THE TRIBUNAL

Composed as above,

After deliberation,

Makes the following Award:

On 17 May 2006, Occidental Petroleum Corporation ("OPC") and Occidental Exploration and Production Company ("OEPC"), two U.S. companies, (together the "Claimants") incorporated in the States of Delaware and California, respectively, filed with the International Centre for Settlement of Investment Disputes ("ICSID" or the "Centre") a Request for Arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States ("ICSID Convention") against the Republic of Ecuador ("Ecuador" or the "Respondent") and Empresa Estatal Petróleos del Ecuador ("PetroEcuador").¹

... The Tribunal has reached the point in its deliberations where it requires the assistance of both parties' experts, Mr. Joseph Kalt and Mr. Daniel Johnston, in order to help the Tribunal assess the proper calculation of damages.

Therefore, in accordance with Rule 34 (2) of the ICSID Arbitration Rules, the Tribunal calls upon the parties to produce Messrs. Kalt and Johnston for consultation with the Tribunal at the ICSID's headquarters in Washington at 10.30 a.m. on Wednesday, 27 April 2011. If the parties agree, the Tribunal would wish to consult with the parties' experts alone without the presence of counsel.

On behalf of the Tribunal, I acknowledge receipt of the parties' replies the contents of which have been noted.

To be clear, the Tribunal reiterates that its deliberations are continuing. The Tribunal requests the parties to protect the date of 27 April 2011 for consultation with Messrs. Kalt and Johnston. Again, to be clear, this consultation will not take place without the presence of counsel unless both parties agree.

Finally, the Tribunal notes that both parties request that they be informed of the issues it wishes to discuss with their experts. The Tribunal agrees. This information will be communicated to the parties after the consultation of 27 April 2011 has been definitely confirmed. The parties are invited to confirm by Monday, 7 March 2011, their and the experts' availability on the proposed date...

At the beginning of the hearing, the President of the Tribunal made the following statement:³

As the parties will recall, on 15 February 2011, the tribunal informed the parties that it had reached the point in its deliberations both as to liability and quantum where it required the assistance of both parties' respective quantum experts, Professor Joseph Kalt and Mr. Daniel Johnston. More specifically, the tribunal stated that, in the event, after it concludes the first phase of its deliberations, it should make a positive finding of liability, it will be required to determine the fair market value of Block 15 as of 16 May 2006. If it decided -- if it decided to use the discounted cash flow method in order to estimate this value, the tribunal formed the view that Professor Kalt and Mr. Johnston, who had given evidence earlier on the use of that method, could answer certain specific questions and help it with certain calculations.

During the hearing, the members of the Tribunal posed questions to the parties' experts and counsel.

On 6 October 2011, the President of the Tribunal wrote, on behalf of the Tribunal, to the parties as follows:

Members of the Tribunal continue their intense deliberations. The Tribunal regrets that its decision has taken longer to finalize than it would have wished. However, the parties have submitted to the Tribunal, in their extensive written and oral submissions, a myriad of factual and legal issues which all need to be analyzed and determined. The Tribunal is confident that its deliberations will end soon and a decision issued shortly thereafter.

In recent days, the Tribunal has been addressing an issue which, in its view, neither party has dealt with comprehensively in its prior submissions. The issue concerns the interpretation of the Farmout Agreement and the Joint Operating Agreement.

The Respondent submits […] that the calculation of damages (if any) to be awarded to the Claimants in the circumstances must be limited to a 60% interest in Block 15 because of the transfer by the Claimants to AEC under the terms of the Farmout Agreement of 40% of their interest under the Participation Contract. The Claimants do not accept the Respondent's contention […]

The governing law clause of the Farmout Agreement provides:

This Agreement shall be governed by and construed, interpreted and applied in accordance with the laws of the State of New York, United States of America, excluding any choice of law rules or conflict of law principles which would refer the matter to the laws of another jurisdiction, except to the extent that the laws of Ecuador require application of the laws of Ecuador to the Participating Agreements and Block 15 or other property situated in or operations or activities conducted in Ecuador.

The Tribunal notes that the Claimants argued that the transfer of the "economic interest" to AEC would not be considered an assignment under New York law and that, as a result, the non-assignment clause in Article 16(1) of the Participation Contract was not breached [...]. Accordingly, the Claimants did not analyze the effect and validity of an assignment, (assuming an assignment had indeed occurred as a result of the Farmout Agreement and the Joint Operating Agreement), in breach of Article 16(1) of the Participation Contract and Article 79 of the Hydrocarbons Law. In addition, the Claimants did not analyze Ecuadorian and New York law in this regard. The Tribunal further notes that the Respondent argued that New York law is irrelevant to the issue of whether an assignment under the Farmout Agreement and the Joint Operating Agreement (if any) is in breach of Ecuadorian law (CounterMemorial on Liability, para 185).

In sum, neither party, in their quantum submissions, referred to the effect of Article 79 of the Hydrocarbons Law or Article 16(1) of the Participation Contract on the assumption that an assignment of rights occurred as a result of the Farmout Agreement and the Joint Operating Agreement.

The Tribunal now invites the parties to assume that an assignment of rights did occur as a result of the Farmout Agreement and the Joint Operating Agreement. On the basis of this assumption, the parties are requested to undertake a detailed analysis of the effect of an assignment of rights made under a contract governed by New York law (i.e. the Farmout Agreement and the Joint Operating Agreement) in violation of a non-assignment clause set forth in a contract governed by Ecuadorian law (i.e. Article 16(1) of the Participation Contract) and in violation of Article 79 of the Hydrocarbons Law. The parties are further requested to address both New York law and Ecuadorian law and to make submissions accordingly, even if one or both parties may consider that, for any reason, New York law and/or Ecuadorian law may not be relevant to the determination of the effect of the Farmout Agreement and the Joint Operating Agreement.

The parties' submissions will be exchanged simultaneously and submitted to the Tribunal within 28 days from this date. The Tribunal will then decide whether reply briefs are necessary.

While the parties may refer to new legal authorities with their respective submissions, they may not file any document which is not already in the record.

...Members of the Tribunal have now conferred on whether to schedule a hearing in person, as requested by the Respondent, in order to address orally the issues raised by the Tribunal in its communication of 6 October 2011 to the parties and then briefed extensively by them in the submissions of 3 and 22 November 2011.

While the Tribunal remains of the view that a hearing is not necessary, it notes that the Claimants, in their communication of 20 February, stated that they had no objection to a hearing. In the circumstances, the Tribunal has decided to accede to the Respondent's request and schedule peremptorily a hearing in London on Thursday 12 April 2012. The Hearing will commence at 10 a.m. and end at 5 p.m.

The parties are invited to confer and agree a timetable for the hearing which they will communicate to the Tribunal by 23 March 2012.

The parties are put on notice now that, immediately after the hearing of 12 April, the Tribunal will declare the proceeding closed in accordance with ICSID Arbitration Rule 38.

Claimants respectfully request an award in their favor,

(a) Declaring that Respondents have breached their obligations under the Participation Contract and the Operating Agreements, the Treaty, and Ecuadorian and international law;

(b) Ordering Respondents to declare null and void the Caducidad Decree and to reinstate fully OEPC's rights under the Participation Contract and the Operating Agreements;

(c) Directing Respondents to indemnify Claimants for all damages caused as a result of their breaches, including costs and expenses of this proceeding, in amounts to be determined at the hearing, which Claimants believe will exceed US$1 billion;

(d) Directing Respondents to pay Claimants interest on all sums awarded, in amounts to be determined at the hearing, and to order any such further relief as may be available and appropriate in the circumstances.

Ecuador respectfully requests that the Tribunal:

1. Declare that Ecuador has complied with its obligations under the Participation Contract, Ecuadorian law, and the Treaty, and dismiss all of the Claimants' claims without prejudice.

2. Declare that OEPC breached the Participation Contract by using diplomatic channels and making recourse to the U.S. Government in connection with disputes arising out of or relating to the performance of the Participation Contract in contravention of Clause 22.2.1.

3. Declare that OEPC's claims in this arbitration were not made in good faith, and to the contrary, were asserted either negligently or with the intent to cause harm to Ecuador, and did in fact cause such harm.

4. Declare that Ecuador suffered damages from OEPC's breaches of contract, malicious prosecution/abuse of rights, destruction of Block 15's operation, and failure to pay assignment fees, and order OEPC to pay such damages in an amount subject to proof;

5. Order the Claimants to pay interest on such amount at the legal rate;

6. Order the Claimants to pay the costs of this arbitration, including all costs paid to ICSID and to the Tribunal, plus Ecuador's attorneys' fees and disbursements, as well as interest on the foregoing.

16.1 Transfer of this Participation Contract or assignment to third parties of the rights under the Participation Contract, must have the authorization of the Corresponding Ministry, in accordance with existing laws and regulations, especially the provisions contained in Art. 79 of the Hydrocarbons Law and Executive Decrees No. 809, 2713 and 1179.

16.2 The prohibition to transfer or assign rights under this Participation Contract without the approval of the Corresponding Ministry, as determined in Art. 79 of the Hydrocarbons Law, is not an obstacle to freely trade Contractor's stock, without need of said authorization, provided that the trading of said stock does not change, modify or extinguish the legal existence of Contractor, nor constitute a decrease in its administrative, financial and technical capacities with reference to this Participation Contract.

[...]

16.4 If Contractor deems it advisable to create consortia or associations for one or several exploration and exploitation activities covered by this Participation Contract, Contractor may do so with the prior acceptance of PETROECUADOR and authorization from the Corresponding Ministry. Contractor's obligations shall continue to exist in their parts, and the companies forming the consortium or association shall be jointly and severally liable for performance of same; and for such purpose shall furnish the corresponding guarantees. A joint and several commitment shall constitute an indispensable requirement for PETROECUADOR to accept the creation of the aforementioned consortia or associations. PETROECUADOR shall continue to maintain its direct legal relations with Contractor, to demand compliance with all obligations, and to pay the agreed participation percentages.

16.5 The integration of such consortia or associations, or the withdrawal of Contractor from same, without the authorization of the Corresponding Ministry, shall constitute legal grounds for declaring the termination of this Participation Contract.

[...]

21.1.1 By a declaration of forfeiture [ caducidad ] issued by the Corresponding Ministry for the causes and following the procedure established in Articles seventy four (74), seventy five (75) and seventy six (76) of the Hydrocarbons Law, insofar as applicable.

21.1.2 Due to a transfer of rights and obligations of the Participation Contract without prior authorization from the Corresponding Ministry.

[…]

21.3 For the purposes of forfeiture and penalties, the provisions of Chapter IX of the Hydrocarbons Law shall be applicable.

At this juncture, the Tribunal also observes that these provisions of the Participation Contract refer to many of the provisions of Ecuador's HCL⁵, in particular the following:

CHAPTER IX

Caducidad, Sanctions and Transfers

Art. 74. The Ministry of Energy and Mines may declare the caducidad of contracts, if the contractor:

[…]

11. Transfers rights or enters into a private contract or agreement for the assignment of one or more of its rights, without the Ministry's authorization;

12. Forms consortia or associations for exploration and exploitation operations, or withdraws from them, without the Ministry's authorization; and,

13. Commits repeat violations of the Law and the regulations thereto.

Art. 75. The declaration of caducidad of a contract implies the immediate return to the State of the contracted areas, and the delivery of all equipment, machinery and other exploration or production items, industrial or transportation installations, at no cost to PETROECUADOR and, also in addition, the automatic loss of bonds and securities provided under the Law and the contract, which shall remain to the benefit of the State.

Art. 76. Before caducidad of a contract is declared, the Ministry of Energy and Mines shall notify the contractor, providing it not less than thirty and not more than sixty days from the date of the notification, to perform its unmet obligations or dismiss the charges.

Art. 77. A breach of contract that does not cause caducidad effects or a violation of the Law or Regulations shall be punished with a fine imposed by the National Hydrocarbons Director, of two hundred to three thousand United States Dollars, depending on the seriousness of the violation, in addition to compensation for the damages caused.

[…]

Art. 79. The transfer of a contract or the assignment to third parties of rights derived from a contract shall be null and void and shall have no validity whatsoever if there is no prior authorization from the Ministry of Energy and Mines, without prejudice to the declaration of caducidad as provided for in this Law.

The State shall receive a premium for the transfer and the beneficiary company shall enter into a new contract under more favourable economic conditions for the State and for PETROECUADOR than the ones contained in the original contract.

As will become apparent, the provisions of Article 74(11) and Article 79 are of central importance in this case.

AEC then proposed to "farmin" to Block 15. OEPC stated to the Tribunal that a farmout agreement with AEC was an attractive alternative because it allowed OEPC to continue to invest in Block 15 but with less of its own capital and to diversify its incountry risk. The negotiations led to the signing on 9 August 2000 of a Letter of Intent which described in some detail (at paragraph 1) the proposed farmout as a two-stage transaction as follows:

1. PROPOSED FARMIN TRANSACTION

AEC International a Business Unit of Alberta Energy Company Ltd., or its designated direct or indirect wholly owned subsidiary (collectively hereinafter referred to as "AECI"), would acquire a 40% economic interest in Block 15 by farming it to OEPC's interest as follows (the "Farmin Transaction").

(a) AECI would farmin to Block 15 to acquire a 40% economic interest in Block 15 from OEPC. The economic interest would be a "working interest" or "participating interest" except that it would not include nominal legal title to Block 15 or interest as a party to the Participation Contract. While OEPC would continue to own 100% of the legal title of the participating interest in Block 15 under the Participation Contract, OEPC would hold AECI's 40% economic interest as a "nominee" or "bare trustee" with the obligation to convey legal title, subject to government approvals, at a mutually agreeable time following AECI's payment of all amounts required to earn its interest. Prior to such conveyance, while OEPC holds AECI's interest in trust, OEPC shall be obligated to represent the interest of AECI, as if AECI were a participant with a 40% interest under the terms of a standard joint operating agreement to be mutually agreed. After such acquisition, the economic interests associated with Block 15 would be shared as follows (subject to paragraph (b) below):

OEPC 60%

AECI 40%

(b) AECI would earn its 40% economic interest by paying a total of U.S. $180 million (subject to increase as described below) towards OEPC's share of Block 15 exploration and development expenditures. This U.S. $180 million shall be paid as U.S. $70 million as described in Clause 1(c) below, plus 90% of OEPC's 60% share (the "OEPC Carry") of: (A) the total capital expenditures to be incurred in connection with the development of Block 15, including, without limitation, costs associated with the construction of ancillary pipelines or facilities related to Block 15 crude oil production and (B) costs otherwise properly incurred under the Participation Contract for drilling, exploration or exploitation (collectively, "Block 15 Capex"), for the calendar years as set forth below (each, an "Annual Carry Amount"), pursuant to the following schedule:

Calendar Year Annual Carry Amount

2001 US$50 million

2002 US$25 million

2003 US$20 million

2004 US$15 million

For each calendar year set forth above (each, a "Year") AECI shall pay its 40% share of Block 15 Capex plus the Annual Carry Amount to satisfy the OEPC Carry, and the Annual Carry Amount shall constitute a cap on AECI's obligation to pay the OEPC Carry; provided that:

(i) if AECI satisfies the OEPC Carry for any Year, then additional Block 15 Capex for such Year, shall be shared among OEPC and AECI as set forth in paragraph (a) above;

(ii) if the amount of the OEPC Carry for any Year except 2004 is less than the Annual Carry Amount for such Year, then AECI shall add 110% of the shortfall amount (the "Carry Over Amount") to the Annual Carry Amount for the following Year, thereby increasing the Annual Carry Amount for the following Year; and

(iii) if the amount of the OEPC Carry for 2004 is less than the Annual Carry Amount for such Year, then AECI shall pay to OEPC, on or before January 31, 2005, an amount equal to the shortfall amount as an advance by AECI to OEPC of OEPC's 60% share of Block 15 Capex to be incurred thereafter. AECI and OEPC shall each act in good faith and use reasonable efforts to conduct development, drilling, exploration and exploitation operations on Block 15 so as to minimize the shortfall amount for 2004.

(c) AECI shall pay to OEPC, on the Closing Date, as hereinafter defined, the sum of U.S. $70 million as an advance by AECI to OEPC of OEPC's 60% share of Block 15 Capex incurred after the Effective Date, as hereinafter defined, in excess of the OEPC Carry. Notwithstanding OEPC's obligation ultimately to use this U.S. $70 million and any shortfall amount payable to OEPC pursuant to Clause 1(b)(iii) above for its 60% share of Block 15 Capex, nothing herein shall prohibit, limit, or otherwise restrict OEPC, in the meanwhile, from loaning all or any portion of such U.S. $70 million and/or such shortfall amount to one or more of its affiliates, at a reasonable fair market interest, with such interest to be for OEPC's account and used to pay OEPC's Block 15 Capex incurred after the Effective Date in excess of OEPC Carry.

(d) The effective date of the proposed Farmin Transaction shall be August 1, 2000 (the "Effective Date"), and the closing date shall be at a time and date mutually agreed by the Parties and as soon thereafter as practicable (the "Closing Date"), subject to satisfaction or waiver of the conditions set forth in Section 5 of this letter. On the Closing Date AECI shall acquire, effective as of the Effective Date, a 40% economic interest in Block 15 and 40% of OEPC's (or its affiliate's, as the case may be) interest, if any, in the OCP Pipeline Project.

(e) Each of Alberta Energy Company Ltd. and Occidental Oil and Gas Corporations will cause their respective subsidiaries to perform their obligations under the Transaction Documents (as defined below).

(f) OEPC will be the Operator under the Joint Operating Agreement.

Art. 2.01 Effective as of the Effective Time, and subject to obtaining required governmental approvals, if any, OEPC agrees at Closing (as defined in Section 2.06) to farm out and transfer to AECI, and AECI agrees at Closing to assume all obligations that originate, accrue or arise after the Effective Time with respect to, a 40% economic interest (the "Farmout Interest") in the Farmout Property, subject, however, to payment by AECI of the amounts required to earn such interest as hereinafter provided and subject to the terms and provisions set out hereinafter. The Farmout Interest to be transferred to AECI as of the Effective Time includes a "working interest" or "participating interest" in the Participating Agreements and Block 15 except that it does not include nominal legal title to an interest in Block 15 or an interest as a party to the Participating Agreements. OEPC shall continue to own 100% of the legal title to the Participating Agreements and to the interests in Block 15 granted or provided for in the Participating Agreements; provided that from and after the Effective Time OEPC shall hold legal title to the interest in the Farmout Property represented by the Farmout Interest of AECI in the Participating Agreements and Block 15 as a "nominee" with the obligation to convey legal title to such interest to AECI, subject to obtaining required governmental approvals, promptly following AECI's payment of all amounts required to earn the interest in the Farmout Property represented by the Farmout Interest as hereafter provided and the expenditure of such amounts by OEPC as Operator under the JOA for Block 15 Capex (as hereinafter defined). Prior to such conveyance, while OEPC holds legal title to AECI's interest in the Farmout Property on behalf of AECI, OEPC shall be obligated, at the sole risk, cost and expense of AECI, to act with respect to the Farmout Interest of AECI as AECI shall direct from time to time as if AECI were a party to the Participating Agreements owning legal title to a 40% interest in the Participating Agreements and the interests therein granted in Block 15, subject to and in accordance with the terms and provisions of the JOA provided for in Section 2.02.

[…]

Art. 2.03 For such period of time that under Ecuadorian law OEPC holds legal title to the Farmout Interest on behalf of AECI pursuant to this Agreement, OEPC and AECI recognize and agree that taxable items attributable to the Farmout Interest will be required to be included on the Ecuadorian tax returns of OEPC's branch registered in Ecuador and that OEPC will pay AECI's Farmout Interest share of Ecuadorian Tax on behalf of AECI. If Closing occurs, AECI agrees to reimburse OEPC for any Ecuadorian Taxes payable by OEPC, or its Ecuador branch, that are attributable to the Farmout Interest. [...]

[...]

Art. 2.07 If all required governmental approvals, if any, for the transfer to AECI of the Farmout Interest pursuant to Section 2.01 (being the transfer of an economic interest in the Farmout Property as provided therein as opposed to the transfer of a legal title interest as provided for in Section 4.01) have not been obtained on or before March 31, 2001 then any party hereto may elect, at its option, to terminate this Agreement by written notice of termination delivered to the other parties, whereupon this Agreement shall terminate without any further liability or obligation on the part of any party hereto. […]

Art. 4.01 Promptly after AECI has made all payments of the OEPC Carry provided for in Sections 3.03, 3.04 and 3.05 and OEPC as Operator under the JOA has expended such amounts for Block 15 Capex, OEPC and AECI shall execute and deliver such documents as are required to convey legal title to AECI in and to a 40% economic interest in the Participating Agreements and Block 15 and to make AECI a party to the Participating Agreements as owner of such 40% economic interest (subject to obtaining required governmental approvals). Any transfer fees or administrative charges imposed by any government agency or department with respect to such transactions shall be paid by AECI.

As between OEPC and [AEC], [AEC] upon Closing shall be obligated and agrees to perform all obligations and to bear and pay all costs, charges, expenses and liabilities attributable to the Farmout Interest in the Participating Agreements and Block 15 [...].

Pursuant to the provisions of the Farmout Agreement, AECI has on the Effective Date a forty percent (40%) interest in the Participating Agreements that until the Transfer Date shall be equivalent economically to, but shall not include, nominal legal title and, thereafter, shall include legal title. As between OEPC and AECI, AECI shall be obligated and agrees to perform all obligations and to bear and pay all costs, charges, expenses and liabilities attributable to the Farmout Interest in the Participating Agreements and Block 15, and shall be entitled to the rights and benefits attributable to such Farmout Interest, accruing from and after and attributable to periods of time after 4:00 a.m. local time in Ecuador on the Effective Date under and subject to the terms and provisions of this Agreement, in the same manner and to the same extent as if AECI held legal title to a 40% economic interest as a participant in the Participating Agreements and Block 15 as a Non-Operator under this Agreement, both prior to and after legal title to the 40% interest comprising the Farmout Interest in the Participating Agreements and Block 15 is conveyed from OEPC and AECI pursuant to Section 4.01 of the Farmout Agreement. Likewise, as between OEPC and AECI, subject to the provisions of Article III of the Farmout Agreement, OEPC shall be obligated to perform all obligations and to bear and pay all costs, charges, expenses and liabilities attributable to the remaining 60% interest in the Participating Agreements and Block 15 owned and held by OEPC for its own account, and shall be entitled to the rights and benefits attributable to such remaining 60% interest, accruing from and after and attributable to periods of time after the Effective Time under and subject to the terms and provisions of this Agreement applicable to OEPC as Operator and owner of such remaining 60% interest. This results in the following effective Participating Interests, for purposes of this Agreement.

OEPC 60%

AECI 40%

SUBJECT: TRANSFER OF 40% OF THE ECONOMIC INTERESTS OF THE BLOCK 15 PARTICIPATION CONTRACT BY OCCIDENTAL EXPLORATION TO CITY INVESTING COMPANY

With regard to letter No. GG-014-00 dated October 25, 2000, in which Occidental reports the transfer of 40% of the economic interests in the Participation Contract for Hydrocarbons Production and Additional Exploration for Block 15, including the OEPC rights in the Unified Production Operating Agreements for the Unified Edén Yuturi and Limoncocha Fields to City Investing Company, I would like to inform you of the following:

City Investing currently has a Participation Contract with the Government in the Tarapoa Block and Fanny-18B and Mariann-4A Unified Fields and is the current operator of the aforementioned Fields. Therefore, it has proven that it has technical solvency, and for this reason, there would be no impediment for that assignment of rights.

In a letter dated 22 November 2000, the Director of the National Hydrocarbons Directorate ("DNH"), Dr. Raúl Salgado, wrote to OEPC requesting information regarding the technical and financial capabilities of AEC. This letter states:

BACKGROUND:

In communication GG-014-00 dated October 25, 2000, the company you represent requests authorization to transfer 40% of the rights it has in Block 15, including the Operational Agreements for Unified Exploitation of the Unified Fields Edén Yuturi and Limoncocha, in favor of City Investing Company.

ANALYSIS:

According to stipulations in Art. 3 of Executive Decree No. 2713, published in Official Register No. 694 of May 12, 1995, in which the Regulations to Art. 79 of the Hydrocarbons Law were issued, the total or partial transfer of rights and obligations derived from a contract cannot for any reason originate the deterioration of the financial solvency or operational capacity of the contractor, nor can it negatively affect the work and investment chronogram contemplated in the original contract or the economic participation of the State and PETROECUADOR.

In view of this, the Minister of Energy and Mines, previous to the authorization to transfer said rights and obligations, must make a technical - economic analysis with the purpose of guaranteeing the work and operation of this current contract.

CONCLUSION:

The National Direction of Hydrocarbons, as a technical organism of the Ministry of Energy and Mines, requires information to guarantee the economic solvency of the company City Investing Company Limited, regarding:

Income Tax Declarations for the last two years.

Balances audited and duly notarized, for the last two years.

BACKGROUND:

Through letter GG-014-00 dated October 25, 2000, Occidental Exploration and Production Company informed the Ministry of Energy and Mines of its intent to assign 40% of the rights and obligations for Block 15 to City Investing Company in the future, including the Unified Production Operating Agreements for the Unified Edén Yuturi and Limoncocha Fields.

ANALYSIS:

At a meeting held on December 14 of this year at the Department of Hydrocarbons Economy of this National Office, executives from Occidental stated that the company is negotiating with City Investing Company to transfer 40% of the rights and obligations it has in Block 15. They will report the decision when they reach a final agreement.

The representatives of this National Office explained to the company that when they decide to assign the rights, they must request authorization from the Ministry of Energy and Mines; otherwise, any participation of City Investing Company in the current contract would be null and void, as stipulated by Executive Decree No. 809 that issued the Regulations for Article 79 of the Hydrocarbons Act, published in Official Gazette No. 197 of May 31, 1985.

CONCLUSIONS:

From the explanation given by executives from Occidental Exploration and Production Company, we can conclude that the Company is not requesting authorization to transfer rights, but only reporting on a possible transaction to be made in the immediate future.

When the company decides to make that transfer, it will request the corresponding approval from the Ministry of Energy and Mines, which will be legalized after payment of the premiums for transfer and improvement of the economic conditions of the contract.

The only company that will continue to participate in the current contract with the Ecuadorian Government will be Occidental Exploration and Production Company, owner of 100% of the shares.

I acknowledge receipt of your letter GG-014-00, dated October 25, 2000, in which the company that you represent made know to this Minister its intention to transfer in the future 40% of the rights and obligations of block 15, including the Operating Agreements for the Unified Exploitation of the Eden-Yuturi and Limoncocha Fields in favor of City Investing Company, and further to the meeting with officers of Occidental, please be advised of the following:

Executive Decree No. 809, which contains the Regulation to Art. 79 of the Hydrocarbons Law, published in the Official Register No. 197, dated May 31, 1985, in its Article I stipulates that the total or partial transfer of rights and obligations derived from a contract may be assigned in favor of third parties with the prior authorization of the Corresponding Ministry, otherwise such transfer will be invalid and may give rise to the contract's termination.

In the meeting held at the National Directorate of Hydrocarbons, officers from Occidental said that the 40% transfer of rights and obligations previously mentioned would not be implemented at the moment, therefore once the company you represent decides to perform said transfer, you must request to this State Ministry the corresponding authorization and the issuance of the Ministerial Decree through which such transfer will be legalized, with the prior payment of the transfer fees and enhancement of the economic conditions of the contract, as it is stipulated in Art. 1 of the Executive Decree 2731, published in the Official Register No. 694, dated May 12, 1995.

It is important to point out that Occidental Exploration and Production Company shall be the sole company that will continue participating in the current contract with the Ecuadorian State since it is the owner of 100% of the rights and obligations.

We are not going to provide a copy of the agreement with Encana to the DNH auditors. Informally, the DNH auditors have told us that not providing them with a copy will determine the inclusion of a paragraph called "limitación al alcance" (limitation to the audit scope). I consider we shall do nothing until the auditors issue they [ sic ] report and/or DNH request us information on the deal with AEC.

In the year 2000, OEPC and AEC Ecuador signed an agreement by means of which, subject to satisfying certain conditions and subject to approvals required by the Ecuadorian Government, they committed themselves to transfer in the future the legal title corresponding to 40% interest in the Contract for Block 15 and the Operation Agreements for Unified Exploitation. OEPC informed this to the Ministry of Energy and Mines in letter GG-014-00 of October 25, 2000. In said communication, we also stated that the Company I represent will continue being the only one responsible for total obligations under the Participation Contract for Block 15 until the indicated conditions are fulfilled and receive the required approvals.

Consistent with the above, OEPC is the only entity that maintains signed with the Ecuadorian State the Participation Contract for Block 15, including the year 2002, period that corresponds to the Cost Auditing that the Firm Moores Rowland Ecuador Cia. Ltda. is performing in representation of the National Direction of Hydrocarbons ("DNH"). Therefore, OEPC exercised and assumed, in the year 2002, 100% of the rights and obligations derived from the Participation Contract for Block 15.

[...]

During the 2004 exercise, the conditions agreed upon between OEPC and AEC Ecuador will have been fulfilled for transfer of the legal title corresponding to 40% of the rights and obligations in the Contract for Block 15 and in the Operational Agreements for Unified Exploitation. Therefore, in accordance with letter GG-014-00 from OEPC and Official Letter No. 003-DNH-EH-CE-P1, 01-0079, issued in response by the Minister of Energy and Mines, OEPC will ask for the authorizations that may be required to make the transfer according to applicable legal, regulatory, and contractual provisions, after the referred conditions have been satisfied.

As part of the audit process, Moores Rowland then requested from OEPC that they sign a representation letter. OEPC did so on 12 July 2004, and included a representation to the effect that it had provided Moores Rowland with a copy of the "Agreement with Alberta Energy Corp.":

2. We have placed at your disposal:

[...]

d) The Agreement with Alberta Energy Corp - AEC, formally City Investing, which, once the conditions set forth in such agreement have been met, and subject to the authorizations from Petroecuador and the Ministry of Energy and Mines, would culminate in the assignment of 40% of the rights and obligations of the Participation Contract for the Exploration and Exploitation of Hydrocarbons in Block 15 of the Ecuador Amazon Region and the unified fields of Edén Yuturi and Limoncocha; […]

In August 2004, once I came back from London, I went to the Energy Ministry and asked the Hydrocarbons Directorate to present me all the documentation that proved whether or not the Occidental Company was fulfilling the contract. Once the information was checked, after twelve hours of work, we concluded that this company had been in breach of contract.

According to the abovementioned, it is determined that Occidental exploration and Production Company on year 2000 carried out a transfer of the 40% of its rights and obligations in Block 15, including the Operational Agreements de Unified Exploitation of the Unified Fields Eden Yuturi and Limoncocha, in favor of City Investing Company, currently Alberta Energy Company based on a private agreement executed between the parties, which effective date was October 1, 2000, transfer that was carried out without authorization of the corresponding Ministry.

[OEPC] transferred 40% interests and obligations from the Participation Contract for Exploration and Exploitation of Hydrocarbons in Block 15 in favor of [AEC], without having received the authorization of the Ministry of Energy and Mines, as provided by Article 79 of the Hydrocarbons Law and the same Participation Contract. (Emphasis in original)

Ecuador claims that it was entitled under Article 74 of the HCL to terminate for cause. However, the Termination Decree provides remarkably little by way of explanation or argument and nothing by way of proof for that claim. Neither did the papers of the Attorney General and Petroecuador from which the Minister copied and pasted in his Termination Decree. This manifest lack of proof and reasoning reflected Ecuador's lack of evidence and arguments. As Claimants will show below, none of the alleged Termination Events has in fact occurred. For that failure alone, the Termination Decree was wrongful as a matter of both Ecuadorian and international law.

The Tribunal observes from the outset that although the Claimants' wrongful termination submissions (as well as those of the Respondent) regarding Articles 74.11 and 74.12 of the HCL significantly overlap, they predominantly address the former (unauthorized transfer or assignment) rather than the latter (unauthorized consortium). Thus, by reference to the two-stage transaction envisaged by the Farmout, the Claimants reject the Respondent's allegation that the Farmout violated the HCL because it was tantamount to a wrongful assignment or transfer:

In the first stage, OEPC transferred a 40% economic interest in Block 15 to AEC, in exchange for certain capital contributions by AEC. AEC's economic interest consisted essentially of 40% of OEPC's share in the crude produced from Block 15. AEC's capital contribution required payments from AEC to OEPC over the course of four years and was known in the industry as the "earning obligation."

Article 2.01 of the Farmout, which described this phase, specifically stated that the Farmout of the economic interest:

does not include nominal legal title to an interest in Block 15 or an interest as a party to the Participating Agreements. OEPC shall continue to own 100% of the legal title to the Participating Agreements and to the interest in Block 15 granted or provided for in the Participating Agreements. CE-9 (OC00347). (Emphasis added)

Thus, the operative provision of the Farmout directly contradicts Ecuador's claim that an assignment or transfer occurred.

The second stage, which never came to pass, contemplated a future assignment by OEPC of legal title to the 40% economic interest. As described in Article 4.01, that assignment was subject to: (i) AEC's meeting its earning obligation; and (ii) OEPC's obtaining prior government approval:

[A]fter AEC has made all payments... OEPC and AEC shall execute and deliver such documents as are required to convey legal title to AEC in and to a 40% economic interest in the Participating Agreements and Block 15 and to make AEC a party to the Participating Agreements as owner of such 40% economic interest (subject to obtaining required governmental approvals). CE-9 (OC00353). (Emphasis added)

When AEC met its earning obligation in July 2004, OEPC proceeded to request government approval for the transfer of legal title to AEC. It sent a letter to this effect to the then-Minister of Energy and Mines, Eduardo López Robayo on July 15, 2004. The government never responded to the request, and OEPC therefore did not proceed with the transfer. (Emphasis in original)

Under New York law, as presented in the opinion submitted by Andrew Derman, the expert appointed by the Minister of Energy and Mines, an assignment does not exist unless "the assignor's right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance." CA-236, Restatement Second ¶317; CA-235, American Jurisprudence ¶1; CA-237, Williston ¶74:1. Put otherwise, an assignment requires that "an assignee step[] into the assignor's shoes and acquire[] whatever rights the latter had." CA-234, Furlong ¶ 382. Under New York law, a mere promise to assign rights and obligations in the future subject to conditions precedent is not an assignment. CA-236, Restatement Second ¶330; CE-127. (OC02737; OC02741)

It is plain that as a matter of New York law, the transfer of a 40% economic interest did not effectuate an assignment. The mere transfer of an economic interest did not in any way create privity under the Participation Contract between Ecuador and Petroecuador, on the one hand, and AEC, on the other. That transfer of economic interest did not create any rights of AEC against Ecuador or Petroecuador; nor did it create any obligations for AEC to them.

Thus, under Ecuadorian law, for the transfer of economic interest under the Farmout to constitute an assignment, it should have resulted in AEC exercising rights and assuming obligations under the Participation Contract vis-à-vis Ecuador and Petroecuador, and OEPC ceasing to exercise such rights and to perform such obligations. HPL ER ¶49. Additionally, under Ecuadorian law, the assignment of a contract or personal rights occurs only when the assignor turns over to the assignee a deed that describes the rights being assigned. HPL ER V ¶¶18-27. In other words, there is no assignment without the physical transfer from assignor to assignee of such deed. HPL ER V ¶21. As explained below, neither of these conditions for an assignment has been met.

In the Counter-Memorial on Liability, Ecuador surmises without support that "OEPC presumably hoped that the true nature of the [Farmout Agreement and the Operating Agreement] would never be known to Ecuador...." In fact, the evidence proves that at all times prior to the eventual transfer of legal title, OEPC recognized that authorization by Ecuador and full disclosure of all agreements would occur. The agreement itself required full disclosure and governmental consent. OEPC not only disclosed its relationship with AEC to Ecuador in a series of meetings in 2000, but it would have provided copies of the underlying agreements in 2000 if the Minister of Energy and Mines had advised that approval was necessary at that stage - or if the Minister had simply requested them.

• The agreements constituted a transfer of rights and obligations under the Participation Contract.

• OEPC and AEC believed that the nature of the Farmout Agreement and the Joint Operating Agreement constituted such a transfer that required immediate government approval.

• Nevertheless, in order to obtain certain short-term benefits, OEPC and AEC chose to risk their substantial investments and their longterm profits in Block 15 by concealing the "true nature" of the Farmout Agreement and the Joint Operating Agreement.

Minister Terán complains that OEPC and AEC never informed him of the details of the Operating Agreement, but concedes that OEPC did inform him that a transfer of legal title was subject to a future negotiation. Ecuador apparently hopes that the Tribunal will read these two statements by Minister Terán together to imply that no discussion of either AEC's proposed involvement in Block 15 or of the agreement between AEC and OEPC ever occurred, although Minister Terán does not actually say as much. Contrary to what Ecuador seeks to imply, OEPC and AEC informed Minister Terán that AEC would be offering its expertise to OEPC, and that OEPC and AEC were in the midst of closing the deal to transfer an economic interest in Block 15. It is not plausible that OEPC and AEC would schedule a meeting with Minister Terán in 2000 only to limit the conversation, for all intents and purposes, to a hypothetical transfer of legal title tentatively planned for 2004. In fact, OEPC informed Minister Terán of the immediate transfer of economic interest and everything that the transfer entailed.

Ecuador concedes that OEPC communicated on several different occasions that AEC had acquired an economic interest in Block 15. Ecuador seeks to diminish these presentations by arguing that OEPC's description of the Farmout Agreement as a transfer of economic interest was insufficient. However, as Claimants have shown, that description was entirely accurate for the earn-in period of the transaction. In light of considerable effort spent by OEPC to inform Ecuador of the transfer of economic interest and its public disclosure of the transaction, it is implausible to suppose that OEPC's efforts were part of a campaign actually to withhold information. OEPC had no reason to conceal any aspect of its relationship with AEC, but instead chose to communicate repeatedly that AEC was acquiring an economic interest in Block 15.

As for the Respondent's allegation that it inadvertently discovered the true nature of the Farmout Agreements as a result of the 2003/2004 Moores Rowland audit, the Claimants refute this suggestion in the following words:

DNH was continuously involved in exchanges or discussions about the Farmout and Operating Agreements, between February and early May 2004. Not once during that period - or thereafter until the VAT Award was issued - did the DNH suggest that it learned anything from Moores Rowland about the Farmout that it did not already know. Not once did the DNH suggest that OEPC would face caducidad because of the Farmout. On the contrary, on May 10, 2004, having discussed the matter with Moores Rowland and OEPC, the DNH specifically subscribed to the conclusion that it would be "prudent" for OEPC to "define and expedite the process of assignment of obligations and rights to AEC," so that the Ministry of Energy and Mines could authorize the transfer of legal title and "thereby avoid any observation by the regulatory authorities." Thus, it is not at all surprising that, as noted above, Ecuador never alleged concealment through the caducidad proceedings or in the Termination Decree.

The prohibition to transfer or assign rights [...] is not an obstacle to freely trade Contractor's stock, without need of said authorization, provided that the trading of said stock does not change, modify or extinguish the legal existence of the Contractor, nor constitute a decrease in its administrative, financial and technical capacities.

Ecuador's case that an assignment occurred within the meaning of Article 74.11 rests on the assertion that "it is enough if the contractor agrees to share [participation contract] rights with a third party, or otherwise gives the third party the ability to influence the contractor's performance of the contract." Its case that a consortium was formed within the meaning of Article 74.12 similarly rests on the assertion that OEPC and AEC "enter[ed] into a binding agreement in which they commit[ted] themselves to work together for exploration or production operations."

Both assertions are factually wrong. Under the terms of the Operating Agreement, AEC could not direct either the day to day management or long term development strategy of Block 15; and AEC never did direct either the day to day management or long term development strategy of Block 15. (Emphasis in original)

It was envisaged under the Operating Agreement that OEPC and AEC would jointly fund operations in Block 15 as "joint operations," and its voting procedures gave both parties a vote on whether any particular proposed joint operation should receive such funding. Clause 5.13. Ecuador cites these voting procedures to claim that "all significant operational decisions. required AEC's approval." That is simply not true. The only right that AEC had under these voting provisions was the right to refuse to fund a certain operation by not approving certain items of a work plan and budget - not a right to preclude OEPC from carrying out the operation altogether.

[…]

Even with full access to the voluminous files OEPC left in Ecuador, the only evidence Ecuador can produce to support this claim are a few documents showing nothing more than AEC's frustration at its lack of involvement in Block 15 operations and a few letters recommending or "approving" specific operational issues. As explained above, AEC's "approval" only affected the financing of operations, not the operations themselves. Ecuador has failed to offer any evidence demonstrating that AEC possessed any control over the operations at Block 15. Indeed, the frustration shown in the few letters cited by Ecuador proves the absence of control by AEC rather than any ability in fact to control these operations.

[…]

OEPC alone established the key strategic Development Plans and the Work Plans and Budget, and OEPC alone retained final decision-making authority over day to day operations. AEC provided views and advice on specific operations based on its independent assessment and its experience operating other blocks. AEC never withdrew funding and knew it could not sole-risk OEPC. As evidenced by AEC's complaints about its lack of involvement in Block 15 operations, OEPC never hesitated to exercise its final decision-making authority. AEC was a watchful investor, but it never exercised rights or assumed obligations under the Participation Contract, nor did it cause OEPC to depart from its operational plans and objectives. (Emphasis in original)

[N]o Article 74.12 Termination Event has occurred because (i) a consortium must have separate legal personality and AEC and OEPC did not create any entity with separate legal personality; and (ii) even if no separate legal personality were required, members of a consortium must undertake joint and several liability; OEPC remained at all times the only party to the Participation Contract with Petroecuador and Ecuador, and because AEC never assumed any liability under the Participation Contract, OEPC never undertook joint and several liability with AEC vis-à-vis Petroecuador and Ecuador. In any event, general principles of Ecuadorian and international law preclude punishment on the basis of concepts as ill-defined as "consortium" is under Ecuadorian law.

Unable to show that OEPC and AEC formed a consortium, Ecuador attempts to employ untenably broad definitions and argues that a consortium within the meaning of Article 74.12 is created whenever parties "enter into a binding agreement in which they commit themselves to work together for exploration or production operations."

As shown above, this nebulous definition is baseless; but the Farmout and the Operating Agreement do not meet even Ecuador's untenably broad definition. As shown above, AEC neither acquired nor exercised any rights under the Farmout Agreement or the Operating Agreement to direct either the day to day management or long term development strategy of Block 15. Therefore, even under Ecuador's erroneous definition, OEPC and AEC did not form a consortium.

The 62 alleged technical infractions referenced by the Termination Decree's [ sic ] occurred over a period of five years, 2001-2006, and can be grouped as follows: (i) 12 claims of drilling of individual wells either without prior authorization or without proper notification; (ii) 14 claims of production from individual wells above, or without, the authorized rates; (iii) 22 claims of reporting violations, such as late filing of final drilling reports; and (iv) 11 claims of miscellaneous violations. Due to the lack of substantiating documents in the administrative file for almost half of the 62 alleged infractions, Claimants have been unable to determine in any way the nature of three of these infractions.

Ecuador's new theory should be dismissed because (i) under international law the Tribunal should assess the lawfulness of Ecuador's conduct solely on the basis of the reasons stated in the Termination Decree; (ii) Clause 22.2.1 is unenforceable as a matter of international law; (iii) Ecuador is estopped from invoking Clause 22.2.1 because it had knowledge of the relevant facts long before it began its caducidad proceedings in 2002; and (iv) Ecuador failed to prove that Occidental engaged in any proscribed conduct after the caducity proceedings began (and indeed after 2002). To the contrary, once Ecuador began those proceedings in 2004, OEPC consistently informed the U.S. Government that it did not seek diplomatic assistance.

Both the Treaty and Ecuadorian law guaranteed Claimants and their investments fair, non-arbitrary, and non-discriminatory treatment. In passing the Termination Decree, Ecuador blatantly disregarded these standards. Having openly premeditated the termination, Ecuador imposed manifestly disproportionate punishment on Claimants on grounds that it never substantiated in the face of OEPC's vigorous defenses and that were not found sufficient to warrant contract termination in the case of other oil companies.

(i) the Termination Decree was manifestly disproportionate;

(ii) the Termination Decree frustrated the Claimants' legitimate expectations;

(iii) the Termination Decree was unfair and arbitrary;

(iv) the Termination Decree was discriminatory;

(v) the Termination Decree denied the Claimants' full protection and security;

(vi) the Termination Decree expropriated the Claimants' investments without compensation; and

(vii) the Respondent allowed PetroEcuador and Petroproducción to aid and abet the Termination Decree.

Accepting Ecuador's simplistic proposition, for which it cites no authority, that imposing "the very sanction that the law calls for in a specified context" is per se proportionate would deny the very essence of the proportionality principle. A finding that prohibited conduct has occurred is not enough to justify the administration in imposing the harshest of sanctions in the administrative arsenal. The administration must also carefully examine the particular circumstances of the alleged prohibited conduct, including the consequences flowing from it. As the cases cited above show, the Minister had to find that the contract was no longer viable, or at least that serious damage had occurred, as well as determining that the underlying policy of the contractual norm had been violated, before it could terminate OEPC's contract. No such finding was made here, and as shown above, none could have been made. (Emphasis in original)

[…] Contrary to Ecuador's assertion, however, this standard is nowhere found in the text of Temple of Preah Vihear, nor is it a settled rule of international law. On the contrary, the doctrine of estoppel in international law has traditionally included two elements: (i) clear, voluntary and authorized statements or conduct from a party and (ii) reliance by the other party triggering either detriment to the relying party or advantage to the party making the statement or engaging in conduct. ("What appears to be the common denominator of the various aspects of estoppel which have been discussed, is the requirement that a State ought to maintain towards a given factual or legal situation an attitude consistent with that which it was known to have adopted with regard to the same circumstances on previous occasions.") (emphasis added); ("Estoppel operates on the assumption that one party has been induced to act in reliance on the assurances or other conduct of another party in such a way that it would be prejudiced were the other party later to change its position."). (Emphasis in original)

At the outset of its pleadings, the Respondent characterizes the Claimants' case, to the extent that it is based on an alleged "purely innocuous arrangement that the Government had known about all along," as pure fiction. The Respondent summarizes its own view of the facts of the case as follows:

OEPC's transaction with AEC was not of the innocuous nature the Claimants suggest, did require the approval of the Ministry of Energy and Mines (the "Ministry"), and was not properly disclosed to Ecuador. In fact, the Claimants repeatedly represented to the Government that the "first phase" of the transaction involved only the transfer of what it called a passive "economic interest" having no effect on any aspect of the Participation Contract. That was false. Far from assigning a mere "economic interest," the so-called "Farmout Agreement" transferred to AEC a "‘working interest' or ‘participation interest'" in Block 15. As a result, OEPC was obliged, from the outset of the relationship, "to act with regard to the Farmout Interest of [AEC] as [AEC] shall direct from time to time as if [AEC] were a party to the Participation Agreement owning legal title to a 40% interest in the Participation Agreements. " This fundamental aspect of the OEPC/AEC arrangement was never disclosed to Ecuador.

On the same day they signed the Farmout Agreement, OEPC and AEC also executed an undisclosed "Joint Operating Agreement." Under that agreement, AEC was given the right to appoint a representative to the Block 15 Management Committee that "supervised and directed" the Block 15 operations. It also had the power to veto the most important decisions relating to Block 15's operations, such as the adoption of its development plan, work program, and budget. Moreover, AEC could, at its election, conduct "exclusive operations" in Block 15 without the participation or approval of OEPC. In sum, OEPC was required to obtain AEC's approval for all major operating actions, including, but not limited to:

• submitting development plans;

• submitting work programs or budgets;

• making financial decisions;

• designating oil discoveries as commercial;

• amending or extending the Participation Contract; and

• assigning, selling, licensing or transferring any Participation Contract rights.

It is undisputed that OEPC failed to disclose the foregoing terms to Ecuador. And in its numerous meetings with the Government in 2000 and 2001, OEPC never provided the Government with copies of the Farmout Agreement or the Joint Operating Agreement. To the contrary, OEPC misrepresented to the Government that it was still in negotiations with AEC over any possible future transfer of rights. In reality, the Farmout Agreement and Joint Operating Agreement had been executed on October 19, 2000 - five days before OEPC's first meeting with the Government on the matter.

Once these simple facts are understood, the real story emerges. As told by Pablo Terán, then-Minister of Energy and Mines, in his witness statement, the Government was never told of a "farmout" or that there had been (or would be in the immediate future) an effective transfer of meaningful rights and obligations under and in relation to the Participation Contract. Moreover, Minister Terán made clear to OEPC that approval would be necessary if and when OEPC and AEC reached an agreement on the transfer of rights and obligations concerning the Participation Contract.

Thus, Minister Terán sent a letter to OEPC dated January 17, 2001, stating that he would wait until OEPC and AEC had reached an agreement on the transfer of rights and obligations under the Participation Contract and would expect OEPC to seek prior approval at that time. He also warned that such a transfer without authorization "would give rise to the contract's caducidad. " Unbeknownst to the Government, the transfer agreements between OEPC and AEC had already been executed three months earlier. (Emphasis in original)

[T]he Claimants contended that anything short of a formal conveyance of a legal interest was permissible without consent. That position is artificial, disingenuous, and unsustainable under both Ecuadorian law and common sense. The Farmout Agreement and the Joint Operating Agreement created immediately-effective rights for AEC to exert influence over the Participation Contract area. They also created a means by which premiums arising from Block 15 interests could be earned by others to the exclusion of Ecuador. Both are objectionable unless fully informed consent is given in advance.

In addition, the Respondent takes issue with the Claimants' alleged attempt to circumvent the language of the agreements at issue:

Thus, the Claimants' case has now been reduced to an argument that, although the actual language of the Farmout Documents provided for AEC to receive operational and managerial rights in Block 15 in 2000, OEPC and AEC had some unwritten "understanding" that these rights could not be exercised until the "second phase" of their transaction. The Claimants do not - and cannot - point to a single contemporaneous document that reflects this understanding.

More fundamentally, this argument is flatly contradicted by two undeniable facts. First, the argument is contradicted by what the Farmout Documents actually say. Those agreements make unmistakably clear that operational rights vested immediately. Indeed, the precise timing of the transfer of these operational rights is clearly set forth by the Farmout Agreement itself:

The Farmout Interest is to be transferred to AECI as of the Effective Time includes a "working interest" or "participation interest" in the Participation Agreements and Block 15 except that it does not include nominal legal title to an interest in Block 15..

[…]

Second, the Claimants' argument that the operational rights assigned to AEC were "illusory" is disproved by how the parties acted. As discussed in Paragraphs 43 to 47 of Ecuador's Counter-Memorial, AEC frequently exercised its operational rights with respect to Block 15. These rights were hardly "illusory," and AEC's conduct conclusively shows that it did not believe they were. (Emphasis in original)

[T]he issuance of the Caducidad Decree was explicitly contemplated in the Participation Contract. As previously noted, the Participation Contract provides at Clause 21.1.1 that the Contract shall terminate by caducidad if OEPC commits any of the causes specified in Article 74 of the Hydrocarbons Law. Accordingly, although the issuance of the Decree was not itself a contractual act, the Contract clearly put OEPC on notice that it would be terminated under the precise circumstances that ultimately arose, and OEPC accepted this when it signed the Contract. The Caducidad Decree thus could in no event be considered a breach of contract. Indeed, it is hard to imagine any legal regime that would consider it to be a breach of contract for a party to a contract to take an action to which its counterparty has explicitly consented, in response to that counterparty's own violations of the law and breaches of contract. (Emphasis in original)

It is undisputed that OEPC entered into the Farmout Agreement and Joint Operating Agreement without prior authorization, and that no subsequent authorization was ever granted. While the Claimants have alleged that OEPC was led to believe that no authorization was required for their agreements with AEC, they do not contend that OEPC obtained authorization. The only question, therefore, is whether those agreements gave rise to a consortium or association for the exploration or production operations, or whether they constituted a transfer of rights or private agreement for the assignment of one or more rights under the Participation Contract. (Emphasis in original)

The Claimants contend that OEPC was justified in going forward with its agreements with AEC without Ministry authorization, because Ecuadorian officials led them to believe that authorization was not necessary. This contention fails for two simple reasons. First, the officials in question could not possibly have offered a meaningful appraisal as to whether or not authorization was required without knowing the true nature of OEPC's agreements with AEC, and OEPC knew this. Second, those officials repeatedly emphasized to OEPC that it would need to seek authorization from the Ministry before making any transfer of rights. (Emphasis in original)

Referring inter alia to Article 5.9 of the Joint Operating Agreement entitled "Voting Procedure," the Respondent emphasizes that "all significant operational decisions regarding Block 15 required AEC's approval" The Respondent quotes this provision:

5.9 Voting Procedure

[...]

5.92 The following acts shall require affirmative vote of one (1) or more Parties then having collectively at least sixty-six and two-thirds percent (66-2/3%) of the Participating Interests [which would necessarily include AEC]:

5.9.2.1 Approval of a Development Plan;

5.9.2.2 Approval of a Work Program and Budget or any amendment or modification thereof;

5.9.2.3 Overexpenditures on any line item of an approved Work Program and Budget by more than twenty percent (20%) or U.S. $1,000,000, whichever is less, of the authorized amount for such line item, or overexpenditures for a Calendar Year of a total Work Program and Budget by more than ten percent (10%) or U.S. $5,000,000, whichever is less; and

5.9.2.4 Decisions on financing Joint Operations (including any decisions to repay indebtedness on any such financing) prior to the Transfer Date.

[…]

[F]rom the outset OEPC was "obligated, at the sole risk, cost and expense of [AEC], to act with respect to the Farmout Interest of AECI as AECI shall direct from time to time as if AECI were a party to the Participating Agreements owning legal title to a 40% interest in the Participating Agreements and the interests therein granting in Block 15."

The Farmout Agreement added, moreover, that AEC would be entitled to all "rights and benefits... in the same manner and to the same extent as if AECI held legal title to a 40% economic interest as a participant in the Farmout Property as a Non-Operator under the Joint Operating Agreement, both prior to and after legal title to the participating interest. is conveyed from OEPC to AECI." In substance, therefore, AEC was to be treated exactly as if it were an actual party to the Participation Contract as between AEC and OEPC from the moment the Farmout Agreement closed. Indeed, the fact that the Farmout Agreement granted AEC identical interests and powers before and after OEPC made the contemplated transfer of "legal title" to AEC shows that the transfer of formal "legal title" was inconsequential to AEC's control over the interests in question. (Emphasis in original)

These were not just paper rights. As shown by correspondence and meeting minutes between AEC and OEPC produced by the Claimants in this arbitration, AEC in fact frequently exercised its managerial and operational rights with respect to Block 15 and regarded the arrangement as a "joint venture" between the two companies. AEC was given, and exercised, voting rights with respect to well locations, contributed to planning and budgeting decisions, and participated in Block 15 operations in respect of which it demonstrated its willingness to exercise its rights on important development decisions.

[…]

As previously noted, one of the grounds for the Government's declaration of caducidad was that OEPC and AEC entered into an unauthorized consortium, in violation of the Hydrocarbons Law. And this is precisely what OEPC and AEC formed. Indeed, in their ordinary business communications, these companies themselves referred to their arrangement as a "consortium." In April 2004, for example, representatives from AEC and OEPC discussed the possibility of asking the Ministry for authorization for the transfer of "legal title" to OEPC's rights to AEC, and AEC's representatives indicated that AEC would prefer to delay seeking Government authorization for the time being: "For your info, my current preference is to do nothing this calendar year, and next year approach the government with the proposal to pay the transfer tax, but continue to leave the ‘consortium' outside the country" - in other words, continue to hide it from the Government.

Their use of this terminology is not surprising, as the arrangement established between OEPC and AEC was of a nature that is commonly called a consortium in the international oil and gas industry. As Mr. Martin explains, the term "consortium" is typically used in the industry to encompass, among other things, "[a] group of companies operating jointly, usually in a partnership with one company as operator in a given permit, license, contract area, block, etc." Mr. Martin observes further that this concept "describe[s] exactly what international O&G companies undertake to do in farmout agreements and JOAs, including the Farmout Agreement and Operating Agreement that OEPC and AEC signed and used to carry out their activities on Block 15. (Emphasis in original)

[T]he Claimants' experts assert that AEC's Management Committee rights may have been insufficient to give it "control" of operations in Block 15. This is another red herring, because a third party need not have "control" over operations in order for an Article 74 violation to occur. To the contrary, as explained by Dr. Merlo, a "transfer of rights" occurs when the contractor conveys to the transferee the right to participate in strategic and operational decisions relating to petroleum exploration or extraction, thereby giving it influence over operations. Similarly, a "consortium" is formed within the meaning of Article 74.12 if a contractor and a third party "enter into a binding agreement in which they commit themselves to work together for exploration or production operations." Hence, neither type of violation is contingent on the third party obtaining "effective operational control."

Thus, whereas the Claimants contend that the formation of a consortium requires the creation of a distinct legal person, the decision clearly states that the mere agreement between the parties to enter into a consortium (as defined by the Court) is sufficient to create a consortium and that, as a consequence of the parties' agreement, a new legal entity exists, without the need to accomplish any special formality.

It cannot be disputed that OEPC and AEC both (i) "contributed something in common" (with AEC's contribution consisting of, inter alia, providing funding and expertise for the development of Block 15), and (ii) "divided among them[selves] the benefits derived from the common activity," in the proportion of 60%-40%, less the operating costs born in the same proportion. It follows that OEPC and AEC did form a consortium, according to the definition given by the Court. It also follows, although this is not relevant to the present case, that this consortium had legal standing as a separate legal person. (Emphasis in original)

At the meeting, OEPC and AEC brought up their contemplated transaction relating to Block 15. They spoke in generalities from a prepared "script," without referring to their transaction as a "farmout," and without ever providing Minister Terán with the Farmout Agreement or the Joint Operating Agreement. Nevertheless, that script (now disclosed by the Claimants in this arbitration) confirms that OEPC and AEC concealed the true nature of the transaction from Minister Terán.

The script begins by asserting that "Oxy and AEC have agreed that AEC will assume a 40% economic interest" and that there will be "no change in the operations" and "no initial change in the contractual rights and obligations or legal title for [Block 15]." What Minister Terán did not know, of course, was that significantly more was being transferred to AEC. OEPC's script also suggests that OEPC stated that at a later date it "would seek to transfer 40% of our legal title subject to the Government's approval," although, as Minister Terán has testified, OEPC assured Minister Terán that this was a matter to be left for future negotiation and would be subject to Ministry approval, if it happened at all. (Emphasis in original)

Furthermore, the Respondent recalls the meeting between OEPC and the DNH on 14 December 2000. According to the Respondent, OEPC's representatives present at this meeting "falsely represented to the Government that [OEPC] was still in negotiations with AEC over a possible future transaction". This meeting led to the letter by Minister Terán to OEPC dated 17 January 2001, which the Respondent characterizes as follows:

For avoidance of doubt, Minister Terán made sure that OEPC knew the consequences of making a transfer without authorization. In his January 17, 2001 letter, Minister Terán stated in no uncertain terms:

Executive Decree No. 809, which contains the Regulation to Art. 79 of the Hydrocarbons Law, published in the Official Register No. 197, dated May 31, 1985, in its Article I stipulates that the total or partial transfer of rights and obligations derived from a contract may be assigned in favour of third parties with the prior authorization of the Corresponding Ministry, otherwise such transfer will be invalid and will give rise to the contract's termination.

Thus, Minister Terán specifically warned OEPC, as early as January 2001, that a transfer of rights without approval would result in caducidad. Unbeknownst to the Government, however, the deed had already been done - back in October 2000. (Emphasis in original)

Specifically, it was the Claimants' decision to make their request for transfer of "legal title" to AEC immediately after the VAT Award was dispatched to the parties that led to the discovery of the details of the relationship between OEPC and AEC by the Minister of Energy and Mines and the Attorney General. The timing of that request - following as it did on the heels of the VAT Award -could not have been coincidental.

As the witness statement from OEPC witness Paul MacInnes reveals, AEC had completed its required payments under the Farmout Agreement by the spring of 2004. Under the terms of the Farmout Agreement, OEPC should have immediately sought authorization from the Government for the "second stage" of the transaction, i.e., the transfer of "legal title" to AEC. But OEPC did not make any such request at that time. Instead, it delayed for several months, failing to make the request until July 15, 2004, immediately after the award in the VAT Arbitration was dispatched to the parties.

OEPC must also have known that any request for the transfer of "legal title" to AEC would prompt scrutiny from the Ministry, given that the Ministry was bound to conduct an investigation whenever a request for the transfer of rights was made. OEPC must also have known that this could lead to the discovery of the offending agreements by Government officials who would be able to appreciate their significance. This may explain why OEPC did not make an immediate request for the transfer of "legal title" to AEC when AEC's payments were completed in Spring 2004, and, instead, delayed until the VAT Arbitration had concluded. Indeed, correspondence between OEPC and AEC in April 2004 confirms the parties' intent, for the time being anyway, to "continue to leave the ‘consortium' outside the country." OEPC would have known that if it prevailed in the VAT Arbitration, then made its request for transfer of legal title to AEC, any adverse response by the Government could be made to appear retaliatory in nature. OEPC has certainly not hesitated to characterize the Government's response in precisely that manner in this arbitration.

The objective reality, however, is that the Claimants most certainly did have at least two motives to conceal the Farmout: (i) the desire to avoid the payment of a transfer fee and the enhancement to the economic terms of the contract, and (ii) the desire to avoid any potential delay or complications that could have been associated with the Ministry's evaluation of the Claimants' transfer request. Further, AEC, in the context of deciding not to seek approval for the second phase transfer, noted that it would have to "approach the government with the proposal to pay the transfer tax," and OEPC said that AEC might be concerned about "anti-trust provisions." (Emphasis in original)

The Respondent asserts that it has discovered a third "separate" and "independent" justification for termination of the Participation Contract in the circumstances based on the Claimants' repeated use of diplomatic channels to put improper pressure on Ecuadorian authorities in violation of Clause 22.2.1 of the Participation Contract. In this regard, the Respondent does not accept the Claimants' explanations:

In any event, the point that the Claimants are now attempting to make - i.e., that the Claimants lobbied the U.S. Government with regard to the VAT arbitration but did not with regard to this dispute - is a distinction without a difference. Both are prohibited under the plain terms of the Participation Contract, and both give Ecuador grounds to declare caducidad. The Participation Contract prohibits the use of "diplomatic or consular channels" with regard to any "controversies that may arise as a result of this Participation Contract." Article 22.2.1 of the Contract provides:

"In the event of controversies that may arise as the result of the performance of this Participation Contract, in accordance with Ecuadorian law, Contractor expressly waives its right to use diplomatic or consular channels, or to have recourse to any national or foreign jurisdictional body not provided for in this Participation Contract. Lack of compliance with this provision shall constitute grounds for the caducidad of this Participation Contract."

[…]

More to the point, Ecuador certainly has presented evidence of post-2002 lobbying pressure with its Counter-Memorial. Among the evidence already identified by Ecuador as showing post-2002 lobbying pressure is a telling e-mail exchange between the Claimants and the U.S. State Department on August 2326, 2004. An examination of this document shows that it is a communication initiated by the Claimants, inviting U.S. Government assistance in this very dispute. (Emphasis in original)

In its Decision on Jurisdiction, the Tribunal denied Ecuador's request for a stay of the arbitration pending OEPC's pursuit of claims before Ecuadorian courts, but the denial of the request was in no way dispositive of Ecuadorian courts. The Tribunal based its decision to deny the stay on its conclusion that the Claimants were not contractually required to pursue their claims before Ecuadorian courts. Decision on Jurisdiction ¶96. The reasoning of the Tribunal seems to have been that since the Claimants were not contractually required to bring their claims in Ecuador, there was not basis to direct them to pursue claims in that forum before their present claims could be addressed on the merits. That conclusion does not dispose of the present argument because Ecuador's position is that the Claimants' Treaty claims are substantively defective even if the Tribunal has jurisdiction over those claims and the Claimants were not contractually required to bring their claims in Ecuador. This is true for the simple reason that (as developed more fully below) the act of the Minister in issuing the Caducidad Decree cannot attach responsibility to the State as a substantive matter when there was a mechanism available for the review of that act, which the investor simply failed to invoke. (Emphasis in original)

When considering the propriety of the termination under the Participation Contract and its governing law, it is important to keep in mind that the Caducidad Decree carries with it a presumption of validity, which may be overcome only through a determination in an Ecuadorian administrative court. Because the Claimants have not sought such a determination, they could not possibly establish that the termination was wrongful under the Participation Contract or under Ecuadorian law generally. It bears noting in this regard that several BIT tribunals have acknowledged that an investor cannot state a valid treaty claim if the viability of the claim under international law turns on whether or not a contract governed by municipal law has been violated, and the investor has not sought a ruling on that issue from a domestic court - provided, of course, that the investor had the opportunity to pursue such a claim.

The Claimants can hardly maintain that an expropriation occurred, or that their legitimate expectations were violated, given that Ecuador issued the Caducidad Decree in response to OEPC's own violations of the Hydrocarbons Law, particularly where the Participation Contract itself explicitly provided for that result in such a situation. Nor can the Claimants credibly claim to have been subjected to any arbitrary or discriminatory treatment, given that the Minister's decision was grounded in Ecuadorian law and was open to review by competent Ecuadorian courts, and there were valid reasons for him to terminate the OEPC's contract, while leaving in place those of other investors. The simple truth is that the Claimants have no one but themselves to blame for the forfeiture of their investment.

(i) the Respondent did not expropriate the Claimants' investment because the termination of a contract in accordance with its terms and governing law is not an expropriation, and the Caducidad Decree was a bona fide administrative sanction in furtherance of a legitimate regulatory policy;

(ii) the Respondent did not violate the obligation to provide treatment "no less favourable;"

(iii) the Respondent did not arbitrarily or discriminatorily impair OEPC's investment;

(iv) the Respondent did not deny the Claimants fair and equitable treatment because, inter alia, the Claimants' "legitimate expectations" theories (estoppel, disproportionate sanction and absence of due process) are unwarranted and, additionally, it cannot be unfair and inequitable for the State to exercise a right explicitly granted to it in a contract with the investor, in the absence of any showing that the contract was obtained by fraud or duress, or was otherwise unenforceable;

(v) the Respondent did not deny the Claimants full protection and security;

(vi) the Respondent did not violate the umbrella clause; and

(vii) the Respondent did not violate the Treaty based on conduct of PetroEcuador.

The Claimants do not come close to meeting the Temple of Preah Vihear [estoppel] standard. To begin with, neither the Ministry, nor any other Ecuadorian official, ever made a "clear statement of fact" that authorization was not required for an agreement of the nature that was actually signed between OEPC and AEC, let alone one that was "voluntary, unconditional, and authorized." Indeed, no indication from an official to the effect that authorization did not seem to be necessary could have been "voluntary," because the Claimants withheld key details of OEPC's contractual arrangements with AEC in their discussions with officials, and never gave them a copy of the actual agreements. Moreover, there was no "reliance in good faith" by OEPC, let alone detrimental reliance. OEPC could not have relied on any statements of Ecuadorian officials in good faith because it had concealed key details from them, and was aware that they had no way of knowing the true nature of OEPC's agreements with AEC. And there was certainly no detrimental reliance by the Claimants, because - far from suffering any detriment - OEPC made profits from its investments in Ecuador that were made after the Farmout was signed.

In the instant case, the Claimants' expectations at the time OEPC made its investment were necessarily shaped by the terms of the Participation Contract and the Hydrocarbons Law, both of which explicitly prohibited transactions of the nature that OEPC surreptitiously entered into with AEC, and provided that caducidad would be the sanction for any such unauthorized agreements. The Claimants' expectations were further confirmed by the letters from the Ministry and DNH, which both stated that prior authorization would be required before any such agreement could be concluded. Despite knowing full well about that prohibition, and the sanction that would result if their violations came to light, the Claimants went ahead and entered into the Farmout Agreement and the Joint Operating Agreement with AEC, without prior authorization from the Ministry, and concealed the true nature of both agreements from Ecuadorian authorities. In this context, the Claimants cannot credibly claim that they had a legitimate expectation that caducidad would not be declared when their violations were discovered, and they have no equitable basis to seek relief from this Tribunal.

(i) malicious prosecution (abuso del derecho) in relation to these ICSID proceedings;

(ii) breach of Clause 22.2.1 of the Participation Contract regarding waiver of the right to use diplomatic or consular channels;

(iii) the Claimants' allegedly destructive and unlawful conduct following the Caducidad Decree, including alleged damage to data and software as well as unavailability of drilling rigs; and

(iv) the Claimants' alleged failure to pay the required assignment fee and negotiate a new participation contract more favourable to the Respondent in accordance with Article 79 of the HCL.

The Claimants have launched these proceedings knowing that their claims in relation to caducidad are objectively baseless and cannot succeed. They have done so to apply further severe pressure on Ecuador - both in itself and in combination with procuring the U.S. Government pressure noted herein - in order to coerce settlement and other concessions by making it extremely difficult for Ecuador to maintain its defense in this action, and also to avoid the financial consequences of creating a means by which synthetic interests in Block 15 could be traded and profits thereby earned and concealed.

In a growing number of cases, claimants who have asserted baseless claims purportedly founded in international law before ICSID or other tribunals have been ordered to pay the fees and costs of the Respondent State, in order to compensate the Respondent State for the burden and expense of defending the claims. In this case, however, recovery of fees and costs alone could by no means compensate Ecuador for all of the harm it has suffered from OEPC's wrongful conduct, which includes not only the expense associated with defending these unworthy claims, but also the loss of profits arising on the improper trading of Block 15 interests, and the substantial damage to Ecuador's reputation and economic prejudice in the market for foreign investment and world opinion.

First, Ecuador's counterclaim for abuse of process is legally misconceived. The doctrine of abuse of process is seldom invoked in international practice, and Ecuador is unable to cite a single international-law case in which a tribunal has actually determined that an abuse of process occurred. The consensus that emerges from the cases that deal with the issue is that, as long as the tribunal has jurisdiction and the claims have been properly submitted, no abuse of process can have occurred. Indeed, the cases question whether the doctrine of abuse of process has any application at all in international arbitral practice.

[...]

Second, even if Ecuador's expansive notion of abuse of process has any merit, it would still fail because OEPC's claims are fully justified by the facts and the law, and Ecuador's allegation of bad faith is completely baseless. (Emphasis in original)

The Tribunal agrees with the Claimants. The matter is "res judicata".

SIXTEEN: TRANSFER AND ASSIGNMENT.-

16.1 Transfer of this Participation Contract or assignment to third parties of the rights under the Participation Contract, must have the authorization of the Corresponding Ministry, in accordance with existing laws and regulations, especially the provisions contained in Art. 79 of the Hydrocarbons Law and Executive Decrees No. 809, 2713 and 1179.

16.2 The prohibition to transfer or assign rights under this Participation Contract without the approval of the Corresponding Ministry, as determined in Art. 79 of the Hydrocarbons Law, is not an obstacle to freely trade Contractor's stock, without need of said authorization, provided that the trading of said stock does not change, modify or extinguish the legal existence of Contractor, nor constitute a decrease in its administrative, financial and technical capacities with reference to this Participation Contract.

[…]

In this context, the Tribunal considers it apposite to highlight certain provisions of the Joint Operating Agreement:

(i) Article 4.2 of the Joint Operating Agreement under the heading "Rights and Duties of Operator" of Article 4 entitled "Operator":

4.2.1 Subject to the terms and conditions of this Agreement, Operator shall have all of the rights, functions and duties of Operator under the Participating Agreements and shall have exclusive charge of and shall conduct all Joint Operations. Operator may employ independent contractors and/or agents (which may include any Non-Operator, Affiliates of Operator and Affiliates of any Non-Operator) in such Joint Operations.

4.2.2 In the conduct of Joint Operations Operator shall:

[…]

4.2.2.4 Perform the duties for the Management Committee set out in Article 5, and prepare and submit to the Management Committee the proposed Work Programs, Budgets and AFEs as provided in Article 6. Operator shall perform all Joint Operations in accordance with approved Work Programs and Budgets;

[…]

(ii) Article 4.10.3 of the Joint Operating Agreement under the heading entitled "Removal of Operator" of Article 4 entitled "Operator":

4.10.1 Subject to Article 4.11, Operator shall be removed upon receipt of notice from any Non-Operator if:

[…]

4.10.3 Notwithstanding any provisions of this Article 4.10 to the contrary, in no event may Operator resign or be removed prior to the Transfer Date unless another Person legally entitled under the Participation Agreements to become a successor Operator may be appointed as successor Operator.

(iii) Article 5.2 of the Joint Operating Agreement entitled "Powers and Duties of Management Committee" of Article 5 entitled "Management Committee":

Without prejudice to the rights and duties of Operator under this Agreement, the Management Committee shall have power and duty to authorize and supervise Joint Operations that are necessary or desirable to fulfill the Participating Agreements and properly explore and exploit the Agreement Area in accordance with this Agreement and in a manner appropriate in the circumstances. […]

(iv) Article 5.9.2 of the Joint Operating Agreement entitled "Voting Procedure" of Article 5 entitled "Management Committee":

5.9.2 The following acts shall require affirmative vote of one (1) or more Parties then having collectively at least sixty-six and two-thirds percent (66-2/3%) of the Participating Interests [which would necessarily include AEC]:

5.9.2.1 Approval of a Development Plan;

5.9.2.2 Approval of a Work Program and Budget or any amendment or modification thereof;

5.9.2.3 Overexpenditures on any line item of an approved Work Program and Budget by more than twenty percent (20%) or U.S. $1,000,000, whichever is less, of the authorized amount for such line item, or overexpenditures for a Calendar Year of a total Work Program and Budget by more than ten percent (10%) or U.S. $5,000,000, whichever is less; and

5.9.2.4 Decisions on financing Joint Operations (including any decisions to repay indebtedness on any such financing) prior to the Transfer Date.

[...]

(v) Article 5.13.5 of the Joint Operating Agreement under the heading entitled "Effect of Vote" of Article 5 entitled "Management Committee":

5.13.5 No decision of the Management Committee shall be binding if it conflicts with a decision by any Integrated Management Committee with Petroecuador for the Eden-Yuturi Unit or the Limoncocha Unit or any other unit in which all or any portion of Block 15 is hereafter utilized.

(vi) Article 6.3 of the Joint Operating Agreement under the heading entitled "Production" of Article 6 entitled "Work Programs and Budgets":

On or before the 1st Day of October of each Calendar Year, Operator shall deliver to the Parties a proposed production Work Program and Budget detailing the Joint Operations to be performed in the Development Area and the projected production of schedule for the following Calendar Year. Within Thirty (30) Days of such delivery, the Management Committee shall agree upon a production Work Program and Budget.

(vii) Article 7.1.1 of the Joint Operating Agreement under the heading entitled "Limitation on Applicability" of Article 7 entitled "Operations By Less Than All Parties":

7.1.1 No operations may be conducted in furtherance of the Participating Agreements except as Joint Operations under Article 5 or as Exclusive Operations under Article 7. No Exclusive Operation shall be conducted which conflicts with a Joint Operation or which conflicts with any of the Participating Agreements.

(viii) Article 14.1 of the Joint Operating Agreement under the heading entitled "Relationship of Parties" of Article 14 entitled "Relationship of Parties and Tax":

The rights, duties, obligations and liabilities of the Parties under this Agreement shall be individual, not joint or collective. It is not the intention of the Parties to create, nor shall this Agreement be deemed or construed to create a mining or other partnership, joint venture or association or (except as explicitly provided in this Agreement) a trust. This Agreement shall not be deemed or construed to authorize any Party to act as an agent, servant or employee for any other Party for any purpose whatsoever except as explicitly set forth in this Agreement. It is understood that each Party is entering into this Agreement for the purpose of protecting and developing its Participating Interest. In their relations with each other under this Agreement, the Parties shall not be considered fiduciaries except as expressly provided in this Agreement.

No operations may be conducted in furtherance of the Participating Agreements except as Joint Operations under Article 5 or as Exclusive Operations under Article 7. No Exclusive Operation shall be conducted which conflicts with a Joint Operation or which conflicts with any of the Participating Agreements.

5.13.5 No decision of the Management Committee shall be binding if it conflicts with a decision by any Integrated Management Committee with Petroecuador for the Eden-Yuturi Unit or the Limoncocha Unit or any other unit in which all or any portion of Block 15 is hereafter utilized.

Art. 2.01 [...]The Farmout Interest to be transferred to AECI as of the Effective Time includes a "working interest" or "participating interest" in the Participating Agreements and Block 15 except that it does not include nominal legal title to an interest in Block 15 or an interest as a party to the Participating Agreements. OEPC shall continue to own 100% of the legal title to the Participating Agreements and to the interests in Block 15 granted or provided for in the Participating Agreements; provided that from and after the Effective Time OEPC shall hold legal title to the interest in the Farmout Property represented by the Farmout Interest of AECI in the Participating Agreements and Block 15 as a "nominee" with the obligation to convey legal title to such interest to AECI, subject to obtaining required governmental approvals, promptly following AECI's payment of all amounts required to earn the interest in the Farmout Property represented by the Farmout Interest as hereafter provided and the expenditure of such amounts by OEPC as Operator under the JOA for Block 15 Capex (as hereinafter defined). Prior to such conveyance, while OEPC holds legal title to AECI's interest in the Farmout Property on behalf of AECI, OEPC shall be obligated, at the sole risk, cost and expense of AECI, to act with respect to the Farmout Interest of AECI as AECI shall direct from time to time as if AECI were a party to the Participating Agreements owning legal title to a 40% interest in the Participating Agreements and the interests therein granted in Block 15, subject to and in accordance with the terms and provisions of the JOA provided for in Section 2.02. (Emphasis added)

Art. 4.01 Promptly after AECI has made all payments of the OEPC Carry provided for in Sections 3.03, 3.04 and 3.05 and OEPC as Operator under the JOA has expended such amounts for Block 15 Capex, OEPC and AECI shall execute and deliver such documents as are required to convey legal title to AECI in and to a 40% economic interest in the Participating Agreements and Block 15 and to make AECI a party to the Participating Agreements as owner of such 40% economic interest (subject to obtaining required governmental approvals). Any transfer fees or administrative charges imposed by any government agency or department with respect to such transactions shall be paid by AECI. (Emphasis added)

SIXTEEN: TRANSFER AND ASSIGNMENT.-

16.1 Transfer of this Participation Contract or assignment to third parties of the rights under the Participation Contract, must have the authorization of the Corresponding Ministry, in accordance with existing laws and regulations, especially the provisions contained in Art. 79 of the Hydrocarbons Law and Executive Decrees No. 809, 2713 and 1179. (Emphasis added)

Just as clearly, Clause 21.1.2 of the Contract expressly provided that the Participation Contract shall terminate "[d]ue to a transfer of rights and obligations of the Participation Contract without prior authorization of the Corresponding Ministry." (Emphasis added) The Tribunal recalls that the Participation Contract tracks the requirements of Ecuador's HCL, in particular the following:

CHAPTER IX

Caducidad, Sanctions and Transfers

Art. 74. The Ministry of Energy and Mines may declare the caducidad of contracts, if the contractor:

[...]

11. Transfers rights or enters into a private contractor agreement for the assignment of one or more of its rights, without the Ministry's authorization ;

[…]

Art. 79. The transfer of a contract or the assignment to third parties of rights derived from a contract shall be null and void and shall have no validity whatsoever if there is no prior authorization from the Ministry of Energy and Mines, without prejudice to the declaration of caducidad as provided for in this Law.

[...] (Emphasis added)

I. BACKGROUND

1. As you are aware, OEPC and PETROECUADOR entered into a Participation Contract for upstream activities in Block 15 of the Amazon Region, in the terms and conditions contained in the corresponding Public Deed, recorded with the National Hydrocarbons Registry on June 2, 1999.

2. In order to reinforce the additional exploration work, development and production of Block 15, OEPC and AOEPC [AEC] are in the process of studying the possibility of executing an agreement based on which AOEPC [AEC] would contribute funds to finance part of the investments required for such purpose, in exchange of a share in the proceeds derived from such investment. AOEPC [AEC] would not acquire the rights and obligations derived from said Participation Contract, and OEPC will continue to comply with said Contract and will continue to be the sole liable party towards PETROECUADOR. Consequently, this negotiation only implies the acquisition by AOEPC [AEC] of an economic interest in the results produced by such additional exploration work, development and production of the Block 15 Participation Contract, without AOEPC [AEC] acquiring legal tile in said Contract. OEPC will continue to be the only entity with legal rights and obligations under the Block 15 Participation Contract.

3. Based on this negotiation, OEPC would recognize to AOEPC [AEC] the right to acquire legal title and an effective share in the Block 15 Participation Contract, once the several conditions that would be stipulated in the agreement, prior clearance from the Ministry of Energy and Mines, and other requirements of Ecuadorian laws and the Block 15 Participation Contract between OEPC and PETROECUADOR are met.

I. REQUEST:

In view of the above and based on the provisions contained in Article 74(1) and Article 79 of the Law on Hydrocarbons, as well as the regulatory rules issued for the application of said law, we request the following:

1. Please confirm whether, as is our understanding, the transaction described in the background to this request does not require the prior approval referred to in Article 74(11) and 79 of the Law on Hydrocarbons. As indicated above, this transaction does not imply an assignment of legal title or rights in the Block 15 Contract, but rather it is a simple recognition in favor of AOEPC [AEC] of an economic interest in the results derived from said contract. If, however, AOEPC [AEC] will acquire legal title and rights in the Block 15 Participation Contract once the conditions to be stipulated in said agreement are fulfilled, then prior clearance from the Ministry of Energy and Mines and compliance of other procedures and requirements contemplated by Ecuadorian laws would be required;

2. On a subsidiary basis, in the unlikely event that your answer to the preceding point is negative, we request you authorize OEPC to assign to AOEPC [AEC] an economic interest in the results produced by the additional exploration work, development and production of the Block 15 Participation Contract. In this case, we request you also authorize the agreement by virtue of which both companies would agree that once several conditions to be stipulated in the contract to be executed between them have been fulfilled, OEPC would transfer to AOEPC [AEC] legal title and rights in the Block 15 Participation Contract, prior compliance of other procedures and requirements contemplated by applicable Ecuadorian laws and regulations and the Block 15 Participation Contract. It should be noted that the transaction described in the background to this request would not, in any way, affect the rights and obligations assumed by the Contractor - OEPC - under the Participation Contract with PETROECUADOR; and that the transfer of rights in Block 15, which would be made once the several conditions to be stipulated in said agreement are fulfilled, would in no way diminish the capacity of the Block 15 Contractor. Not only would OEPC continue to be jointly liable for contract compliance, but AOEPC [AEC] would also be liable for the compliance of said obligations. It should also be noted that the financial, technical and operative capacity of AOEPC [AEC] to enter into upstream contracts has already been qualified by the Ecuadorian Government since the time Petroecuador executed several upstream contracts with said company.

3. Lastly, in the event the answer to the first point is negative, we would also appreciate your indicating whether the payments contemplated in Article 2.b of Presidential Decree 809 (Official Gazette 197, May 31, 1985) that regulates the application of Article 79 of the Law on Hydrocarbons must be made as a result of the authorization referred to in point 2 above; or, otherwise whether such sums must be paid only when the transfer of rights and obligations in the Block 15 Participation Contract, by OEPC in favor of AOEPC [AEC], becomes effective. As repeatedly stated above, the transfer would be made only when several conditions to be agreed in the agreement that would be negotiated are fulfilled, and after other formalities and requirements contemplated by Ecuadorian Law and the conditions stipulated in the Participation Contract have been met. (Emphasis added)

I. BACKGROUND

1. As you are aware, OEPC and PETROECUADOR entered into a Participation Contract for upstream activities in Block 15 of the Amazon Region, in the terms and conditions contained in the corresponding Public Deed, recorded with the National Hydrocarbons Registry on June 2, 1999.

2. In order to reinforce the additional exploration work, development and production of Block 15, upon receipt of all required government approvals, OEPC and AOEPC [AEC] will complete an agreement based on which AOEPC [AEC] would contribute funds to finance part of the investments required for such purpose, in exchange for a forty percent (40%) share in the proceeds derived from the Block including its unitized operations. AOEPC [AEC] would only acquire the rights and obligations derived from said Participation Contract at a future time and only after the Ministry of Energy and Mines granted its express approval, prior to the time that such rights are transferred. Until such future transfer is separately approved by the Ministry of Energy and Mines and finalized with OAEPC [ sic ] [AEC], OEPC will continue to comply with said Participation Contract and will continue to be the sole party liable to PETROECUADOR. Consequently, the agreement to be completed, for the present only implies the acquisition by AOEPC [AEC] of an economic interest in the results produced from the Block 15 Participation Contract, without AOEPC [AEC] acquiring any legal title in said Participation Contract. OEPC will continue to be the only entity with legal rights and obligations under the Block 15 Participation Contract.

3. In addition to the economic interest presently being acquired by AOEPC [AEC], as described above, and based on the negotiated agreement to be completed between OEPC and AOEPC [AEC], OEPC will commit to assign to AOEPC [AEC], sometime during or after January, 2005, legal title and an effective share in the Block 15 Participation Contract and its unitized operations, but only once the several conditions stipulated in the agreement, the requirement for prior clearance from the Ministry of Energy and Mines, and other requirements of Ecuadorian laws and the Block 15 Participation Contract between OEPC and PETROECUADOR are satisfied. Separate approval of this transfer of interest in the Block 15 Participation Contract and unitized areas will be sought from the Ministry of Energy and Mines at future time.

I. REQUEST:

In view of the above and based on the provisions contained in Article 74 (11) (12) and Article 79 of the Law on Hydrocarbons, as well as the regulatory rules issued for the application of said law, we request the following:

1. Please grant for this transaction the prior approval referenced in Articles 74 (11) (12) and 79 of the Law on Hydrocarbons or else indicate that no such approval is required for such transaction. As indicated above, this transaction does not imply a present assignment of legal title or rights in the Block 15 Participation Contract, but rather is a simple recognition in favor of AOEPC [AEC] of an economic interest in the results derived from said contract.

2. Under the negotiated agreement between OEPC and AOEPC [AEC], AOEPC [AEC] may acquire legal title and rights in the Block 15 Participation Contract and unitized areas, provided that approval from the Ministry of Energy and Mines is obtained prior to the time of the transfer, and further, provided that the conditions to be stipulated in said agreement are satisfied, and finally, provided that compliance of other procedures and requirement contemplated by Ecuadorian laws is achieved.

3. Lastly, we would also appreciate your indicating whether the payments contemplated in Article 2.b of Presidential Decree 809 (Official Gazette 197, May 31, 1985) that regulates the application of Article 79 of the Law on Hydrocarbons must be made as a result of the authorization referred to in point 1 above; or, otherwise whether such sums must be paid only when the transfer of rights and obligations in the Block 15 Participation Contract, by OEPC in favour of AOEPC [AEC], becomes effective as described in point 2 above. As repeatedly stated above, the transfer would be made only when several conditions to be agreed in the agreement that would be negotiated are fulfilled, and after the other formalities and requirements contemplated by Ecuadorian Law, including the requirement for formal approval by the Ministry of Mines and Energy, and all other conditions stipulated in the Participation Contract have been met. (Emphasis added)

Under the Farmout Agreement, if AEC satisfied its payment obligations, AEC had a right to receive from OEPC a portion of OEPC's oil produced under the Participation Contract. While OEPC could not guarantee that AEC would receive legal title, as legal title required approval by the Government of Ecuador, OEPC had a right to dispose of its oil freely, under the Participation Contract, and it could give AEC a portion of such produced oil. AEC essentially financed a portion of OEPC's financial exposure and, like a bank, AEC was repaid and compensated under the pre-agreed terms of the Farmout Agreement. If the Government of Ecuador did not approve the assignment of legal title, AEC would be repaid and compensated for its financing, but it would never secure its position and it would never obtain legal title. Like a bank, AEC's financing would remain uncollateralized.¹⁸ (Emphasis added)

The "script" prepared for that important meeting demonstrates, without the shadow of a doubt, that the proponents of Version A had carried the day and that no authorization would be sought for the "earn-in" phase. The first three numbered paragraphs of this "script" tell the whole story in a nutshell by highlighting that:

1) Oxy and AEC have agreed that AEC will assume a 40% economic interest in Block 15 effective 01 Oct 00.

2) AEC will assume a role as full partner effective 2005, subject to GoE approval.

3) No initial change in the contractual rights and obligations or legal title for Bl15. No change in operational methodology for Petroecuador or the GoE. (Emphasis added)

In our meeting held on October 24 of this year, we had the opportunity to notify you about the imminent transaction pursuant to which Occidental Exploration and Production Company ("OEPC") intends to transfer to City Investing Company Limited ("CITY") 40% of its economic interests in the Participation Contract for the Exploitation and Additional Exploration of Hydrocarbons in Block 15 (the "Block 15 Contract"). This transfer shall also include the rights of OEPC in the Operating Agreements for Unified Exploitation of the Eden Yuturi and Limoncocha Unified Fields.

After the consummation of this transaction, OEPC shall continue being the only "Contractor" entity under the Block 15 Contract. Once CITY has complied with its obligations contemplated in the transfer agreement, OEPC shall transfer to CITY the legal title corresponding to 40% of its interests in the Block 15 Contract and in the Operating Agreements for Unified Exploitation, subject to the approvals that the Government of Ecuador may require at that time.

This transaction will not negatively affect any of the operations contemplated in the Block 15 Contract or in the Operating Agreements for Unified Exploitation.

We are sure that this transaction will bring significant benefits to the Government of Ecuador and the companies. Therefore, we respectfully request that the Ministry of Energy and Mines confirm as soon as possible, your consent with respect to the aforementioned transfer of economic interests in favor of CITY.

We are sure that this transaction will bring significant benefits to the Government of Ecuador and the companies. Therefore, we respectfully request that the Minister of Energy and Mines confirm as soon as possible, your consent with respect to the aforementioned transfer of economic interests in favour of CITY.

1. Notwithstanding anything to the contrary contained in the Farmout Agreement or in any related document, OEPC and AECI hereby expressly waive satisfaction of any and all requirements for governmental approvals applicable to the transfer by OEPC to AECI of said 40% economic interest in the Farmout Property. The foregoing mutual waiver is not intended, however, and shall not be construed to constitute a waiver by either party hereto of any requirements for governmental approvals applicable to (a) the assignment, transfer or assignments, transfers or conveyances by OEPC and Occidental del Ecuador, Inc. to AECI provided for in that certain letter agreement or even date herewith, by and among OEPC, Occidental del Ecuador, Inc., AECI and AEC OCP Holdings Ltd., relating to the Oleoducto de Crudos Pesados (OCP) Project referred to therein. (Emphasis added)

Occidental Petroleum Corporation (NYSE:OXY) said today that it has agreed to farm out an interest in its operations in Block 15 in Ecuador to Alberta Energy Company Ltd., of Calgary, Canada.

AEC will earn a 40-percent interest in the block and will assume certain capital costs through 2004. Occidental will remain the operator.

SUBJECT: TRANSFER OF 40% OF THE ECONOMIC INTERESTS OF THE BLOCK 15 PARTICIPATION CONTRACT BY OCCIDENTAL EXPLORATION TO CITY INVESTING COMPANY

With regard to letter No. GG-014-00 dated October 25, 2000, in which Occidental reports the transfer of 40% of the economic interests in the Participation Contract for Hydrocarbons Production and Additional Exploration for Block 15, including the OEPC rights in the Unified Production Operating Agreements for the Unified Edén Yuturi and Limoncocha Fields to City Investing Company, I would like to inform you of the following:

City Investing currently has a Participation Contract with the Government in the Tarapoa Block and Fanny-18B and Mariann-4A Unified Fields and is the current operator of the aforementioned Fields. Therefore, it has proven that it has technical solvency, and for this reason, there would be no impediment for that assignment of rights.

2. REPORT ON THE AGREEMENT WITH AECI

Paul MacInnes reports to the Joint Management Committee on the negotiations carried out between OEPC and Alberta Energy Corporation International (AECI), by virtue of which OEPC would sell to AECI 40% of the shares in Block 15, long term. He indicates that a letter was sent to the Ministry of Energy and Mines reporting on these negotiations. This change does not mean a change in OEPC operations, as it is only a stake by AECI in part [of] the capital and OEPC could invest in other projects.

The contractual obligations that OEPC has with the Government would remain unchanged.

The minutes appear to suggest that the Farmout Agreement was in the process of being negotiated ("venderá"). However, the evidence before the Tribunal does not disclose who drafted the minutes which are signed by the participants but not by Paul MacInnes. In any event, in the Tribunal's view, it demonstrates again that, for the Claimants, their transaction with AEC was in the public domain in Ecuador. The transaction was definitely not a secret.

We had a meeting with the DNH regarding the notice of the Minister about the AECI deal. Their initial position was to understand the deal as a current transfer of rights. They explained that they were ready to issue a Ministerial Decree authorizing the transfer. After reviewing with them the terms of our letter they realized that the letter basically contains a notice of the future transaction. The answer from the DNH to our letter will be as an acknowledgement of the notice given to them stating that the corresponding Ministerial Decree will be issued once OEPC request the government to authorize the transfer. Meanwhile OEPC will remain 100% liable for the performance of Block 15 contract. (Emphasis added)