Occidental turned to international arbitration (again) in 2006, accusing the Ecuadorian government of nationalising its massive Amazonian oil concession. The two parties had earlier fallen out over the tax treatment of that investment, with Occidental ultimately prevailing in arbitration – and securing a $75m refund of VAT paid in Ecuador.

However, that victory for Oxy appeared somewhat Pyrrhic when Ecuador subsequently terminated the company’s concession, accusing the US firm of breaking the law by handing a 40% stake in the project over to the Canadian energy firm Encana.


Oxy moved quickly to file another arbitration against Ecuador – this time at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). The US energy giant claims that Ecuador’s actions breach protections found in the US-Ecuador bilateral investment treaty, including a duty to provide full compensation for nationalised investments.

In September, Oxy won a preliminary skirmish in this second arbitration. Ecuador had insisted that ICSID arbitrators lacked jurisdiction to hear the dispute. However, the three-person arbitration tribunal dismissed the government’s objections.

The panel will now rule on Ecuador’s compliance with its treaty obligations, a task which could take several years.

Oxy entered Ecuador in 1999, and was given exclusive rights to explore for oil in a block of the Amazonian rainforest. The firm is now seeking upwards of $3bn in compensation for its lost investments and projected future profits.

Oxy is far from alone in fighting the Ecuadorian government.

In recent years, a series of multinational energy companies have filed – or threatened – international arbitrations in the face of a so-called windfall royalty imposed by Ecuador on ‘excess’ energy profits. Currently, Murphy Oil, Repsol, Shell and Perenco are all suing Ecuador at ICSID in relation to the windfall scheme.

Ecuador has also been embroiled in disputes with foreign investors in the electricity generation sector.

Indeed in August, US-based Duke Energy won a long-running arbitration with Ecuador, convincing an ICSID tribunal that Ecuador had breached certain legal obligations contained in power purchase agreements concluded during the mid-1990s. In particular, arbitrators found that lapses in payment by Ecuador were contrary to payment commitments pledged to Duke. However, arbitrators looked sceptically on the outsized losses claimed by Duke, awarding the firm only $5.5m of the $24.7m claimed in the arbitration.

Ecuador had better luck in another dispute with a pair of US power producers, MCI Power Group and New Turbine Inc., who argued that Ecuador had failed to fulfil commitments in a power purchase arrangement. The investors did not convince arbitrators that Ecuador had breached its legal obligations, but the US firms are now attempting to annul the 2007 arbitral award in a special ICSID process.

Given the tendency of foreign investors to opt for international arbitration in case of disputes with government agencies, Ecuador has begun to look more warily at the network of investment protection treaties concluded by earlier administrations, and is also pushing to have foreign investors use South American arbitration forums, rather than the World Bank’s dispute settlement facility.

Luke Eric Peterson is the editor of Investment Arbitration Reporter www.iareporter.com a legal news, analysis and intelligence service.