Originally from Journal of Damages in International Arbitration

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I.  FACTUAL BACKGROUND

A.    Contractual History

In 1987, Claimant Murphy Exploration & Production Company (“Murphy”) acquired an indirect 20% interest in a Service Contract for Block 16 in Ecuador (the “Service Contract”) through two of its wholly-owned subsidiaries: Murphy Ecuador Oil Company Limited (“Murphy Ecuador”) and Canam Offshore Limited (“Canam”).   The Service Contract was originally executed the prior year between a consortium of foreign investors (the “Consortium”) and the predecessor of Petroecuador, Ecuador’s State-owned oil company.   Under the Service Contract, the Consortium earned a fee for exploration and development of Block 16 but did not take a share of any of the oil produced (rather, Petroecuador retained all production).   Shortly before the relevant events giving rise to this dispute, Canam assigned its interests in the Consortium to Murphy Ecuador. 

The Consortium first discovered oil in Block 16 in 1987, and production began thereafter in December 1994.   By the following year, it was clear to Ecuador that the sale of produced oil would be insufficient to cover the costs owed to the Consortium under the Service Contract.   This was true in Block 16 as well as in other Blocks where Petroecuador had entered into similar service contracts with other foreign companies.   In response, Ecuador sought to convert its existing service contracts into participation contracts where contractors would earn a share of production instead of a fee for their services.   Ecuador believed this model would incentivize contractors to efficiently produce oil by keeping costs low while producing the maximum amount of reserves. 

Ecuador passed legislation throughout the 1990s to facilitate the conversion to participation contracts, including Law 44, which amended the Hydrocarbons Law specifically to allow for participation contracts.   In tandem, it passed legislation to attract foreign investment to its hydrocarbons industry.   In December 1997, Ecuador passed the Investment Promotion and Guarantee Law (known as “Law 46”) to “promote national and foreign investment and to regulate the rights and obligations of the investors so that they may effectively contribute to the economic and social development of the country.”   Ecuador also amended its Constitution to guarantee foreign investment the same treatment as national investments.