World's largest company loses arbitration battle with Yemen over disputed PSA.
Last month saw Yemen triumph over YEPC, a joint venture company formed by a mighty alliance of ExxonMobil and Hunt Oil. In a case which went all the way to International Chamber of Commerce arbitration, the outcome has ensured that the Yemeni state retains earnings from a disputed production block from 2005 to date, a ruling worth billions of dollars to the oil-revenue dependent state.
Oil & Gas Middle East spoke exclusively with Ben Knowles, a partner at the law firm representing Yemen, Clyde & Co.
Hunt Oil went into Yemen in the 1980s with a production sharing agreement (PSA), for 20 years. In due course ExxonMobil were brought into the project, largely for their expertise and to expedite production. The two US firms created a JV company called Yemen Exploration and Production Company (YEPC).
The PSA for Block 18 was set to run for 20 years, and had a clause in it that provided for a five year extension. "As the original contract approached expiry, negotiations were entered into between Yemen and YEPC. Those negotiations worked through, and both the Yemeni Ministry of Oil and the JV came to the conclusion that they wanted to extend the PSA on amended terms.
In this regard, the parties put a procedure in place which, as with all contracts pertaining to the exploitation of mineral resources, included a requirement that for the agreement to be binding, a Parliamentary approval should be granted," explained Knowles.
The approval of Parliament had been required for the original PSA, and that was obtained. The extension was put to Parliament and rejected. "That was not what either the ministry of oil, or in fact anyone on either side had expected." Parliament effectively vetoed the PSA extension.
In rather a hurry Yemen had to establish an oil company to run this field in 2005. YEPC sat tight and waited, expecting their expertise to be called on, and Parliamentary approval to follow - but it never came. In November 2005 there was a handover, and the issue has been contested between the two parties ever since.
The arbitration itself was all about whether the extension could, or indeed had been, granted without the approval of Parliament. "There was an agreement signed, and whether that agreement created an extension which some how didn't require the approval of Parliament, was everything the case hung on," added Knowles.
The main elements of the case were that YEPC were seeking US $1.6 billion from the Yemen government, and in return, an $8 billion counterclaim by Yemen was launched.
Typically a settlement one way or other is agreed at the end of a PSA relating to costs or rebates. Usually this would include an environmental audit and a general accounting that would give rise to payments in one direction.
"As this PSA was coming towards its expiry, that didn't happen, and after relations broke down there was very little discussion about settling the matter once and for all," he said.
The claims (both ways) were an accounting of a whole array of matters that has arisen throughout the previous two decades which had not been resolved.
The two big ticket items on the Yemen side pertained to environmental matters, and reservoir mis-management claims. Over time technology has been developed which can improve field exploitation efficiency, and the Yemen felt that there was an issue over whether appropriate technologies had been applied at the right time to maximise the exploitation, and production life, of Block 18.
Block 18 is also the main source of gas for Yemen's primary LNG facility. Hunt Oil remains an investor in the LNG project there. It is possible that YEPC were arguably more interested in the LNG project going forwards, than they were in the oil from Block 18. However, the block is a major producer and revenue source for the Yemen government, and now produces crude worth around $1 billion a year.
The case was heard by the International Chamber of Commerce, a French based international business body. "In terms of arbitration it's probably the best known, and its jurisdiction was actually written into the fabric of the original production sharing agreement," said Knowles.
The ICC is often nominated in complex international cases because it is deemed to be independent. The chamber is not beholden to any particular country's law courts or commercial law practices.
This case had a French arbitrator, an Anglo-Dutch arbitrator and a Belgian-American arbitrator applying a combination of Yemeni law, US law, and some general principles of international commercial law, and on top of that, good oilfield practice was examined and formed an important part of the case.
It sounds vastly complicated, but the process is seen as extremely fair. Each party will appoint one member of the tribunal and the two that are appointed will select the third. This means you end up with some eminent and extremely experienced people in their field presiding over these cases.
"The tribunal decided that the extension did, as per Yemen's constitution, require Parliamentary approval, which had indeed not been granted."
The Tribunal ruled that Yemen should pay the costs of the proceedings, and that they should not recover any of their counterclaims.
"In crude terms, I think the perspective from the ICC tribunal was that whilst YEPC were clearly in the wrong, it wasn't right that Yemen should have profited from the award either. YEPC started the arbitration, and the 90% of the claim was regarding the contract extension, so in this regard it was an important victory for Yemen, and naturally they are absolutely delighted with the outcome," explained Knowles.
"Crucially, Yemen has had the benefit of the production of that field between 2005, and will do through to 2010 without having to share those profits with a third party investor." Effectively the outcome of the case means the Yemen are better off to the tune of several billion dollars.
One of the most important things to emerge from the case is that might is not always right, and despite the legal force of the world's largest company behind it, the American joint venture did not win.
"For many years GCC countries and state oil companies may have had the impression that the playing field wasn't level in these proceedings. What this case shows is that the playing field is very level indeed. The result that the vast majority of people in the outside world were expecting was not the ruling."
The message is clear that governments and oil companies should not be wary of such proceedings. "If you have a good case then there's no reason why you won't achieve a favourable outcome."