Perenco Negotiates with Ecuador Government

Wednesday, July 08, 2009

Perenco Ecuador Limited has called on the Government of Ecuador to cease efforts to sell oil seized from Blocks 7 and 21 in defiance of orders by international arbitration tribunals, and instead to seek a negotiated solution to the dispute concerning the applicability of Law 42. Perenco Ecuador is the Operator of the two blocks in question.  On February 19, 2009, the Republic of Ecuador and its oil company, Empresa Estatal Petroleos del Ecuador ("Petroecuador"), commenced a coercive process to collect from Perenco approximately $327 million they claimed were due under a 2006 Ecuadorian law ("Law 42") by which the government asserts a right to 99% of the oil revenues above an arbitrary "reference price."  In March 2009, Petroecuador began seizing crude oil produced by Perenco and its consortium partner, Burlington Resources Oriente Ltd. ("Burlington"), from Blocks 7 and 21 in Ecuador to satisfy the alleged Law 42 debt. 

However, on May 8, 2009, a three-member international arbitration tribunal constituted under the auspices of the International Center for the Settlement of Investment Disputes ("ICSID") unanimously ordered that the Republic of Ecuador and Petroecuador be restrained from "instituting or further pursuing any action" - including oil seizures - "to collect from Perenco any payments [they] claim are owed… pursuant to Law 42."  The tribunal made clear that such orders "are binding on the party to which they are directed" and that the parties "are under an international obligation to comply." On June 29, 2009, a different international arbitration tribunal in a separate ICSID arbitration commenced by Burlington issued a similar provisional measures order.

Despite these ICSID tribunal orders, the Ecuadorian Government has twice attempted to auction the crude oil it has seized from Perenco and Burlington.  Petroecuador first attempted to sell the seized oil at an auction in May, but no buyers materialized.  On July 3, Petroecuador convened a second auction, but the only bidder was Petroecuador itself.  Petroecuador has recently announced an intention to conduct a third auction.

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