks 7 and 21.374

236. On January 21, 2009, the Ministry reiterated Ecuador’s intention to terminate the Block 7 and 21 PSCs if an agreement was not reached with Perenco and Burlington:

372 Exhibit C-46, Letter from Alex Martinez to Eric d’Argentré, December 16, 2008; Exhibit C-47, Letter from Alex Martinez to Derlis Palacios Guerrero, January 7, 2009.

373 Exhibit C-49, Letter from Derlis Palacios Guerrero to Eric d’Argentré, December 23, 2008. Unofficial English translation. In its original Spanish version it reads: “la imposibilidad de arribar a un acuerdo final entre las partes, debido a la posición invariable de […] Burlington Resources.”

374 Exhibit C-47, Letter from Alex Martínez to Derlis Palacios Guerrero, January 7, 2009.

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[Continued negotiations with Perenco and Burlington are] practically impossible [and an existing deal is headed towards] termination.375

237. The Ministry’s threats to terminate the Block 7 and 21 PSCs were followed by President Correa’s announcement of an immediate seizure of all the Consortium’s unpaid amounts under Law No. 2006-42 due to Burlington’s and Perenco’s refusal to agree to the new terms of the PSCs proposed by the Government. In particular, on February 14, 2009, President Correa announced in a press conference:

But two companies, Perenco and Repsol, with which Burlington is also allied, have wasted our time. When an agreement was near, they backed out. I believe, I fear, that they thought they were still dealing with previous administrations. Which, gentlemen, we will not permit.

This is going to create friction with the governments of France and Spain, which are very protective of their transnational corporations, and for this we are sorry. We like these governments and hold them in high esteem, but on this subject we must observe our national sovereignty and our national interests.

Therefore, since they have not paid their taxes on extraordinary profits, I have ordered enforcement actions against Repsol and Perenco, and these companies can go wherever they like. This country will not pay attention to extra-regional authorities that attempt to tell us what to do or not to do.

375 Exhibit C-50, Ecuador Looks to End Perenco Deal, Minister Says, ASSOCIATED PRESS, January 21, 2009.

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So we are going to take matters into our own hands, we are going to take measures to stand up to them, but gentlemen, this is unavoidable.376

238. Minister Palacios subsequently confirmed that if Burlington and Perenco did not pay the amounts due pursuant to Law No. 2006- 42 “their possessions [would] be taken.”377 This statement echoed previous comments from Minister Palacios that “[we]

376 Exhibit C-51, Transcript of President Correa Press Conference, February 14, 2009 at 2-3. Unofficial English translation. In its original Spanish version it reads: Pero dos compañías: Perenco y Repsol, de la cual forma parte también Burlington, nos han hecho perder el tiempo. Se llegaba a un acuerdo, se retrocedía. Creo, temo, que creyeron que todavía seguían los Gobiernos de antes. Así que señores, nosotros no vamos a permitir esto. Esto nos va a crear fricciones con los Gobiernos de Francia, los Gobiernos de España que defienden mucho a sus transnacionales, lo sentimos mucho. Son Gobiernos a los cuales queremos y estimamos mucho pero aquí haremos respetar la soberanía nacional y los intereses nacionales. Así que como no han pagado sus impuestos sobre ganancias extraordinarias he ordenado que ya se ejecute la coactiva en Repsol y Perenco, y vayan donde les dé la gana a estas compañías. Este país no hará caso a instancias extra regionales que quieren decirnos qué hacer o no hacer. Entonces, vamos a tomar cartas en el asunto, vamos a tomar medidas, que nos crearán un nuevo frente, pero señores, es inevitable […].

See also Exhibit C-52, Ecuador to Freeze Repsol, Perenco Assets Over Tax, REUTERS, February 14, 2009.

377 Exhibit C-53, Ecuador Warns that It Will Seize Perenco and Repsol Oil Company Installations, ECUADORINMEDIATO.COM, February 16, 2009.

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are headed towards the termination of the contract and we will see if those wells will be permanently closed; if we let them stand by; or if PetroEcuador takes them over.”378

239. One of the purported reasons for terminating the Block 7 and 21 PSCs was Ecuador’s need to comply with the oil production cuts mandated by OPEC:

[T]he Minister spoke about the relationship of the Government with the oil companies Agip and Perenco, which he asked to cut their production in order for Ecuador to comply with the reduction of 67,000 barrels of oil per day required by OPEC […]. According to Palacios, the Government seeks “a technical form for reducing exploitation […] in order to reach an eventual agreement with these companies. With Perenco it is almost impossible” to [negotiate] because “it has a partner which does not allow it to, which is not willing” to negotiate, therefore “we are heading towards terminating its contract” and we are analyzing what to do with their oil wells.”379

378 Exhibit C-54, The Government Will Seek To Terminate Contract with Perenco After Failure of Negotiations, EL COMERCIO, January 21, 2009. Unofficial English translation. In its original Spanish version it reads: “Vamos a la terminación del contrato, y veremos si es que esos pozos los cerramos definitivamente, los dejamos en “stand by” o los toma (la estatal) PetroEcuador.”

379 Exhibit C-185, Ecuador Will Receive Another Oil Cut from OPEC, According to Minister, YAHOO NOTICIAS, January 21, 2009. Unofficial English translation. In its original Spanish version it reads: [E]l ministro habló de la relación del Gobierno con las petroleras Agip y Perenco, a las que pidió un recorte de la producción para poder cumplir con la reducción de 67.000 barriles de petróleo diarios que la OPEP pidió a

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240. Rather than terminate Burlington’s rights directly, the Government adopted a series of measures that effectively rendered all rights under the Block 7 and 21 PSCs worthless.

241. On February 19, 2009, Ecuador and PetroEcuador (through the Executory Tribunal of PetroEcuador) instituted coactiva proceedings to enforce the payment of US$327.3 million, corresponding to the Consortium’s allegedly unpaid amounts owed under Law No. 2006-42 for Blocks 7 and 21. In accordance with the coactiva order, assets would be attached if full payment was not made within three days:

Considering that the aforementioned debt is a net, specific, and overdue debt, it is herewith ordered that the debtor pay the same within THREE DAYS or, by the same deadline, provide equivalent assets for attachment, subject to the condition that assets will be attached that are equivalent to the debt, interest, and court costs.380

Ecuador. […] Según Palacios, el Gobierno busca “la forma técnica de ir deduciendo la explotación […] para lograr una eventual solución con estas compañías. Con Perenco está prácticamente imposible” conseguir un acuerdo porque “tiene un socio que no le deja, que no tiene la voluntad” de negociar, por lo que “vamos a la terminación el contrato” y se analiza qué hacer con sus pozos petroleros.

380 Exhibit C-55, PetroEcuador Executory Tribunal Notifications, February 19, 2009. Unofficial English translation. In its original Spanish version it reads: Como la mencionada deuda es líquida, determinada y de plazo vencido, se ordena que el deudor pague dentro de TRES DÍAS o, dentro de igual término, dimita bienes equivalentes para el embargo, bajo prevención de que se embargará bienes equivalentes a la deuda, intereses y costas.

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242. Ecuador and PetroEcuador issued the second and third coactiva notices on February 20 and 25, 2009.

243. On March 3, 2009, PetroEcuador’s Executory Tribunal ordered the seizure of Block 7 and Block 21 crude production and cargo and appointed Compañía Oleoducto de Crudos Pesados as the judicial custodian of confiscated crude, specifically providing:

[A] SEIZURE has been ordered on the production and loading of Oriente Crude Oil owned by [the Consortium] […] until full payment of all outstanding debt has been made.381

244. On the same date, an Ecuadorian court summarily rejected Perenco’s objections to the coactiva measures – based on the existence of ICSID arbitrations – and held that there would be no suspension of enforcement unless Perenco paid US$327 million demanded by the Respondents.382 On March 9, 2009, this decision was confirmed by a higher Ecuadorian court.383

245. Ecuador enforced the payments required under Law No. 2006- 42 even though President Correa had publicly acknowledged

381 Exhibit C-58, PetroEcuador Executory Tribunal Notifications to Perenco, March 3, 2009. Unofficial English translation. In its original Spanish version it reads: Se ordena el EMBARGO de la producción y cargamentos de Crudo Oriente de propiedad de [el Consorcio] […] hasta la cancelación de la totalidad de la deuda.

382 Exhibit C-59, Letter from Perenco to the Tribunal, March 4, 2009.

383 Exhibit C-60, Decision of Second Court of Pichincha, dated March 9, 2009.

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that the 99 percent tax imposed on oil revenues was excessive.384

246. On March 6, 2009, the Tribunal granted Burlington Oriente’s request for a temporary restraining order:

On the basis of the foregoing reasons, the Arbitral Tribunal recommends that the Respondents refrain from engaging in any conduct that aggravates the dispute between the Parties and/or alters the status quo until it decides on the Claimants’ Request for Provisional Measures or it reconsiders the present recommendation, whichever is first.385

247. On March 10, 2009, Burlington Oriente advised Respondents of its intention to abide by the Tribunal’s order and requested assurances from Respondents

that they too will abide by the Tribunal’s recommendation and refrain from taking any steps which may, directly or indirectly, modify the status quo between the parties vis-à-vis the production sharing contracts for Block 7 and 21, including refraining from sending any further coactiva notices or instituting any proceedings to enforce the disputed Law 2006-42 amounts, including but not limited to, the seizure of the production and shipments of Oriente and Napo

384 Exhibit C-57, Repsol and Perenco Will Be Subject to Compulsory Actions, EL COMERCIO, February 15, 2009.

385 Tribunal’s Recommendations dated March 6, 2009 at ¶13.

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Crude Oil identified in PetroEcuador’s notices dated March 3rd, 2009.386

248. Ecuador and PetroEcuador ignored Burlington Oriente’s request.

249. Ecuador was unclear about what it would do with the Consortium’s crude. However, because PetroEcuador sent seizure orders to third parties involved in the oil sale process, Perenco – as operator of the Consortium and on behalf of the partners – was forced to send force majeure notices under its crude oil sale agreements with its current buyers.

250. Recent news and media reports indicate that Ecuador and PetroEcuador have seized all crude produced by the Consortium.387 Ecuadorian Minister for Mines and Petroleum, Minister Derlis Palacios, admitted that Ecuador already “has seized 70%” of crude production and would “sell it to cover the [alleged] debts.”388 The Minister also indicated that other

386 Exhibit C-61, Letter from Burlington Resources Inc. and Burlington Oriente to Ecuador and PetroEcuador, March 10, 2009.

387 Exhibit C-62, Ecuador Will Continue the Perenco Seizures, AMÉRICAECONOMÍA.COM, March 18, 2009; see also Exhibit C-63, Ecuador Seized Production of French Oil Company Perenco, ECONOMISTA24.COM, March 18, 2009.

388 Exhibits C-63, Ecuador Seized Production of French Oil Company Perenco, ECONOMISTA24.COM, March 18, 2009 at 2. Unofficial English translation. In its original Spanish version it reads: “retuvo el 70%” de esa producción “y lo venderá para cubrir el pago de los valores deudados.”

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operating assets, including fields and offices, might be attached if necessary.389

251. On March 27, 2009, the Consortium received a notice from the coactivas judge informing the Consortium that an oil shipment had been seized and valued by an expert under a specific formula and on the basis of WTI prices as of March 20, 2009:

In reply to your communication dated March 20, 2009, by means of which I was appointed as an EXPERT to prepare an expert report regarding the Napo Crude Oil of Block Twenty-One (21), seized from [the Consortium] and concerning Executory Trial No. 004-2009-RYC, I herewith inform you of the following:

1. As of March 20, 2009, the WTI quote is USD 51.270 per barrel.

2. The formula to be applied to appraise the shipment must be: average of the WTI Platt's quotes first line for the month of the Bill of Lading, minus the average difference for Napo Crude Oil published by Platt's and Argus during the month of the shipment, plus a premium of USD 2.09 per barrel.390

389 Exhibits C-63 and C-62. See also Exhibit C-64, State Company Hopes to Retain the First Crude Oil Shipment Today, EL UNIVERSO, March 27, 2009.

390 Exhibit C-65, PetroEcuador Executory Tribunal Notifications to Perenco, March 26, 2009. Unofficial English translation. In its original Spanish version it reads: En respuesta a su comunicación de fecha 20 de marzo del 2009, mediante el cual se me designa PERITO, con el objeto de elaborar un informe

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252. The obvious purpose of this notification is to inform the Consortium of the amount that Ecuador will deduct from the Consortium’s alleged debt based on the seizure.

253. The same day, Mr. Jaramillo, Executive President of PetroEcuador, publicly ratified PetroEcuador’s decision to proceed with the auction of the oil seized from the Consortium.391 According to Mr. Jaramillo, the shipment seized contains approximately 720,000 barrels of crude oil.392

254. Minister Palacios openly blames these developments on Burlington Oriente’s alleged failure to renegotiate its contracts with Ecuador:

pericial del Crudo Napo del Bloque Veinte y un (21) embargado a [el Consorcio] y correspondiente al Juicio Coactivo No. 004- 2009-RYC, pongo en su conocimiento lo siguiente: 1.- Al día 20 de marzo del 2009, la valoración del WTI es de USD 51,270 por barril. 2.- La formula a ser aplicada para valorar el embarque debe ser: Promedio de las publicaciones del WTI Platt’s primera línea correspondiente al mes del Conocimiento del Embarque menos el promedio de los diferenciales para crudo Napo publicados por Platt’s and Argus durante el mes del embarque, más un premio de USD 2,09 por barril […]. A similar communication was sent with respect to crude oil confiscated from Block 7.

391 Exhibit C-64, State Company Hopes to Retain the First Crude Oil Shipment Today, EL UNIVERSO, March 27, 2009.

392 Id.

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As Minister Palacios explained it, as reported by the newspaper El Tiempo, Burlington – Perenco's minority partner in the exploitation of two blocks in the Ecuadorian Amazon – is responsible for the delay in the renegotiation of the contracts, since it registered a dispute before an arbitral body of the World Bank in June 2008 in order to avoid payment of the extraordinary profits.393

255. Predictably, Ecuador’s measures have resulted in a substantial decline in the country’s oil production, with oil exports in the first two months of 2009 down 17.55 percent from 2008 levels, and revenues down 71.5 percent.394

256. If Ecuador continues to seize the Consortium’s oil, Burlington Oriente will be forced to spend significant money to produce oil for the sole benefit of Ecuador and PetroEcuador, and will therefore have no choice but to exit the Blocks.395

393 Exhibit C-62, Ecuador Will Continue the Perenco Seizures, AMÉRICAECONOMÍA.COM, March 18, 2009. Unofficial English translation. In its original Spanish version, it reads: Según explicó el ministro Palacios, consignó el diario El Tiempo, la empresa Burlington – socio minoritario de Perenco en la explotación de dos bloques en la Amazonía ecuatoriana – es la culpable por la demora en la renegociación de los contratos, ya que presentó una demanda ante un órgano de arbitraje del Banco Mundial en junio de 2008 para evitar los pagos de las ganancias extraordinarias.

394 Exhibit C-186, Mercedes Alvaro, Ecuador Jan-Feb Oil Export Revs Dn 71.5% At $541M vs Year Ago, DOW JONES NEWSWIRES, April 16, 2009.

395 Martinez Supp. WS at ¶25.

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6. Law No. 2006-42 and Decree 662 Destroyed The Value Of Burlington’s Investments In Ecuador

257. As will be demonstrated by the Claimants in the Quantum phase of this arbitration, the value of Burlington’s investments in Ecuador was destroyed by Ecuador’s measures. Indeed, Ecuador’s former Minister of Energy and Mines, Fernando Santos Alvite, conceded that Ecuador was “removing all the profits so that the foreign oil companies will leave the country because they are not going to operate at a loss.”396 According to Mr. Alvite, the measures would mean the end of the petroleum industry in Ecuador.397

258. As noted above, Burlington has been forced to abandon efforts to expand its investment in Blocks 7 and 21.398 The measures stripped Burlington of any incentive to invest more capital in the oil fields and thereby increase their value. As expressly communicated by the Consortium to the Ministry of Mines and Petroleum on February 20, 2008, when submitting its five-year plan for Blocks 7 and 21:

New additional investment programs are not included in view of the fact that Law 42 has discouraged the making of new investments […].399

396 Exhibit C-41, Ecuador Retains 99 Percent of the Extraordinary Earnings of the Petroleum Sector, EL TIEMPO, October 6, 2007. Unofficial English translation. In its original Spanish version it reads: “les quitamos toda la utilidad para que se vayan del país porque no van a trabajar a pérdida.”

397 Id.

398 Martinez Supp. WS at ¶¶16-21.

399 Exhibit C-187, Five-Year Plan Block 21 2008-2012 and Five-Year Plan Block 7 2008-2010, February 20, 2008 at 11 and Annex 1 and 2 (Block

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259. The suspension of new investment in Block 7 will also prevent Burlington Oriente from exercising its right to an extension of the term of the Block 7 PSC.400

260. Due to the impact of Law 2006-42, Burlington Oriente will present a loss for 2008.401 The Government’s measures have effectively destroyed the value of Burlington’s investments in Ecuador and have made further operations uneconomic.

261. Over the course of its investment in Ecuador, Burlington received a number of offers for its hydrocarbon interests in Ecuador, including offers following the introduction of Law No. 2006-42, the value of which was already reduced due to the effects of Law No. 2006-42.402 Following the enactment of Decree 662, however, the prospective purchasers of Burlington’s Ecuador assets rescinded their offers.403

262. Although Burlington’s exploration activities in Blocks 23 and 24 have been suspended by force majeure events, Law No. 2006-42 and Decree No. 662 will apply to those PSCs when activities commence. Discussions with prospective purchasers

21 Five-Year Plan) and at 3 and Annex 1 (Block 7 Five-Year Plan). Unofficial English translation. In its original Spanish version it reads: No se incluye programas de nuevas inversiones adicionales en vista de que con la ley 42 ha desestimulado realizar nuevas inversiones […]. Martinez Supp. WS at ¶¶19-21.

400 See above at ¶¶177-178; Martinez Supp. WS at ¶21.

401 Martinez Supp. WS at ¶26.

402 Id. at ¶27.

403 Id.

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indicate that these measures have already negatively impacted the value of the Blocks 23 and 24 investments.404

III. JURISDICTION

A. THIS TRIBUNAL HAS JURISDICTION OVER THE CLAIMS OF THE BURLINGTON SUBSIDIARIES UNDER THE PSCS

1. Ecuador And PetroEcuador Agreed In The PSCs To ICSID Arbitration Of The Burlington Subsidiaries’ Claims

263. The PSCs for Blocks 7, 21, 23 and 24 expressly and unambiguously provide for ICSID arbitration for all disputes arising under the PSCs. Thus, pursuant to the PSCs, Ecuador, PetroEcuador and the Burlington Subsidiaries consented to have all disputes arising under the PSCs – including the disputes set forth in the Request for Arbitration and further detailed herein – resolved by ICSID arbitration. As a result, and in accordance with Article 25(1) of the ICSID Convention, this Tribunal has jurisdiction over the claims of the Burlington Subsidiaries.

264. In particular, Clause 20.3 of the Block 7 PSC provides the consent of Ecuador, PetroEcuador and Burlington Oriente to ICSID arbitration:

[F]rom the date the Congress of Ecuador approves the Convention on the Settlement of Investment Disputes between States and Nationals of other States (hereinafter referred to as the “Convention”) signed by the Republic of Ecuador as a Member State of the International Bank for Reconstruction and Development, on January fifteenth (15), nineteen eighty-six (1986) and published in Official Registry number three

404 Martinez Supp. WS at ¶22.

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hundred eighty-six (386) on March third (3), nineteen eighty-six (1986), the Parties shall submit disputes or disagreements relating to or arising from performance of this Production Sharing Contract to the jurisdiction and competence of the International Center for Settlement of Investment Disputes (hereinafter referred to as “ICSID”) for settlement and resolution under the terms of that Convention.405

265. Clause 20.2.19 of the Block 21 PSC, after setting forth an alternative dispute resolution procedure in the event that Ecuador did not ratify the ICSID Convention, also provides for the consent to ICSID arbitration of Ecuador, PetroEcuador and Burlington Oriente upon Ecuador’s ratification of said Convention:

In the event that the Ecuadorian Congress approves the Investment Dispute Settlement

405 Exhibit C-1. Unofficial English translation. In its original Spanish version it reads: [D]esde la fecha en que el Convenio sobre Arreglo de Diferencias Relativas a Inversiones entre Estados y Nacionales de otros Estados (el “Convenio”), suscrito por la República del Ecuador, como Estado Miembro del Banco Internacional de Reconstrucción y Fomento, el quince de enero de mil novecientos ochenta y seis y publicado en el Registro Oficial número trescientos ochenta y seis del tres de marzo de mil novecientos ochenta y seis, sea aprobado por el Congreso Ecuatoriano, las Partes se obligan a someter las controversias o divergencias que tengan relación o surjan de la ejecución de este Contrato de Participación, a la jurisdicción y competencia del Centro Internacional de Arreglo de Diferencias Relativas a Inversiones (el “CIADI”), para que sean arregladas y resueltas de conformidad con lo dispuesto en dicho Convenio.

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Agreement (ICSID) and such agreement therefore comes into force and effect, said Agreement shall supersede the Arbitration procedure mentioned in this present Contract.406

266. The consent of Ecuador, PetroEcuador and Burlington Andean to ICSID arbitration is embodied in Clause 20.3 of the Block 23 PSC:

[F]rom the date the Congress of Ecuador approves the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the “Convention”), signed by the Republic of Ecuador as a Member State of the International Bank for Reconstruction and Development, on January fifteenth, nineteen hundred eighty-six (January 15, 1986), and published in Official Register Number Three hundred eighty six (386) on March third, nineteen hundred eighty-six (March 3, 1986), the Parties shall submit disputes or disagreements relating to or arising from the performance of this Contract to the Jurisdiction and competence of the International Centre for Settlement of Investment Disputes (the “ICSID”), for settlement and resolution under the terms of that Convention.407

406 Exhibit C-2. Unofficial English translation. In its original Spanish version it reads: En caso de que el Congreso Nacional llegare a aprobar el Convenio de Arreglo de Controversias de Inversiones – CIADI y por tanto este se halle vigente, este dejará sin efecto al procedimiento de Arbitraje señalado en este Contrato.

407 Exhibit C-3. Unofficial English translation. In its original Spanish version it reads:

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267. Finally, Clause 20.3 of the Block 24 PSC provides the consent to ICSID arbitration of Ecuador, PetroEcuador and Burlington Ecuador:

[T]he Parties agree to submit any differences pertaining to investment as defined in the Treaty on Reciprocal Promotion and Protection of Investments signed by the Republic of Ecuador and the United States of America and published in Official Register No. 49 dated April 22, 1997, as provided in Article VI, Paragraph 3 of the Treaty on Reciprocal Promotion and Protection of Investments mentioned in this Clause.408

[D]esde la fecha en que el Convenio sobre Arreglo de Diferencias Relativas a Inversiones entre Estados y Nacionales de otros Estados (el “Convenio”), suscrito por la República del Ecuador, como Estado Miembro del Banco Internacional de Reconstrucción y Fomento, el quince de enero de mil novecientos ochenta y seis (15 de enero de 1986) y publicado en el Registro Oficial Número. Trescientos ochenta y seis (386) el tres de marzo de mil novecientos ochenta y seis (3 de marzo de 1986), sea aprobado por el Congreso Ecuatoriano, las Partes se obligan a someter las controversias o divergencias que tengan relación o surjan de la ejecución de este Contrato, a la Jurisdicción y competencia del Centro Internacional de Arreglo de Diferencias Relativas a las Inversiones (el “CIADI”), para que sean arregladas y resueltas de conformidad con lo dispuesto en dicho Convenio.

408 Exhibit C-4. Unofficial English translation. In its original Spanish version it reads: [L]as Partes acuerdan también someter cualquier diferencia en material de Inversión según lo estipulado en el Tratado suscrito entre la República del Ecuador y los Estados Unidos de América sobre Promoción y

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268. Article VI, paragraph 3 of the Treaty provides for ICSID arbitration where the respondent State is a party to the ICSID Convention.409

269. As a result, through the express language of the PSCs for Blocks 7, 21, 23 and 24, Ecuador, PetroEcuador and the Burlington Subsidiaries consented to ICSID jurisdiction from the moment the ICSID Convention was ratified by Ecuador.

270. Ecuador completed this step by ratifying the ICSID Convention on February 7, 2001.410 Since February 2001, therefore,

Protección Recíproca de Inversiones, publicado en el Registro Oficial No. 49 de 22 de abril de 1997, a lo dispuesto en el artículo VI, numeral 3, del Tratado sobre Promoción y Protección Recíproca de Inversiones mencionado en esta cláusula.

409 Exhibit C-6; see ¶288 below.

410 Ecuador’s ratification of the ICSID Convention was officially published in Official Register No. 309 dated April 19, 2001, which included Presidential Decree No. 1417-B ratifying the ICSID Convention. Exhibit C-105, Decree No. 1417-B, Official Register No. 309, published April 19, 2001. Unofficial English translation. In its original Spanish version it reads: Artículo Primero.- Ratifícase el “Convenio Sobre Arreglo de Diferencias Relativas a Inversiones entre Estados y Nacionales de otros Estados,” cuyo texto lo declara Ley de la República y compromete para su observancia el Honor Nacional. Artículo Segundo.- Encárgase la ejecución del presente decreto al señor Ministro de Relaciones Exteriores.

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Ecuador and PetroEcuador have consented to ICSID arbitration to resolve any disputes arising under the PSCs.411

271. The Burlington Subsidiaries were validly assigned the rights of the original contracting investors in the acquisition of their ownership interests in Blocks 7, 21, 23 and 24.412 Those rights included the right to ICSID arbitration of disputes relating to the performance of the PSCs.

2. The Other Requirements Of Article 25(1) Of The ICSID Convention Are Met With Respect To The Claims Under The PSCs

a. Ecuador And PetroEcuador have the requisite status

272. As discussed above, Ecuador’s status as a Contracting State to the ICSID Convention has been effective since February 7,

411 The fact that Ecuador consented to ICSID arbitration in advance of its ratification of the ICSID Convention is irrelevant. Since the time of the first ICSID arbitration, it has been accepted that a State can consent to ICSID arbitration in advance of its ratification of the Convention. For example, in Holiday Inns v. Morocco, ICSID Case No. ARB/72/1, Decision on Jurisdiction dated May 12, 1974, neither the host State nor the investor’s State had ratified the ICSID Convention when the agreement containing consent was made. Nevertheless, the tribunal found that consent expressed in the agreement became effective and irrevocable as of the latter of the two dates when the States ratified the Convention. See CL-23, Christoph H. Schreuer, THE ICSID CONVENTION: A COMMENTARY (2001) at 142-143. See also CL-24, Autopista Concesionada de Venezuela, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/00/5, Decision on Jurisdiction dated September 27, 2001 at ¶¶89-91 (explaining that a party can consent to ICSID jurisdiction subject to the fulfillment of conditions that will occur at a later point in time).

412 See Section II.C.2 above.

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2001. Additionally, the Burlington Subsidiaries’ claims may be asserted against PetroEcuador, an entity specially designated by Ecuador as capable of participation in an ICSID arbitration. Pursuant to Article 25 of the ICSID Convention, a government subdivision or agency of a Contracting State qualifies as a party under the ICSID Convention, and thus may be a party to an ICSID dispute, where, as here: (a) the host State (Ecuador) has designated the subdivision or agency to the Centre as an entity capable of being a party to an ICSID arbitration; and (b) the host State (Ecuador) has specifically approved the consent given by the subdivision or agency (the case here), or has waived this approval right, under Article 25(3).

273. PetroEcuador is subject to the jurisdiction of the Tribunal because Ecuador has designated PetroEcuador as an entity capable of being a party to an ICSID arbitration,413 and, in the PSCs, Ecuador gave its consent to allow the Burlington Subsidiaries to invoke the ICSID arbitration clauses in the PSCs against PetroEcuador.

b. The Burlington Subsidiaries have the requisite nationality

274. The Burlington Subsidiaries have qualifying nationality under Article 25(1) of the ICSID Convention. In order to qualify under Article 25(1), each Burlington Subsidiary must be a “national of [a] Contracting State” to the ICSID Convention. The Burlington Subsidiaries are companies incorporated under the laws of Bermuda.414 Bermuda is not itself a signatory to the

413 See CL-25, ICSID Membership, Designations and Notifications (designating PetroEcuador’s predecessor company, Corporación Estatal Petrolera Ecuatoriana, on April 19, 1988).

414 See CL-26, Certificate of Incorporation on Change of Name of Burlington Resources Oriente Limited, August 9, 1999; CL-27, Certificate of Incorporation of Burlington Resources Andean Limited,

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ICSID Convention. However, Bermuda is a territory of the United Kingdom of Great Britain and Northern Ireland, which has extended the protection of the ICSID Convention to Bermuda.415 Thus, the Burlington Subsidiaries satisfy the nationality requirement under Article 25(1) of the ICSID Convention.

c. The Burlington Subsidiaries have a qualifying investment under the ICSID Convention

275. Each of the Burlington Subsidiaries’ agreements with Ecuador and PetroEcuador for the exploration and exploitation of Ecuador’s crude reserves is a classic type of investment contemplated by Article 25 of the ICSID Convention. The term “investment” under the ICSID Convention is broad in scope and encompasses the assets and interests of the Burlington Subsidiaries in Ecuador. As explained by the Report of the Executive Directors on the ICSID Convention:

No attempt was made to define the term “investment” given the essential requirement of consent by the parties, and the mechanism through which Contracting States can make known in advance, if they so desire, the classes of disputes which they would or would not consider submitting to the Centre (Article 25(4)).416

February 9, 2001; CL-28, Certificate of Incorporation of Burlington Resources Ecuador Limited, December 17, 1998.

415 See CL-29, Arbitration (International Investment Disputes) Act 1966, December 13, 1966 at Chapter 41, Section 6; CL-30, Arbitration (International Investment Disputes) Act 1966 (Application to Colonies etc.) Order 1967, February 20, 1967 at Section 2 and Schedule 1.

416 CL-31, International Centre for Settlement of Investment Disputes, HISTORY OF THE ICSID CONVENTION (Volume II-2) (1968) at ¶27.

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276. A number of tribunals have concluded that contracts between a foreign investor and a host State meet the requirement of an investment within the meaning of Article 25(1) of the ICSID Convention.417 According to the tribunal in Autopista Concesionada de Venezuela, C.A. v. Venezuela, where the performance of a contract “implies substantial resources during significant periods of time,” the contract “clearly qualifies as an investment in the sense of Article 25 of the ICSID Convention.”418

277. The tribunals in Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco419 and Fedax N.V. v. Bolivarian Republic

417 CL-32, Noble Energy Inc. and MachalaPower Cia Ltda v. Ecuador and Consejo Nacional de Electricidad, ICSID Case No. ARB/05/12, Decision on Jurisdiction dated March 5, 2008 at ¶117 (concluding that the arbitration clauses contained in the investment agreement and concession agreement under scrutiny could be used as the basis for jurisdiction); see also CL-33, IBM World Trade Corporation v. Ecuador, Case No. ARB/02/10, Decision on Jurisdiction and Competence dated December 22, 2003 at ¶43 (contracts qualify as an “investment” within the meaning of Article 25 of the ICSID Convention); CL-34, CDC Group PLC v. Republic of the Seychelles, Case No. ARB/02/14, Award dated December 17, 2003 at ¶¶3-4 (ICSID jurisdiction was based on ICSID arbitration clauses in the contracts between the claimant and the respondent Government); CL-35, Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction dated July 23, 2001 at ¶¶47-49 (contracts were an investment within the meaning of the applicable treaty); CL-36, Fedax N.V. v. The Republic of Venezuela, ICSID Case No. ARB/96/3, Decision of the Tribunal on Objections to Jurisdiction dated July 11, 1997 at ¶43 (finding that promissory notes qualify as an investment).

418 CL-24, Aucoven v. Venezuela, Decision on Jurisdiction dated September 27, 2001 at ¶101.

419 The Salini tribunal tested the contract separately under both the bilateral investment treaty and the ICSID Convention. For its analysis of whether a contract can constitute an investment under Article 25 of the

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of Venezuela concluded that the concept of investment under the ICSID Convention encompasses: (a) economic contributions of a certain duration; (b) regularity of profit and return; (c) assumption of risk; (d) substantial commitment; and (e) significance for the host State’s development.420 The Salini tribunal further observed that the various elements constituting an investment under the ICSID Convention “may be interdependent” and “should be assessed globally.”421

278. Recent commentators have questioned whether the Salini test interjects too high a standard, or unnecessary requirements relating to the effect of an investment on a country’s economic development, into the question of whether an investor made an investment within the meaning of Article 25 of the ICSID Convention. However, the analysis is worth applying here since the investments made by the Burlington Subsidiaries in Ecuador qualify under the Salini criteria.

279. First, beginning in 2001, each of the Burlington Subsidiaries made substantial investments in the Ecuadorian hydrocarbons sector. The Burlington Subsidiaries acquired interests in four blocks of the Amazon Region and assumed the rights and responsibilities set out in the applicable PSCs.

280. Second, the PSCs are of a certain duration. The PSC for Block 7 was signed on March 23, 2000 and terminates on August 20,

ICSID Convention, see CL-35, Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction dated July 23, 2001 at ¶¶50-58.

420 Id. at ¶¶52-58; CL-36, Fedax v. Venezuela, Decision of the Tribunal on Objections to Jurisdiction dated July 11, 1997 at ¶43.

421 CL-35, Salini v. Morocco, Decision on Jurisdiction dated July 23, 2001 at ¶52.

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2010.422 The PSCs for Blocks 21, 23 and 24 permit an exploration period of up to four years, with a possible extension of up to two years under certain circumstances.423 These PSCs also provide for a exploitation or production period of 20 years, with a possible extension of up to five years under certain circumstances.424

281. Third, the PSCs ensure a regularity of profit and return. As consideration for the investments and risks taken, Ecuador guaranteed the Burlington Subsidiaries a participation in crude oil production and the right to sell it freely on the open market.425

282. Fourth, the PSCs impose a high degree of risk on the Burlington Subsidiaries. The Burlington Subsidiaries, with their joint venture partners, are responsible for all exploration and exploitation of crude oil in the designated areas (Blocks 7, 21, 23 and 24) at their own expense, including minimum required investments of capital and expenditures on equipment, machinery and technology.426 If no hydrocarbons are found, the contract and the area must be relinquished at no cost to Ecuador.427 The Burlington Subsidiaries can only recapture this

422 Exhibit C-1 at Clause 6.2.

423 Exhibit C-2 at Clause 6.1; Exhibit C-3 at Clause 6.1; Exhibit C-4 at Clause 6.1.

424 Exhibit C-2 at Clause 6.3; Exhibit C-3 at Clause 6.3; Exhibit C-4 at Clause 6.4.

425 Exhibit C-1 at Clauses 4.2, 8.1; Exhibit C-2 at Clauses 4.2, 8.1; Exhibit C-3 at Clauses 4.2, 8.1; Exhibit C-4 at Clauses 4.2, 8.1.

426 Exhibit C-1 at Clauses 4.2, 5.1.5; Exhibit C-2 at Clauses 4.2, 5.1.4; Exhibit C-3 at Clauses 4.2, 5.1.5; Exhibit C-4 at Clauses 4.2, 5.1.6.

427 Exhibit C-1 at Clause 5.1.22; Exhibit C-2 at Clause 5.1.21; Exhibit C- 3 at Clause 5.1.22; Exhibit C-4 at Clause 5.1.21.

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investment by disposing of their ratable share of crude production from each of the Blocks.

283. Fifth, the Burlington Subsidiaries invested critical capital and technological expertise essential to the success of Ecuador’s development of its hydrocarbons sector. The Burlington Subsidiaries have invested heavily in the local economy, having specific contractual obligations to give preference to goods and services produced in Ecuador or provided by Ecuadorians,428 hire qualified Ecuadorian personnel,429 contribute capital for the maintenance of the access roads to the contractors’ area,430 and re-invest at least 10 percent of their annual revenues in the development of the Ecuadorian hydrocarbons industry, or in State-owned companies or government bonds.431 Upon contract termination, this capital and technology investment will be transferred to Ecuador at no cost.432

284. The Burlington Subsidiaries’ interests in the PSCs qualify as investments under the ICSID Convention, particularly given that Ecuador and PetroEcuador consented in each PSC to ICSID arbitration of any claims relating to Burlington’s investments

428 Exhibit C-1 at Clause 5.1.25; Exhibit C-2 at Clause 5.1.25; Exhibit C- 3 at Clause 5.1.26; Exhibit C-4 at Clause 5.1.24.

429 Exhibit C-1 at Clause 19.1; Exhibit C-2 at Clause 19.1; Exhibit C-3 at Clause 19.1; Exhibit C-4 at Clause 19.1.

430 Exhibit C-1 at Clause 5.1.26; Exhibit C-2 at Clause 5.1.27; Exhibit C- 3 at Clause 5.1.27; Exhibit C-4 at Clause 5.1.26.

431 Exhibits C-1 and C-3 at Clause 5.1.24 and Exhibits C-2 and C-4 at Clause 5.1.23.

432 Exhibit C-1 at Clause 5.1.22; Exhibit C-2 at Clause 5.1.21; Exhibit C- 3 at Clause 5.1.22; Exhibit C-4 at Clause 5.1.21.

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under the PSCs. Accordingly, the PSCs qualify as investments within the meaning of the ICSID Convention.433

d. The claims arise out of an investment dispute between the Burlington Subsidiaries and the Respondents

285. The present dispute was created by Ecuador’s breach of specific provisions of the PSCs. Claims arising out of the breach of the PSCs qualify as an investment dispute under Article 25 of the ICSID Convention.434

433 In CSOB, the tribunal held that a reference in a contract to a bilateral investment treaty containing an ICSID arbitration clause expressed the parties’ view that their transaction was an investment within the meaning of the ICSID Convention. CL-37, Československa Obchodní Banka, A.S. v. The Slovak Republic, ICSID Case No. ARB/97/4, Decision of the Tribunal on Objections to Jurisdiction dated May 24, 1999 at ¶¶66-67, 88-91.

434 See CL-32, Noble Energy v. Ecuador, Decision on Jurisdiction dated March 5, 2008 at ¶¶117, 176 (the ICSID tribunal determined that it had jurisdiction as the claimants properly invoked the arbitration clauses in the investment agreement and the concession contract); CL-24, Aucoven v. Venezuela, Decision on Jurisdiction dated September 27, 2001 at ¶100 (the dispute between the claimant and the Respondent State constituted a “legal dispute” for Article 25(1) purposes since the dispute “relate[d] to the parties’ obligations agreed upon in the Agreement”); CL-34, CDC Group v. Seychelles, Award dated December 17, 2003 at ¶¶3-6 (the legal dispute between the parties stemmed from disagreements relating to the underlying investment agreements); CL-38, PSEG Global Inc., The North American Coal Corporation, and Konya Ilgin Elektrik Üretim ve Ticaret Limited Şirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, Decision on Jurisdiction dated June 4, 2004 at ¶¶113, 124 (finding that the dispute for ICSID purposes related to the interpretation and application of the investment contract and investment authorization).

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e. The parties have provided their consent to ICSID arbitration

286. As set forth above, Ecuador, PetroEcuador and the Burlington Subsidiaries have consented in the PSCs to ICSID’s jurisdiction over this dispute. Because all elements of Article 25(1) of the ICSID Convention are satisfied, this Tribunal has jurisdiction over the claims of the Burlington Subsidiaries under the PSCs.

B. THIS TRIBUNAL HAS JURISDICTION OVER THE CLAIMS OF BURLINGTON ARISING UNDER THE TREATY

287. As set forth above, this Tribunal has jurisdiction where: (a) the parties have consented to ICSID arbitration in writing; (b) the Claimant is a national of a Contracting State and the Respondent is a Contracting State; (c) the parties have a legal dispute; and (d) the dispute involves an investment within the meaning of the ICSID Convention and the instrument of consent (in this case, the Treaty). All such jurisdictional prerequisites are met in this case.

1. Ecuador And Burlington Have Consented In Writing To Submit Burlington’s Claims To ICSID Arbitration

288. As has been confirmed in a number of ICSID cases already, in Article VI(4) of the Treaty, Ecuador consented to arbitrate disputes arising under the Treaty with qualifying investors.435 In particular, pursuant to Article VI(4) of the Treaty, Ecuador

435 See CL-39, Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador, ICSID Case No. ARB/06/11, Decision on Jurisdiction dated September 9, 2008 at ¶86 (“[B]y virtue of the Treaty, [Ecuador] expressly consented to the submission of disputes for settlement by binding arbitration under the Washington Convention, thereby establishing the basis for this Tribunal’s jurisdiction in the present circumstances.”); see also CL-33, IBM v. Ecuador, Decision on Jurisdiction dated December

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consent[ed] to the submission of any investment dispute for settlement by binding arbitration in accordance with the choice specified in the written consent of the nationality or company under paragraph 3. Such consent, together with the written consent of the national or company, when given under paragraph 3, shall satisfy the requirement for:

(a) written consent of the parties to the dispute for Purposes of Chapter II of the ICSID Convention (Jurisdiction of the Centre) […].436

289. Ecuador thus has agreed in the Treaty to submit to ICSID disputes with qualifying investors arising under the Treaty.

290. Burlington has fulfilled the procedural requirements in the Treaty for providing its own consent to the Tribunal’s jurisdiction over its claims that Ecuador breached the Treaty. Article VI(3)(a) of the Treaty specifically provides:

Provided that the national or company concerned has not submitted the dispute for resolution under paragraph 2(a) or (b) and that six months have elapsed from the date on which the dispute arose, the national or company concerned may choose to consent in writing to the submission of the dispute for settlement by binding arbitration:

(i) to the International Centre for the Settlement of Investment Disputes (“Centre”) established by the Convention on the Settlement of Investment

22, 2003 at ¶¶23-30 (concluding that Ecuador had expressed its consent in writing to ICSID arbitration via the Treaty).

436 Exhibit C-6.

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Disputes between States and Nationals of other States, done at Washington, March 18, 1965 (“ICSID convention”), provided that the Party is a party to such Convention […].437

291. Burlington provided written consent to ICSID arbitration in its Request for Arbitration filed with ICSID on April 21, 2008.438 Burlington also provided its written consent to ICSID arbitration under the Treaty in its letters of October 11, 2007 to representatives of the Ecuadorian State.439

292. Additionally, Burlington filed its claims against Ecuador on April 21, 2008, more than six months after Ecuador breached its Treaty obligations to Burlington. Finally, Burlington has not submitted its dispute with Ecuador for resolution to any other court or tribunal or pursuant to any previously agreed dispute

437 Exhibit C-6.

438 See CL-40, El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Decision on Jurisdiction dated April 27, 2006 at ¶35 (“It is now established beyond doubt that a general reference to ICSID arbitration in a BIT can be considered as being the written consent of the State, required by Article 25 to give jurisdiction to the Centre, and that the filing of a request by the investor is considered to be the latter’s consent”); CL-14, Saipem v. The People’s Republic of Bangladesh, ICSID Case No. ARB/05/07, Decision on Jurisdiction and Recommendation on Provisional Measures dated March 21, 2007 at ¶74 (explaining that consent to ICSID arbitration contained in a BIT and in a request for arbitration filed by the claimant satisfied the “consent in writing” element of Article 25(1)); CL-41, Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award dated August 18, 2008 at ¶156 (same).

439 Exhibit C-45, Letters from Randy Limbacher to Rafael Correa Delgado, Galo Alfredo Chiriboga Zambrano, María Fernanda Espinosa and Doctor Xavier Garaicoa Ortiz M. Sc., October 11, 2007.

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resolution procedure, as proscribed by Article VI(2)(a) and (b) of the Treaty.440

2. Burlington And Ecuador Have The Requisite Status And Nationality Under The ICSID Convention And The Treaty

293. As stated at paragraph 270 above, Ecuador is a signatory to, and has ratified, the ICSID Convention.

294. Burlington satisfies the nationality requirement for purposes of the ICSID Convention. Under Article 25 of the ICSID Convention, an investor’s nationality is that of its place of incorporation.441 Burlington is a corporation duly organized and existing under the laws of the State of Delaware, United States, a Contracting State since October 14, 1966.442 As a result, Burlington is a national of a Contracting State within the meaning of the ICSID Convention.

3. Burlington Has A Legal Dispute With Ecuador

295. A “legal dispute” for purposes of Article 25(1) has been defined as “any dispute concerning a legal right or obligation or concerning a fact relevant to the determination of a legal right or

440 Exhibit C-6.

441 See, e.g., CL-32, Noble Energy v. Ecuador, Decision on Jurisdiction dated March 5, 2008 at ¶¶3, 69 (concluding that an entity incorporated in Delaware qualified as a U.S. national under the Treaty); CL-41, Duke Energy v. Ecuador, Award dated August 18, 2008 at ¶¶3, 165 (the claimant, incorporated in Delaware, qualified as a U.S. national for purposes of the Treaty).

442 CL-42, Certificate of Merger of Burlington Resources Inc., March 31, 2006; CL-43, International Centre for the Settlement of Investment Disputes, List of Contracting States and Other Signatories of the Convention, November 4, 2007.

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obligation.”443 In other words, a dispute is of a legal nature if it involves “a disagreement about legal rights or obligations.”444

296. Burlington has claims against Ecuador arising under Articles II(3) and III of the Treaty. These claims are based on Ecuador’s abrogation of its specific obligations with respect to Burlington’s investments and expropriation of those investments without compensation. Among other things, Ecuador took 99 percent of the revenues that Ecuador unilaterally deemed “extra” and then seized Burlington’s crude production in violation of Ecuador’s specific commitments to Burlington and the Tribunal’s recommendation under Article 47 of March 6, 2009.

297. Further, Article VI(1) of the Treaty specifically provides:

For purposes of this Article an investment dispute is a dispute between a Party and a national or company of the other Party, arising out of or relating to (a) an investment agreement between that Party and such national or company; (b) an investment authorization granted by that Party’s foreign investment authority to such national or

443 CL-44, International Centre for Settlement of Investment Disputes, HISTORY OF THE ICSID CONVENTION (Volume I) (1970) at Article 30.

444 CL-32, Noble Energy v. Ecuador, Decision on Jurisdiction dated March 5, 2008 at ¶123. The International Court of Justice consistently has defined “dispute” for jurisdictional purposes as “a disagreement on a point of law or fact, a conflict of legal views or interests between parties.” CL-45, Certain Property (Liechtenstein v. Germany), Preliminary Objections, Judgment dated February 10, 2005, I.C.J. REPORTS 6 at ¶24 (extensive citations to prior ICJ jurisprudence omitted); cf. CL-40, El Paso v. Argentina, Decision on Jurisdiction dated April 27, 2006 at ¶61 (the ICSID tribunal relied on the International Court of Justice’s jurisprudential definition of the word “dispute”).

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company; or (c) an alleged breach of any right conferred or created by this Treaty with respect to an investment.445

298. The claims asserted in this arbitration qualify as an “investment dispute” under Article VI(1) of the Treaty. Ecuador’s acts constitute breaches of the rights of Burlington under the Treaty, in particular, the right to fair and equitable treatment and full protection and security (Article II(3)(a) of the Treaty), the right to be free from arbitrary treatment (Article II(3)(b)), the right to protection of the obligations entered into by Ecuador with regard to Burlington’s investments (Article II(3)(c) of the Treaty, the umbrella clause), and the right not to be expropriated without prompt, adequate and effective compensation (Article III of the Treaty). Breaches of a right conferred by the Treaty with respect to an investment constitute an “investment dispute” for purposes of the Treaty.446 As set forth below, Burlington has made qualifying investments in Ecuador within the meaning of the Treaty.

4. Burlington’s Claims Arise Directly Out Of Its Investments In Ecuador

299. Ecuador’s unlawful acts have injured Burlington’s investments in Ecuador’s hydrocarbons sector – i.e., rights in the four contracts for the exploration and exploitation of crude reserves in Ecuador.447

445 Exhibit C-6.

446 See CL-41, Duke Energy v. Ecuador, Award dated August 18, 2008 at ¶166 (concluding that the alleged breach of investment rights as set forth in Article I of the Treaty constituted an “investment dispute” for purposes of the Treaty).

447 A claimant who submits claims relating to an underlying investment agreement to ICSID is not precluded from also submitting claims under

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300. The contracts constitute “investments” within the meaning of Article I(a) of the Treaty, which provides that

“investment” means every kind of investment in the territory of one Party owned or controlled directly by nationals or companies of the other Party, such as equity, debt, and service and investment contracts.448

301. Article I(1)(a)(i)-(v) sets forth a non-exhaustive and broad list of qualifying investments. These include:

(i) tangible and intangible property, including rights, such as mortgages, liens and pledges;

(ii) a company or shares of stock or other interest in a company or interest in the assets thereof; […]; and

(v) any right conferred by law or contract […].449

an applicable bilateral investment treaty stemming from breaches of the Treaty relating to the investment agreements. See id.; CL-32 Noble Energy v. Ecuador, Decision on Jurisdiction dated March 5, 2008 at ¶150 (explaining that where both the applicable treaty and the underlying investment contracts refer to ICSID arbitration, the primary task is to determine the applicable legal framework of the claims, which can be done in one proceeding).

448 Exhibit C-6.

449 Exhibit C-6. See also CL-33, IBM v. Ecuador, Decision on Jurisdiction and Competence dated December 22, 2003 at ¶43 (examining the Treaty, the Tribunal concluded, “[m]oreover, by the BIT definition, contracts do also constitute or represent investments”).

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302. Burlington’s investment in Ecuador’s hydrocarbons sector falls within the category of investments in Article I(1)(a) to which Ecuador granted its consent to ICSID arbitration.450

303. Burlington holds its investments in Blocks 7, 21, 23 and 24 through wholly owned subsidiaries. Neither Article 25(1) of the ICSID Convention nor the Treaty draws a distinction between direct investments and indirect investments channeled through a subsidiary or another company for the purpose of carrying out a foreign investor’s activities in the host State. To the contrary, Ecuador consented to ICSID arbitration of the claims of an investor holding its investment in Ecuador through a subsidiary. Burlington owns and controls its investments in Ecuador through its 100 percent ownership of the Burlington Subsidiaries. Through its ownership of the Burlington Subsidiaries, Burlington possesses all the rights and obligations to explore, extract and trade natural resources conferred by both the PSCs themselves and the laws of Ecuador.451 Burlington satisfies the ownership requirement under Article I of the Treaty, as it owns and controls its investment in Ecuador indirectly through the Burlington Subsidiaries.452

450 See CL-46, Chevron Corporation and Texaco Petroleum Corporation v. Ecuador, (UNCITRAL) Interim Award dated December 1, 2008 at ¶¶180, 211 (finding that the claimants’ oil exploration and extraction activities in Ecuador would constitute an investment under the Treaty). The Chevron tribunal construed the sub-provisions very broadly based on the plain language of the text as well as a comparison of sub- provision (v) with (i)-(iv)). Id. at ¶¶194-195.

451 See CL-32, Noble Energy v. Ecuador, Decision on Jurisdiction dated March 5, 2008 at ¶130 (shares in a company qualify as an investment under the Treaty).

452 See, e.g., CL-33, IBM v. Ecuador, Decision on Jurisdiction and Competence dated December 22, 2003 at ¶¶44-49 (the Tribunal considered that the claimant indirectly held an investment in Ecuador

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304. Similarly, Article I(1)(a) of the Treaty affords protection to companies of one Party that own or control directly or indirectly investments in the territory of the other Party. Article I(1)(b) of the Treaty defines a “company” of a Party as

any kind of corporation, company, association, partnership, or other organization, legally constituted under the laws and regulations of a Party or a political subdivision thereof whether or not organized for pecuniary gain, or privately or governmentally owned or controlled.453

305. Burlington, a corporation duly organized and existing under the laws of the State of Delaware, United States, is included within the scope of protected companies under the Treaty.454

306. Thus, Burlington has standing to bring its claims under the Treaty before this Tribunal.

IV. ECUADOR AND PETROECUADOR BREACHED THEIR OBLIGATIONS UNDER THE PRODUCTION SHARING CONTRACTS

307. Ecuador and PetroEcuador both breached the PSCs by refusing to either (a) agree to amend the PSCs to indemnify effectively the Block 7 & 21 Tax Consortium from the effects of Law No. 2006-42 or (b) exempt the Block 7 & 21 Tax Consortium from the application of Law No. 2006-42.

through its subsidiary, and was thus entitled to bring claims under the Treaty).

453 Exhibit C-6.

454 CL-42, Certificate of Merger of Burlington Resources Inc., March 31, 2006.

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A. ECUADOR AND PETROECUADOR BREACHED THEIR UNEQUIVOCAL OBLIGATION UNDER THE PSCS TO AGREE TO AMENDMENTS OF THE PSCS NECESSARY TO EFFECT ECONOMIC STABILIZATION FOLLOWING THE ADOPTION OF LAW NO. 2006-42

1. The PSCs Guarantee Economic Stability In The Face Of New Or Increased Taxes

308. Acting pursuant to the authority explicitly provided in the Constitution,455 the Regulations to the Hydrocarbons Law,456 and the Contractual Bases,457 Ecuador and PetroEcuador agreed, in each PSC, to guarantee economic stabilization. In each of the PSCs, Ecuador agreed to modify the PSCs in response to any new tax measure so as to “absorb” the effect of such new tax on the Burlington Subsidiaries.458

309. Clause 11.12 of the Block 7 PSC is a representative example of the economic stabilization clause contained in each of the PSCs:

455 Exhibit C-88, Political Constitution of the Republic of Ecuador, Official Register No. 1 (Constitutional Court), published August 11, 1998 at Article 271.

456 Exhibit C-89, Executive Decree No. 1417 – Regulation of the Hydrocarbons Law, Official Register No. 364, published January 21, 1994 at Article 16.

457 Exhibit C-17, Executive Decree No. 1416, Official Register No. 364, published January 21, 1994 at Article 24.2; Exhibit C-29, Executive Decree No. 2845 – Issuing the Contractual Basis for the Eighth Bidding Round of Participation Contracts for the Exploration and Exploitation of Hydrocarbons, Official Register No. 729, published July 3, 1995 at Article 24.3.

458 Exhibit C-1 at Clause 11.12; Exhibit C-2 at Clause 11.7; Exhibit C-3 at Clause 11.10; Exhibit C-4 at Clause 11.10.

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Modification to the tax system: In the event of a modification to the tax system or the creation or elimination of new taxes not foreseen in this Contract, or a change in the employee profit- sharing regulations in effect on the signature date of this Contract and as described in this Clause, or their interpretation, which have an impact on the economics of this Contract, a correction factor will be included in the production sharing percentages to absorb the impact of the increase or decrease in the tax or employee profit-sharing burden. This correction factor will be calculated by agreement of the Parties and will be subject to the procedure set forth in Article thirty-one (31) of the Regulations for Application of the Law Reforming the Hydrocarbons Law.459

459 Exhibit C-1 at Clause 11.12. Unofficial English translation. In its original Spanish version it reads: Modificación del régimen tributario: En caso de modificación del régimen tributario o de creación o eliminación de nuevos tributos no previstos en este Contrato o de la participación laboral, vigentes a la fecha de suscripción de este Contrato y según están descritos en esta Cláusula, o de su interpretación, que tengan consecuencias en la economía de este Contrato, se incluirá un factor de corrección en los porcentajes de participación, que absorba el incremento o disminución de la carga tributaria o de la participación laboral. Este factor de corrección será calculado entre las Partes y se observará el procedimiento establecido en el artículo treinta y uno (31) del Reglamento para la Aplicación de la ley Reformatoria a la Ley de Hidrocarburos.

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310. These mandatory provisions apply to tax increases as well as new taxes.460

2. Law No. 2006-42 Is A Tax

311. In enacting Law No. 2006-42, Ecuador studiously avoided using the term “tax” to characterize the operation of the law on investors. However, simply because Law No. 2006-42 does not call itself a tax does not change the fact that, under Ecuadorian law, it is a tax.

312. As set forth above, Law No. 2006-42 mandates that the Burlington Subsidiaries pay a percentage of the revenue earned on the sale of the companies’ share of crude production. The amount is calculated based on the previous month’s market price and is applied to the relevant Burlington Subsidiary’s monthly share of production. This arrangement meets the legal definition of a “tax” “imposed” by the Government under Ecuadorian law.461

313. Law No. 2006-42 is a “tax” under Ecuadorian law because it is a “mandatory obligation in cash or in kind that the State, in use of its authority, demands by virtue of the Law, without being compelled to any consideration with respect to the taxpayer directly relating to the obligation.”462 The mandatory nature of

460 Each of the stabilization clauses addresses both “modification to the tax system” and “the creation or elimination of new taxes not foreseen in [the] Contract.” 461 CL-47, Ecuador Tax Code, Official Register Supplement 38, published June 14, 2005 at Article 1.

462 CL-48, Catalina García Vizcaíno, DERECHO TRIBUTARIO: CONSIDERACIONES ECONÓMICAS Y JURÍDICAS (1999) at 46. Unofficial English translation. In its original Spanish version it reads: […] prestación obligatoria, en dinero o en especie, que el Estado, en ejercicio de su poder de imperio, exige, en virtud de ley, sin que se obligue a una contraprestación,

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Law No. 2006-42 has been explained repeatedly by Ecuador in the context of the coactiva process. Similarly, there has been no reference in the Law itself or in practice to Ecuador or PetroEcuador providing “consideration” for the payments made under Law No. 2006-42 by the Block 7 & 21 Tax Consortium. Thus, Law No. 2006-42 meets the definition of “tax” under Ecuadorian Law.

314. The Law No. 2006-42 payments also fit the broader definition of “imposition” as required for taxes under Ecuadorian law, which provides that a payment must be “destined for financing public services.”463 As described in a 1994 ruling by the Ecuador Supreme Court of Justice, “an indispensible element” of the imposition involves “its purpose or performance of its objectives, the existence of public services to satisfy public needs […].”464

respecto del contribuyente, directamente relacionada con dicha contraprestación.

463 CL-49, José Vicente Troya Jaramillo, ESTUDIOS DE DERECHO TRIBUTARIO (1984) at 26. Unofficial English translation. In its original Spanish version it reads: ¿Qué son los tributos? Son prestaciones pecuniarias que el Estado y los sujetos activos exigen a los contribuyentes en virtud de su potestad de imperio, y están destinadas a la financiación de los servicios públicos.

464 CL-50, Specialized Fiscal Chamber of the Supreme Court of Justice, Judicial Gazette Series 17, No. 12, March 23, 1994 at 390. Unofficial English translation. In its original Spanish version it reads: Constituyendo por tanto un elemento indispensable, para la razón de ser del tributo, su finalidad o el cumplimiento de sus fines, la existencia de servicios públicos para satisfacer necesidades públicas […].

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315. Decree 1672 – which initially implemented Law No. 2006-42 – directed that the proceeds of the tax be made part of the General State Budget (if the API of the crude oil were under 23° API) or deposited in an account kept by the State at the Central Bank of Ecuador (for crude oil over 23° API).465 In either case, the State utilizes the proceeds for public services.

316. The true nature of Law No. 2006-42 as a tax is also supported by legislation enacted by Ecuador on December 29, 2007 (December 2007 Tax Law), which was to apply to the investments of those foreign investors that Ecuador forced to migrate to service agreements as an alternative to expulsion.466 The December 2007 Tax Law imposes a windfall profits tax on investors with new agreements for exploration and exploitation of non-renewable resources.467 Notably, both Law No. 2006-42 and the December 2007 Tax Law apply to all “extraordinary revenues” over a contract reference price, but in the December 2007 Tax Law, Ecuador appropriately labels them a “tax,” whereas in Law No. 2006-42, Ecuador labels them a “participation.”468 Furthermore, not only was the December 2007 Tax Law created with almost identical characteristics as the lien established by Law No. 2006-42, but Ecuador ordered that payments made under Law No. 2006-42 would constitute a

465 Exhibit C-8, Decree No. 1672, Official Register No. 312, published July 13, 2006 at Article 8; see also CL-51, Organic Law on Fiscal Responsibility, Stabilization and Transparency, Official Register No. 334, published August 15, 2006 at Article 14.

466 CL-52, Reformatory Law for Tax Equity of Ecuador, Official Register No. 242, published December 29, 2007.

467 Id. at Article 164.

468 Id.

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tax credit for the new tax, thus admitting that Law No. 2006-42 is a tax.469

317. Indeed when President Correa recently complained about Burlington’s decision to deposit its payments under Law No. 2006-42 in a segregated account, he specifically stated that Burlington had not “paid [its] taxes on extraordinary profits.”470 In addition, Ecuador acted in a manner consistent with the notion that Law No. 2006-42 is a tax. For example, when Ecuador notified the foreign investors in Blocks 7 and 21 of the reference price for the purposes of calculating payments under Law No. 2006-42, it did so by contacting the Block 7 & 21 Tax Consortium.471 This entity had been created seven months earlier at the behest of the Ecuadorian IRS for the purpose of paying taxes.472 From that point forward, Ecuador continued to accept Law No. 2006-42 payments from the Block 7 & 21 Tax Consortium.

318. Considering Law No. 2006-42 in a global context, the types of payments required under Law No. 2006-42 have been universally characterized elsewhere as “taxes.” For example, on April 15, 2008, Venezuela approved an “Excess Profits Tax,” pursuant to which, if the price of Brent crude oil exceeds US$70 per barrel, oil producers must pay, for each barrel of oil

469 Id. at Article 171 (“Any amount paid to the State for extraordinary income by reason of other regulations shall constitute a credit for this tax.”) (original Spanish: “Los valores que por otras normas hayan sido pagados al estado en concepto de ingresos extraordinarios, constituirán crédito de este impuesto.”).

470 Exhibit C-51, Transcript of President Correa Press Conference, February 14, 2009 at 2-3; see also ¶237 above. 471 Exhibit C-178, Letter from Stalin Napoleón Salgado L. to Laurent Combe and related correspondence, July 6, 2006.

472 See ¶179 above.

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exported, an additional 50 percent tax on the difference between the market price of Brent Crude oil (up to US$100 per barrel) and US$70. If the Brent crude oil price exceeds US$100 per barrel, exporters must also pay, for each barrel of oil exported, a 60 percent tax on the difference between the market price of Brent crude oil and US$100. 473

319. Similarly, in 2006 the Government of Mongolia enacted legislation known as the Windfall Profit Tax Law, pursuant to which any gold sales at prices in excess of US$500 per ounce are subject to tax at the rate of 68 percent on the amount exceeding US$500 per ounce.474 In the cases of Venezuela and Mongolia, the structure of the tax is similar to the payments at issue in this case: all revenue deriving from that portion of the price above a benchmark price is taxed at a particular percentage that is higher than the otherwise applicable tax rate. Therefore, any payment made under Law No. 2006-42 is in fact a “tax.”

473 CL-53, Law of Special Assessment on Extraordinary Prices on the International Hydrocarbons Market, Official Gazette No. 38,910, published April 15, 2008 at Article 1.

474 CL-12, Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. Mongolia, (UNCITRAL) Order on Interim Measures dated September 2, 2008 at ¶¶4-5.

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3. Ecuador And PetroEcuador Breached The PSCs By Refusing To Absorb The Effects Of Law No. 2006-42 For The Block 7 & 21 Tax Consortium

320. Law No. 2006-42 is a tax not anticipated in the PSCs. On the contrary, it is a tax that has severe consequences on the economics of the PSCs – confiscating initially 50 percent of all revenues above the contract reference price and subsequently 99 percent of all revenues above the contract reference price. Therefore, Ecuador was obligated not to ignore the Burlington Subsidiaries’ requests that Ecuador absorb the effects of Law No. 2006-42 on their investments.

321. The Burlington Subsidiaries sent letters to Ecuador and PetroEcuador following the enactment of Law No. 2006-42 in April 2006 (through Perenco, the operator of Blocks 7 and 21)475 and the promulgation of Decree 662 in October 2007, imposing the 99 percent tax.476 In each case, Burlington Oriente requested that the production sharing percentages for Blocks 7 and 21 be adjusted to account for the new tax. In the second round of letters, Burlington Andean and Burlington Ecuador made the same request regarding Blocks 23 and 24. In doing so, the Burlington Subsidiaries carried out the procedural requirements under the PSCs and Ecuadorian law to inform Ecuador of the effects of Law No. 2006-42 on their investments and to request a process for correcting the effects of the Law. However, the Respondents refused to respond despite a contractual obligation under Clause 5.2.1 of the PSCs to

475 Exhibit C-11, Letter from Laurent Combe to Dr. Galo Chiriboga, December 18, 2006; Exhibit C-12, Letter from Laurent Combe to Dr. Galo Chiriboga, December 18, 2006.

476 Exhibit C-43, Letters from A. Roy Lyons to Procurador General del Estado and Empresa Estatal Petroleos del Ecuador, dated November 28, 2007.

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“respond promptly” to the requests or requirements of the Burlington Subsidiaries.477

322. Ecuador and PetroEcuador’s failure to stabilize the effects of Law No. 2006-42 on the operational projects – Blocks 7 and 21 – breached their obligations under the Block 7 and 21 PSCs. Furthermore, Ecuador and PetroEcuador’s refusal to respond to Burlington Andean and Burlington Ecuador’s requests to nullify the potential effects of Law No. 2006-42 also breached the Block 23 and 24 PSCs. As explained further below, Ecuador and PetroEcuador are not excused from their obligations under Clause 11 of the PSCs simply because those projects are in force majeure. Law No. 2006-42 was intended to apply to any future production from Blocks 23 and 24. Ecuador and PetroEcuador’s refusal to respond to the Burlington Subsidiaries’ requests has made those projects virtually worthless if Burlington Andean and Burlington Ecuador begin exploiting Blocks 23 and 24.

B. ALTERNATIVELY, ECUADOR AND PETROECUADOR BREACHED THEIR OBLIGATION TO EXEMPT THE BLOCK 7 & 21 TAX CONSORTIUM FROM THE EFFECTS OF LAW NO. 2006-42

323. Ecuador and PetroEcuador still have not explained their refusal to agree to the adjustment in the PSCs to absorb the effects of Law No. 2006-42 on the Burlington Subsidiaries. Even if they believed that Law No. 2006-42 were not a tax, Ecuador still

477 Exhibits C-1, C-2, C-3 and C-4. Unofficial English translation. In its original Spanish version it reads: “Atender oportunamente […].” Similarly, Ecuador and PetroEcuador did not respond to Claimants’ requests for reimbursement of payments made to the Amazon Road Fund under the “ECORAE tax.” See Exhibit C-11, Letter from Laurent Combe to Dr. Galo Chiriboga, December 18, 2006 (Request of adjustment of “X” Factors. Participation Contract for Block 21).

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should have exempted the Burlington Subsidiaries from the application of Law No. 2006-42 as it was a prohibited royalty.

1. If Law No. 2006-42 Is Not A Tax, Then It Is A Royalty

324. Under Ecuadorian law, a royalty, or regalía, is a

payment in cash or in kind to the State by […] a concessionaire or a person who has a contract or an exploitation permit over a mining deposit [or an oil reservoir] for the mere fact of utilizing that resource.478

325. This concept is echoed in other legal texts describing the operation of a royalty. For example, the Diccionario Panhispánico de Dudas defines royalty as

an amount paid to the owner of a right in exchange for permission to use it […].479

326. Thus, the defining characteristic of a royalty is its imposition of a fee on a foreign investor for the right to extract non-

478 CL-54, Alvaro Bahamón, DERECHO DE MINAS Y PETRÓLEOS (1988) at 274. Unofficial English translation. In its original Spanish version it reads: […] pago, en dinero o en especie, que debe efectuar, por tonelada extraída por un concesionario o quien tenga contrato o permiso de explotación de un yacimiento minero, a favor del Estado, por el solo hecho de utilizar el recurso.

479 CL-55, Royal Spanish Academy, DICCIONARIO PANHISPÁNICO DE DUDAS (2005). Unofficial English translation. In its original Spanish version it reads: […] la cantidad que se paga al propietario de un derecho a cambio del permiso para ejercerlo […].

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renewable, natural resources. As Chilean jurist Armando Uribe has stated with regard to extraction contracts in the mining industry:

The royalty system consists in considering mines as the State’s patrimonial and exclusive possession. The State grants mines to private persons who may use them at their own discretion by paying or sharing their products […] In this system, the State may exploit the deposit directly in the same manner as a private individual exploits a property of his own, or may sell or lease the mines or enter into any contracts pertaining to them, thus establishing the various ways adopted by this system as the basis of mining legislation […].480

327. To the extent that it is not a tax, Law No. 2006-42, operates as a royalty in the sense that it is a pre-condition for an investor to obtain its share of the crude production. Moreover, Law No.

480 CL-56, Armando Uribe Herrera, MANUAL DE DERECHO DE MINERÍA (1948) at 30. Unofficial English translation. In its original Spanish version it reads: El sistema regalista consiste en considerar a las minas como bienes del dominio patrimonial y exclusivo del Estado, en el que las otorga a los particulares disponiendo de ellas a su arbitrio mediante el pago o participación en los productos […] Dentro de este sistema, el Estado puede explotar directamente el yacimiento en la misma forma que lo puede hacer un particular con un bien propio, o venderlas, arrendarlas o celebrar cualquier contrato con ellas, marcándose de esta manera las distintas formas que puede tomar este sistema, como fundamento de una legislación minera […].

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2006-42 is calculated in a manner that is similar to the manner in which a State would calculate a royalty.

328. Historically, relevant Ecuadorian laws have provided texture to the characteristics of a royalty. Article 26 of the Petroleum Law enacted in 1961 (which has been replaced by the Hydrocarbons Law) provided that royalties collected in cash on an oil concession were to be established on the preceding quarter’s average of fuel oil and gasoline prices quoted in the world and Ecuadorian markets.481

329. Similarly, the Law No. 2006-42 payments made by the Block 7 & 21 Tax Consortium were calculated based on the amount of production taken from the Blocks, without taking into account production costs, and the price to be used in calculating the Law No. 2006-42 payments on current crude production is the previous month’s average sales.

2. Pursuant To The PSCs, The Burlington Subsidiaries Are Exempted From All Royalties

330. Under the PSCs for Blocks 7, 21 and 24, the Burlington Subsidiaries are exempted in all circumstances from the payment of royalties for the duration of the PSCs.482 Clause 11.9 of the Block 7 PSC provides a representative example:

Exemptions: The Contractor, pursuant to the provisions of the revised Article fifty-four (54) of the Hydrocarbons Law, is exempt from the payment of entry fees, surface rights, royalties,

481 CL-57, Petroleum Law, Official Register Supplement No. 356, published November 6, 1961 at Article 26.

482 Exhibit C-1 at Clause 11.9; Exhibit C-2 at Clause 11.6; Exhibit C-4 at Clause 11.9.

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contributions to compensation projects and contributions to technological research.483

331. The royalty exemption applies equally to the Block 23 PSC. Even though the Block 23 PSC does not expressly exempt investors from royalties, the exemption is mandated by the Hydrocarbons Legal Framework and the Contracting Basis, which govern the PSC under principles of Administrative Law, and Clause 22.1, which incorporates the legal framework into the PSC. Were the Block 23 PSC to conflict with the Hydrocarbons Legal Framework, the Legal Framework would prevail.

332. Article 44 of the Hydrocarbons Law provides the general rule that the State is entitled to royalties and other related payments.484 However, Article 54 of the Hydrocarbons Law provides an exception to this general rule, establishing that parties to participation contracts – such as the Burlington Subsidiaries – are exempt from paying royalties and other

483 Exhibit C-1. Unofficial English translation. In its original Spanish version it reads: Exenciones: La Contratista, según el artículo cincuenta y cuatro (54) reformado de la Ley de Hidrocarburos, está exenta del pago de primas de entrada, derechos superficiarios, regalías y aportes en obras de compensación y de la contribución a la investigación tecnológica.

484 Exhibit C-76, Supreme Decree No. 1459 – Hydrocarbons Law, Official Register No. 322, published October 1, 1971 at Article 41 (current Article 44).

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related payments.485 The PSCs explicitly incorporate the royalty exemption provided in Article 54.486

333. This royalty exemption was critical to the economics of the Burlington Subsidiaries’ investments in Ecuador. It complements the economic stabilization clause and ensures maintenance of the agreed financial equilibrium.

334. Despite these explicit provisions in Law No. 2006-42, Ecuador added “participation over surpluses from oil selling prices” as another category of payments to be collected by the State under Article 44 of the Hydrocarbons Law but made no corresponding change to Article 54 to exempt parties to participation contracts from paying such a “participation.” 487 Ecuador then refused to exempt the Block 7 & 21 Tax Consortium from the application of Law No. 2006-42. Similarly, Ecuador failed to exempt Burlington Andean and Burlington Ecuador from the application of Law No. 2006-42 with respect to Blocks 23 and 24 respectively.

335. In short, to the extent that Law No. 2006-42 imposes a royalty on the Burlington Subsidiaries’ investments, Ecuador has breached the royalty exemption provisions in the PSCs.

C. ALTERNATIVELY, ECUADOR AND PETROECUADOR BREACHED THEIR OBLIGATIONS UNDER THE PSCS BY

485 Exhibit C-15, Law No. 1993-44, Official Register No. 326, published November 29, 1993 at Article 12 (amending Article 54 of the Hydrocarbons Law).

486 Exhibit C-1 at Clause 11.9; Exhibit C-2 at Clause 11.6; Exhibit C-4 at Clause 11.9.

487 Exhibit C-7, Law No. 2006-42, Official Register No. 257, published April 20, 2006. Unofficial English translation. In its original Spanish version it reads: “participación en los excedentes de los precios de venta del petróleo.”

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TAKING AMOUNTS FROM THE BURLINGTON SUBSIDIARIES IN EXCESS OF THEIR DEFINED PARTICIPATIONS

336. While there is little doubt that Law No. 2006-42 either imposes an impermissible tax upon the investments of the Burlington Subsidiaries, or violates the royalty exemption guaranteed in the PSCs, at the very least, application of Law No. 2006-42 to the investments of the Burlington Subsidiaries deprives these investors of their fundamental right to a defined participation in crude production in accordance with the formula guaranteed in each of the PSCs.488

337. As a representative example, Clause 5.3.2 of the Block 7 PSC provides the right to

[r]eceive the Contractor’s Share of the Production at the Inspection and Delivery Center and freely dispose of the Contractor’s Share of the Production, pursuant to the provisions of Clause eight point one (8.1).489

338. Thus, each PSC provided each party with the right to a defined participation in production determined in accordance with an agreed formula. At Clause 8.1 of each PSC, Ecuador and PetroEcuador set forth the formula that governs the actual

488 Exhibit C-1 at Clause 5.3.2; Exhibit C-2 at Clauses 5.3.2, 5.3.3; Exhibit C-3 at Clauses 5.3.2, 5.3.3; Exhibit C-4 at Clause 5.3.2.

489 Exhibit C-1. Unofficial English translation. In its original Spanish version it reads: Derechos de la Contratista: La Contratista tendrá derecho a: […] CINCO PUNTO TRES PUNTO DOS.- Recibir en el Centro de Fiscalización y Entrega y disponer libremente de la Participación de la Contratista, según lo establecido en la cláusula ocho punto uno.

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production participation that the Burlington Subsidiaries are to receive on a monthly basis.490 Furthermore, Ecuador and PetroEcuador guaranteed the Burlington Subsidiaries the absolute right to dispose freely of the participations on the market once title passed to the respective Burlington Subsidiaries at the delivery point.491 The right of the Burlington Subsidiaries to receive crude and to dispose freely of this participation are the essential elements of these Production Sharing Contracts.

339. Ecuador’s application of Law No. 2006-42 to Burlington Oriente’s investments in Block 7 and Block 21, and its refusal to acknowledge that Law No. 2006-42 does not apply to Burlington Andean and Burlington Ecuador’s investments in Blocks 23 and 24, breaches the Subsidiaries’ right to their ratable participation in production. Law No. 2006-42 imposes a payment requirement on the Burlington Subsidiaries’ crude production on a monthly basis. Under this scheme, the Burlington Subsidiaries do not receive their full participation in crude because every dollar earned on the sale of crude received over the contract reference price goes to the Government. Thus, Law No. 2006-42 fundamentally alters the parties’ agreement by depriving the Burlington Subsidiaries of their right to a fixed participation in crude production and their right to market that participation.

490 Exhibit C-1, Exhibit C-2, Exhibit C-3 and Exhibit C-4.

491 Exhibit C-1 at Clause 5.3.2; Exhibit C-2 at Clauses 5.3.2, 5.3.3; Exhibit C-3 at Clauses 5.3.2, 5.3.3; Exhibit C-4 at Clause 5.3.2.

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D. ECUADORIAN LAW PROVIDES NO APPLICABLE EXCEPTION THAT WOULD EXEMPT ECUADOR AND PETROECUADOR FROM THEIR OBLIGATIONS

340. Any attempt by Ecuador or PetroEcuador to justify or to legitimize the application of Law No. 2006-42 to the Burlington Subsidiaries’ investments is futile.

341. First, Ecuador and PetroEcuador are prohibited in Clause 15.2 of the PSCs from unilaterally modifying the PSCs without the agreement of the parties.492 In Article 31 of the Hydrocarbons Law, Ecuador expressly prohibited any unilateral modifications to the PSCs.493 These provisions rest upon the principle of legality – a cornerstone of Ecuador’s public administrative law.494 The purpose of the principle of legality is to prevent arbitrary action by the State. The Ecuadorian Constitution guarantees the principle of stability of the legal regime, which means that the State cannot make decisions arbitrarily if not contemplated in Ecuador’s body of laws. Essentially, the principle of legality

means that, while exercising authority, the legal system bans any practice that could lead to uncertainty, in other words, to the impossibility of anticipating or foreseeing the juridical consequences of a conduct; it is not a rule susceptible to being invoked in order to valuate

492 Exhibit C-1, Exhibit C-2, Exhibit C-3 and Exhibit C-4.

493 Exhibit C-15, Law No. 1993-44, Official Register No. 326, published November 29, 1993 at Article 10 (amending Article 31).

494 Exhibit C-88, Political Constitution of the Republic of Ecuador, Official Register No. 1 (Constitutional Court), published August 11, 1998 (the principle of legality was contemplated in Article 119 of the 1998 Constitution).

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the acts of authority that create specific norms if resulting from the regulated powers.495

342. While it is true that the PSCs are public administrative law contracts, Ecuador’s exercise of its administrative law powers is limited under the PSCs and the Hydrocarbons Law, which provides the fundamental framework underlying the PSCs. In the Hydrocarbons Law, Ecuador limited its administrative law powers with respect to the PSCs to specific exorbitant powers.496 These powers do not include the right to modify unilaterally the PSCs. Rather than preserve its powers with respect to the contracts, this case is extraordinary with respect to how diligently Ecuador committed itself to the guarantees given to the Burlington Subsidiaries under the PSCs and prevented itself from altering those guarantees. As detailed in Section II above, each guarantee flows through the legal framework into the PSCs. One fundamental self-imposed limitation was the guarantee that Ecuador would not, and could not, unilaterally modify the PSCs.

495 CL-58, First Chamber for Civil and Commercial Matters, Supreme Court of Justice, Resolution No. 147-2002, Official Register No. 663, published September 16, 2002 at 15. Unofficial English translation. In its original Spanish version it reads: significa que el orden jurídico proscribe cualquier práctica en el ejercicio del poder que conduzca a la incertidumbre, es decir, a la imposibilidad de anticipar o predecir las consecuencias jurídicas de la conducta; que no se trata de una regla susceptible de invocarse para valorar los actos de poder creadores de normas particulares, si son el resultado de facultades regladas.

496 See, e.g., Exhibit C-15, Law No. 1993-44, Official Register No. 326, published November 29, 1993 at Article 10 (amending Article 31); Exhibit C-76, Supreme Decree No. 1459 – Hydrocarbons Law, Official Register No. 322, published October 1, 1971 at Article 68 (current Article 74), Article 70 (current Article 76).

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343. Alongside the Hydrocarbons Law, Ecuador drew upon fundamental principles of civil law to limit its power to alter the specific guarantees provided to the Burlington Subsidiaries in the PSCs. For example, in Clause 3.1 of the PSCs, Ecuador incorporated by reference Title XIII, Book IV of the Civil Code of Ecuador, which includes the fundamental principle of pacta sunt servanda.497 Ecuador’s own Attorney General has admitted that the Ecuadorian Civil Code prevents Ecuador from unilaterally modifying the PSCs, stating:

[…] in the specific case of the Participation Contract for the Tarapoa Block, in force with Andes Petroleum Company Ltd., Law 2006-42 reforming the Hydrocarbons Law does not apply, because this contract already assured the Ecuadorian State a participation in the economic benefits derived from the increase in the price of crude oil exploited by this field.

With respect to the distribution percentage, the Participation Contract, which constitutes law for the contracting parties and cannot be modified without their joint agreement, consistent with the principle established by Article 1561 of the Codified Civil Code – which applies to the Contract, which is subject to Ecuadorian legislation, according to that stipulated in Clause Twenty-Two, number 22.1 of the same – has

497 Exhibit C-1, Exhibit C-2, Exhibit C-3 and Exhibit C-4. See CL-59, Ecuador Civil Code, Official Register No. 46, published June 24, 2005 at Article 1561 (providing that “all contracts legally executed become a law upon the contracting parties and cannot be invalidated except with their mutual consent or due to legal causes”) (original Spanish: “Todo contrato legalmente celebrado es una ley para los contratantes, y no puede ser invalidado sino por su consentimiento mutuo o por causas legales.”).

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established a modality of distribution equivalent to that provided in Law 2006-42, the same which should apply in the case of this contract, pursuant to the principle of legal security for the parties.498

344. The Ecuadorian Constitution according to which the PSCs were adopted provided the State with the authority to bind itself in this manner. Article 271 of the Constitution then in effect provided:

The State will guarantee national and foreign capital that is invested in production, destined especially for internal consumption and for export. The law may grant special treatment to public and

498 Exhibit C-188, Letter from Diego García Carrión to Luis Jaramillo Arias, July 18, 2008 (emphasis in original). Unofficial English translation. In its original Spanish version it reads: […] en el caso específico del Contrato de Participación sobre el Bloque Tarapoa, vigente con Andes Petroleum Company Ltd., no se aplica la Ley 2006-42 reformatoria a la Ley de Hidrocarburos, puesto que en el contrato ya asegura una participación del Estado ecuatoriano en los beneficios económicos derivados del incremento del precio del petróleo crudo que se explote en dicho campo. En cuanto al porcentaje de distribución, el Contrato de Participación vigente, que constituye ley para las partes contratantes y no puede ser modificado sino por acuerdo entre ellas, atento el principio establecido por el artículo 1561 de la Codificación del Código Civil – que se aplica al Contrato por estar sujeto a la legislación ecuatoriana, según lo estipula la cláusula Vigésimo Segunda, numeral 22.1 del mismo – ha establecido una modalidad de distribución equivalente a la prevista en la Ley 2006-42, la misma que debe aplicarse en el caso de este contrato, en beneficio del principio de seguridad jurídica para las partes.

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private investment in less developed zones or in activities in the national interest. The State, in contracts entered into with investors, can establish special guarantees and assurances, to the effect that the agreements will not be modified by laws or other actions of any type that affect their terms.499

345. Moreover, the Investment Guarantee Law mandates that Ecuador provide all investors with a secure legal framework, including tax stability.500 The implementing regulations of this Law provide for the legal stability of all contracts and that guarantees ratified in investment contracts or by the legislature cannot be unilaterally modified by the State.501

499 Exhibit C-88, Political Constitution of the Republic of Ecuador, Official Register No. 1 (Constitutional Court), published August 11, 1998 (emphasis added). Unofficial English translation. In its original Spanish version it reads: El Estado garantizará los capitales nacionales y extranjeros que se inviertan en la producción, destinada especialmente al consumo interno y a la exportación. La ley podrá conceder tratamientos especiales a la inversión publica y privada en las zonas menos desarrolladas o en actividades de interés nacional. El Estado en contratos celebrados con inversionistas, podrá establecer garantías y seguridades especiales, a fin de que los convenios no sean modificados por leyes u otras disposiciones de cualquier otra clase que afecten a sus cláusulas.

500 Exhibit C-13, Law No. 46, Official Gazette No. 219, published December 19, 1997 at Articles 21, 22.

501 CL-60, Substitute Regulations of the Law of Promotion and Guarantee of Investments, Decree No. 1132, Official Gazette No. 252, published January 25, 2001 at Article 9.

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346. Second, any changes to the legal framework governing hydrocarbons concessions do not apply to these PSCs. Ecuador and PetroEcuador bolstered their guarantee of no new taxes by including Clause 22 in each PSC, which explicitly incorporates the Ecuadorian legal framework in effect at the time of the execution of the PSCs into the contracts:

Applicable Legislation: This Contract is governed exclusively by Ecuadorian legislation, and laws in force at the time of its signature are understood to be incorporated by reference.502

347. Each PSC specifically identified the relevant applicable laws.503 And in the event that Ecuador changed its tax law, Ecuador provided a stabilization clause to absorb the effects of any new taxes that had any economic effect on the PSCs.

348. Clause 22.1 is based on the fundamental principle under Ecuadorian law of non-retroactivity.504 The principle of non- retroactivity

guarantees the security and stability of rights: Whoever executes a contract in accordance with

502 Exhibit C-1 at Clause 22.1; Exhibit C-2 at Clause 22.1; Exhibit C-3 at Clause 22.1; Exhibit C-4 at Clause 22.1. Unofficial English translation. In its original Spanish version it reads: Legislación aplicable: Este contrato se rige exclusivamente por la legislación ecuatoriana y en él se entienden incorporadas las leyes vigentes al tiempo de su celebración.

503 Exhibit C-1 at Clause 22.1.4; Exhibit C-2 at Clause 22.1.1; Exhibit C-3 at Clause 22.1.3; Exhibit C-4 at Clause 22.1.2.

504 CL-59, Ecuador Civil Code, Official Register No. 46, published June 24, 2005 at Article 7.

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the law in force should not be concerned about any possible changes that the legislation might endure.505

349. Clause 22.1 also embodies Article 1561 of the Civil Code – pacta sunt servanda – which provides that the contract becomes a law upon the contracting parties.506

350. Ecuadorian officials have questioned the legality of Law No. 2006-42 as a mere attempt to create a tax and apply it retroactively to existing PSCs. With respect to Ecuador’s enactment of Law No. 2006-42, President Correa has stated that “they accused us of threatening rule of law, of committing an exaggeration, and they were probably right […].”507 During the Congressional debates on Law No. 2006-42, one representative noted that the question before the Congress was “whether or not we can by law unilaterally amend oil contracts with retroactive

505 CL-61, Judicial Gazette, Year CIV, Series XVII, No. 2, Resolution No. 205-2003, published September 25, 2003 at 3838. Unofficial English translation. In its original Spanish version it reads: […] garantía de seguridad y estabilidad de los derechos: quien ha actuado de conformidad con la ley vigente, no tiene que preocuparse por unos posibles cambios que posteriormente pueda sufrir la legislación.

506 CL-59, Ecuador Civil Code, Official Register No. 46, published June 24, 2005 at Article 1561.

507 Exhibit C-179, Mandatory Dialogue with the Oil Companies, EL TELÉGRAFO, August 10, 2008. Unofficial English translation. In its original Spanish version it reads: nos acusaron de atentar contra la seguridad jurídica, de cometer una exageración, probablemente tengan razón […].

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effect. That and nothing else is the legal discussion.”508 Law No. 2006-42 is legally flawed in that it forces upon all production sharing contracts the participation regime included in only some of them. Referring to the price variable method adopted in the 1995 Tarapoa contract, one representative noted:

351. Even if Ecuador were able to craft some view of Ecuadorian public administrative law to suggest that Ecuador has the power to alter its explicit commitments in the PSCs, Ecuador would still be legally required to compensate the Burlington Subsidiaries. According to a fundamental tenet of public administrative law – responsibility – the State is responsible for

508 Exhibit C-177, Second Debate of the Project of the Reformatory Law of the Law of Hydrocarbons, Minutes No. 25-227, Special Evening Session, National Congress of Ecuador, March 29, 2006 at 103. Unofficial English translation. In its original Spanish version it reads: […] si mediante ley podemos o no modificar, unilateralmente, contratos petroleros con efecto retroactivo. Esa y no otra es la discusión juridica.

509 Id. at 73. Unofficial English translation. In its original Spanish version it reads: Vea, como que parece copiado, esa es la difusión que está planteando el Gobierno, lo que ya está contemplado en un contrato y queremos que esto que está contemplado en un contrato, se incorpore en el resto de contratos.

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the harm caused to private entities under administrative contracts.510

352. Ecuador’s guarantees to the Burlington Subsidiaries in the PSCs, such as the specific incorporation of the principles of pacta sunt servanda and non-retroactivity, were chosen by Ecuador and incorporated into the PSCs. These provisions were not the product of an arm’s-length negotiation. These obligations were Ecuador’s choice, and Ecuador chose to repeat them throughout the legal framework and the PSCs. It is difficult to imagine what more Ecuador could have done to bind itself to these legal commitments and to guarantee the Burlington Subsidiaries their rights under the PSCs.

353. Third, while Ecuador has attempted to justify Law No. 2006-42 based on changed conditions as a result of the fluctuations in the price of oil, the principle of rebus sic stantibus is unavailable to excuse Ecuador’s breaches of the PSCs.511 Pacta sunt servanda is the governing principle of the Ecuadorian contractual system.512 As mentioned above, the PSCs specifically reference Title XIII, Book IV of the Civil Code, which includes the

510 The principle of responsibility is embodied in Article 271 of the Constitution and in other areas throughout Ecuadorian law. Exhibit C-88, Political Constitution of the Republic of Ecuador, Official Register No. 1 (Constitutional Court), published August 11, 1998 at Article 271.

511 See e.g., Exhibit C-174, Letter from Alfredo Palacio Gonzalez to Wilfredo Lucero Bolaños, March 1, 2006 (invoking the principle of rebus sic stantibus to justify enactment of Law No. 2006-42); CL-62, Constitutional Tribunal, Case Nos. 0008-06-TC and 0010-06-TC, Official Register No. 350 published September 6, 2006 at 20.

512 CL-63, First Chamber for Civil and Commercial Matters, Supreme Court of Justice, Official Register No. 201, Resolution No. 324, published November 10, 2000 at 24.

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principle of pacta sunt servanda, but not rebus sic stantibus.513 On this basis, Ecuador clearly intended to be bound by the terms of the PSCs. In the event that the two principles conflict, the principle that is specifically referenced in the PSCs should prevail over the more remote, less fundamental principle that is an infrequently used exception in Ecuadorian law.

354. Regardless, even if the principle of rebus sic stantibus were a relevant consideration, it would be inapplicable in these circumstances. This principle applies only where truly unforeseeable circumstances render one party unable to perform the contract.514 Changes in the price of oil provide no

513 CL-59, Ecuador Civil Code, Official Register No. 46, published June 24, 2005 at Article 1561.

514 CL-64, Arturo Alessandri R. et al., TRATADO DE LAS OBLIGACIONES: DE LAS OBLIGACIONES EN GENERAL Y SUS DIVERSAS CLASES (2001) at 183 (noting that rebus sic stantibus applies only “when the situation that existed at the time of contract execution or that the parties knew when they entered into the contract suffers a deep change, making it very difficult for one of the parties to perform”) (original Spanish: “[…] cuando la situación de hecho que existía al tiempo del contrato o que las partes tuvieron en vista al obligarse, sufre un cambio profundo que hace muy gravosa la prestación de una de las partes […].”) (emphasis added); CL-65, Juan Carlos Dörr Zegers, Notes Regarding the Theory of Lack of Foresight, REVISTA CHILENA DE DERECHO 253 (1985) at 253 (observing that the principle applies to cases where “the equilibrium is shattered when an event occurs in brusque, sudden, violent and unpredictable fashion that radically changes the circumstances existing at the time of entering into the contract”) (original Spanish: “[…] el equilibrio roto al producirse de un modo brusco, repentino, violento, imprevisible, un acontecimiento sobreviniente que cambiara radicalmente las circunstancias existentes en el momento de contratar […].”) (internal citations omitted); CL-66, Enrique L. Abatti & Ival Rocca, TEORÍA DE LA IMPREVISIÓN (2002) at 3 (noting that the doctrine “was not instituted to rectify ‘bad deals’ or to correct [a party’s] commercial or financial mistakes. It does not protect only one of the parties from the destructive consequences of the contract. The idea is to expurgate it from a supervening inequity stemming from circumstances

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justification for unilateral modification of the PSCs by Ecuador. Ecuador and PetroEcuador created a sophisticated participation formula and established specific tax rates as part of a broader legal framework. As with other commodities, the price of oil has fluctuated greatly for over 100 years. Further fluctuations in price were to be expected, yet price was not a component in the participation formula. Ecuador knew how to recalibrate the economics of these PSCs in the event of shifts in the price of oil as it had done in contracts with other foreign investors. It chose not to do so.515 Ecuador also established a tax stabilization clause that would address increases or decreases in the applicable tax rate.516 Yet, Ecuador did not provide that the tax rates established in the PSCs should vary according to fluctuations in price. Rather, the PSCs struck a particular balance between PetroEcuador and private investors, with those investors carrying the risk associated with developing the projects, but also enjoying any potential upside regarding price (and, at the same time, suffering from any downside).

alien to the parties and to the object or purpose of the contract.”) (original Spanish: “[…] no ha sido instituida para rectificar ‘malos negocios’ ni para subsanar errores comerciales ni financieros de los mismos. No protege singularmente a una de las partes de consecuencias destructoras del contrato, se trata de expurgarla de una sobrevenida iniquidad nacida por circunstancias ajenas a las partes y al objeto o fin del negocio contractual.”).

515 See ¶101 above, citing Exhibit C-94, Unified Operation Agreement for the Exploration and Exploitation of Common Field Palo Azúl, August 7, 2002 at Clause 8.2 and Annex 7 and Exhibit C-95, Modification of the Contract for the Exploration and Exploitation of Hydrocarbons (Crude Oil) Between PetroEcuador and City Investing Company Ltd., July 25, 1995 at Clause 8.1.

516 In other words, had the tax rate decreased under Law 42, the Burlington Subsidiaries would have been obligated to apply a correction factor that would have increased the participation percentage available for PetroEcuador.

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355. Ultimately, these contracts must be performed in good faith. Ecuador’s intent in designing, bidding and selling the rights under the PSCs with the guarantees offered to the Burlington Subsidiaries achieved Ecuador’s aim. Ecuador was able to attract foreign investment to develop its flagging hydrocarbons sector. Ecuador chose to abandon the Service Contract regime in favor of the Production Sharing regime in order to recast the risk/benefit equilibrium. Under the new regime, Ecuador benefited from exploitation of its hydrocarbons sector while being exposed to no risk whatsoever. In exchange for the enormous risk borne by the investor in developing the Blocks, Ecuador guaranteed the investor tax stabilization protection, an exemption from royalties and a ratable share of crude. Ecuador’s obligation to perform the PSCs in good faith requires that Ecuador maintain the bargained-for risk/benefit balance and refrain from disturbing the fundamental elements of the parties’ agreement.

E. ECUADOR AND PETROECUADOR BREACHED THEIR OBLIGATION UNDER THE PSCS TO PROVIDE SECURITY TO BLOCKS 23 AND 24

356. Pursuant to Clause 5.2.6 of the Block 23 and 24 PSCs, Ecuador and PetroEcuador had an obligation to provide Burlington Andean and Burlington Ecuador with reasonable conditions of security in performance of the contracts. In particular, the Block 23 PSC provides that PetroEcuador is obligated to provide conditions of reasonable security for the performance of the operations of this Contract.517

357. Similarly, the Block 24 PSC provides that PetroEcuador is obligated to

517 Exhibit C-3. Unofficial English translation. In its original Spanish version it reads: 5.2.6. Proporcionar condiciones razonables de seguridad para la realización de este Contrato.

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provide the Contractor with conditions of reasonable security for the performance of operations hereunder.518

358. Although Clause 5.2.6 of both PSCs refers to PetroEcuador only, the Clause applies equally to Ecuador pursuant to Clause 1 of both PSCs, which provides that PetroEcuador operates as a representative of the Ecuadorian State.

359. Moreover, both the Constitution in effect during the relevant period of time,519 as well as the regulations to the National Security Law520 and regulations to the Investment Law,521 require the Ecuadorian Government to guarantee security to all its inhabitants. The Investment Law enacted in 1997 provides that all such constitutional guarantees also apply to foreign investors.522

518 Exhibit C-4. Unofficial English translation. In its original Spanish version it reads: 5.2.6. Proporcionar a la Contratista condiciones razonables de seguridad para la realización de las operaciones de este contrato.

519 Exhibit C-88, Political Constitution of the Republic of Ecuador, Official Register No. 1 (Constitutional Court), published August 11, 1998 at Articles 171 and 183.

520 CL-67, General Regulations to the National Security Law, Executive Decree No. 2,264, Official Register No. 642, published March 14, 1991 at Article 14.

521 CL-60, Substitute Regulations of the Law of Promotion and Guarantee of Investments, Decree No. 1132, Official Gazette No. 252, published January 25, 2001 at Article 15.

522 Exhibit C-13, Law No. 46, Official Gazette No. 219, published December 19, 1997 at Article 21.

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360. Ecuador and PetroEcuador had a responsibility to provide reasonable conditions of security in Blocks 23 and 24. There is no question that Blocks 23 and 24 are not reasonably secure, and have not been secure, since the declaration of force majeure in 2001. Conditions in Blocks 23 and 24 have been dominated by indigenous protests, involving arson and kidnappings, that have rendered the Contractor in the Blocks unable to proceed with development of the Blocks.523 The Government itself attempted to avoid admitting this breach by instituting a suspension of performance rather than “reflect an image of conflicts to foreign investors, who, after bidding and being awarded contracts, would not receive the guarantees which [would] allow them to carry out their activities.”524 This state of insecurity in these Blocks gives rise to Ecuador and PetroEcuador’s liability under Ecuadorian law for breach of their obligations.525

523 See Section II.C.5 above.

524 Exhibit C-33, Directive 083-UCP-99, from Miguel Montalvo R., General Coordinator, Petroleum Contracts Unit, Ministry of Energy and Mindes to Mr. Rene Ortiz Duran, Minister of Energy and Mines, April 8, 1999. Unofficial English translation. In its original Spanish version it reads: […] refleja al exterior una imagen de conflicto para los inversionistas que luego de ofertar y ser adjudicatarios, no reciben las garantías que permitan el desarrollo de sus actividades.

525 CL-68, Jorge O. Benchetrit Medina, Caso Fortuito, in ENCICLOPEDIA JURIDICA OMEBA 818 (1979) at 823 (“[…] not only by its action but also by its omission may the authority originate an event of force majeure.”) (original Spanish: “[…] No solamente por acción sino también por omisión puede la autoridad originar caso fortuito o de fuerza mayor.”); CL-69, Arturo Alessandri Rodríguez, DE LA RESPONSABILIDAD EXTRA- CONTRACTUAL EN EL DERECHO CIVIL CHILENO (1983) at 602 (“If [force majeure] occurs due to the agent’s fault, if the agent provoked or aided to its appearance whether by action or inaction […] his responsibility

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361. In any event, as set forth above, when Ecuador and PetroEcuador fell short of their obligation, in 2005, Ecuador unilaterally terminated all cooperation with the investors in Blocks 23 and 24, including Burlington Andean and Burlington Ecuador.526 At this time, Burlington Andean and Burlington Ecuador had proposed the Block 23 Settlement and Block 24 Settlement, and were completing negotiations with local indigenous communities that would have peacefully resolved all objections to the development of both Block 23 and Block 24 and allowed exploration activity to recommence.527 As was the case with the adoption of Law No. 2006-42, Ecuador’s motive in unilaterally withdrawing support for the negotiations with indigenous communities was transparent: to force out Burlington Andean, Burlington Ecuador and CGC and have PetroEcuador assume control over the Blocks.528

F. AS A RESULT OF RESPONDENTS’ BREACHES OF THE PSCS, THE BURLINGTON SUBSIDIARIES ARE ENTITLED TO SPECIFIC PERFORMANCE AND DAMAGES

362. In light of Ecuador and PetroEcuador’s breaches of the PSCs, the Burlington Subsidiaries are entitled under Ecuadorian law to make a choice between specific performance and damages or termination and damages.529 As set forth in the Request for

exists in its entirety.”) (original Spanish: “Si el caso fortuito sobreviene por culpa del agente, si éste lo provocó o contribuyó a producirlo, sea por acción o por omisión […] su responsabilidad subsiste íntegramente […].”).

526 See Section II.D.2 above.

527 See Sections II.C.5 and II.D.2 above.

528 See ¶217 above.

529 See CL-18, Tecco v. IEOS, Supreme Court of Justice of Ecuador, Fourth Division, Decision, July 25, 1983 at 10 (noting that “in bilateral contracts […] one of the contracting parties may ask an arbitrator for the

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Arbitration, the Burlington Subsidiaries are seeking specific performance in this arbitration, as well as money damages.

363. However, if Burlington Oriente’s application for provisional measures were denied, the Burlington Subsidiaries would seek termination of the PSCs – as specific performance would be moot.

364. Clause 21.1.7 of the Block 7 PSC, Clause 21.1.8 of the Block 21 PSC, Clause 21.1.9 of the Block 23 PSC and Clause 21.1.9 of the Block 24 PSC allow the Burlington Subsidiaries to terminate the PSCs – by act of this Tribunal – in the event that Ecuador and PetroEcuador breach the PSCs.530 As a representative example, Clause 21.1.7 of the Block 7 PSC provides for termination

[a]s a result of a final and binding legal ruling ordering that the Contract be terminated.531

settlement of the contract or the fulfillment of the contract, with indemnification and damages”) (original Spanish: “en los contratos bilaterales […] podrá el otro contratante pedir, a su arbitrio, o la resolución o el cumplimiento del contrato, con la indemnización de daños y perjuicios”).

530 Exhibit C-1, Exhibit C-2, Exhibit C-3 and Exhibit C-4.

531 Exhibit C-1. Unofficial English translation. In its original Spanish version it reads: “Por sentencia judicial ejecutoriada que declare la terminación de este Contrato.” See also Exhibit C-2 (“By enforced judicial judgment”) (original Spanish: “Por sentencia judicial ejecutoriada”); Exhibit C-3 (“In the event of a court decision terminating the Contract”) (original Spanish: “Por sentencia judicial ejecutoriada que declare la terminación del Contrato”); Exhibit C-4 (“By a final court judgment”) (original Spanish: “Por sentencia judicial ejecutoriada”).

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365. Additionally, under Article 1505 of the Civil Code, the Burlington Subsidiaries are entitled to termination of the PSCs because of Ecuador and PetroEcuador’s breach of the PSCs.532

366. The Burlington Subsidiaries are entitled to the full extent of relief under Ecuadorian law, to be considered during the Quantum phase of the arbitration proceedings as ordered by the Tribunal in Annex 2 to the Minutes of the First Session. The Burlington Subsidiaries reserve all rights with respect to their claims of relief under Ecuadorian law.

V. ECUADOR BREACHED ITS OBLIGATIONS TO BURLINGTON UNDER THE TREATY

367. Ecuador’s unlawful conduct also constitutes a breach of its obligations to Burlington under the Treaty. Specifically, by applying Law No. 2006-42 to the investments of Burlington – in contravention of Ecuador’s specific obligations in the PSCs and the legal framework – Ecuador has breached its duty: (a) to observe obligations entered with regard to the investments (Article II(3)(c)); (b) to provide fair and equitable treatment (Article II(3)(a)); (c) to refrain from arbitrary treatment (Article II(3)(b)); (d) to expropriate investments only by payment of prompt, fair and adequate compensation (Article III); and (e) to provide full protection and security (Article II(3)(a)).

532 CL-59, Ecuador Civil Code, Official Register No. 46, published June 24, 2005 at Article 1505 (“Bilateral contracts include a resolutory condition if one of the parties fails to comply with the agreement. In that case, however, the other party may request, at its discretion, either contract termination or contract performance plus indemnification for damages.”) (original Spanish: “En los contratos bilaterales va envuelta la condición resolutoria de no cumplirse por uno de los contratantes de lo pactado. Pero, en tal caso, podrá el otro contratante pedir, a su arbitrio, o la resolución o el cumplimiento del contrato, con indemnización de perjuicios.”).

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A. ECUADOR FAILED TO OBSERVE THE OBLIGATIONS IT HAD WITH RESPECT TO THE INVESTMENTS OF BURLINGTON

368. Pursuant to Article II(3)(c) of the Treaty, Ecuador undertook to

observe any obligations that it may have entered into with regard to investments.533

369. In this case, Ecuador had three obligations with respect to the investments of Burlington that it ultimately failed to observe:

• First, pursuant generally to Article 16 of Decree No. 1416534 and specifically set out in Clause 11.12 of the Block 7 PSC, Clause 11.7 of the Block 21 PSC, and Clause 11.10 of the Block 23 and 24 PSCs, Ecuador had an obligation to absorb the effects of all new taxes on the investments of Burlington.535

• Second, in accordance with Article 49 of the Hydrocarbons Law, Ecuador was obligated to exempt the investments of Burlington from the obligation to pay any royalties pursuant to Clause 11.9 of the PSCs for Blocks 7 and 24, and Clause 11.6 of the PSC for Block 21.536

533 Exhibit C-6.

534 Exhibit C-17, Executive Decree No. 1416, Official Gazette No. 364, January 21, 1994 at Articles 24.1.4 and 24.2 and Exhibit C-91, PETROECUADOR – U.C.P. – Hydrocarbons Bidding – Seventh Round Documents, January 1994, at 189-190 (11.2.4 and Clauses 11.9).

535 Exhibit C-1 at Clause 11.12; Exhibit C-2 at Clause 11.7; Exhibit C-3 at Clause 11.10; Exhibit C-4 at Clause 11.10.

536 Exhibit C-1 at Clause 11.9; Exhibit C-2 at Clause 11.6; Exhibit C-4 at Clause 11.9.

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• Third, pursuant to Article 12A of the Hydrocarbons Law and Clauses 5.3.2 of the Block 7 and 24 PSCs and Clauses 5.3 of the Block 21 and 23 PSCs, Ecuador was obligated to ensure that the Burlington Subsidiaries would receive their fixed participation in monthly crude production as determined according to the formula set out in the PSCs.537

370. Ecuador breached each of these specific obligations:

• First, Ecuador imposed a tax of 50 percent (later, 99 percent) on the vast majority of the revenue generated by the investment of Burlington and did not allow PetroEcuador to honor its obligation to absorb the effects of that tax.

• Second, to the extent that Ecuador and PetroEcuador’s refusal to absorb the effects of Law No. 2006-42 on Burlington was due to Ecuador’s ill-advised belief that Law No. 2006-42 is not a tax, Ecuador’s failure to exempt Burlington from the application of Law No. 2006-42 breached its obligation because the law effectively acts as a royalty, which Ecuador guaranteed it would not impose.

• Third, to the extent that Ecuador and PetroEcuador’s failure to absorb the effects of Law No. 2006-42 on the investments of Burlington or to exempt the application of Law No. 2006-42 was due to Ecuador’s mistaken interpretation that the Law is neither a tax nor a royalty, Ecuador’s application of Law No. 2006-42 to the investments of Burlington breached the Treaty because

537 Exhibit C-15, Law No. 1993-44, Official Register No. 326, published November 29, 1993 at Article 4 (setting forth Article 12A); Exhibit C-1 at Clause 5.3.2; Exhibit C-2 at Clause 5.3; Exhibit C-3 at Clause 5.3; Exhibit C-4 at Clause 5.3.2.

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Ecuador and PetroEcuador had guaranteed Burlington a fixed share of their production as determined by a contractually established formula.

371. Accordingly, Ecuador breached Article II(3)(c) of the Treaty and Burlington is entitled to compensation.

1. Ecuador’s Commitments To Stabilize Taxes, Exempt Royalties, And Guarantee A Share Of Crude Production Are “Obligations” With Regard To The Investments Of Burlington

372. The plain language of Article II(3)(c) is broad in scope: it covers “any obligation” that Ecuador “may have entered into with regard to” the investments of Burlington.538 As the tribunal in Eureko BV v. Poland observed when interpreting language in the Netherlands-Poland bilateral investment treaty that is virtually identical to the language of Article II(3)(c) of the Treaty:

The plain meaning – the “ordinary meaning” – of a provision prescribing that a State “shall observe any obligations it may have entered into” with regard to certain foreign investments is not obscure. The phrase, “shall observe” is imperative and categorical. “Any” obligations is capacious; it means not only obligations of a certain type, but “any” – that is to say, all – obligations entered into with regard to investments of investors of the other Contracting Party.539

538 Exhibit C-6.

539 CL-70, Eureko BV v. Poland, (UNCITRAL) Partial Award dated August 19, 2005 at ¶246 (emphasis added). The operative language in the Treaty and the Netherlands-Poland bilateral investment treaty is to be distinguished from the operative language in Article 11 of the Swiss-

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373. Ecuador assumed obligations in the Hydrocarbons Legal Framework that became specific to Burlington by virtue of their incorporation in the PSCs for each of Blocks 7, 21, 23 and 24. Specifically captured in the PSCs and generally enunciated in the Hydrocarbons Legal Framework, Ecuador’s obligations took on a legal nature. As the Annulment Committee in CMS Gas Transmission Company v. Argentine Republic explained:

It is accepted that by “obligations” is meant legal obligations. Although legitimate expectations might arise by reason of a course of dealing between the investor and the host State, these are not, as such, legal obligations, though they may be relevant to the application of the fair and equitable treatment clause contained in the BIT.540

374. The type of obligation undertaken by the State has also been held to be significant in cases involving umbrella clauses. That is, tribunals have held that the types of obligations elevated to the level of treaty obligations by an umbrella clause must be “sovereign” obligations, as opposed to “merchant” obligations. As explained by the tribunal in El Paso Energy International Company v. The Argentine Republic, which also involved the U.S.-Argentina bilateral investment treaty:

Pakistan bilateral investment treaty at issue in SGS v. Pakistan, in which the States more ambiguously agreed to “constantly guarantee the observance of commitments it has entered into with respect to the investments.” See CL-71, SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13, Decision of the Tribunal on Objections to Jurisdiction dated August 6, 2003.

540 CL-72, CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/08, Annulment Proceeding, Decision of the Ad Hoc Committee on the Application for Annulment of the Argentine Republic dated September 25, 2007 at ¶89.

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[Umbrella clauses] will cover additional investment protections contractually agreed by the State as a sovereign – such as a stabilization clause – inserted in an investment agreement.541

375. The tribunal in Noble Energy Inc. and MachalaPower Cia Ltda v. Ecuador and Consejo Nacional de Electricidad, examining claims arising under production sharing contracts (which provided for ICSID jurisdiction) and the Treaty, concluded:

On this basis, the Tribunal observes that it appears that Ecuador’s obligations vis-à-vis the Claimants stem not only from the Agreements but also from laws and regulations. It also notes that the Investment Agreement appears to contain a stabilization clause which may constitute an obligation of a State capable of falling within the scope of an umbrella clause.542

541 CL-40, El Paso v. Argentina, Decision on Jurisdiction dated April 27, 2006 at ¶81; CL-73, Joy Mining Machinery Limited v. The Arab Republic of Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction dated August 6, 2004 at ¶72 (noting that “a basic general distinction can be made between commercial aspects of a dispute and other aspects involving the existence of some forms of State interference with the operation of the contract involved”).

542 CL-32, Noble Energy v. Ecuador, Decision on Jurisdiction dated March 5, 2008 at ¶157. Sovereign states may undertake obligations in legal instruments that subsequently constrain their behavior. On this point, see SS Wimbledon (1923), where the Permanent Court of International Justice held that Germany, upon signing the Treaty of Versailles – which included a special provision allowing free passage through the Kiel Canal in time of war and in time of peace – could not restrict the passage of a vessel on the basis of the retention of its sovereign rights. CL-74, Case of the SS Wimbledon, Decision dated August 17, 1923, Permanent Court of International Justice, Series A at 25.

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376. The observation of the Noble Energy tribunal is applicable here. Provisions such as the tax stabilization clause, the royalty- exemption clause and the right to participation in crude production are found in each of the PSCs and are sovereign in character. After all, undertakings (a) to absorb the effects of any prospective tax measures that could affect long-term concession agreements, (b) to grant royalty-exempt status, and (c) to guarantee the right to participate in the production of the State’s hydrocarbons, can only be made by a sovereign entity since they relate to the State’s control over its natural resources. Only a State – and not a private party – can decide upon the overall regulatory framework. The capacity of a State to assume undertakings to foreign investors in the agreements that it enters into with them is an attribute of State sovereignty. Once assumed, however, these international obligations bind the sovereign to hold true to its promises. As such, these obligations are protected under Article II(3)(c).

377. Indeed, States have been obliged to honor stabilization clause guarantees made with investors even in the absence of bilateral investment treaties.543 By virtue of the principle of pacta sunt servanda, international law prohibits States from repudiating their undertakings to foreign investors. According to Judge Higgins:

To focus on the principle of pacta sunt servanda and on acquired rights, is to emphasize the protection that the private party has been given against either a later change of mind by the State

543 CL-75, Libyan American Oil Company (LIAMCO) v. The Government of the Libyan Arab Republic, Award dated April 12, 1977; CL-76, B.P. Exploration Company (Libya) Limited v. Government of the Libyan Arab Republic, Award dated August 1, 1971.

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or against the exercise of the State’s regulatory powers.544

378. In Texaco Overseas Petroleum Company and California Asiatic Oil Company v. Government of the Libyan Arab Republic, Libya was found liable under general principles of international law to provide compensation resulting from its repudiation of a stabilization clause.545 Similarly, the tribunal in Libyan American Oil Company (LIAMCO) v. The Government of the Libyan Arab Republic held that the inclusion of a stabilization clause preventing the alteration of the investor’s contractual rights expressly created by the concession, except by mutual consent of the parties, gave rise to Libya’s duty to compensate under international law.546

379. The LIAMCO and TOPCO tribunals found that repudiation of stabilization clauses with foreign investors was in breach of the international legal principle of pacta sunt servanda. In this case, Ecuador ratified the Treaty, which codifies the principle of pacta sunt servanda in Article II(3)(c). Through Article II(3)(c), the Treaty makes plain that stabilization clauses, royalty exemptions and rights of participation in the production of the crude are undertakings assumed in a State’s sovereign capacity that a State must then respect.

380. Any attempt by Ecuador to argue that the PSCs are concession agreements of an administrative nature governed by Ecuadorian

544 CL-77, Rosalyn Higgins, The Taking of Property by the State, in RECUEIL DES COURS, COLLECTED COURSES OF THE HAGUE ACADEMY OF INTERNATIONAL LAW (1982) at 347.

545 See CL-78, Texaco Overseas Petroleum Company and California Asiatic Oil Company v. Government of the Libyan Arab Republic, Award on the Merits dated January 19, 1977.

546 CL-75, LIAMCO v. Libya, Award dated April 12, 1977.

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law, and not by the Treaty, must fail. After all, Article II(3)(c) applies to “any obligations” made “with regards to investments” generally.547 Obligations with respect to concessions for natural resources have repeatedly qualified as obligations protected under a clause like Article II(3)(c).548

2. Ecuador Breached The Specific Obligations Entered Into With Regard To Burlington’s Investments Through The Use Of Its Sovereign Powers

381. By refusing either to allow PetroEcuador to absorb the effects of Law No. 2006-42 on the investments of Burlington, or to exempt Burlington’s investments from application of Law No. 2006-42 and its implementing decrees, Ecuador breached its express obligations to Burlington in violation of Article II(3)(c) of the Treaty. Where a State promises to nullify the effects of a tax on an investment, and the State later refuses to do so, there is a breach of that obligation. Similarly, where a State expressly promises to exempt an investment from any royalties and then imposes a royalty, there is a breach of that obligation. Finally, where a State expressly guarantees a share of production and then denies the investor its share of crude by requiring payment of 99 percent of “extra” revenues on the sale, there is a breach of that obligation.

382. Other ICSID tribunals have concluded that regulatory changes that nullify stabilization clause guarantees made to foreign investors violate the umbrella clause of applicable bilateral investment treaties. As the Sempra Energy International v. Argentine Republic tribunal explained:

547 See CL-79, Siemens AG v. Argentina, ICSID Case No. ARB/02/8, Award dated February 6, 2007 at ¶206.

548 See CL-77, Higgins, The Taking of Property at 301 (noting that mining and petroleum concessions have been treated as contracts, and not as unilateral acts nor administrative contracts).

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The measures discussed before this Tribunal are not, however, mere ordinary contractual breaches of a commercial nature. They are instead the outcome of major legal and regulatory changes introduced by the State, and give expression to a change of policy that is evidently not what was envisaged in the License and legal framework governing the privatization and the investments made in its context. Only the State, and not an ordinary contract party, can decide that such sweeping changes will operate as part of the public function. Contractual breaches made in this context are far from ordinary, and may in themselves be a source of Treaty violations if they affect a right protected under the Treaty.549

383. Accordingly, Argentina’s decisions to nullify its obligations to prohibit price controls without indemnification and to prohibit license amendments without consent, which were both contained in the respective licenses and which formed part of the legislative framework surrounding the tariff regime, have repeatedly been found to breach the umbrella clause.550

549 See CL-80, Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16, Award dated September 28, 2007 at ¶311. The umbrella clause in that treaty is identical to the present clause in the Treaty.

550 See CL-81, Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award dated May 22, 2007 at ¶276; CL-82, LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability dated October 3, 2006 at ¶175; see also CL-72, CMS v. Argentina, Decision of the Ad Hoc Committee on the Application for Annulment of the Argentine Republic dated September 25, 2007 at ¶¶89-100, where the Ad Hoc Committee annulled the prior finding of an umbrella clause violation, but noted that the umbrella clause covered “consensual obligations arising independently of the BIT

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384. Similarly, in this case Ecuador’s actions are of the type that only a State, acting as a sovereign as opposed to a commercial merchant, could take. As explained by the Sempra tribunal:

The decisions dealing with the issue of the umbrella clause and the role of contracts in a Treaty context have all distinguished breaches of contract from Treaty breaches on the basis of whether the breach has arisen from the conduct of an ordinary contract party, or rather involves a kind of conduct that only a sovereign State function or power could effect.551

385. Ecuador has used its sovereign power to breach the express obligations that it had assumed with regard to Burlington’s investment. Under Article II(3)(c) of the Treaty and under the general principle of pacta sunt servanda, Ecuador is liable for breaching its obligations set forth in the PSCs and in the Hydrocarbons Law.

3. Ecuador Has No Excuse Under International Law To Justify Its Breaches Of Its Obligations

386. Any claim by Ecuador that the dramatic increase in the price of oil beginning in 2006 fundamentally altered the premise of the contract, relieving Ecuador of its contractual undertakings, must fail.

itself” as long as they were “specific obligations concerning the investment. They do not cover general requirements imposed by the law of the host State.” Here, the specific obligations arise from the PSCs, and were contracted on a consensual basis by the parties.

551 See CL-80, Sempra v. Argentina, Award dated September 28, 2007 at ¶310.

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387. The principle of rebus sic stantibus invoked by President Palacio in his letter to the Ecuadorian National Congress justifying Law No. 2006-42 does not provide the requisite legal support for the Law.552 The principle of rebus sic stantibus is not so much a principle of international law, but rather a narrow exception to the principle of pacta sunt servanda.553 This idea, referred to as the “fundamental changes in circumstances” exception, is codified in the Vienna Convention on the Law of Treaties and may only be invoked in limited circumstances.554

552 See Exhibit C-174, Letter from Alfredo Palacio Gonzalez to Wilfredo Lucero Bolaños, March 1, 2006.

553 See CL-83, J.W. Garner, The Doctrine of Rebus Sic Stantibus and the Termination of Treaties, 21 AM. J. INT’L L. 509 (1927) at 511.

554 See CL-84, Vienna Convention on the Law of Treaties, UN Doc. A/Conf.39/27. Article 62 of the Vienna Convention on the Law of Treaties provides: Fundamental change of circumstances 1. A fundamental change of circumstances which has occurred with regard to those existing at the time of the conclusion of a treaty, and which was not foreseen by the parties, may not be invoked as a ground for terminating or withdrawing from the treaty unless: (a) the existence of those circumstances constituted an essential basis of the consent of the parties to be bound by the treaty; and (b) the effect of the change is radically to transform the extent of obligations still to be performed under the treaty. 2. A fundamental change of circumstances may not be invoked as a ground for terminating or withdrawing from a treaty: (a) if the treaty establishes a boundary; or

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388. States have invoked the principle of rebus sic stantibus due to conditions such as war or fundamental changes in territory or alliances. For example, the principle of rebus sic stantibus was invoked by Austria-Hungary in 1908 as a partial justification for the annexation of Bosnia and Herzegovina.555 The non- observance by the Ottoman Government of the Treaty of London of 1913 entered into with the Allied Balkan Powers was defended on the principle of rebus sic stantibus, based on the argument that when the treaty was signed the Allied Balkan Powers were allies with one another, whereas at the time the Ottoman Government refused to observe the treaty, they were at war with each other.556

389. According to Garner:

The most authoritative writers of today are agreed that the rule of rebus sic stantibus can be invoked only in very exceptional circumstances, not merely when there has been a natural and normal change of conditions in the life of the state.557

(b) if the fundamental change is the result of a breach by the party invoking it either of an obligation under the treaty or of any other international obligation owed to any other party to the treaty. 3. If, under the foregoing paragraphs, a party may invoke a fundamental change of circumstances as a ground for terminating or withdrawing from a treaty it may also invoke the change as a ground for suspending the operation of the treaty.

555 See CL-83, Garner, The Doctrine of Rebus Sic Stantibus at 509.

556 Id. at 510.

557 Id. at 513.

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390. Judge Higgins has similarly set the standard high for a State invoking the rebus sic stantibus defense. She states:

A change of circumstances will not normally negate the principles of pacta sunt servanda unless there has been a fundamental change of circumstances which has occurred and which was not foreseen by the parties at the time of concluding their agreement.558

391. Fluctuations in the price of oil are to be expected and were foreseen by the parties.559 As such, the narrow rebus sic stantibus exception under international law is not available to Ecuador because it justifies a State’s abrogation of undertakings only in extraordinary circumstances involving fundamental changes in circumstances. Ecuador may not invoke this principle to remedy what it perceives as a lack of equilibrium in an undertaking.

558 CL-85, Rosalyn Higgins, Legal Preconditions of Foreign Investment, in International Bar Association Section on Energy and Natural Resources Law, PROCEEDINGS OF THE INTERNATIONAL BAR ASSOCIATION SEMINAR 231 (1986) at 244.

559 See e.g., Exhibit C-93, Legal, Economic and Technical Report Regarding the Negotiations for the Transformation of the Service Contract for the Exploration and Exploitation of Block 7 into a Participation Contract, November 3, 1999, and ¶102 above (Ecuador proposed a mechanism for adjusting participation levels based on oil price fluctuations but the proposal was rejected and, therefore, omitted from the final PSC terms for Block 7).

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B. ECUADOR FAILED TO AFFORD BURLINGTON’S INVESTMENTS FAIR AND EQUITABLE TREATMENT

1. Ecuador Committed To Respect Burlington’s Legitimate Expectations

392. Under Article II(3)(a) of the Treaty, Ecuador is obliged to treat Burlington’s investments fairly and equitably in accordance with international law. Article II(3)(a) states:

Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required under international law.560

393. The Treaty does not define what constitutes “fair and equitable treatment” of Burlington’s investments. In accordance with Article 31(1) of the Vienna Convention on the Law of Treaties, Article II(3)(a) of the Treaty should be interpreted in good faith in accordance with the ordinary meaning to be given to its terms in their context and in light of the object and purpose of the Treaty.561

394. The Preamble of the Treaty in this case sheds light not only on the purpose of the Treaty, but also on the critical role of fair and equitable treatment for the protection and promotion of foreign investment. The Preamble provides that “fair and equitable treatment is desirable in order to maintain a stable framework for investment and maximum effective utilization of economic resources.”562 Article II(3)(a) should therefore be interpreted in

560 Exhibit C-6.

561 CL-84, Vienna Convention on the Law of Treaties, UN Doc. A/Conf.39/27.

562 Exhibit C-6.

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light of the object of promoting and protecting a stable framework for investment.

395. Two previous ICSID tribunals have had the occasion to interpret Article II(3)(a) of the Treaty. The tribunals in Occidental Exploration and Production Company v. The Republic of Ecuador563 and Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of Ecuador564 looked to the Treaty’s Preamble and both concluded that fair and equitable treatment must be measured in light of the purpose of promoting and protecting investment through providing a stable environment for foreign investment.565 Under this standard, Ecuador’s failure to implement its express undertakings under a power purchase agreement to provide a payment guarantee to the investor in order to ensure regular payment in exchange for power produced was considered a failure to provide a stable legal framework, giving rise to liability under Article II(3)(a) of the Treaty.566

396. Similarly, Ecuador’s refusal to provide VAT refunds that it promised would apply to Occidental’s oil concession for Block 15 in the Amazon Region, thus depriving Occidental of millions of dollars of tax credits, was considered a failure by Ecuador to provide a stable legal framework in breach of Occidental’s

563 CL-86, Occidental Exploration and Production Company v. The Republic of Ecuador, London Court of International Arbitration Case No. UN3467, Final Award dated July 1, 2004.

564 CL-41, Duke Energy v. Ecuador, Award dated August 18, 2008.

565 CL-86, Occidental v. Ecuador, Final Award dated July 1, 2004 at ¶183; CL-41, Duke Energy v. Ecuador, Award dated August 18, 2008 at ¶¶338-340.

566 CL-41, Duke Energy v. Ecuador, Award dated August 18, 2008 at ¶364 (with respect to Power Purchase Agreement 96).

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legitimate expectations and gave rise to liability under Article II(3)(a) of the Treaty.567

397. As these cases demonstrate, when a State abrogates specific promises in contravention of a foreign investor’s justified expectations, it creates an unstable and unpredictable legal framework in violation of fair and equitable treatment.568 States consistently have been held responsible for a breach of this obligation when they similarly fail to abide by the specific undertakings made to, and relied upon by, foreign investors.569

567 CL-86, Occidental v. Ecuador, Final Award dated July 1, 2004 at ¶¶191, 196.

568 See, e.g., CL-87, MTD Equity Sdn Bhd and MTD Chile SA v. Republic of Chile, ICSID Case No. ARB/01/7, Decision on Annulment dated February 16, 2007 at ¶69 (“[…] legitimate expectations generated as a result of the investor’s dealings with the competent authorities of the host State may be relevant to the application of the guarantees contained in an investment treaty. This is expressly accepted by the Respondent and in the case-law”); CL-41, Duke Energy v. Ecuador, Award dated August 18, 2008 at ¶340 (“the stability of the legal and business environment is directly linked to the investor’s justified expectations”); CL-86, Occidental v. Ecuador, Final Award dated July 1, 2004 at ¶¶185-186; CL-82, LG&E v. Argentina, Decision on Liability dated October 3, 2006 at ¶127; CL-88, Tecnicas Medioambientales TECMED S.A. v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award dated May 29, 2003 at ¶154.

569 CL-89, BG Group Plc. v. The Republic of Argentina, (UNCITRAL) Final Award dated December 24, 2007 at ¶¶294, 300; CL-80, Sempra v. Argentina, Award dated September 28, 2007 at ¶113; CL-82, LG&E v. Argentina, Decision on Liability dated October 3, 2006 at ¶¶125, 127, 131, 133, 139; CL-81, Enron v. Argentina, Award dated May 22, 2007 at ¶¶260-262, 264, 266-267; CL-90, Iurii Bogdanov, Agurdino-Invest Ltd and Agurdino-Chimia JSC v. Moldova, (Ad hoc, Stockholm Chamber of Commerce Rules), Award dated September 22, 2005 at 72- 77; CL-91, GAMI Investments, Inc. v. The Government of the United Mexican States, (UNCITRAL) Final Award dated November 15, 2004

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398. The ICSID tribunal in Técnicas Medioambientales TECMED S.A. v. The United Mexican States held that the fair and equitable treatment provision of the Spain-Mexico bilateral investment treaty safeguarded the claimant’s investment-backed expectations.570 The tribunal provided an oft-cited statement of fair and equitable treatment in international law:

[…] in light of the good faith principle established by international law, [fair and equitable treatment] requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment.571

399. The obligation to observe undertakings has its genesis in the principle of pacta sunt servanda, which itself is a principle of good faith, as expressed in Article 26 of the Vienna Convention. The International Law Commission has observed that the principle of good faith forms an integral part of the rule pacta sunt servanda.572 This good faith standard is an objective one: where a State promises to observe an undertaking, and fails to do so, this constitutes without more a breach of the principle. Thus, the standard “requires that the host state authorities

at ¶91; CL-86, Occidental v. Ecuador, Final Award dated July 1, 2004 at ¶183; CL-92, MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award dated May 25, 2004 at ¶114; CL-93, CME Czech Republic B.V. v. The Czech Republic, (UNCITRAL) Partial Award dated September 13, 2001 at ¶611.

570 CL-88, TECMED v. Mexico, Award dated May 29, 2003 at ¶154.

571 Id.

572 CL-94, International Law Commission, Summary Records of the Eighteenth Session, in YEARBOOK OF THE INTERNATIONAL LAW COMMISSION (Volume I, Part II) (1966) at 32-37, 169.

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conform to an objective line of conduct, and that they respect on a daily basis the substance of the commitments undertaken.”573

400. The good faith component of the fair and equitable treatment standard is strengthened as the State’s commitments become more specific to an individual investor. As concluded by the tribunal in PSEG Global Inc. and Konya Ilgin Elektrik Üretim Ve Ticaret Limited Şirketi v. Republic of Turkey:

Legitimate expectations by definition require a promise of the administration on which the Claimants rely to assert a right that needs to be observed.574

401. Reflecting a State’s obligation to observe undertakings in the fair and equitable treatment standard is merely a recognition of the modern day realities of foreign investment: the host country provides an assurance of fair and equitable treatment in order to indicate to the international community that investments within its jurisdiction will be subject to treatment compatible with the main expectations of foreign investors.575

402. Having induced investment with assurances that it will abide by specific guarantees, the State then must leave these investment-

573 CL-95, Jean-Pierre Laviec, PROTECTION ET PROMOTION DES INVESTISSEMENTS (1985) at 95 (original French: “[…] le traitement équitable demande que les autorités d’un État d’accueil se conforment à une ligne de conduite objective, et qu’elles respectent au jour le jour la substance des engagements pris.”).

574 CL-96, PSEG Global Inc. and Konya Ilgin Elektrik Üretim Ve Ticaret Limited Şirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, Award dated January 19, 2007 at ¶241.

575 CL-97, Stephen Vasciannie, The Fair and Equitable Treatment Standard in International Investment Law and Practice, 70 BRITISH YEARBOOK OF INTERNATIONAL LAW 99 (1999) at 99.

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specific undertakings intact when effecting new State policies. Thus, the tribunal in Petrobart Ltd v. Kyrgyzstan emphasized that, notwithstanding the subjective intentions or underlying purpose of Kyrgyzstan’s restructuring of its oil and gas industry – which the tribunal did not doubt was pursued with good reason – Kyrgyzstan’s failure to abide by specific undertakings to investors breached Kyrgyzstan’s obligation of fair and equitable treatment under the Energy Charter Treaty.576 In the same vein, in formulating a national policy to deal with its economic crisis in 2001, Argentina’s obligation to treat foreign investors fairly meant that it could not dispense with the economic and legal framework that had induced investment in the first place.577 Similarly, in Eureko it may have been Poland’s noble cause to retain control over one of the largest national companies in one of its key industries, but once Poland decided not to allow the foreign investor to obtain a controlling shareholding in an IPO, its fairness obligation required

576 CL-98, Petrobart Ltd v. Kyrgyzstan, (Ad hoc, Stockholm Chamber of Commerce Rules) Award dated March 29, 2005 at 55.

577 CL-99, CMS Gas Transmission Company v. The Argentine Republic, ICSID Case No. ARB/01/8, Award dated May 12, 2005 at ¶¶275-277 (confirmed on this point by the Decision on Annulment dated September 25, 2007) (“It is not a question of whether the legal framework might need to be frozen as it can always evolve and be adapted to changing circumstances, but neither is it a question of whether the framework can be dispensed with altogether when specific commitments to the contrary have been made. The law of foreign investment and its protection has been developed with the specific objective of avoiding such adverse legal effects.”); see also CL-100, Saluka Investments BV v. Czech Republic, (UNCITRAL) Partial Award dated March 17, 2006 at ¶309 (“The Czech Republic, without undermining its legitimate right to take measures for the protection of the public interest, has therefore assumed an obligation to treat a foreign investor’s investment in a way that does not frustrate the investor’s underlying legitimate and reasonable expectations.”).

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disclosure of this fact and reparation for any resulting damage.578

403. It is noteworthy that when compared to the promises made by Ecuador to Burlington directly in the PSCs and set out above, the promises Argentina made to investors were much less specific to those investors. Furthermore, the promises considered in several ICSID cases against Argentina did not include the additional protection afforded an investor by a stabilization clause.579

404. In summary, the fair and equitable treatment standard under international law requires States to maintain stable investment environments according to an investor’s legitimate expectations, or to compensate the investor for the effects of such measures.580 If an investor assumes significant commitments and risks, and makes significant capital investments in reliance on certain legal and economic premises, it is fair and equitable that the underlying promises be kept and fully respected, and that they not be unilaterally abrogated.

578 CL-70, Eureko v. Poland, Partial Award dated August 19, 2005 at ¶¶232-35.

579 See, e.g., CL-89, BG v. Argentina, Final Award dated December 24, 2007 at ¶¶306-07 (holding that even though Argentina did not specifically target BG with promises of a stable and efficient tariff system, the dollar standard and a favorable adjustment mechanism, these conditions “appealed to BG, and resulted in its investment” because “BG could reasonably rely on [them]”); CL-81, Enron v. Argentina, Award dated May 22, 2007 at ¶268 (even though Argentina denied that these conditions were promises made to investors and claimed that their dismantlement was based on general market conditions, the tribunal nonetheless found that Argentina’s commitments were specific enough to give rise to Enron’s legitimate expectations and to allow it to invoke the protection of fair and equitable treatment).

580 CL-99, CMS v. Argentina, Award dated May 12, 2005 at ¶¶275 to 280.

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2. Ecuador Breached The Fair And Equitable Treatment Standard Under Article II(3)(a) of the Treaty

405. As set forth fully in Section II.B above, Ecuador constructed a legal framework providing specific promises that were repeated in the PSCs and guaranteed to individual foreign investors. Ecuador’s abrogation of its specific contractual commitments in violation of the legal framework frustrated Burlington’s legitimate expectations that Ecuador would abide by the express provisions of the PSCs. Having imposed a 99 percent tax on extra revenue, Ecuador has violated its obligation to either absorb the effects of the tax on Burlington or exempt Burlington from the tax. Consequently, Ecuador failed to accord fair and equitable treatment in accordance with Article II(3)(a) of the Treaty.

406. In addition, Ecuador’s use of its sovereign taxing power in bad faith to force Burlington to accept a new service contract with diminished rights also violated the Treaty’s fair and equitable treatment clause.

a. Ecuador’s repudiation of specific guarantees frustrated the legitimate expectations of Burlington

407. Few States have bound themselves to such an extent with specific guarantees as Ecuador in the case of Burlington’s investments. Ecuador not only exhaustively listed the specific taxes that would apply to Burlington’s investments, but took the additional step of guaranteeing that any taxes that were enacted by the State at any time during the contract term would have no effect on Burlington’s investments. Ecuador guaranteed that Burlington’s investments in the hydrocarbons sector would be exempt from royalties. In addition, Ecuador guaranteed Burlington a ratable participation in crude production according to a specific formula.

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408. Given the nature of these oil contracts, these guarantees were essential to Burlington’s investment. In structuring the agreements as PSCs, Ecuador placed upon Burlington the burden of the capital investment for all exploration and exploitation activities.581 Ecuador went so far as to impose minimum investment requirements on Burlington.582 In exchange for the risks associated with exploration, production and marketing, Burlington was guaranteed its participation in crude production, and Ecuador protected revenues from additional tax burdens and imposition of royalties.

409. This was the deal as Ecuador structured it. However, in the context of rising global oil prices, Ecuador discarded the parties’ deal and took Burlington’s revenues by imposing a new tax in the form of Law No. 2006-42. Ecuador then refused to honor its obligation to stabilize the effects of the tax. After burdening the Block 7 & Block 21 Tax Consortium with the unlawful 99 percent tax, Ecuador used the tax to leverage itself in “negotiations” designed to coerce the Consortium to migrate to new service contracts. The 99 percent tax was obviously untenable for investors, as evidenced by the subsequent legislation passed by Ecuador that imposed only a 70 percent tax on new concessions applicable only to fluctuations from the date of the tax forward. Migration itself eventually became undesirable to Ecuador when oil prices temporarily plummeted in late 2008 and 2009. Ecuador again shifted gears, desiring to maintain its Production Sharing Contracts with investors.

410. Despite the fact that Burlington sought relief at ICSID to settle the question of the application of Law No. 2006-42 to

581 Exhibit C-1 at Clauses 5.1.5-5.1.8 and 5.1.20.1; Exhibit C-2 at Clause 5.1.4-5.1.7; Exhibit C-3 at Clause 5.1.5-5.1.8; and Exhibit C-4, at Clause 5.1.6-5.1.9.

582 Exhibit C-1 at Clauses 4.2, 5.1.5; Exhibit C-2 at Clauses 4.2, 5.1.4; Exhibit C-3 at Clauses 4.2, 5.1.5; Exhibit C-4 at Clauses 4.2, 5.1.6.

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Burlington’s investment, Ecuador forced Burlington to pay the disputed amounts, first by trying to collect the monies due in local procedures, and then by the outright seizure of Burlington’s share of crude.

411. Ecuador’s acts abrogate the specific guarantees made to Burlington and, as such, they are unfair. Ecuador snatched away the fruits of Burlington’s investments just as Burlington stood to profit from the risks it undertook in making its investment.

412. The nature of Ecuador’s actions is reminiscent of the Czech Republic’s treatment of CME’s investment in a privatized Czech television station.583 As soon as CME created the most successful and profitable private television station after years of effort,584 the Czech Republic orchestrated a mission to take the asset from the investor. Six years into the deal, the Czech Republic amended its media law to disallow the investment’s corporate structure and allow a local national to take over the investment, reaping the profits generated by CME’s efforts.585 An UNCITRAL tribunal determined that the Czech Republic’s acts violated the Czech-Netherlands bilateral investment treaty and awarded CME US$280 million in damages.

413. In a similar manner, Hungary breached its obligations to ADC’s investment in the national airport in Hungary.586 ADC’s

583 CL-93, CME v. Czech Republic, Partial Award dated September 13, 2001 at ¶611 (“[The Government] breached its obligation of fair and equitable treatment by evisceration of the arrangements in reliance upon [which] the foreign investor was induced to invest.”).

584 Id. at ¶¶458-59.

585 Id. at ¶460 et seq.

586 CL-101, ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary, ICSID Case No. ARB/03/16, Award of the Tribunal dated October 2, 2006 at ¶¶426-440, 445.

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investment enjoyed fair and equitable treatment in Hungary until Hungary was accepted into the European Union. At that point, the investment became hugely profitable with the increased traffic related to the free movement of persons and goods in the enlarged European Union. Although the investor had invested in the construction and development of the airport, Hungary abrogated its specific commitments to ADC and ultimately confiscated ADC’s investment in the airport for its own benefit. The tribunal considered Hungary’s acts to be unfair treatment in violation of the Cyprus-Hungary bilateral investment treaty.

414. A finding that Ecuador’s actions violate its obligation to provide fair and equitable treatment to Burlington’s investments would be wholly consistent with these cases. Ecuador did more than simply offer an attractive framework for investment. Ecuador guaranteed an attractive framework, and, in addition, guaranteed that any changes to that framework would be remedied through the stabilization provisions of the PSCs. The repudiation by Ecuador of the stabilization clauses in the PSCs, and its abrogation of its commitments to Burlington under its Hydrocarbons Legal Framework, contravened its duty to afford fair and equitable treatment under Article II(3)(a).

b. Ecuador acted in bad faith by using its sovereign taxing power to coerce Burlington to give up its rights in the PSCs

415. The facts laid before this Tribunal show – in the starkest terms – unfair and inequitable State action. Ecuador constructed a meaningful legal framework and guaranteed specific rights while shifting the burden of exploitation and risk of investment onto the investor. Having enjoyed the benefits of the bargain, Ecuador changed the bargain as soon as Burlington reaped – for a short while – the benefits of its investment and of the risk it assumed under the PSC regime. Ecuador used its sovereign taxing power to extract cash from the investments.

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416. Not only did Ecuador use its taxing power to expropriate Burlington’s revenue, but President Correa has explicitly confirmed that it also designed its attack on the investments in an effort to coerce Burlington into migrating to a new service contract regime that was more beneficial to the State in the context of increasing oil prices.587 President Correa publically admitted that oil companies, such as Burlington, had only three options going forward:

(a) “comply with the 99-1 Decree […] 99 percent for the State and 1 percent for the company because the resource is ours”;

(b) “renegotiate the contract into a services contact. […] Because if the oil is ours we hire somebody to take the oil out, right? We pay for the job, $10 for each barrel of oil extracted, but the rest is for us”; or

(c) “if they are not happy, no problem. We don’t want to rip-off anybody here. How much have they spent in investments? $200 million? Here, have your $200 million and have a nice day, and PetroEcuador will exploit that field.”588

587 See ¶¶207-208 and 230-231 above.

588 Exhibit C-183, Rafael Correa, 53rd National Address of President Rafael Correa (January 26, 2008) (relevant excerpts). Unofficial English translation. In its original Spanish version it reads: [o] se acogen al decreto 99-1 […] 99 por ciento para el Estado, 1 por ciento para la empresa porque el recurso es nuestro […] Si el petróleo es nuestro, nosotros contratamos a alguien para que saque nuestro petróleo, verdad? Le pagamos por el trabajo, 10 dólares por cada barril extraído pero el resto es para nosotros […] [S]i no están contentos, no hay problema. Aquí no

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417. Coercive tactics to force private investors to concede their contract rights have been held to constitute a separate and individual breach of the principles underlying fair and equitable treatment. For example, in LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentine Republic, the tribunal held that Argentina had

acted unfairly and inequitably in forcing the licensees to renegotiate public service contracts, and waive the right to pursue claims against the Government, or risk rescission of the contracts. Even though the Gas Law provided for the renegotiation of public service contracts, in practice there was no real negotiation, but rather the imposition of a process.589

418. Similarly, in TECMED, the tribunal concisely articulated the standard to which States must hold themselves to comply with the obligation of fair and equitable treatment. The tribunal said:

The foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any pre-existing decisions […] that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities. The investor also expects the State to use the legal instruments that govern the actions of the investor or the investment in conformity with the function usually assigned to

queremos estafar a nadie. Cuánto han gastado en inversiones? 200 millones? Tengan sus 200 millones que les vaya bonito y Petroecuador explotara ese campo.

589 CL-82, LG&E v. Argentina, Decision on Liability dated October 3, 2006 at ¶137.

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such instruments, and not to deprive the investor of its investment without the required compensation.590

419. Ecuador plainly fell short of this standard in its bad faith effort to coerce Burlington to migrate to a different regime in order for the State to reap the benefits of increased oil prices, depriving investors of any of the benefits of their bargain. This is fundamentally unfair treatment in violation of Article II of the Treaty.

3. Ecuador Breached Its Obligation Under Article II(3)(b) To Refrain From Enacting Arbitrary Measures That Impair Burlington’s Investments

420. Ecuador breached Article II(3)(b) by setting up an investment framework – supported by Ecuador’s Hydrocarbons Law and guarantees in the PSCs – designed specifically to induce investors like Burlington to take on the risks and expenditures necessary for investment, only to dismantle that framework unilaterally and without compensation. Moreover, Ecuador has taken a series of inconsistent measures that have undermined the legal security of Burlington’s investment.

421. Ecuador’s treatment of Burlington’s investments has lacked transparency since September 2005. In violation of the Hydrocarbons Legal Framework governing the PSCs and the express terms of the PSCs themselves, Ecuador demanded that Burlington renegotiate the PSCs. When it refused to do so, Ecuador imposed an unlawful tax on the investments and ignored Burlington’s requests for Ecuador to honor its obligation to stabilize the effects of the new tax. Ecuador’s tax targeted Burlington’s profits during a period of increasing oil prices – a period of time when Burlington could recoup its investment and capture the benefits of the risks it had assumed

590 CL-88, TECMED v. Mexico, Award dated May 29, 2003 at ¶154.

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in making the investment. Not only did Ecuador’s measure suffocate Burlington’s investments by taking 99 percent of revenue deemed “extra” without taking into account rising costs in crude production, but Ecuador threatened to take the other one percent – leaving Burlington unsure from day to day as to what revenue it could actually earn on its investment.

422. Ecuador then forced the investors into negotiations in which it offered the old service contract regime (a regime that benefited Ecuador in an environment of increasing oil prices) with severely limited rights to investors. This negotiation tactic lasted only until the global financial crisis sent oil prices temporarily plummeting, and Ecuador retreated to the PSC regime once again to avoid the risks associated with fluctuations in crude prices.591

423. In spite of this pending ICSID proceeding – Ecuador’s own chosen dispute resolution mechanism to settle the parties’ dispute about the lawfulness of Law No. 2006-42 payments – Ecuador aggressively pursued collection of Burlington’s disputed debt by commencing the coactiva process in Ecuador and ordering the seizure of Burlington’s crude production while Burlington’s request for provisional measures was pending.592

424. This type of roller-coaster tactic is a classic example of arbitrary treatment. In PSEG, the tribunal found that the Republic of Turkey had contravened the fair and equitable treatment standard of the applicable bilateral investment treaty due to, inter alia, the inconsistency of its administrative actions, negligence in the handling of negotiations and “the roller- coaster” effect of unpredictable legislative measures:

591 See Section II.D.5 above.

592 See Exhibit C-58, PetroEcuador Executory Tribunal Notifications to Perenco, March 3, 2009.

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The Tribunal is persuaded nonetheless that the fair and equitable treatment standard has been breached, and that this breach is serious enough as to attract liability. Short of bad faith, there is in the present case first an evident negligence on the part of the administration in the handling of the negotiations with the Claimants. […] Thirdly, the Tribunal also finds that the fair and equitable treatment obligation was seriously breached by what has been described above as the “roller- coaster” effect of the continuing legislative changes. This is particularly the case of the requirements relating, in law or practice, to the continuous change in the conditions governing the corporate status of the Project, and the constant alternation between private law status and administrative concessions that went back and forth. This was also the case, to a more limited extent, of the changes in tax legislation.593

425. The PSEG tribunal emphasized that inconsistency in the legal framework, even in the absence of subjective bad faith, creates an unpredictable investment environment that undermines fair and equitable treatment.594

426. Other tribunals have examined the standard of arbitrary treatment under Article II(3)(b) of the Treaty. In Occidental, the tribunal found that Ecuador’s changes to its tax law were arbitrary in violation of Article II(3)(b) of the Treaty because they were inconsistent with Ecuador’s normal practices and

593 CL-96, PSEG v. Turkey, Award dated January 19, 2007 at ¶¶246-250.

594 See also CL-88, TECMED v. Mexico, Award dated May 29, 2003 at ¶154.

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existing tax regulations.595 Here, Ecuador not only failed to implement a transparent tax framework, it also repudiated specific commitments to protect Burlington’s investments from the effects of any new taxes under a stabilization provision in a contract and legal decrees. Ecuador’s arbitrary actions have impaired the ability of Burlington to operate and enjoy its investment.

427. From its enactment of Law No. 2006-42 to the present time, Ecuador has created an incoherent, arbitrary framework for Burlington’s investment. Moreover, Ecuador has acted to disrupt the status quo of the respective rights of the Parties during these ICSID proceedings, creating further uncertainty and undermining the protections offered to Burlington under Article II of the Treaty.

C. ECUADOR’S TREATMENT OF BURLINGTON’S INVESTMENTS IS TANTAMOUNT TO EXPROPRIATION IN VIOLATION OF THE TREATY

428. From 2005 through 2009, Ecuador has effected a series of measures tantamount to an expropriation of Burlington’s investments, without compensating Burlington for its taking, in violation of Article III of the Treaty:

• In 2005, Ecuador demanded that Burlington renegotiate the PSCs.596

595 CL-86, Occidental v. Ecuador, Final Award dated July 1, 2004 at ¶200 (finding that Ecuador’s change in its interpretation of its tax law and reversal of its treatment of VAT tax refunds for oil exporters breached the fair and equitable treatment provision of the bilateral investment treaty and constituted arbitrary measures as a result of its incoherent legal framework).

596 See Section II.D.5 above.

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• In 2006, Ecuador enacted Law No. 2006-42 and its implementing regulations, pursuant to which Burlington was required to pay a tax to Ecuador of 50 percent of all revenues above the contract reference price.597

• In 2007, Ecuador increased the Law No. 2006-42 tax applicable to Burlington’s investments to 99 percent of all revenues above the contract reference price.598

• In 2008, in the context of increasing oil prices, Ecuador campaigned to force Burlington to abdicate its rights under the Hydrocarbons Legal Framework and the PSCs and to migrate to service agreements with drastically reduced ownership rights.599

• In 2009, in the context of decreasing oil prices, Ecuador abandoned its campaign of forced negotiation to service agreements and instead enforced Law No. 2006-42 payments against Burlington through the coactiva process, culminating in the confiscation of Burlington’s crude production.600

429. While Ecuador has not officially terminated the PSCs or formally expelled Burlington from Ecuador, the effect of these measures has been to permanently deprive Burlington of its fundamental rights of ownership in its investments in Ecuador and render the investments worthless.

597 See Section II.D.2 above.

598 See Section II.D.3 above.

599 See Section II.D.5 above.

600 Id.

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430. Ecuador’s application of Law No. 2006-42 to Burlington’s investments confiscated initially 50 percent, and subsequently 99 percent, of the revenues above the contract reference price that Burlington is entitled to receive under the terms of the PSCs and the Hydrocarbons Legal Framework. Ecuador’s order of March 3, 2009 directing PetroEcuador to seize Burlington’s crude production in aid of the coactiva process is a direct expropriation of Burlington’s tangible property. In the aggregate, these measures have destroyed the essential elements of Burlington’s investments: in exchange for a participation in crude production, Burlington was to bear the cost of exploiting, and the risk of marketing, the crude reserves in Blocks 7, 21, 23 and 24. As a result of Ecuador’s measures, Burlington continues to bear the burden and cost of production while Ecuador confiscates the fruits of Burlington’s investments, thus depriving the investments of any value.

1. Application Of Law No. 2006-42 To Burlington’s Investments Without Compensation Or Stabilization Is Tantamount To An Unlawful Expropriation

431. Expropriation carried out in violation of an international agreement is per se unlawful.601 In this case, Ecuador expropriated the Claimants’ investments in violation of specific guarantees and, thus, unlawfully, in violation of the Treaty.

601 CL-102, Case Concerning The Factory At Chorzów (Claim for Indemnity) (The Merits), Decision dated September 13, 1928, Permanent Court of International Justice, Series A., No. 17 at 143-144 (“There are certain types of expropriation which are illegal per se and not only because of failure to provide for appropriate compensation. These categories include […] expropriation in breach of treaty provisions, as in the famous Chorzów Factory case. … [E]xpropriation unlawful per se entails a more rigorous standard of compensation, including a liability for consequential loss […].”).

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432. The effect of Law No. 2006-42 on Burlington’s investments has been to transfer virtually all revenue – 99 percent above the contract price – generated by the investment to the State. For example, in July 2008, when Napo crude oil was trading at over US$122 per barrel, Burlington Oriente was forced to pay to Ecuador 99 percent of the difference between that price and US$15 per barrel, or over US$107 for each barrel of oil extracted.602 Originally, Ecuador had unequivocally agreed to absorb the effects of any new taxes on Burlington’s investments, but then imposed a tax that confiscates Burlington’s profits while refusing to absorb the effects of the tax. As a result, Ecuador has unlawfully expropriated Burlington’s investments in contravention of specific guarantees and it must compensate Burlington for the taking.

433. The tribunal in Revere Copper and Brass, Incorporated v. Overseas Private Investment Corporation concluded that Jamaica’s investment commitments made to foreign nationals to attract their capital, such as commitments relating to taxation, allowances, exchange controls and import duties, “must be regarded as binding.”603 The tribunal observed:

Admittedly Parliament could at any time legislate with respect to taxes and thus override contracts with private parties. It could not, however, deprive such parties of compensation, when the circumstances justified the payment of

602 CL-103, Platts Oilgram Price Report, July 15, 2008.

603 CL-104, Revere Copper and Brass, Incorporated v. Overseas Private Investment Corporation, Award dated August 24, 1978 at 1343. The tribunal concluded that Jamaica had expropriated the claimant’s investment and that OPIC was required to pay the claimant under its insurance policy.

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compensation under international law principles.604

434. The tribunal in S.A.R.L. Benvenuti & Bonfant v. Government of the People’s Republic of the Congo held that the Republic of Congo’s failure to afford the claimant special tax status, as promised in the parties’ agreement relating to the construction and operation of a bottled water factory, was a compensable breach of the Congo’s obligations to the foreign investor.605

435. The tax collected pursuant to Law No. 2006-42 has deprived Burlington’s investment of its profits. Ecuador deems the targeted revenue “extra.” However, Law No. 2006-42 does not take into account the rising cost of production that accompanied the rising price of crude. By taking all but one percent of Burlington’s revenue above the contract price, Ecuador has deprived Burlington of practically all of its profit. Ecuador’s measures have left Burlington earning enough to cover cash calls and investment obligations, but not enough to sustain the capital investment and risk that the PSCs placed on Burlington.

436. Whether Law No. 2006-42 is considered a tax, a royalty or a violation of Burlington’s right to a fixed participation in crude production, it is a taking in violation of Ecuador’s specific commitments repeated throughout the Hydrocarbons Legal Framework and set forth in the PSCs. It is well settled that a State expropriates property in violation of international law when the taking violates a specific commitment to an investor,

604 Id. at 1344. See also CL-105, Ian Brownlie, PRINCIPLES OF PUBLIC INTERNATIONAL LAW, Seventh Edition (2008) at 532 (noting that “[t]axation which has the precise object and effect of confiscation is unlawful”).

605 CL-21, S.A.R.L. Benvenuti & Bonfant v. Government of the People’s Republic of the Congo, ICSID Case No. ARB/77/2, Award dated August 8, 1980, 1 ICSID REPORTS 330 at ¶4.29.

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and the State does not compensate the investor for that taking. The commentary to the Draft Convention on Investments Abroad observes that a State may not nationalize property in contravention of specific undertakings:

[…] while in general every state enjoys a sovereign right to nationalize or expropriate property situated within its territory, including if necessary alien property, this right may only be exercised as regards aliens under certain conditions. Of these, the most important require that the measures taken should not be contrary to undertakings given by the state and that they should be accompanied by the payment of just and effective compensation.606

437. In the case of Eureko, the tribunal concluded that Poland’s refusal to honor its promise to a Dutch company that it could purchase in an IPO a majority shareholding in one of Poland’s national insurance companies breached the investor’s acquired

606 CL-106, The Draft Convention on Investments Abroad And Its Commentary, 9 JOURNAL OF PUBLIC LAW 116 (1960) at 121 (emphasis added). The Draft Convention was an early attempt to create a multilateral convention on foreign investment, based on standards of protection under international law. According to its commentary, “[t]he purpose of the present Draft Convention on Investments Abroad is, therefore, to make some contribution to the creation of an atmosphere conducive to the continuing and increasing international flow of private capital. To achieve this aim, the Draft Convention restates, in the first instance, what are believed to be fundamental principles of international law regarding the treatment of the property, rights, and interests of aliens.” Id. at 119.

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rights, and gave rise to a compensable expropriation under the Dutch-Polish bilateral investment treaty.607

438. In ADC, the tribunal found that ADC’s rights acquired under the investment agreement were expropriated in violation of the investor’s legitimate expectations:

[…] it is the opinion of the Tribunal that Professor Crawford articulated the matter correctly. There can be no doubt whatsoever that the legislation passed by the Hungarian Parliament and the Decree had the effect of causing the rights of the Project Company to disappear and/or become worthless. The Claimants lost whatever rights they had in the Project and their legitimate expectations were thwarted. This is not a contractual claim against other parties to the Project Agreements. An act of state brought about the end of this investment and, particularly absent compensation, the BIT has been breached. […]608

439. Ecuador has effected this taking by using its sovereign power to enact legislation to reverse its express commitments to Burlington. When a State uses its governmental or regulatory power to repudiate its obligations to a foreign investor, it is liable to the foreign investor for compensation under general principles of international law.

440. For example, the Jalapa Railroad and Power Co. Claim case concerned a contract between a U.S. railroad company and the

607 CL-70, Eureko v. Poland, Partial Award dated August 19, 2005 at ¶¶240-243. Article 5 of the treaty prohibited measures that “deprive, directly or indirectly, an investor of his assets.”

608 CL-101, ADC v. Hungary, Award of the Tribunal dated October 2, 2006 at ¶304.

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State of Veracruz in Mexico. The claimant challenged the Mexican Government’s nullification by legislative decrees of certain clauses of its contract with the State of Veracruz. The U.S.-Mexico Mixed Claims Commission concluded that Mexico’s use of its government power to abrogate its contractual obligations to foreign investors amounted to expropriation under international law:

In the circumstances, the issue for determination is whether the breach of contract alleged to have resulted from the nullification of clause twelfth of the contract was an ordinary one involving no international responsibility or whether said breach was effected arbitrarily by means of a governmental power illegal under international law […] the 1931 decree of the same Legislature, […] was clearly not an ordinary breach of contract. Here the Government of Veracruz stepped out of the role of contracting party and sought to escape vital obligations under its contract by exercising its superior governmental power. Such action under international law has been held to be a confiscatory breach of contract […].609

441. Ecuador’s intention in applying Law No. 2006-42 to Burlington’s investments was to take Burlington’s profits for the benefit of the State. It is not a measure of incidental interference. This is a direct interference, a step towards Ecuador’s ultimate seizure Burlington’s crude. Application of Law No. 2006-42 to Burlington’s investments has resulted in a substantial deprivation. Ecuador’s failure to compensate Burlington for the taking of its investment contravenes the Treaty and general principles of international law. These

609 CL-107, Jalapa Railroad and Power Co. Claim, Dept. of State Pub. No. 2859, Arbitration Series No. 9 (1948) at 540.

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breaches give rise to Ecuador’s obligation to compensate Burlington.

2. Ecuador’s Confiscation Of Burlington’s Participation In Crude Production Is An Expropriation Of Burlington’s Entire Investment

442. After confiscating Burlington’s revenues through an unlawful tax, Ecuador ultimately effected a complete taking in 2009 by ordering the seizure of Burlington’s participation in crude production. Ecuador’s seizure of the crude production has the effect of destroying the value of Burlington’s investments even though the parties’ contract has not been officially declared null and void.610 Under the seizure order, the Block 7 & 21 Tax Consortium is forced to sustain the production apparatus in Blocks 7 and 21 without earning any profit.

443. The Iran-U.S. Claims Tribunal has held that a State expropriates an investor’s property rights when the State interferes with an investor’s right to receive revenue from the sale of goods produced, denies the investor the ability to use or operate an investment, or coerces the investor into a forced sale.

444. Given Ecuador’s direct seizure of Burlington’s tangible property, the award of the Iran-U.S. Claims Tribunal in Starrett Housing Corporation v. Islamic Republic of Iran is directly

610 It is a well-accepted principle of international law that an act of expropriation does not require a formal decree of nationalization. See, e.g., CL-108, Harza Engineering Company v. The Islamic Republic of Iran, Award No. 19-98-2 dated December 30, 1982, 1982 WL 229389 at 4 (“[A] taking of property may occur under international law, even in the absence of formal nationalization or expropriation.”). See also CL-109, G.C. Christie, What Constitutes a Taking of Property Under International Law?, 38 BRITISH YEARBOOK OF INTERNATIONAL LAW 307 (1962) at 311 (noting that “a State may expropriate property, where it interferes with it, even though the State expressly disclaims any such intention”).

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relevant. In that case, the U.S. investor had an ownership interest in a real estate development project to construct 6,000 apartments outside of Tehran.611 Iran’s revolutionary government, without issuing a formal expropriation decree, took possession and control of the project, including 1,600 finished apartments before the investor had sold them and collected proceeds from their sale. The tribunal held that the claimant’s investment had been expropriated. The tribunal determined that the property interest taken by the government comprised the physical property

as well as the right to manage the Project and to complete the construction in accordance with the Basic Project Agreement and related agreements, and to deliver the apartments and collect the proceeds of the sales as provided in the Apartment Purchase Agreements.612

445. In his concurring opinion, Judge Holtzmann focused on the impact of measures on an investment, stating that expropriation is present when a State “deprives an owner of the use, control or benefit of its property,” including “deny[ing] the owner access to its funds and profits” and “coercion and intimidation forcing the owner to sell at unfairly low prices” – or, as in this case, for almost nothing at all.613

611 CL-20, Starrett Housing Corporation v. Islamic Republic of Iran, Case No 24, Interlocutory Award No ITL 32-24-1, December 19, 1983, YEARBOOK OF COMMERCIAL ARBITRATION (P. Sanders, Volume X) (1985).

612 Id. at 29 (emphasis added).

613 Id. at 35, Concurring Opinion of Howard M. Holtzmann of December 20, 1983.

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446. ICSID tribunals likewise have not countenanced a State’s confiscation of the fruit that is an investor’s reward for its efforts. In Benvenuti, an ICSID tribunal held Congo liable for taking the first shipment of bottled water, produced by the bottling plant constructed and operated by the joint venture between the claimant and the Congo, without paying for the shipment.614 The tribunal held:

It is not disputed by the Government that the sales to SIACONGO, a State company, formed an essential part of the economic justification of the PLASCO project. The Tribunal considers therefore that SIACONGO’s failure to perform its obligations engages the responsibility of the Government.615

447. In TECMED, after the claimant developed a landfill in Mexico to the point of operation, the Mexican government, citing environmental concerns, refused to renew the claimant’s permit to operate the landfill.616 As a result of the denial of the permit, the claimant lost all “profits and income from the economic and commercial operation of the Las Víboras landfill as an on going [sic] business.”617 The ICSID tribunal determined that the Mexican government had expropriated the claimant’s investment in violation of international law.618 The tribunal held:

614 CL-21, Benvenuti v. Congo, Award dated August 8, 1980.

615 Id. at ¶4.40.

616 CL-88, TECMED v. Mexico, Award dated May 29, 2003.

617 Id. at ¶45.

618 Id. at ¶151.

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To establish whether the Resolution is a measure equivalent to an expropriation under the terms of [the agreement], it must be first determined if the Claimant, due to the Resolution, was radically deprived of the economical use and enjoyment of its investments, as if the rights related thereto – such as the income or benefits related to the landfill or its exploitation – had ceased to exist. In other words, if due to the actions of the Respondent, the assets involved have lost their value or economic use for their holder and the extent of the loss. […]

Therefore, it is understood that the measures adopted by a State, whether regulatory or not, are an indirect de facto expropriation if they are irreversible and permanent and if the assets or rights subject to such measure have been affected in such a way that “any form of exploitation thereof” has disappeared: i.e. the economic value of the use, enjoyment or disposition of the assets or rights affected by the administrative action or decision have been neutralized or destroyed. Under international law, the owner is also deprived of property where the use or enjoyment of benefits related thereto is exacted or interfered with to a similar extent, even where legal ownership over the assets in question is not affected, and so long as the deprivation is not temporary.619

448. In Metalclad Corporation v. The United Mexican States, Metalclad invested in the development and operation of a

619 Id. at ¶¶115-16 (emphasis added).

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hazardous waste landfill site.620 Metalclad thought it had obtained all required permits, and thus began construction. After constructing the landfill, Metalclad was prevented from commencing operations due to the refusal of the local municipality to issue a municipal permit on the ground, inter alia, that the landfill would cause adverse environmental effects. The tribunal held that the refusal of the municipality to grant Metalclad a permit constituted a measure equivalent to expropriation. The level of interference with the investment was found to be complete since the measure “involve[d] the complete frustration of the operation of the landfill and negate[d] the possibility of any meaningful return on Metalclad’s investment. In other words, Metalclad has completely lost its investment.”621

449. The Metalclad investor bore the cost of its investment, but was deprived of an opportunity to collect profits from that investment, and as a result, Mexico was deemed to have expropriated the entire investment. The effect of Ecuador’s seizure of the Block 7 & Block 21 Tax Consortium’s participation in crude production is that Burlington will have borne the cost of production without receiving any revenue or, at the very least, profit. In other words, Ecuador has completely frustrated the purpose of Burlington’s investment.

450. In this case, Ecuador’s order to seize Burlington’s participation in crude production is not a single act to be viewed in isolation. Rather, it is to be considered in light of the series of acts that Ecuador has imposed on Burlington’s investments in order to extract cash from the investments – first by forced payment of an unlawful tax and then by confiscation of crude. Three years ago, Ecuador enacted Law No. 2006-42, seizing 50 percent of

620 CL-110, Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award dated August 30, 2000.

621 Id. at ¶113.

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“extra” revenues. Sixteen months ago, Ecuador ordered the seizure of 99 percent of “extra” revenues. Having stripped Burlington of its “extra” revenue, the seizure of crude completes the taking.

451. Other States have expropriated property, including foreign investors’ rights in oil concessions, in a series of acts the effect of which has been considered unlawful in the aggregate by several tribunals. Over a period of three years from 1971 until 1974, Libya nationalized the oil concessions held by foreign oil companies in a series of acts ultimately viewed as a single expropriation.622 Iran often carried out its expropriations through a series of acts, which were characterized by successive encroachments upon management and ownership rights.623 Kuwait expropriated the value of Aminoil’s concession by increasing the royalty rate to 20 percent, then increasing the tax rate to 85 percent, before terminating the concession altogether and nationalizing Aminoil’s investment. The tribunal observed that these decisions “had a revolutionary effect, not only on the prices but on the very nature of the concessions” and “transform[ed] the concessions de facto into service contracts.”624 In concluding that Kuwait had breached its obligations to Aminoil, the tribunal stated:

622 CL-76, BP v. Libya, Award dated August 1, 1971; CL-78, TOPCO v. Libya, Award on the Merits dated January 19, 1977; CL-75, LIAMCO v. Libya, Award dated April 12, 1977 at 159.

623 CL-111, Charles N. Brower and Jason D. Brueschke, THE IRAN-UNITED STATES CLAIMS TRIBUNAL (1998) at 433.

624 CL-112, The Government of the State of Kuwait v. The American Independent Oil Company (Aminoil), Final Award dated March 24, 1982 at ¶50.

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These changes must not simply be viewed piece- meal, but on the basis of their total effect.625

452. In the case of Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentine Republic, the tribunal concluded that an Argentine province expropriated the rights of an investor in a water and sewage treatment concession through a series of acts having a “devastating effect on the economic viability of the concession.”626 The tribunal held that contractual rights are capable of being expropriated627 and that the measures “taken cumulatively, rendered the concession valueless and forced CAA and Vivendi to incur unsustainable losses.”628

453. By taking the Consortium’s production and leaving the Consortium to operate without any revenue or hope of earning any revenue, Ecuador has destroyed any value left in Burlington’s investment. Ecuador has frustrated the essential purpose of the investment, deprived Burlington of all of its contractual rights under the PSCs, and burdened Burlington with ongoing production obligations. Ecuador’s acts fit squarely within the prevailing standards in international law of effecting a de facto expropriation of Burlington’s investment. As a result, Ecuador has unlawfully expropriated Burlington’s investments and Burlington is entitled to the full measure of damages under international law.

625 Id. at ¶97.

626 CL-123, Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Award dated August 20, 2007 at ¶7.5.26.

627 Id. at ¶7.5.34.

628 Id. at ¶7.5.28.

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D. ECUADOR FAILED TO PROVIDE FULL PROTECTION AND SECURITY TO THE INVESTMENTS OF BURLINGTON

454. When deciding to invest in Blocks 23 and 24, Burlington relied on the guarantees provided in the PSCs and on the Ecuadorian Government’s explicit commitment to take all necessary actions to resolve the conflict with the indigenous populations residing in those Blocks.629 Ecuador has failed to provide physical protection and security to Burlington’s installations, personnel and hydrocarbons activities in Blocks 23 and 24.

455. Furthermore, Ecuador has failed to provide legal and commercial security to Burlington’s investments in Blocks 7, 21, 23 and 24. Ecuador has rendered the investment environment in Blocks 7 and 21 insecure by discarding the legal framework governing the investments and seizing Burlington’s entire crude production. In Blocks 23 and 24, Burlington has been unable to complete the Environmental Impact Assessment, a prerequisite task before exploration and exploitation activities can commence. Indeed, as a result of Ecuador’s conduct, contractual obligations under the PSCs have been stalled under force majeure status for the duration of Burlington’s investment in Blocks 23 and 24. In sum, Ecuador has failed to fulfill its obligation under Article II(3)(a) of the Treaty to provide Burlington’s investment in Blocks 23 and 24 with full protection and security.

1. Ecuador Has Failed To Provide Burlington’s Investments In Blocks 23 And 24 With Physical Protection And Security

456. The obligation to provide “full protection and security” has “traditionally been associated with situations where the physical

629 See Section II.C.2 above.

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security of the investor or its investment is compromised.”630 Discussing the initial application of this standard, the Sempra Energy International v. The Argentine Republic tribunal explained:

There is no doubt that historically this particular standard has been developed in the context of physical protection and the security of a company’s officials, employees and facilities.631

457. The standard imposed upon the host State is one of vigilance. State responsibility is triggered by “‘the mere lack or want of diligence,’ without any need to establish malice or negligence.”632 The burden is upon the host State to demonstrate that it has taken all measures to protect the investments of the foreign investor. As the American Manufacturing & Trading, Inc. v. Zaire tribunal explained:

[Respondent] must show that it has taken all measure of precaution to protect the investments of [Claimant] on its territory. It has not done so, by mere recognition of the existing reality of the damage caused […].633

630 See CL-89, BG v. Argentina, Final Award dated December 24, 2007 at ¶¶324, 329.

631 CL-80, Sempra v. Argentina, Award dated September 28, 2007 at ¶323.

632 CL-113, Asian Agricultural Products Ltd (AAPL) v. Sri Lanka, ICSID Case No. ARB/87/3, Award dated June 27, 1990 at ¶77. The tribunal concluded that Sri Lanka had failed to provide protection and security during a military operation conducted by Sri Lanka’s security forces against installations reported to be used by local rebels – including the claimant’s business, a shrimp farm.

633 CL-114, American Manufacturing & Trading, Inc. v. Republic of Zaire, ICSID Case No. ARB/93/1, Award dated February 21, 1997 at ¶6.05.

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458. Indeed, the standard to which the State is held is high. The United Nations Conference on Trade and Development has explained:

In the course of these cases, the tribunals have indicated that the obligation is not one of result – that is, it is not a complete insurance policy against any and every loss due to some form of civil strife. However, the standard of care required has been set at a fairly high level. For example, comparisons with treatment of domestic nationals in cases of similar strife have been rejected. Arguments of incapacity or higher priorities in responding to the circumstances of the strife have also been rejected as a basis for a defence to a claim. In essence, while not an obligation of result, an obligation of good faith efforts to protect the foreign-owned property has been established by these recent cases without regard for the resources available to do so.634

459. While the standard might not necessarily be strict liability, the host State is still required to exercise due diligence.635 After all, the requirement of full protection and security “obliges the host State to adopt all reasonable measures to protect assets and

634 CL-115, United Nations Conference on Trade and Development, Investor-State Disputes Arising from Investment Treaties: A Review, UNCTAD Series on International Investment Policies for Development, United Nations (2005) at 40-41.

635 CL-116, Noble Ventures v. Romania, ICSID Case No. ARB/01/11, Award dated October 5, 2005 at ¶164.

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property from threats or attacks which may target particularly foreigners or certain groups of foreigners.”636

460. Ecuador has not fulfilled this standard. Despite repeated requests for assistance from Burlington and the predecessor owners of Blocks 23 and 24, Ecuador has not taken reasonable measures to protect the investments from the attacks and threats of the indigenous communities. The situation is analogous to Wena Hotels Limited v. Arab Republic of Egypt.637 There, the Egyptian government was aware of the intentions of certain officials to seize the claimant’s hotels, but did not take any preventive measures. Assistance was not forthcoming despite assurances given to the claimant’s parliamentary consultant.638 Furthermore, after seizing the investment, Egypt did not take any steps to return the investment to the foreign investor or to compensate the foreign investor for the losses sustained.639

461. Apart from declaring the Block 23 and 24 investments to be in force majeure status, Ecuador has failed to assist affirmatively Burlington in its negotiations with the indigenous communities. This is not a case of mere negligence. In 2006, Ecuador actually walked away from the negotiating table, despite the vital role it could play in repairing relations between the foreign investor and the indigenous communities. As the Parkerings- Compagniet AS v. Republic of Lithuania tribunal observed, “[a]

636 CL-100, Saluka v. Czech Republic, Partial Award dated March 17, 2006 at ¶484.

637 See CL-117, Wena Hotels Limited v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award dated December 8, 2000.

638 Id. at ¶¶84-88.

639 Id. at ¶¶84-95; see also CL-118, Wena Hotels Limited v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Decision on Annulment dated January 28, 2002 at ¶110 (confirming the tribunal’s finding of a violation of full protection and security).

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violation of the standard of full protection and security could arise in case of failure of the State to prevent the damage, to restore the previous situation or to punish the author of the injury.”640 That scenario clearly has played itself out in relation to Burlington’s investments in Ecuador.

462. Any objection by Ecuador that it should not be held responsible for the acts of indigenous communities should not be entertained by this Tribunal. The full protection and security obligation typically is used to protect the investors from third parties.641 In any event, Ecuador and PetroEcuador are inextricably involved in the security situation in Blocks 23 and 24 given that they are parties to the PSCs for Blocks 23 and 24. Accordingly, they have an affirmative obligation to secure the investments to allow for contract performance. Moreover, it was Ecuador’s failure to comply with an order of the Inter- American Court of Human Rights calling on it to adopt measures to protect the Kichwa indigenous community of Sarayaku that exacerbated the security situation in Blocks 23 and 24.642

640 CL-119, Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8, Award dated September 11, 2007 at ¶355.

641 See CL-120, Eastern Sugar BV v. Czech Republic, (Ad hoc, Stockholm Chamber of Commerce Rules) Partial Award dated March 27, 2007 at ¶203.

642 See Exhibit C-158, Matter of Pueblo Indígena Sarayaku (Int. Am. Ct. Human Rights), Order on Provisional Measures Regarding Ecuador dated July 6, 2004 at 10.

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2. Ecuador Has Failed To Provide Burlington With A Secure Investment Environment In Any Of The Blocks

463. Early cases such as Asian Agricultural Products Ltd (AAPL) v. Sri Lanka643 and American Manufacturing644 dealt with physical protection and security of investments. However, where the terms “protection” and “security” are preceded by the adjective “full” without any modifiers used, a broader interpretation of the standard may be employed. Recently, tribunals have held that “[i]t is not only a matter of physical security; the stability afforded by a secure investment environment is as important from an investor’s point of view.”645 According to this view, full protection and security also entails a State’s guarantee of security of an investment’s commercial and legal stability. In 2008, the Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania tribunal explained:

The Arbitral Tribunal adheres to the Azurix holding that when the terms “protection” and “security” are qualified by “full,” the content of the standard may extend to matters other than physical security. It implies a State’s guarantee of stability in a secure environment, both physical, commercial and legal. It would in the Arbitral Tribunal’s view be unduly artificial to confine the notion of “full security” only to one aspect of security, particularly in light of this term in a BIT,

643 CL-113, AAPL v. Sri Lanka, Award dated June 27, 1990. 644 CL-114, American Manufacturing v. Zaire, Award dated February 21, 1997. 645 CL-121, Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award dated July 14, 2006 at ¶408.

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directed at the protection of commercial and financial investments.646

464. Biwater Gauff builds upon a series of cases that has interpreted “full protection and security” to encompass “stability of the legal framework applicable to the investment.”647

465. Here, Ecuador’s actions towards Burlington’s investments in Blocks 7, 21, 23 and 24 have dismantled the legal and commercial framework in which those investments operate or were intended to operate. Ecuador has failed to provide reasonable protection and security as it was mandated to do under the terms of the PSCs,648 as well as in accordance with its own laws and Constitution.649

466. With respect to Burlington’s investments in Blocks 23 and 24, and even though under the PSCs, Ecuadorian law and international law Ecuador is required to act, Ecuador has used its authority to extend the force majeure status indefinitely, ultimately rendering the investments incapable of any commercial development. As the CME Czech Republic B.V. v. The Czech Republic tribunal stated:

The host State is obligated to ensure that neither by amendment of its laws nor by actions of its

646 CL-122, Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award dated July 24, 2008 at ¶729.

647 CL-89, BG v. Argentina, Final Award dated December 24, 2007 at ¶326. See also CL-121, Azurix v. Argentina, Award dated June 23, 2006 at ¶408; CL-79, Siemens v. Argentina, Award dated February 6, 2007 at ¶303; CL-123, Compañía de Aguas v. Argentina, Award dated August 20, 2007 at ¶7.4.15.

648 Exhibit C-3, Clause 5.2.6; Exhibit C-4, Clause 5.2.6.

649 See ¶359 above.

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administrative bodies is the agreed and approved security and protection of the foreign investor’s investment withdrawn or devalued. This is not the case here. The Respondent is therefore in breach of this obligation.650

467. On the same reasoning that the CME tribunal held the Czech Republic liable for the actions of its administrative bodies, Ecuador here should be found liable for its inactions. By failing affirmatively to provide security and protection to Burlington’s investment, Ecuador has completely devalued the foreign investor’s investment.

468. With respect to Burlington’s investments in Blocks 7 and 21, Ecuador has affirmatively acted to create an environment devoid of security for the investments. There is no longer any legal framework protecting the investments. Burlington’s entire crude production is subject to seizure at the will of the Government.

469. Where tribunals have extended the application of “full protection and security” beyond the realm of physical protection and security, they have noted frequently a possible overlap of the breach with a violation of fair and equitable treatment, especially since – as here – the two standards co-exist in the same sub-clause or article of a bilateral investment treaty. The Occidental tribunal concluded that the question of whether Ecuador’s actions resulted in a violation of the full protection and security standard was moot since “treatment that is not fair and equitable automatically entails an absence of full protection and security of the investment.”651

650 CL-93, CME v. Czech Republic, Partial Award dated September 13, 2001 at ¶613.

651 CL-86, Occidental v. Ecuador, Final Award dated July 1, 2004 at ¶187. See also CL-96, PSEG v. Turkey, Award dated January 19, 2007 at ¶258

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470. Presently, since Blocks 23 and 24 have not yet been able to reach the exploration and exploitation phases of the PSCs, Law No. 2006-42 has not yet been applied to them. However, were Ecuador and PetroEcuador to observe their obligations to secure the investments and lift the force majeure declaration, the eventual application of Law No. 2006-42 and its implementing regulations would further contribute to the complete erosion of the legal and commercial value of the Block 23 and 24 investments. As a result, the legitimate expectations of Burlington with respect to its investments in Blocks 23 and 24 will not be fulfilled. Likewise, the newly created legal regime destroys the legal and commercial security of the investments. Accordingly, prospectively, Ecuador’s actions breach both standards of Article II(3)(a) of the Treaty.

471. In conclusion, Ecuador failed to provide Burlington’s investments with the full protection and security required under the Treaty. Ecuador provided no material assistance whatsoever to protect Burlington’s investments in Blocks 23 and 24. Specifically, Ecuador used neither its political resources nor its police powers – despite assurances that it would do so – to ensure the full protection and security of the investments in Blocks 23 and 24 and the employees and sub-contractors working there. Ecuador equally eviscerated all legal security with respect to Burlington’s investments in Blocks 7 and 21 by seizing all crude production. Accordingly, Ecuador breached its obligations under Article II(3)(a) of the Treaty.

E. BURLINGTON IS ENTITLED TO DAMAGES AS A RESULT OF ECUADOR’S BREACHES OF THE TREATY

472. Pursuant to Annex 2 to the Minutes of the First Session, Burlington will submit its quantum claim to the Tribunal at a later stage in the proceedings. At the present moment it is

(an expansion of full protection and security results in a very close connection with fair and equitable treatment).

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sufficient to say that, as a result of Ecuador’s multiple breaches of the Treaty, Burlington is entitled to a declaration from the Tribunal terminating the PSCs and awarding full compensation under international law.

473. Customary international law requires a State that has breached its obligations under international law to provide compensation to the aggrieved party that is “sufficient to compensate the affected party fully and to eliminate the consequences of the state’s action.”652 The Permanent Court of International Justice provided an authoritative statement of this basic principle in the Case Concerning The Factory At Chorzów (Claim for Indemnity) (The Merits), stating that

reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it – such are the principles which would serve to determine the amount of

652 CL-123, Compañía de Aguas v. Argentina, Award dated August 20, 2007 at ¶8.2.7. See also CL-124, Opinion in the Lusitania Cases, United States-Germany Decisions of Mixed Claims Commission, dated November 1, 1923 at 39 (“The fundamental concept of ‘damages’ is […] reparation for a loss suffered […] . The remedy should be commensurate with the loss, so that the injured party may be made whole.”) (emphasis in the original).

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compensation due for an act contrary to international law.653

474. In accordance with this prevailing principle, once the Tribunal has determined that Ecuador violated the Treaty, it must place Burlington in the economic position that it would have enjoyed had the wrongful acts never occurred.654 This should be accomplished by an award of damages, plus compensation for any other losses attributable to the State’s unlawful actions.655 The same standard applies whether the Tribunal finds Ecuador liable for breach of its obligations under Article II(3), for unlawful confiscation, violation of fair and equitable treatment, arbitrary treatment or failure to provide full protection and

653 CL-102, Chorzów, Decision dated September 13, 1928 at 47. See also CL-124, Lusitania Cases, dated November 1, 1923 at 33-36.

654 CL-98, Petrobart v. Kyrgyzstan, Award dated March 29, 2005 at 56 (“The Arbitral Tribunal agrees that, insofar as it appears that Petrobart has suffered damage as a result of the Republic’s breaches of the Treaty, Petrobart shall so far as possible be placed financially in the position in which it would have found itself, had the breaches not occurred.”); CL-125, Sapphire International Petroleums Ltd. v. National Iranian Oil Company, Arbitral Award dated March 15, 1963 at 185-86 (“[T]he object of damages is to place the party to whom they are awarded in the same pecuniary position that they would have been in if the contract had been performed in the manner provided for by the parties at the time of its conclusion.”); CL-126, Biloune and Marine Drive Complex Ltd. v. Ghana Investments Centre and the Government of Ghana, (UNCITRAL) Award on Jurisdiction and Liability dated October 27, 1989 and Award on Damages and Costs dated June 30, 1990 at 228 (“The standard for compensation in cases of expropriation is restoration of the claimant to the position he would have enjoyed but for the expropriation. This principle of customary international law is stated in many recent awards of international arbitral tribunals.”).

655 CL-102, Chorzów, Decision dated September 13, 1928 at 47 and 49.

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security.656 Burlington will seek reparation from Ecuador to the full extent permitted under international law, and reserves all its rights with respect to its claims of relief thereunder.

VI. THE CLAIMANTS’ REQUEST FOR RELIEF

475. On the basis of the foregoing, without limitation and reserving Claimants’ rights to supplement these prayers for relief, including without limitation in the light of further action by Ecuador and PetroEcuador, as well as Claimants’ rights as nationals of Contracting States to the ICSID Convention with claims concerning investments in Ecuador arising while the ICSID Convention remains in force and effect, Claimants respectfully request that the Tribunal:

(a) DECLARE that Ecuador and PetroEcuador have breached the PSCs;

(b) DECLARE that Ecuador has breached:

(i) Article II of the Treaty by failing to observe its obligations with regard to Burlington’s investments, by failing to accord Burlington’s investments fair and equitable treatment and full protection and security, and by implementing arbitrary and discriminatory measures against Burlington’s investments; as well as

(ii) Article III of the Treaty by unlawfully expropriating and/or taking measures tantamount to expropriation with respect to Burlington’s investments in Ecuador;

656 CL-127, International Law Commission Draft Articles on the Responsibility of States for Internationally Wrongful Acts, text adopted rd at 53 Session, YEARBOOK OF THE INTERNATIONAL LAW COMMISSION, Volume II (Part Two) (2001) at Articles 1, 28 and 31(1).

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(c) ORDER Ecuador and PetroEcuador to specifically perform their obligations under the PSCs and pay damages for their breaches of the PSCs, and Ecuador to pay damages for its breaches of the Treaty, in an amount to be determined during the Quantum phase of these proceedings pursuant to the Tribunal’s order set forth Annex 2 to the Minutes of the First Session of the Arbitral Tribunal dated February 18, 2009, including payment of compound interest at such a rate and for such period as the Tribunal considers just and appropriate until the effective and complete payment of the award of damages; or

(d) In the event that Ecuador and PetroEcuador make future collaboration impossible, DECLARE the PSCs terminated and ORDER Ecuador and PetroEcuador to pay damages for their breaches of the PSCs and Ecuador to pay damages to Burlington for its breaches of the Treaty, in an amount to be determined during the Quantum phase of these proceedings pursuant to the Tribunal’s order set forth Annex 2 to the Minutes of the First Session of the Arbitral Tribunal dated February 18, 2009, including payment of compound interest at such a rate and for such period as the Tribunal considers just and appropriate until the effective and complete payment of the award of damages;

(e) AWARD such other relief as the Tribunal considers appropriate; and

(f) ORDER Ecuador and PetroEcuador to pay all of the costs and expenses of this arbitration, including Burlington’s legal and expert fees, the fees and expenses of any experts appointed by the Tribunal, the fees and expenses of the Tribunal and ICSID’s other costs.

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Respectfully submitted April 20, 2009

______Alexander Yanos Nigel Blackaby Jessica Bannon Vanto Noiana Marigo

520 Madison Avenue New York, NY 10022 United States of America

______José M. Pérez Javier Robalino-Orellana

Ave. República de El Salvador No.1082 Edif. Mansión Blanca Quito Ecuador

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