PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 55 Bishopsgate, London EC2N 3AH, United Kingdom
MEMORANDUM
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I. Executive Summary
The purpose of this memorandum is to identify, analyze, and assess the material risks arising from the prolonged dormancy of ICSID Case No. ARB/22/11 (Dunmore Energy Holdings Ltd. v. Republic of Valderia), and to recommend strategic options for the client's consideration. This memorandum is prepared for the internal files of Calderwood & Harkness LLP and is intended to inform a forthcoming discussion with Sir Malcolm Dunmore, KBE (Founder and Chairman of Dunmore Energy Holdings Ltd.) and Priya Nandakumar (Chief Executive Officer) regarding the preferred course of action for the prosecution of the claim.
The ICSID proceedings in this matter have been dormant since June 17, 2022 — a period now exceeding twenty-five months — pursuant to a joint request of the parties, filed on the understanding that state-to-state diplomatic consultations between the United Kingdom Foreign, Commonwealth & Development Office ("FCDO") and the Valderian Ministry of Foreign Affairs would be conducted with a view to achieving a negotiated resolution. The dormancy has been renewed on four successive occasions: December 15, 2022; June 14, 2023; December 13, 2023; and most recently June 12, 2024. The next dormancy review date is December 12, 2024.
The Tribunal in this matter has not yet been constituted. To date, only the Claimant's arbitrator — Professor Ingrid Svensson, a Swedish national and Professor of International Investment Law at the University of Uppsala — has been nominated. The Respondent, the Republic of Valderia, has not nominated its arbitrator, as the parties agreed to defer the constitution of the Tribunal pending the outcome of the diplomatic track.
Several converging risk factors now require the urgent attention of the client and the deal team. These are as follows:
(a) Litigation funder termination risk: The 24-month dormancy threshold under the Litigation Funding Agreement with Beaufort Litigation Capital LLP ("Beaufort") was passed on June 17, 2024. Beaufort now holds a contractual right to terminate the funding arrangement on ninety days' written notice. As of the date of this memorandum, Beaufort has not exercised this right, but its continued forbearance cannot be assumed.
(b) Project finance standstill expiry: The standstill agreement between Dunmore Energy Holdings Ltd. ("DEH") and Commonwealth Capital Bank plc ("CCB") in respect of the USD 175,000,000 senior secured project finance facility expires on March 31, 2025 — approximately eight months from the date of this memorandum. If the standstill is not renewed, CCB may accelerate the outstanding principal of USD 112,400,000, plus accrued interest, and enforce the DEH parent guarantee, with potentially existential consequences for the client.
(c) Absence of diplomatic progress: The state-to-state diplomatic consultations between the UK FCDO and the Valderian Ministry of Foreign Affairs have, to the best of our knowledge, produced no concrete results. Intelligence received from our local counsel, Castaño Herrera & Asociados, suggests that the Valderian government's position may be hardening.
(d) Evidentiary degradation: The passage of time is eroding the integrity and currency of the evidentiary record. Key reserves certifications are now over three and a half years old, the DCF model is based on commodity price assumptions that require updating, and witness memories are fading.
The total claim quantum in this matter stands at USD 867,000,000, comprising USD 347,000,000 in sunk capital expenditure, USD 312,000,000 in lost future profits calculated on a discounted cash flow basis, and USD 208,000,000 in consequential damages. This quantum will require recalibration in light of changes in commodity prices, reserves depletion, and additional financing costs accrued during the period of dormancy.
In light of the foregoing, this memorandum recommends a Hybrid Approach (Option 5, as detailed in Section IV below) involving phased proactive engagement with all key stakeholders, preparation of the case for potential reactivation, and a decision point no later than November 2024. We recommend that instructions be sought from Sir Malcolm Dunmore, KBE and Priya Nandakumar at a meeting to be convened in late July or early August 2024, ideally at DEH's London office at 27 Curzon Street, with attendance by Vivienne St. Claire, Robert Adeyemi, and Jeffrey Park.
II. Background and Procedural History
A. The Investment and the Expropriation
Dunmore Energy Holdings Ltd. ("DEH") is an exempted company incorporated under the laws of the Cayman Islands, with its registered office at 4th Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman KY1-1002, and its principal business office at 27 Curzon Street, London W1J 5HT, United Kingdom. DEH is the ultimate parent company of the Dunmore Energy group and the claimant in the ICSID proceedings that are the subject of this memorandum.
DEH's wholly-owned Valderian subsidiary is Dunmore Valderia upstream S.A. ("DVU"), a Sociedad Anónima incorporated and existing under the laws of the Republic of Valderia, with its registered office at Avenida Libertador 1480, Piso 12, Puerto Valdés, Valderia. DVU was the named concessionaire under the hydrocarbon concession at issue in this dispute.
The Concession. On September 12, 2013, DVU was granted Concession No. HYD-2012-047, known as "Bloque Orinoco Sur" (Block Orinoco South), pursuant to the Valderian Hydrocarbons Law of 2009 (as amended). The concession covered an area of approximately 1,240 square kilometres in the Valderian Orinoco Basin, an onshore region, and was granted for a term of thirty years, with a contractual expiry date of September 12, 2043. Under the original terms of the concession, PetroValderia S.A., the 100% state-owned national oil company of the Republic of Valderia, held a 10% carried interest in the concession.
Capital Invested. Between 2014 and 2021, DEH (through DVU) invested a total of approximately USD 347,000,000 in the development and operation of Block Orinoco South. This investment was deployed across three principal categories:
• Exploration and development drilling: USD 211,000,000, encompassing 3D seismic acquisition over approximately 800 square kilometres, seven exploration wells (five of which were determined to be commercial), and twenty-two development wells.
• Surface infrastructure and gathering pipeline: USD 89,000,000, including the construction of the Central Processing Facility ("CPF Orinoco Sur"), with a designed processing capacity of 35,000 barrels per day, and a 68-kilometre gathering pipeline network connecting the wellheads to the CPF.
• Seismic acquisition and geological studies: USD 47,000,000, covering the initial and supplemental seismic survey programmes and associated geological and geophysical interpretation work.
Operational Performance. DVU achieved material operational milestones over the life of the investment. Peak production was reached in September 2020 at a rate of 24,800 barrels per day. The financial year 2020 average production rate was 21,200 barrels per day. At the time of expropriation, production stood at approximately 18,600 barrels per day. As of December 31, 2020, proved reserves were independently certified at 87.4 million barrels of oil equivalent ("mmboe") by Ridgewell Subsurface Consultants Ltd. of Calgary, Canada. Probable reserves were certified at an additional 42.1 mmboe. The FY2020 financial results for DVU showed gross revenue of USD 128,600,000 and EBITDA of USD 41,300,000, representing a margin of approximately 32.1%.
Equity Structure. The equity ownership of DEH is held as follows:
Meridian Growth Partners Fund III, L.P. is a limited partnership organized under the laws of the Cayman Islands, managed by its general partner, Meridian Growth Partners LLC, a Delaware limited liability company with offices at 399 Park Avenue, 28th Floor, New York, New York 10022. Meridian's 26% stake makes it a significant minority investor whose interests and disclosure obligations must be considered in connection with strategic decision-making.
B. The Expropriatory Acts
The expropriation of DVU's concession and assets took place over a period of approximately eight months during 2021, through a series of executive, legislative, and administrative measures taken by the government of the Republic of Valderia. The relevant chronology is as follows:
January 15, 2020: President Héctor Luján Montalvo was inaugurated as President of the Republic of Valderia, having campaigned on a platform of "resource sovereignty" (soberanía de los recursos) and the recovery of strategic national assets from foreign ownership. The Montalvo administration's posture toward foreign investment in the extractive industries was adversarial from its inception, and the legislative programme that followed was consistent with the campaign rhetoric.
March 2, 2021: The Ministry of Energy and Natural Resources, under Minister Claudia Ríos Salazar, issued a formal "Notice of Review" (Aviso de Revisión) addressed to all holders of foreign-owned hydrocarbon concessions operating in Valderia. The Notice purported to initiate a comprehensive review of the terms, compliance status, and "national benefit" of all such concessions. DVU received its copy of the Notice on March 5, 2021.
April 17, 2021: President Montalvo issued Presidential Decree No. 2021-0417, entitled "Decree on the Nationalization of Strategic Hydrocarbon Assets" (Decreto sobre la Nacionalización de Activos Hidrocarburíferos Estratégicos). The Decree declared certain designated hydrocarbon concessions — including Concession No. HYD-2012-047 (Bloque Orinoco Sur) — to be of "strategic national interest" and ordered their transfer to PetroValderia S.A. on terms to be determined by the Ministry of Energy and Natural Resources. No compensation mechanism was specified in the Decree.
May 3, 2021: Personnel of the Valderian armed forces, accompanied by representatives of PetroValderia S.A., physically occupied the Central Processing Facility at Orinoco Sur. DVU employees were denied access to the facility. Operational control of all surface infrastructure, wells, and pipeline networks within Block Orinoco South was assumed by PetroValderia. DEH's expatriate staff were escorted from the premises by military personnel. This date marks the effective date of physical dispossession.
June 23, 2021: Presidential Decree No. 2021-0623, the "Decree on the Transfer of Concession Rights to PetroValderia S.A." (Decreto sobre la Transferencia de Derechos de Concesión a PetroValderia S.A.), was issued, formally transferring the legal title to Concession No. HYD-2012-047 from DVU to PetroValderia S.A. The Decree provided no mechanism for the payment of compensation to DVU or DEH.
August 5, 2021: Ministerial Resolution No. MEN-2021-089, issued by the Ministry of Energy and Natural Resources, formally revoked all operating licenses held by DVU in the Republic of Valderia. The revocation was stated to take effect immediately. No right of appeal or compensation was provided.
September 1, 2021: By order of the Attorney General of the Republic of Valderia, Dr. Renata Villamizar Ochoa, all bank accounts held by DVU at the Banco Nacional de Valderia were frozen. The freezing order was purportedly issued pursuant to the Attorney General's authority under the Valderian Anti-Money Laundering and Proceeds of Crime Law (2018), although no charges or investigation relating to money laundering or financial crime were disclosed. The practical effect of the order was to deny DVU access to its remaining liquid assets in-country.
It is critical to note that at no stage during the foregoing chronology of events did the Republic of Valderia offer, propose, or pay any compensation to DVU or DEH in respect of the expropriation. The failure to provide prompt, adequate, and effective compensation is central to DEH's claim under Article 5 of the UK-Valderia Bilateral Investment Treaty (2006).
C. Pre-Arbitration Steps
Following the completion of the expropriatory acts, DEH initiated the pre-arbitration dispute resolution procedures specified in the UK-Valderia BIT.
On October 14, 2021, DEH dispatched a formal Notice of Dispute to the Republic of Valderia pursuant to Article 8 of the UK-Valderia BIT (2006). The Notice was addressed to His Excellency Ambassador Diego Fuentes Castillo, in his capacity as Minister of Foreign Affairs of the Republic of Valderia, and to Dr. Renata Villamizar Ochoa, in her capacity as Attorney General of the Republic. The Notice described the investment, the expropriatory acts, the absence of compensation, and the consequent breaches of the BIT, and stated DEH's intention to submit the dispute to ICSID arbitration in the event that the dispute was not resolved within the six-month cooling-off period prescribed by the treaty.
The six-month cooling-off period expired on April 14, 2022 without any resolution, settlement, or meaningful engagement from the Republic of Valderia. During this period, DEH received no substantive response to the Notice of Dispute, and no offer of compensation or negotiation was made.
D. ICSID Proceedings and Dormancy
On March 15, 2022, DEH filed a Request for Arbitration with the International Centre for Settlement of Investment Disputes ("ICSID") pursuant to Article 36 of the ICSID Convention. The Request invoked the arbitration clause in Article 8 of the UK-Valderia BIT (2006) and the ICSID Convention. The case was registered by the ICSID Secretary-General on April 8, 2022, and assigned Case No. ARB/22/11.
In connection with the Request for Arbitration, DEH nominated Professor Ingrid Svensson, a Swedish national and Professor of International Investment Law at the University of Uppsala, as its party-appointed arbitrator. Professor Svensson accepted the appointment and filed her declaration of independence and impartiality in accordance with the ICSID Rules. The Respondent has not yet nominated its party-appointed arbitrator, owing to the dormancy of the proceedings described below.
On June 17, 2022, a joint letter was submitted to ICSID by Calderwood & Harkness LLP (acting for DEH) and Harcastle Fenton LLP (acting for the Republic of Valderia, led by Charles Winterbottom QC), requesting the suspension of the proceedings pending the conduct of state-to-state diplomatic consultations between the UK FCDO and the Valderian Ministry of Foreign Affairs. The joint letter was filed on the basis that both parties anticipated that the diplomatic track might facilitate a negotiated resolution of the dispute without the need for a full arbitral proceeding.
The dormancy has been renewed on four successive occasions by further joint letters filed with ICSID:
1. First renewal: December 15, 2022.
2. Second renewal: June 14, 2023.
3. Third renewal: December 13, 2023.
4. Fourth renewal: June 12, 2024.
The next dormancy review date, at which the parties will be required to advise ICSID of their intentions regarding the continued suspension or reactivation of the proceedings, is December 12, 2024.
Respondent's Legal Representation. The Republic of Valderia is represented in this matter by:
• International counsel: Harcastle Fenton LLP, a 600-lawyer international disputes boutique with offices in London, Paris, and Washington, D.C. The lead partner on the matter is Charles Winterbottom QC, and the senior associate is Dr. Marie-Laure Dupont. Harcastle Fenton is a formidable opponent in investor-state disputes and has successfully defended several Latin American states in ICSID proceedings in recent years.
• Local counsel: Ortega & Bernal, Abogados, based in Puerto Valdés, Valderia; an 80-lawyer firm with a well-established presence in Valderian energy and administrative law. The lead partner is Dr. Alejandro Bernal Quiroga, and the associate is Lic. Sofía Estrada Mendoza.
Respondent's Quantum Expert. The Respondent has retained Northbridge Economic Consulting Ltd. of London, with Dr. Henrik Johansson as lead expert, to provide quantum analysis. We anticipate that Dr. Johansson will challenge DEH's DCF methodology and may advocate for an asset-based or book-value approach to valuation.
Claimant's Local Counsel. DEH is represented in Valderia by Castaño Herrera & Asociados, based in Puerto Valdés, with Dr. Gabriel Castaño Herrera as lead partner and Lic. Isabella Montoya Ruiz as associate.
III. Risk Analysis
This section identifies and assesses the principal categories of risk arising from the prolonged dormancy of the ICSID proceedings. Each risk category is analyzed in turn, with specific recommendations for mitigation.
A. Litigation Funding Risk — Beaufort Litigation Capital LLP
1. Terms of the Funding Agreement
The ICSID proceedings are funded by Beaufort Litigation Capital LLP ("Beaufort"), a specialist litigation funder based at 14 St. James's Square, London SW1Y 4LG. The primary contact at Beaufort is Jonathan Hargreaves, Managing Partner. The relationship between DEH and Beaufort is governed by the Litigation Funding Agreement dated February 28, 2022 (the "Funding Agreement").
Under the Funding Agreement, Beaufort committed to fund DEH's legal costs and disbursements in the prosecution of the ICSID claim up to a maximum committed amount of GBP 8,500,000 (approximately USD 10,455,000 at the GBP/USD exchange rate of 1.23 prevailing at the date of execution). In return, Beaufort is entitled to a success fee of 22% of the net recovery obtained by DEH (after deduction of costs), whether by way of arbitral award, settlement, or other agreed resolution.
The Funding Agreement contains standard provisions governing the relationship between funder and funded party, including Beaufort's right to receive regular case updates, its approval right over any settlement or discontinuance, and its right to appoint legal costs auditors to review the reasonableness of professional fees charged to the matter. These provisions are materially consistent with the Association of Litigation Funders' Code of Conduct and the ALF Capital Adequacy Requirements.
2. Termination Right — The 24-Month Threshold
The Funding Agreement contains a termination provision that is now of acute relevance. Under clause 11.3(b) of the Funding Agreement, Beaufort may terminate the funding arrangement upon ninety (90) days' written notice to DEH if the ICSID proceedings remain dormant — defined as being subject to a stay, suspension, or other agreed cessation of active procedural steps — for more than twenty-four (24) consecutive months.
The proceedings were placed into dormancy on June 17, 2022, by the joint letter of Calderwood & Harkness LLP and Harcastle Fenton LLP. The twenty-four-month threshold date was therefore June 17, 2024. As of the date of this memorandum, this threshold has been passed by a margin of approximately four weeks.
As of our most recent correspondence with Beaufort — the status update letter dispatched by this firm on June 28, 2024, and acknowledged by Mr. Hargreaves by email on July 3, 2024 — Beaufort has not exercised its termination right under clause 11.3(b). However, the contractual right to serve the ninety-day termination notice is now available to Beaufort at any time, and nothing in the Funding Agreement requires Beaufort to provide advance warning of its intention to do so. The right remains exercisable until such time as the dormancy is lifted and active proceedings resume.
The significance of this risk cannot be overstated. If Beaufort were to serve its ninety-day termination notice today, the effective date of termination would fall in approximately mid-October 2024. If notice were served at any point in the coming months, the termination could take effect at a critical juncture — potentially on the eve of the December 12, 2024 dormancy review date, or in the period immediately preceding the CCB standstill expiry on March 31, 2025.
3. Consequences of Funder Withdrawal
The consequences of Beaufort's withdrawal from the matter would be severe and potentially case-ending. The most significant implications are as follows:
Self-funding burden. In the absence of litigation funding, DEH would be required to bear all legal costs and disbursements from its own resources or to source alternative funding from a third-party funder. The estimated remaining costs to bring the case to a merits hearing, assuming proceedings are reactivated, are in the range of GBP 4,000,000 to GBP 6,000,000. This estimate encompasses Calderwood & Harkness LLP's professional fees for the preparation of the Memorial on the Merits, the Counter-Memorial, the Reply, and the hearing; the fees of expert witnesses, including Pemberton Valuation Advisory (New York) and Ridgewell Subsurface Consultants Ltd. (Calgary); local counsel fees payable to Castaño Herrera & Asociados; the costs of witness preparation and travel; and ICSID administrative fees and Tribunal members' fees. DEH's ability to absorb this cost burden in the absence of external funding, particularly in light of the CCB standstill situation and the loss of its principal revenue-generating asset, requires careful assessment by Thomas Rearden (CFO).
Adverse costs insurance. DEH has the benefit of an adverse costs insurance policy placed with Oakshield Underwriting Syndicate Ltd. (Policy No. OUS-2022-ARB-4417), providing coverage of up to GBP 3,000,000 in respect of any adverse costs award in the ICSID proceedings. It is necessary to verify whether the Oakshield policy survives the termination of the Beaufort Funding Agreement or whether the two instruments are co-terminous — that is, whether Oakshield's coverage is contingent upon the continued existence of the funding arrangement. If the Oakshield policy lapses upon Beaufort's withdrawal, DEH would face both the burden of self-funding and the risk of uninsured adverse costs exposure. We recommend that the Oakshield policy wording be reviewed urgently by our insurance team.
Alternative funding. If Beaufort withdraws, DEH could seek to replace the funding with a new funder. However, the investor-state arbitration litigation funding market has tightened considerably since early 2022. A number of specialist funders have reduced their exposure to ICSID claims, and the prolonged dormancy of this case, combined with the absence of a constituted Tribunal, would be viewed by prospective funders as a significant risk factor. Any new funder would likely require a comprehensive due diligence period of three to six months before committing capital, and would almost certainly demand a higher success fee — potentially in the range of 25% to 30% of net recovery, compared to the 22% currently payable to Beaufort. The delay and increased cost associated with re-marketing the case would be materially adverse to DEH's interests.
4. Recommendation Regarding Beaufort
We recommend the following steps in relation to the Beaufort funding risk:
(a) Proactive engagement. Vivienne St. Claire should contact Jonathan Hargreaves at Beaufort at the earliest opportunity — ideally within the next two weeks — to discuss Beaufort's current posture and appetite for the matter. The purpose of this engagement should be to understand whether Beaufort has any present intention to exercise its termination right, and to gauge Beaufort's willingness to continue funding the case in light of the extended dormancy.
(b) Written confirmation. Following the call, we should request written confirmation from Beaufort that it does not presently intend to exercise its termination right under clause 11.3(b), and that it anticipates maintaining its commitment for a defined further period (ideally through the end of 2025).
(c) Amendment proposal. We should consider proposing an amendment to the Funding Agreement that either extends the dormancy threshold from twenty-four months to a longer period (e.g., thirty-six months), or substitutes the dormancy-based termination right with a milestone-based framework under which Beaufort's termination right is triggered only if certain agreed milestones (e.g., reactivation of proceedings, constitution of the Tribunal, filing of the Memorial) are not achieved by specified dates.
(d) Updated case assessment. In connection with the foregoing, we should provide Beaufort with an updated case assessment and quantum summary that reinforces its confidence in the strength and value of the claim, including a summary of the legal and factual basis for the expropriation claim, the quantum analysis, and the anticipated procedural timeline upon reactivation.
B. Project Finance Lender Risk — Commonwealth Capital Bank plc
1. Background on the Facility
DEH's Valderian subsidiary, DVU, is the borrower under a senior secured project finance facility extended by Commonwealth Capital Bank plc ("CCB"), a UK-domiciled bank with offices at 1 Broadgate, London EC2M 2QS. The relationship manager at CCB for the Dunmore account is Helen Okafor, Director, Energy & Resources.
The facility was established pursuant to a Facility Agreement dated March 20, 2016, in the amount of USD 175,000,000. The facility was structured as a senior secured project finance facility, with the following key terms:
• Borrower: Dunmore Valderia upstream S.A. (DVU).
• Guarantor: Dunmore Energy Holdings Ltd. (DEH), pursuant to a parent company guarantee.
• Security: First-priority lien on all assets of DVU, including moveable and immoveable property, plant and equipment, concession rights, and receivables; assignment of concession receivables from hydrocarbon sales.
• Outstanding principal at the time of expropriation (May 3, 2021): USD 112,400,000.
• Interest rate: SOFR plus 4.25% per annum (following the transition from LIBOR in mid-2023; originally LIBOR plus 4.25%).
• Original maturity date: March 20, 2026.
The facility was drawn to fund the capital expenditure programme for Block Orinoco South, including development drilling, infrastructure construction, and pipeline installation. The facility had been performing satisfactorily, with DVU making scheduled principal and interest payments from concession revenues, until the expropriatory acts of 2021 disrupted all operations and revenue flows.
2. Technical Default and Standstill
On November 1, 2021, CCB formally declared a technical default under Section 9.1(k) of the Facility Agreement. Section 9.1(k) provides that it is an event of default if any material asset of the Borrower is subject to compulsory acquisition, expropriation, nationalisation, or seizure by any governmental authority, and such event is not remedied or compensated within sixty (60) days. The expropriation of DVU's assets, including the concession, the CPF Orinoco Sur, the gathering pipeline, and all associated infrastructure, squarely triggered this provision.
Following the declaration of default, DEH and CCB entered into a standstill agreement dated December 22, 2021 (the "Standstill Agreement"), pursuant to which CCB agreed not to accelerate the outstanding loan balance or enforce the DEH parent guarantee for a defined period, subject to certain conditions. The primary conditions included periodic reporting by DEH to CCB on the status of the ICSID arbitration and the diplomatic consultations, and DEH's continued good-faith prosecution of all available legal remedies.
The Standstill Agreement has been extended on multiple occasions since its original execution. The current standstill expires on March 31, 2025 — a date that is now approximately eight and a half months away.
3. Risk of Standstill Expiry or Non-Renewal
The March 31, 2025 expiry of the CCB Standstill Agreement represents a critical risk for DEH. The potential consequences of non-renewal are significant and merit careful analysis.
If CCB declines to extend the standstill beyond March 31, 2025, it will be entitled to exercise the full range of creditor remedies available to it under the Facility Agreement and the Standstill Agreement, including:
(a) Acceleration of the loan. CCB may declare the entire outstanding principal of USD 112,400,000 to be immediately due and payable, together with all accrued and unpaid interest. Given the interest rate of SOFR plus 4.25% per annum, and the period that has elapsed since the last payment (May 2021), the accrued interest component is substantial. Assuming a blended SOFR rate of approximately 5.0% over the relevant period (reflecting the significant rise in base rates since 2022), the all-in interest rate would be approximately 9.25% per annum. Over the approximately four years since the last payment, accrued interest would be in the order of USD 41,000,000 to USD 45,000,000 (on a simple interest basis; higher if compounding applies under the Facility Agreement). The total claim by CCB upon acceleration would therefore likely exceed USD 153,000,000.
(b) Enforcement of the parent guarantee. CCB holds a parent company guarantee from DEH. If the loan is accelerated, CCB may make demand under the guarantee for payment of the entire accelerated amount. DEH's ability to satisfy a demand of this magnitude is doubtful; enforcement could precipitate insolvency proceedings against DEH and fundamentally compromise the client's ability to prosecute the ICSID claim.
(c) Exercise of security. CCB holds a first-priority lien over all DVU assets. However, those assets are now in the possession and control of PetroValderia S.A. and the Republic of Valderia. The practical enforceability of CCB's security interest is negligible in the absence of a successful arbitral award or negotiated resolution that restores or compensates for the expropriated assets. CCB's security is, in substance, worthless absent a favourable outcome in the ICSID proceedings or the diplomatic consultations.
This last point is significant from a strategic perspective. CCB's best — and arguably its only realistic — path to recovery on the outstanding USD 112,400,000 loan is through the ICSID arbitration or a negotiated settlement with the Republic of Valderia. If DEH is forced into insolvency by an accelerated demand under the parent guarantee, the ICSID claim itself would be imperilled, and CCB's recovery prospects would diminish rather than improve. This alignment of interest should be leveraged in our negotiations with CCB for a further extension of the standstill.
Nevertheless, CCB's credit committee cannot be assumed to share this view indefinitely. Prolonged dormancy, with no visible progress toward resolution, may exhaust the bank's institutional patience. The credit committee may take the view that an indefinite standstill represents an unacceptable concentration of risk in a non-performing asset, and that enforcement — even at a recovery discount — is preferable to continued forbearance with no end date in sight.
4. Recommendation Regarding CCB
We recommend the following approach in respect of the CCB lender risk:
(a) Formal extension request. DEH should write to CCB (Helen Okafor, Director, Energy & Resources) in the autumn of 2024 — ideally in October 2024 — requesting a further twelve-month extension of the standstill to March 31, 2026. This timing allows sufficient lead time for CCB's credit committee to consider the request before the current standstill expiry date.
(b) Updated status report. The extension request should be accompanied by an updated status report on the ICSID arbitration, the diplomatic consultations, and the quantum assessment. The report should be prepared by Calderwood & Harkness LLP in consultation with DEH management and should emphasize the strong merits of the claim, the total quantum of USD 867,000,000 (substantially exceeding the outstanding loan balance), and the realistic timeline for resolution upon reactivation of proceedings.
(c) Alignment argument. The letter should underscore that CCB's best recovery prospect depends on the maintenance and active prosecution of the ICSID claim, and that enforcement of the parent guarantee would be counterproductive to CCB's own interests.
(d) Reporting and observer rights. Consideration should be given to whether CCB should be offered enhanced reporting rights or an observer role in connection with the arbitration, to ensure alignment and to provide CCB's credit committee with comfort that the claim is being managed actively. Any such arrangement would need to be structured carefully to preserve attorney-client privilege and to avoid any implication that CCB has standing in or control over the ICSID proceedings.
C. Diplomatic Consultation Uncertainty
1. Status of UK-Valderia Consultations
The dormancy of the ICSID proceedings was originally predicated on the expectation that state-to-state diplomatic consultations between the United Kingdom and the Republic of Valderia would produce a negotiated resolution of the dispute, or at minimum create conditions conducive to a settlement. These consultations have been conducted at the governmental level between the UK Foreign, Commonwealth & Development Office and the Valderian Ministry of Foreign Affairs (under Ambassador Diego Fuentes Castillo as Minister of Foreign Affairs).
As of the date of this memorandum, the diplomatic consultations have been underway for over twenty-five months. During this period, four consecutive dormancy renewals have been filed with ICSID on a joint basis. Calderwood & Harkness LLP has limited visibility into the substance, progress, or current trajectory of the diplomatic discussions, as these are conducted at an inter-governmental level to which the client and its legal advisors do not have direct access.
The limited intelligence available to us from secondary sources is not encouraging. Our local counsel, Dr. Gabriel Castaño Herrera of Castaño Herrera & Asociados in Puerto Valdés, has reported informally — based on his contacts within the Valderian legal and governmental community — that the Valderian government's position appears to be hardening rather than softening. President Montalvo has made several public statements in recent months reaffirming his administration's commitment to the "resource sovereignty" agenda and characterising the nationalization of foreign-held hydrocarbon assets as an irreversible achievement of his presidency. These public statements are inconsistent with a posture of willingness to negotiate a compensatory settlement with DEH.
2. Risk Assessment
The risks associated with the diplomatic track are multi-dimensional and significant:
(a) No indication of progress. There is no formal or informal indication, from any source available to us, that the diplomatic consultations are making progress toward a resolution that would be acceptable to DEH. The absence of any concrete output after twenty-five months — no framework agreement, no term sheet, no joint communiqué — is itself a negative indicator.
(b) Lack of standing. DEH has no standing to participate directly in the state-to-state diplomatic consultations. The client is entirely reliant on the willingness and capacity of the UK government to advocate effectively on its behalf. This creates a principal-agent problem: the UK government's priorities may not align perfectly with DEH's commercial interests.
(c) Delay tactic risk. There is a material risk that the diplomatic track is being used by the Republic of Valderia as a tactical device to extend the dormancy of the ICSID proceedings while the practical foundations of the claim erode. Each additional month of dormancy brings the Beaufort termination threshold further into the past, the CCB standstill expiry closer, and the evidentiary record further out of date. A rational Valderian strategy would be to maintain the appearance of diplomatic engagement while allowing time to weaken the claimant's position.
(d) Subordination risk. The UK government may subordinate DEH's specific commercial interests to broader bilateral diplomatic considerations between the United Kingdom and Valderia. These broader considerations could include trade relations, security cooperation, migration policy, climate commitments, or other matters of state-to-state concern. DEH's expropriation claim, while commercially significant to the client, may represent a secondary priority in the context of the UK's overall relationship with Valderia.
3. Recommendation. We recommend the following steps to address the diplomatic consultation risk:
(a) FCDO briefing. DEH should seek an informal briefing from the UK FCDO on the status and realistic prospects of the diplomatic consultations. Sir Malcolm Dunmore, KBE, may be best positioned to make this approach, given his personal connections within the UK government and his standing as a prominent British investor. Alternatively, Calderwood & Harkness LLP could approach the FCDO on a professional basis, through the relevant desk officer or through the Special Envoy for Investment Disputes (if such a role currently exists).
(b) Internal deadline. We recommend that the client set an internal decision point: if no meaningful progress in the diplomatic consultations is reported by the next dormancy review date of December 12, 2024, DEH should instruct Calderwood & Harkness LLP to decline to consent to any further dormancy renewal and to seek the reactivation of the ICSID proceedings. This deadline provides a clear trigger for strategic decision-making and prevents indefinite drift.
D. Evidentiary and Witness Risks
1. Document Preservation
The integrity and completeness of the documentary record is a matter of significant concern. The physical records and local IT systems of DVU, which were housed at the CPF Orinoco Sur and at DVU's registered office in Puerto Valdés, were seized or rendered inaccessible following the physical occupation of the CPF by Valderian military and PetroValderia personnel on May 3, 2021. DVU's bank records at the Banco Nacional de Valderia remain frozen by order of the Attorney General and are not currently accessible to DVU's management or its legal advisors.
Calderwood & Harkness LLP and DEH's London office at 27 Curzon Street hold copies of key corporate, financial, and operational records, including board minutes, shareholder resolutions, the concession agreement, the CCB Facility Agreement, financial statements, tax returns, geological and engineering reports, and selected operational correspondence. However, the completeness of these copies as against the totality of DVU's original records has not been independently verified. There may be categories of documents — particularly local operational records, regulatory correspondence, and communications with Valderian governmental entities — that exist only in the seized archives and are not available in the London document set.
Castaño Herrera & Asociados holds certain local document archives, including copies of filings with Valderian regulatory agencies, local tax records, and correspondence with the Ministry of Energy and Natural Resources. However, Dr. Castaño Herrera has reported difficulty in accessing additional Valderian governmental records through domestic channels. Applications under Valderian freedom of information legislation have been met with delays and, in some cases, outright refusal by the relevant ministries.
2. Witness Availability
The passage of time since the expropriatory events of 2021 — now over three years — creates progressively greater risks to the availability and reliability of witness testimony.
Key fact witnesses include DEH and DVU personnel who were present in Valderia at the time of the expropriation, including the country manager, the operations manager, the finance director, and engineering staff who witnessed the physical occupation of the CPF on May 3, 2021 and the preceding governmental measures. Some of these individuals have since relocated from Valderia and dispersed to other jurisdictions. With each passing month, their recollections of specific events, conversations, and chronologies will inevitably become less precise and less detailed, increasing the vulnerability of their testimony to cross-examination by Charles Winterbottom QC and Dr. Marie-Laure Dupont.
DVU's local Valderian employees present a distinct challenge. Many of these individuals may be reluctant to provide testimony in ICSID proceedings against the government of the country in which they continue to reside and work. The risk of reprisal — whether in the form of employment consequences, tax audits, or other forms of governmental pressure — is real and cannot be discounted. Moreover, some former DVU local employees may now be employed by PetroValderia S.A. itself, having transitioned to the national oil company following the takeover of Block Orinoco South. These individuals are unlikely to cooperate voluntarily with DEH's legal team.
As regards expert witnesses, both Dr. Elaine Cho of Pemberton Valuation Advisory (New York) and Dr. Alistair Greaves of Ridgewell Subsurface Consultants Ltd. (Calgary) remain retained by DEH and have confirmed their continued availability. However, their existing reports and models will require material updating to reflect changed circumstances, as discussed further below.
3. Data Staleness
The passage of over three and a half years since the relevant valuation date has created a significant data staleness problem that must be addressed before the claim can be presented at a merits hearing. The principal areas of concern are:
(a) Reserves certification. The proved reserves certification of 87.4 mmboe, and the probable reserves estimate of 42.1 mmboe, are both based on the Ridgewell Subsurface Consultants Ltd. report dated December 31, 2020. This data is now over three and a half years old. In the intervening period, PetroValderia S.A. has been actively producing from Block Orinoco South, and the reserves have been depleted to an extent that is unknown to us but can be estimated based on assumed production rates. The condition of the reservoir, the maintenance of well integrity, and the status of surface infrastructure under PetroValderia's management are also unknown and may have materially changed.
(b) DCF model. The discounted cash flow model prepared by Dr. Elaine Cho of Pemberton Valuation Advisory uses a Brent crude oil price assumption of USD 65 per barrel. Since the model was originally constructed, Brent crude prices have fluctuated significantly — reaching over USD 120/bbl during the Russia-Ukraine conflict in 2022 and subsequently moderating to a range of approximately USD 75–85/bbl in recent months. The model will need to be recalibrated using current forward price curves and updated consensus forecasts. Additionally, the remaining concession term, which forms the basis of the DCF horizon, has shortened by approximately three years since the original valuation, and the model will need to reflect this.
(c) Financial statements. Audited financial statements for DVU for the period following the expropriation may not be available. DVU's auditors, Ashworth & Palliser LLP, would have been unable to complete their audit of DVU's post-expropriation financial position given the seizure of DVU's records and the freezing of its bank accounts. This gap in the financial record may complicate certain aspects of the quantum analysis.
(d) Commodity price and fiscal assumptions. The original DCF model incorporated a Valderian royalty rate of 12.5% and a Valderian corporate income tax rate of 34%, both of which were the rates applicable at the time of expropriation. If these rates have been changed by the Montalvo administration in the interim — a possibility that Castaño Herrera & Asociados should be asked to verify — the model may need adjustment, depending on the valuation methodology adopted.
4. Recommendation. We recommend the following steps to address the evidentiary and data staleness risks:
(a) Witness declarations. Commission updated witness declarations from key fact witnesses as soon as practicable, while their memories are as fresh as they can be. The priority witnesses are the DVU country manager, the operations manager, and any expatriate staff who witnessed the physical occupation of the CPF on May 3, 2021 and the preceding governmental measures. These declarations should be taken in the form of detailed, chronological witness statements that can serve as the basis for formal witness evidence in the arbitration.
(b) Supplemental reserves memorandum. Instruct Dr. Alistair Greaves of Ridgewell Subsurface Consultants Ltd. to prepare a supplemental reserves memorandum that addresses the estimated depletion of proved and probable reserves as a result of PetroValderia's production since May 2021, and that updates the reserves estimates to a current date using available data (including any production data that can be obtained from public sources or intelligence channels).
(c) Updated DCF model. Instruct Dr. Elaine Cho and Marcus Whitfield of Pemberton Valuation Advisory to update the DCF model with current commodity price forward curves, revised reserves estimates (as provided by Ridgewell), a recalculated remaining concession term, and updated fiscal assumptions. The updated model should also consider the impact of PetroValderia's interim production on the unjust enrichment and restitution components of the claim.
(d) Document preservation. Coordinate with Castaño Herrera & Asociados on any available domestic discovery or document preservation mechanisms under Valderian law that could be employed to secure access to DVU's seized records or to compel the production of governmental documents relevant to the expropriation.
E. ICSID Procedural Risks
1. Discontinuance Under ICSID Rules
Under the ICSID Arbitration Rules (as amended, effective July 1, 2022), provisions exist for the discontinuance of proceedings in cases of extended inactivity. Rule 44, which addresses the discontinuance of proceedings, provides that if a case remains inactive for a specified period, the Secretary-General or either party may raise the question of whether the proceedings should be discontinued.
While the current dormancy of Case No. ARB/22/11 is by joint consent and has been periodically renewed by agreement of both parties, the following risks should be noted:
(a) Unilateral withdrawal of consent. The Republic of Valderia could, at the next dormancy review date of December 12, 2024, unilaterally withdraw its consent to the continuation of the dormancy. This could force DEH into one of two positions: either consenting to the reactivation of proceedings (which DEH may not be prepared for at that point, depending on the status of the Beaufort funding and the expert report updates), or facing a contested discontinuance application by the Respondent.
(b) ICSID Secretary-General's initiative. The ICSID Secretary-General retains the authority to raise the question of discontinuance on its own initiative if the case remains inactive for an extended period. While this is uncommon where dormancy is by joint consent, the possibility cannot be excluded, particularly as the period of dormancy continues to extend.
2. Tribunal Constitution Delays
As noted in Section II.D above, the Tribunal in this matter has not yet been constituted. Only the Claimant's arbitrator, Professor Ingrid Svensson, has been nominated and has accepted appointment. The Respondent has not nominated its party-appointed arbitrator, and the presiding arbitrator has not been appointed.
Upon reactivation of the proceedings, the following steps would need to be completed before the Tribunal could be constituted:
(a) The Respondent would need to nominate its party-appointed arbitrator, which it would be required to do within the time period prescribed by the applicable ICSID Rules. Given that the Respondent's legal team (Harcastle Fenton LLP and Ortega & Bernal) has presumably had ample time to identify candidates during the dormancy period, this step could in principle be completed relatively quickly, but tactical delay cannot be excluded.
(b) The two party-appointed arbitrators, once both nominated and confirmed, would need to agree on the appointment of the presiding arbitrator. If the party-appointed arbitrators are unable to agree within the prescribed time, the ICSID Chairman would appoint the presiding arbitrator. The entire process of Tribunal constitution could take three to six months from reactivation.
Additionally, the passage of over two years since Professor Svensson's nomination raises the question of whether she remains available and willing to serve. While Professor Svensson has not communicated any withdrawal of her acceptance, her academic and professional commitments may have changed in the intervening period, and her continued availability should not be assumed.
3. Recommendation. We recommend the following steps to address the ICSID procedural risks:
(a) Professor Svensson's availability. Contact Professor Svensson's chambers or university office to confirm her ongoing availability and willingness to serve as Claimant's arbitrator in the event that proceedings are reactivated. This inquiry should be made discreetly, so as not to signal a definitive decision to reactivate before the client has given instructions.
(b) Presiding arbitrator candidates. In consultation with the client, prepare a shortlist of potential presiding arbitrators who would be suitable for this case, taking into account the relevant subject matter (expropriation, hydrocarbons, Latin American investment disputes), language requirements (English and Spanish), and any applicable nationality restrictions under the ICSID Convention. Having this shortlist prepared in advance will enable DEH to move swiftly in the arbitrator selection process upon reactivation, and will provide a strategic advantage in negotiations with the Respondent's counsel.
IV. Strategic Options
Based on the risk analysis set out in Section III above, we have identified five strategic options for the client's consideration. Each option is assessed in terms of its advantages, disadvantages, key dependencies, and overall viability.
Option 1: Continue Dormancy and Monitor
Description. Under this option, DEH would consent to a further dormancy renewal at the December 12, 2024 review date, maintaining the current status quo. Calderwood & Harkness LLP would continue to monitor the diplomatic consultations, Beaufort's posture, and the CCB standstill, but no proactive steps would be taken to reactivate the proceedings or to fundamentally alter the current trajectory of the case.
Advantages. The principal advantage of this option is its low immediate cost. Continued dormancy requires minimal expenditure on legal fees, expert fees, and disbursements. It also preserves optionality, in that DEH retains the ability to reactivate proceedings at a later date while allowing additional time for the diplomatic track to produce results.
Disadvantages. The disadvantages of this option are considerable and, in our assessment, outweigh its advantages. All of the risks identified in Section III above — the Beaufort termination right, the CCB standstill expiry, the evidentiary degradation, and the absence of diplomatic progress — would continue to compound with each passing month. The client would be in a progressively weaker position with each successive dormancy renewal, and the risk of a sudden adverse development (e.g., Beaufort serving termination notice, CCB declining to extend the standstill, or Valderia withdrawing its consent to dormancy) would increase. There is also a reputational risk: continued inactivity may project passivity and weakness to the Respondent, its counsel, and the broader market, and may embolden the Valderian government to maintain its intransigent posture.
Assessment. This option is viable only if there is credible evidence — as opposed to mere hope — that the diplomatic consultations between the UK FCDO and the Valderian Ministry of Foreign Affairs are likely to yield tangible results within the next six to twelve months. In the absence of such evidence, continued dormancy is not a sustainable strategy and is not recommended.
Option 2: Reactivate ICSID Proceedings
Description. Under this option, DEH would decline to consent to any further dormancy renewal at or before the December 12, 2024 review date. Calderwood & Harkness LLP would notify ICSID that DEH wishes to proceed with the arbitration. The parties would then move to complete the constitution of the Tribunal — including the nomination of the Respondent's arbitrator and the appointment of the presiding arbitrator — and the case would proceed to the merits phase.
Advantages. Reactivation forces resolution and ends the drift that has characterised the past twenty-five months. It demonstrates to Beaufort and CCB that the claim is being actively prosecuted, which may be critical to securing continued funding and the extension of the standstill. Reactivation also freezes, or at least mitigates, the evidentiary staleness problem: once the proceedings are active, expert reports will need to be updated and witness statements will need to be finalized, creating a natural discipline around the evidentiary record. Finally, reactivation creates pressure on the Republic of Valderia: the prospect of a Tribunal, memorials, a hearing, and a binding award fundamentally changes the calculus for the Respondent and may create incentives for a negotiated settlement.
Disadvantages. Reactivation brings an immediate and significant escalation of costs. Expert reports from Pemberton and Ridgewell would need to be updated and formalized. The Memorial on the Merits and supporting witness statements would need to be prepared. Hearing preparation, including moot exercises and document management, would need to be undertaken. The combined cost of these activities, from reactivation through to a merits hearing, is estimated at GBP 4,000,000 to GBP 6,000,000. Reactivation may also provoke the Republic of Valderia to raise aggressive jurisdictional objections — Harcastle Fenton LLP and Charles Winterbottom QC are formidable opponents with deep experience in defending sovereign states in investor-state proceedings, and we should expect a vigorous challenge on jurisdiction, admissibility, and potentially the scope of the ICSID Convention and the UK-Valderia BIT. Reactivation may also disrupt the diplomatic track, to the extent that one exists, and could be perceived by the UK FCDO as unhelpful.
Key Dependencies. The viability of this option depends on three critical factors:
(a) Beaufort's confirmation that it will not exercise its termination right and will fund the active phase of the proceedings through to hearing.
(b) Updated expert reports from Pemberton (quantum/DCF) and Ridgewell (reserves), confirming that the quantum analysis supports the USD 867,000,000 claim or a revised quantum of comparable magnitude.
(c) Confirmation of Professor Ingrid Svensson's continued availability and willingness to serve as Claimant's arbitrator.
Estimated Timeline to Hearing. Based on our experience with ICSID proceedings of comparable complexity, the estimated timeline from reactivation to the issuance of an award is approximately two to three years:
• Tribunal constitution: 3–6 months from reactivation.
• Written phase (Memorial, Counter-Memorial, Reply, Rejoinder): 9–12 months.
• Hearing: 1–2 weeks.
• Post-hearing briefs: 2–3 months.
• Award: 3–6 months post-hearing.
• Total from reactivation to award: approximately 24–36 months.
Assessment. This option is recommended if the diplomatic track shows no meaningful progress by December 2024. Reactivation is the strongest single step available to DEH to protect the claim and to create the conditions for either adjudication or settlement.
Option 3: Pursue Direct Settlement Negotiations with Valderia / PetroValderia
Description. Under this option, DEH would approach the Republic of Valderia or PetroValderia S.A. directly, through Castaño Herrera & Asociados (on the Valderian side) or through Calderwood & Harkness LLP to Harcastle Fenton LLP or Ortega & Bernal, Abogados (on the international counsel side), to explore the possibility of a negotiated commercial settlement. A settlement could potentially involve partial monetary compensation, a revised concession arrangement under which DEH or DVU would be reinstated as concessionaire on revised terms, a production-sharing agreement with PetroValderia, or some combination of these elements.
Advantages. A negotiated settlement could achieve a faster resolution than a full ICSID hearing, potentially delivering value to DEH years earlier than would be achievable through arbitration. Settlement avoids the inherent uncertainties of adjudication — including jurisdictional challenges, the risk of a Tribunal applying a less favourable valuation methodology, and enforcement risk. A settlement may also be attractive to the Republic of Valderia if it enables the government to avoid an adverse arbitral precedent, which could encourage further investor-state claims by other expropriated concession holders.
Disadvantages. The disadvantages of a standalone settlement strategy are significant. Negotiating from a position of dormancy — with an unfunded or tenuously funded claim, a stale evidentiary record, and no constituted Tribunal — projects weakness and invites the Respondent to offer derisory terms. The Republic of Valderia has shown no interest in voluntary compensation at any stage since the expropriation, and there is no reason to believe that this posture has changed. Any settlement that is achievable in the current circumstances is likely to be at a significant discount to the USD 867,000,000 claim quantum, and may not be sufficient to satisfy both CCB's outstanding USD 112,400,000 loan and the interests of DEH's shareholders. Additionally, under the terms of the Beaufort Funding Agreement, Beaufort holds an approval right over any settlement — any proposed settlement terms would need to be acceptable to Beaufort, whose interest is in maximizing the gross recovery (from which its 22% success fee is calculated). Similarly, CCB would need to be satisfied that any settlement adequately addresses its outstanding loan balance and accrued interest.
Assessment. A direct settlement approach is not recommended as a standalone strategy given the current posture of the Republic of Valderia. However, settlement negotiations could be pursued effectively in parallel with Option 2 (reactivation), using the reactivation of proceedings as leverage to bring the Respondent to the negotiating table on more favourable terms. The combination of a live arbitral proceeding and a demonstrated willingness to negotiate is the most effective framework for achieving a satisfactory settlement.
Option 4: Parallel Domestic Litigation in Valderian Courts
Description. Under this option, DEH would instruct Castaño Herrera & Asociados to file a claim in the domestic courts of the Republic of Valderia for unlawful expropriation, breach of DVU's concession rights under the Valderian Hydrocarbons Law of 2009, or other available causes of action under Valderian law. This would open a second front in addition to the ICSID proceedings.
Advantages. Domestic litigation could serve several tactical purposes. It could generate useful discovery through Valderian procedural mechanisms (though the effectiveness of such mechanisms against the government is questionable). It could demonstrate exhaustion of local remedies, which may be relevant to certain interpretive issues under the UK-Valderia BIT if the Respondent argues that DEH failed to pursue available domestic remedies before resorting to international arbitration. It would also signal to the Valderian governme