PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 55 Bishopsgate London EC2N 3AH United Kingdom
Matter Number: 1016-00002
To: Vivienne St. Claire, Responsible Partner (Capital Markets)
From: Jeffrey Park, Lead Associate (Litigation (General))
Date: April 2022
Re: Memorandum on Merits — Expropriation and BIT Breach Analysis; Dunmore Energy Holdings Ltd. v. Republic of Valderia, ICSID Case No. ARB/22/11
Reviewed by: Vivienne St. Claire
CONFIDENTIALITY LEGEND: This memorandum is prepared for the internal use of Calderwood & Harkness LLP and its client, Dunmore Energy Holdings Ltd. It is subject to attorney-client privilege and the work-product doctrine. No portion of this memorandum may be disclosed, copied, or distributed to any person or entity outside the firm or the client without the prior written authorization of the Responsible Partner. Receipt of this memorandum by any unauthorized person does not constitute a waiver of any applicable privilege.
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I. Executive Summary
This memorandum analyzes the merits of the claims of Dunmore Energy Holdings Ltd. ("DEH" or the "Claimant") against the Republic of Valderia (the "Respondent" or "Valderia") under the Agreement Between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Valderia for the Promotion and Protection of Investments, signed May 22, 2006, and entered into force November 1, 2006 (the "UK-Valderia BIT" or the "BIT"). The claims are the subject of ICSID Case No. ARB/22/11, for which the Request for Arbitration was filed on March 15, 2022, and registered by the ICSID Secretary-General on April 8, 2022.
The claims arise from the expropriation of DEH's 30-year oil and gas concession — Concession No. HYD-2012-047, known as "Bloque Orinoco Sur" — in the Valderian Orinoco Basin. The expropriation was effected through a series of presidential decrees, ministerial resolutions, and coercive physical measures undertaken by the Valderian government over the period from March to September 2021. These measures included the formal nationalization of DEH's concession, the physical occupation of DEH's central processing facility by Valderian military forces, the transfer of concession rights to PetroValderia S.A. (the 100% state-owned national oil company), the revocation of DVU's operating licenses, and the freezing of DVU's bank accounts — all without any offer or payment of compensation.
DEH's total invested capital in the Bloque Orinoco Sur concession amounts to approximately USD 347 million. The total claim quantum, as calculated by Pemberton Valuation Advisory LLC, the Claimant's damages expert, is USD 867 million. The quantum is addressed in the separate Quantum Memorandum and Damages Framework, which is under preparation for finalization in May 2022. This memorandum focuses exclusively on the liability analysis.
Having reviewed the relevant factual record, the applicable treaty provisions, pertinent ICSID and other investment treaty jurisprudence, and the analysis of our local Valderian counsel, Castaño Herrera & Asociados (Dr. Gabriel Castaño Herrera and Lic. Isabella Montoya Ruiz), our conclusions on the merits are as follows:
(a) Direct Expropriation (Article 5 of the BIT): DEH has a very strong claim for direct expropriation. The presidential decrees and ministerial resolutions constitute a formal, acknowledged taking of DEH's investment. The expropriation fails to satisfy at least three of the four cumulative conditions required by Article 5 — it was discriminatory, devoid of due process, and accompanied by no compensation whatsoever.
(b) Indirect Expropriation (Article 5, alternative and cumulative): In the alternative, and cumulatively, DEH has a strong claim that the series of measures taken by Valderia between March and September 2021 constitutes an indirect or "creeping" expropriation. This claim addresses any argument by the Respondent that individual measures were merely regulatory in nature.
(c) Fair and Equitable Treatment (Article 3 of the BIT): DEH has a strong and independent claim that Valderia breached the fair and equitable treatment standard. The Respondent frustrated DEH's legitimate expectations, acted arbitrarily and discriminatorily, and denied DEH any semblance of due process.
(d) Full Protection and Security (Article 3 of the BIT): DEH has a strong claim that Valderia breached the full protection and security standard. The military occupation of CPF Orinoco Sur and the freezing of DVU's bank accounts without judicial authorization are particularly egregious violations.
(e) Respondent's Defenses: The Respondent's potential defenses — including the police powers doctrine, the essential security exception, denial of benefits, and exhaustion of local remedies — are weak on the facts and on the law. The total absence of compensation is fatal to any defense of lawful expropriation.
This memorandum has been prepared in coordination with our local Valderian counsel, Castaño Herrera & Asociados, who have provided analysis on points of Valderian domestic law, and in consultation with the Claimant's damages expert, Pemberton Valuation Advisory LLC, and its reserve consultant, Ridgewell Subsurface Consultants Ltd.
II. Factual Background
A. The Claimant and Its Investment
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, Cayman Islands. DEH maintains its principal business office at 27 Curzon Street, London W1J 5HT, United Kingdom, from which its senior management conducts the company's strategic and operational activities.
DEH is engaged in oil and gas exploration, production, and renewable energy development, with a primary focus on upstream hydrocarbon operations in emerging markets. The company was founded by Sir Malcolm Dunmore, KBE, a veteran of the North Sea oil industry with over thirty-five years of experience in international energy development. Sir Malcolm, who is 62% equity holder through the Dunmore Family Trust, is a British national and serves as the company's Founder and Chairman.
The company's Chief Executive Officer is Priya Nandakumar, who holds 8% equity and is a dual British-Indian national with extensive experience in international hydrocarbon project development and management. The Chief Financial Officer is Thomas Rearden, a British national who holds 4% equity and is a former managing director at Galloway Merchant Bank, where he led the bank's energy project finance practice for over a decade. Mr. Rearden's background in structured project finance was instrumental in securing the facility agreement that underpinned the Bloque Orinoco Sur development.
The remaining 26% equity in DEH is held by Meridian Growth Partners Fund III, L.P., a Cayman Islands limited partnership managed by Meridian Growth Partners LLC, a Delaware limited liability company. Meridian Growth Partners is a mid-market private equity firm specializing in energy and natural resources investments. The fund's investment in DEH was made in 2012 as part of the initial capitalization of the Valderian upstream venture.
DEH's investment in Valderia was made through its wholly-owned Valderian subsidiary, Dunmore Valderia upstream S.A. ("DVU"), a Sociedad Anónima incorporated under Valderian law. DVU is registered at Avenida Libertador 1480, Piso 12, Puerto Valdés, Valderia. DVU was the named concessionaire under Concession No. HYD-2012-047 and the operating entity responsible for all exploration, development, and production activities under the concession. DVU employed approximately 340 local staff at the time of expropriation, in addition to approximately 45 expatriate personnel seconded from DEH.
B. The Concession — Bloque Orinoco Sur
Concession No. HYD-2012-047, commonly known as "Bloque Orinoco Sur," was granted to DVU on September 12, 2013, pursuant to the Valderian Hydrocarbons Law of 2009, by the Ministry of Energy and Natural Resources of the Republic of Valderia. The concession was awarded following a competitive tender process in which DVU participated alongside several other international oil companies. DVU's technical proposal and work program were ranked highest by the tender evaluation committee, and the concession was formally executed following a presidential ratification certificate issued by the then-President of the Republic.
The concession was granted for a term of 30 years, with an expiry date of September 12, 2043. At the time of the expropriation in 2021, approximately 23 years of the concession term remained — a substantial period representing the majority of the productive life of the concession and the period during which DEH expected to realize the return on its substantial capital investment.
The concession area encompasses approximately 1,240 square kilometers of onshore territory in the Valderian Orinoco Basin, a region of significant hydrocarbon prospectivity. The Orinoco Basin has been a focus of international exploration interest since the early 2000s, with geological characteristics favorable for the accumulation of medium-to-heavy crude oil in Cretaceous and Tertiary reservoir formations.
The fiscal terms of the concession were established at the time of grant and included the following principal elements:
• A royalty of 12.5% on the gross production value of all hydrocarbons produced and saved from the concession area, payable to the Valderian Treasury on a monthly basis;
• Valderian corporate income tax at the standard rate of 34%, applicable to DVU's net taxable income from concession operations; and
• A 10% carried interest held by PetroValderia S.A., the 100% state-owned national oil company of Valderia, which was entitled to a proportionate share of production revenue without contributing to capital expenditure during the exploration and development phases.
These fiscal terms were considered competitive at the time of the concession grant and were a material factor in DEH's investment decision. The terms were enshrined in the concession agreement itself and, under the Valderian Hydrocarbons Law of 2009, could not be unilaterally altered during the concession term without the consent of the concessionaire.
C. Operational History and Capital Deployed
DEH, through DVU, undertook a phased development of the Bloque Orinoco Sur concession over the period from 2013 to 2021. The investment program was substantial, reflecting the geological complexity and scale of the concession, and was executed in accordance with the work program approved by the Ministry of Energy and Natural Resources.
Exploration Phase (2013–2016). During the initial exploration phase, DVU conducted a comprehensive 3D seismic acquisition program over approximately 800 square kilometers of the concession area, providing high-resolution subsurface imaging of the reservoir formations. On the basis of the seismic data, DVU drilled seven exploration wells, of which five were determined to be commercially viable. The exploration results confirmed the presence of significant hydrocarbon accumulations in the target reservoir intervals and provided the geological basis for the development plan submitted to the Ministry.
Development Phase (2016–2019). Following the successful exploration program, DVU proceeded to the development phase, during which 22 development wells were drilled on the commercially viable prospects identified during exploration. DVU also constructed a 68-kilometer gathering pipeline connecting the production wells to a purpose-built central processing facility ("CPF Orinoco Sur"). The CPF was designed and constructed to a nameplate processing capacity of 35,000 barrels per day, providing full crude treatment, water separation, and export storage capabilities. The pipeline and CPF were designed in compliance with Valderian environmental and safety regulations and were subject to inspection and approval by the Ministry of Energy and Natural Resources.
The development phase was financed in part through a USD 175 million senior secured project finance facility with Commonwealth Capital Bank plc, pursuant to a facility agreement dated March 20, 2016 (the "CCB Facility"). The CCB Facility was structured as a non-recourse project finance loan to DVU, with a parent guarantee from DEH. The facility was secured by a first-priority lien on all DVU assets, including the concession rights, physical infrastructure, and assignment of concession receivables. The CCB Facility is addressed separately in Section X of this memorandum.
Production Phase (2019–2021). DVU commenced commercial production from the Bloque Orinoco Sur concession in early 2019 and achieved a peak production rate of 24,800 barrels per day in September 2020. Average production during fiscal year 2020 was 21,200 barrels per day. By the time of the expropriation in mid-2021, production had declined modestly to approximately 18,600 barrels per day, consistent with the natural decline profile of the reservoir and within the parameters of the approved development plan.
As of December 31, 2020, the proved reserves of the Bloque Orinoco Sur concession were independently certified at 87.4 million barrels of oil equivalent (mmboe) by Ridgewell Subsurface Consultants Ltd., under the supervision of Dr. Alistair Greaves, P.Eng., a qualified reserves evaluator with over twenty-five years of experience in the petroleum industry. In addition, probable reserves of 42.1 mmboe were identified, providing further upside potential. The reserve certification was conducted in accordance with the standards of the Society of Petroleum Engineers Petroleum Resources Management System (SPE-PRMS) and represents a rigorous, independent assessment of the remaining resource base.
Financial performance during fiscal year 2020, the last full year of uninterrupted operations, was as follows:
• Gross revenue: USD 128.6 million
• EBITDA: USD 41.3 million (approximately 32.1% margin)
These figures demonstrate the commercial viability and profitability of the concession, which was generating substantial cash flows at the time of the expropriation.
Total capital expenditure invested by DEH and DVU in the Bloque Orinoco Sur concession from 2014 through 2021 was approximately USD 347 million, broken down as follows:
• Exploration and development drilling: USD 211 million
• Surface infrastructure and pipeline construction: USD 89 million
• Seismic acquisition and geological studies: USD 47 million
This capital investment represents a substantial commitment by DEH and its shareholders to the development of the Valderian hydrocarbon sector, made in reliance on the legal and contractual framework in place at the time of the concession grant.
D. Timeline of Expropriation Events
The expropriation of DEH's investment was effected through a series of governmental measures undertaken over a period of approximately six months, from March to September 2021. The following chronology sets out the material events in sequence:
January 15, 2020 — Inauguration of President Héctor Luján Montalvo. President Montalvo was inaugurated as President of the Republic of Valderia following a general election in which his campaign platform prominently featured the theme of "resource sovereignty" (soberanía de los recursos). During the campaign, President Montalvo made repeated public statements criticizing the presence of foreign companies in the Valderian hydrocarbon sector and promising to "return Valderia's natural wealth to the Valderian people." While these statements did not, at the time, constitute formal governmental action, they established the political context for the measures that followed.
March 2, 2021 — Notice of Review. The Ministry of Energy and Natural Resources, under Minister Claudia Ríos Salazar, issued a formal "Notice of Review" (Aviso de Revisión) of all foreign-held hydrocarbon concessions in Valderia. The Notice stated that the Ministry would conduct a comprehensive review of the fiscal, environmental, and operational terms of all concessions held by foreign investors, purportedly to assess compliance with the Valderian Hydrocarbons Law and national policy objectives. The Notice of Review did not identify any specific deficiency or non-compliance on the part of DVU or any other concessionaire. It applied broadly to all foreign-held concessions while leaving domestically-owned concessions unaffected. The issuance of this Notice created immediate regulatory uncertainty and effectively froze investment and operational planning for the affected concessionaires.
April 17, 2021 — Presidential Decree No. 2021-0417 ("Decree on the Nationalization of Strategic Hydrocarbon Assets"). Only six weeks after the Notice of Review, and without any substantive review process having been completed, President Montalvo issued Presidential Decree No. 2021-0417, formally declaring the nationalization of "strategic hydrocarbon concessions" held by foreign investors, including Concession No. HYD-2012-047 (Bloque Orinoco Sur). The Decree cited "resource sovereignty," "national energy security," and "the strategic importance of hydrocarbon assets to the economic development of Valderia" as the basis for the nationalization. The Decree did not address compensation in any respect — it neither offered compensation nor established any mechanism for the assessment or payment of compensation.
May 3, 2021 — Physical Occupation of CPF Orinoco Sur. On May 3, 2021, Valderian military personnel, accompanied by representatives of PetroValderia S.A., physically occupied the central processing facility CPF Orinoco Sur. Armed military units arrived at the facility in the early morning hours and secured the perimeter. DEH/DVU staff were informed that they were required to vacate the premises and were denied further access to the facility and the surrounding operational areas. No formal legal process preceded this action. No court order or administrative warrant was presented. At the time of the occupation, DVU remained the lawful concessionaire — the formal transfer decree transferring the concession rights to PetroValderia was not issued until nearly two months later. The physical occupation was thus an extralegal seizure of DVU's assets.
June 23, 2021 — Presidential Decree No. 2021-0623 ("Decree on the Transfer of Concession Rights to PetroValderia S.A."). President Montalvo issued a second decree formally transferring Concession No. HYD-2012-047 from DVU to PetroValderia S.A. The decree purported to vest all concession rights, including the exclusive right to explore, develop, and produce hydrocarbons within the concession area, in PetroValderia. It also purported to transfer ownership of all concession-related infrastructure, including the 22 development wells, the 68-kilometer gathering pipeline, and CPF Orinoco Sur. No compensation was offered, assessed, or paid in connection with the transfer.
August 5, 2021 — Ministerial Resolution No. MEN-2021-089 (License Revocation). The Ministry of Energy and Natural Resources, under Minister Ríos Salazar, issued Ministerial Resolution No. MEN-2021-089, formally revoking all operating licenses held by DVU in Valderia. The resolution stated that DVU's licenses were revoked "in consequence of the nationalization of strategic hydrocarbon assets pursuant to Presidential Decree No. 2021-0417." No compensation was offered. Critically, as confirmed by our local Valderian counsel, Castaño Herrera & Asociados, the revocation did not comply with the procedural requirements of the Valderian Hydrocarbons Law of 2009. That law mandates that, prior to the revocation of a hydrocarbon concession or operating license, the concessionaire must be afforded a formal hearing, the revoking authority must issue a reasoned decision, and a compensation valuation process must be completed. None of these requirements was satisfied.
September 1, 2021 — Freezing of DVU Bank Accounts. DVU's bank accounts at Banco Nacional de Valderia were frozen by order of Attorney General Dr. Renata Villamizar Ochoa. The freezing order was issued without judicial authorization — the Attorney General acted unilaterally, without obtaining a court order or providing DVU with an opportunity to challenge the measure. The frozen accounts contained DVU's working capital, production revenue receivables, and operating reserves. The freezing of these accounts effectively prevented DVU from meeting its financial obligations, including debt service payments under the CCB Facility, employee wages, and contractor payments, and deprived DEH of access to any remaining financial assets in Valderia.
No compensation of any kind has been offered or paid to DEH or DVU in connection with any of the foregoing measures. As of the date of this memorandum, DEH and DVU have been completely and permanently dispossessed of the Bloque Orinoco Sur concession and all associated assets.
E. Dispute Notice and Procedural History
On October 14, 2021, DEH, acting through Calderwood & Harkness LLP, transmitted a formal Notice of Dispute to the Republic of Valderia under Article 8 of the BIT. The Notice was addressed to Ambassador Diego Fuentes Castillo, Minister of Foreign Affairs, and Dr. Renata Villamizar Ochoa, Attorney General, at their respective official addresses. The Notice set out the factual and legal basis for DEH's claims and invoked the six-month cooling-off period provided for in Article 8(1) of the BIT as a precondition to the commencement of arbitration proceedings.
Despite the transmission of the Notice of Dispute, no substantive response was received from the Valderian government during the cooling-off period. No negotiations or settlement discussions were initiated by the Respondent. The six-month cooling-off period expired on April 14, 2022, without any resolution of the dispute.
On March 15, 2022, DEH filed a Request for Arbitration with the International Centre for Settlement of Investment Disputes ("ICSID") pursuant to Article 8 of the BIT and Article 36 of the ICSID Convention. The Request was registered by the ICSID Secretary-General on April 8, 2022, under Case No. ARB/22/11.
The Claimant has nominated Professor Ingrid Svensson, a Swedish national and Professor of International Investment Law at the University of Uppsala, as its party-appointed arbitrator. As of the date of this memorandum, the Respondent has not yet nominated an arbitrator, and the Tribunal has not yet been constituted.
The Respondent is represented by Ortega & Bernal, Abogados (with Dr. Alejandro Bernal Quiroga as lead partner), a prominent Valderian law firm, and by Harcastle Fenton LLP (with Charles Winterbottom QC as lead partner and Dr. Marie-Laure Dupont as senior associate), a London-based international arbitration firm.
III. Applicable Legal Framework
A. The UK-Valderia BIT (2006)
The principal legal instrument governing DEH's claims is the Agreement Between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Valderia for the Promotion and Protection of Investments (the "UK-Valderia BIT" or the "BIT"). The BIT was signed on May 22, 2006, and entered into force on November 1, 2006, following the completion of the ratification procedures required by both contracting parties.
Importantly for the jurisdictional analysis, the United Kingdom issued a territorial extension declaration dated February 14, 2007, extending the application of the BIT to the Cayman Islands, a British Overseas Territory. DEH, as an exempted company incorporated under the laws of the Cayman Islands, is therefore a covered investor under the BIT by virtue of this territorial extension. The validity and scope of the territorial extension have been confirmed in prior investment treaty decisions involving UK BITs extended to overseas territories, and we do not anticipate a serious challenge on this point.
The following substantive provisions of the BIT are directly relevant to the claims:
Article 3 — Fair and Equitable Treatment and Full Protection and Security. Article 3 of the BIT provides that investments of nationals or companies of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party. The provision further states that neither Contracting Party shall in any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment, or disposal of investments in its territory of nationals or companies of the other Contracting Party. Article 3 establishes an autonomous treaty standard that is independent of and additional to the expropriation protection under Article 5.
Article 5 — Expropriation. Article 5 of the BIT provides that investments of nationals or companies of either Contracting Party shall not be expropriated, nationalized, or subjected to measures having effect equivalent to nationalization or expropriation (hereinafter collectively referred to as "expropriation") in the territory of the other Contracting Party except for a public purpose related to the internal needs of that Party, on a non-discriminatory basis, in accordance with due process of law, and against prompt, adequate, and effective compensation. The compensation shall amount to the fair market value of the investment expropriated immediately before the expropriation or before the impending expropriation became public knowledge, whichever is the earlier, shall include interest at a normal commercial rate until the date of payment, shall be made without unreasonable delay, be effectively realizable, and be freely transferable.
Article 8 — Dispute Resolution. Article 8 of the BIT provides for the resolution of investment disputes between a national or company of one Contracting Party and the other Contracting Party. Where a dispute cannot be settled amicably within six months from the date of a written notice of the dispute, the national or company concerned may submit the dispute for settlement by arbitration to ICSID. The six-month cooling-off period is the only procedural precondition to the commencement of ICSID arbitration under the BIT; there is no requirement for the exhaustion of local remedies.
B. ICSID Convention
Both the United Kingdom and the Republic of Valderia are Contracting States to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the "ICSID Convention"), which entered into force on October 14, 1966. The ICSID Convention provides the jurisdictional and procedural framework for the arbitration.
Jurisdiction under Article 25(1) of the ICSID Convention requires: (i) a legal dispute; (ii) arising directly out of an investment; (iii) between a Contracting State (or any constituent subdivision or agency designated by the Contracting State) and (iv) a national of another Contracting State. All four jurisdictional requirements are satisfied in this case. The dispute is a legal dispute concerning the expropriation of DEH's investment. The dispute arises directly out of DEH's investment in the Bloque Orinoco Sur concession. The Respondent, the Republic of Valderia, is a Contracting State. And DEH, as a company incorporated in the Cayman Islands (a British Overseas Territory), qualifies as a national of the United Kingdom, another Contracting State, for the purposes of Article 25(2)(b), by virtue of the territorial extension of the BIT.
C. Customary International Law
The claims are also informed by the applicable principles of customary international law, which provide the interpretive backdrop for the treaty provisions at issue. Two principles are particularly relevant.
First, the minimum standard of treatment under customary international law establishes a baseline of protection for foreign investments that informs the interpretation of the fair and equitable treatment standard in the BIT. While the precise relationship between the FET standard and the customary minimum standard varies across treaties and jurisprudence, the conduct at issue in this case — forcible seizure of assets, denial of due process, and total absence of compensation — would violate even the most restrictive interpretation of the minimum standard.
Second, the Chorzów Factory standard, derived from the Permanent Court of International Justice's 1928 judgment in Case Concerning the Factory at Chorzów (Germany v. Poland), establishes the principle that the consequences of an internationally wrongful act must be wiped out by restitution or, where restitution is not possible, by payment of damages sufficient to place the injured party in the position it would have occupied had the wrongful act not been committed. The Chorzów Factory standard is directly relevant to the measure of damages in this case. Because the expropriation of DEH's investment was unlawful (failing to satisfy the conditions of Article 5 of the BIT), DEH is entitled to full reparation, which encompasses not only the fair market value of the investment at the date of expropriation but also lost profits, consequential damages, and interest. This is a more favorable standard for the Claimant than the simple "fair market value" compensation that would be payable for a lawful expropriation.
Third, the Hull Formula — the principle that compensation for expropriation must be "prompt, adequate, and effective" — is reflected in the language of Article 5 of the BIT and represents the widely accepted customary international law standard for compensation.
D. Valderian Domestic Law
While DEH's claims are brought under the BIT and international law, Valderian domestic law is relevant insofar as it forms part of the factual matrix and bears on the lawfulness of the Respondent's actions.
The Valderian Hydrocarbons Law of 2009 is the principal domestic law statute governing the grant, administration, and revocation of hydrocarbon concessions in Valderia. It was the legal framework under which Concession No. HYD-2012-047 was granted to DVU. The Hydrocarbons Law includes specific provisions governing the procedures for the revocation or termination of concessions, including mandatory requirements for:
(a) A formal hearing (audiencia formal) at which the concessionaire is entitled to appear, present evidence, and make submissions;
(b) A reasoned decision (resolución motivada) setting out the factual and legal basis for the revocation; and
(c) A compensation valuation process (proceso de avalúo y compensación) to determine and provide for the payment of compensation for the value of the concessionaire's investment and the remaining concession term.
Our local Valderian counsel, Castaño Herrera & Asociados, has confirmed in a memorandum dated March 10, 2022, that the expropriation measures undertaken by the Valderian government — including Ministerial Resolution No. MEN-2021-089 revoking DVU's operating licenses — did not comply with any of the foregoing procedural requirements. Dr. Gabriel Castaño Herrera has opined that the failure to comply with these requirements renders the revocation unlawful as a matter of Valderian domestic law, independent of the BIT analysis.
The presidential decrees and ministerial resolutions at issue are instruments of executive action under the Valderian constitution. Under Valderian constitutional law, presidential decrees carry the force of law but are subject to judicial review by the Valderian Supreme Court of Justice. However, as discussed below in the context of the Respondent's potential exhaustion of local remedies defense, the political environment in Valderia following President Montalvo's inauguration makes the prospect of an impartial judicial review of the expropriation decrees unrealistic.
IV. Direct Expropriation Under Article 5 of the BIT
A. Legal Standard
Article 5 of the UK-Valderia BIT prohibits the expropriation or nationalization of investments of nationals or companies of either Contracting Party except where four cumulative requirements are satisfied: (1) the expropriation must be for a public purpose related to the internal needs of the expropriating state; (2) the expropriation must be non-discriminatory; (3) the expropriation must be carried out in accordance with due process of law; and (4) the expropriation must be accompanied by the payment of prompt, adequate, and effective compensation at fair market value. These four conditions are cumulative — the failure to satisfy any one of them renders the expropriation unlawful under the BIT.
Direct expropriation, in the parlance of international investment law, refers to the open, deliberate, and acknowledged taking of property by the state through formal legislative, executive, or administrative action. It is characterized by the transfer of title to the investment or the physical seizure of the investment by state authorities. Unlike indirect expropriation, which may involve a more subtle erosion of investment value through regulatory measures, direct expropriation involves an unambiguous assertion of sovereign authority over the investor's property.
The standard for direct expropriation is well-established in ICSID jurisprudence. Tribunals have consistently held that a formal legislative or executive act declaring the nationalization or confiscation of an investment, the transfer of title or concession rights from the investor to the state or a state entity, or the physical seizure of the investment by state security forces, constitutes a direct expropriation. The critical inquiry is whether the state has taken a deliberate, affirmative act that deprives the investor of its ownership rights, control over, or economic benefit from the investment. Where such an act has occurred, the four conditions of Article 5 must be satisfied for the expropriation to be lawful; if any condition is not met, the expropriation is unlawful and gives rise to a duty of full reparation under the Chorzów Factory standard.
B. Application to the Facts
1. Presidential Decree No. 2021-0417 (April 17, 2021) — Nationalization
Presidential Decree No. 2021-0417, the "Decree on the Nationalization of Strategic Hydrocarbon Assets," constitutes the centerpiece of the direct expropriation claim. The Decree expressly and unambiguously declared the nationalization of foreign-held hydrocarbon concessions in Valderia, including Concession No. HYD-2012-047, Bloque Orinoco Sur. The Decree was issued under the authority of the President of the Republic, carried the force of law, and was published in the Gaceta Oficial de Valderia.
This is a textbook case of direct expropriation. The sovereign state, acting through its head of government, issued a formal decree declaring the nationalization of the investor's concession. The word "nationalization" was used expressly. The intent to take the investment was stated explicitly. There is no ambiguity about the nature, purpose, or effect of the Decree. It is precisely the type of "open, deliberate, and acknowledged" act of taking that constitutes direct expropriation under established international law.
We note that the Decree is general in form — it applies to "strategic hydrocarbon concessions" rather than naming DVU's concession individually. However, the substance of the Decree is targeted at a narrow and identifiable class of concessionaires: foreign-held concessions. This formulation reinforces the discriminatory nature of the measure, as discussed below, but does not alter its character as a direct expropriation. A general decree that results in the taking of an identified investment is no less an act of expropriation because it applies to multiple investments simultaneously.
2. Presidential Decree No. 2021-0623 (June 23, 2021) — Transfer to PetroValderia
Presidential Decree No. 2021-0623, the "Decree on the Transfer of Concession Rights to PetroValderia S.A.," completed the formal legal expropriation by expressly transferring Concession No. HYD-2012-047 from DVU to PetroValderia S.A., the 100% state-owned national oil company. The transfer decree vested all concession rights in PetroValderia, including:
• The exclusive right to explore, develop, and produce hydrocarbons within the 1,240 km² concession area for the remaining 23-year concession term;
• Ownership and operational control of all physical infrastructure associated with the concession, including the 22 development wells, the 68-kilometer gathering pipeline, and the central processing facility CPF Orinoco Sur; and
• All revenues, receivables, and economic benefits derived from the concession.
The effect of the transfer decree was to deprive DVU — and, through DVU, DEH — of all legal title to the concession rights and all associated assets. Following the issuance of this decree, DVU held no interest whatsoever in the concession that it had operated for nearly eight years and in which DEH had invested approximately USD 347 million. The concession rights, along with all physical and financial assets, were vested entirely in a state-owned commercial entity, PetroValderia, which has continued to operate the Bloque Orinoco Sur concession for its own commercial benefit. We understand from public reports that PetroValderia resumed production from the concession within weeks of the transfer.
No compensation was offered, assessed, or paid in connection with the transfer.
3. Ministerial Resolution No. MEN-2021-089 (August 5, 2021) — License Revocation
Ministerial Resolution No. MEN-2021-089, issued by the Ministry of Energy and Natural Resources under Minister Claudia Ríos Salazar, formally revoked all operating licenses held by DVU in Valderia. The resolution stated that the revocation was "in consequence of" the nationalization decreed under Presidential Decree No. 2021-0417.
While the nationalization and transfer decrees had already deprived DVU of its concession rights, the license revocation removed any residual administrative authorization that DVU might have held to conduct hydrocarbon operations in Valderia. The revocation was absolute and final — no alternative license, substitute authorization, or transitional arrangement was offered or provided.
No compensation was offered, assessed, or paid. Critically, as confirmed by our local Valderian counsel, Castaño Herrera & Asociados, the revocation of DVU's operating licenses did not comply with the mandatory procedural requirements of the Valderian Hydrocarbons Law of 2009. The Hydrocarbons Law requires that, before a hydrocarbon concession or operating license may be revoked, the concessionaire must be afforded: (a) a formal hearing at which it may appear, present evidence, and make legal submissions; (b) a reasoned decision, issued in writing, setting out the factual and legal basis for the revocation; and (c) a compensation valuation process to determine and provide for the payment of just compensation. None of these requirements was satisfied. The Ministry issued the revocation without notice, without a hearing, without a reasoned decision, and without any compensation mechanism.
Dr. Gabriel Castaño Herrera has confirmed, in his opinion memorandum dated March 10, 2022, that this procedural failure renders the revocation unlawful as a matter of Valderian domestic law, in addition to its unlawfulness under the BIT.
4. Physical Occupation (May 3, 2021)
The physical occupation of CPF Orinoco Sur by Valderian military forces and PetroValderia personnel on May 3, 2021, is a particularly significant element of the expropriation narrative. Armed military units arrived at the facility in the early morning hours, secured the perimeter and all access points, and informed DEH/DVU staff that they were required to vacate the premises immediately. DEH/DVU personnel were denied any further access to the facility, the surrounding well pads, the gathering pipeline, and all associated operational areas.
The physical seizure is significant for several reasons. First, it demonstrates the coercive and extralegal character of the expropriation. The occupation was carried out by military force, without any prior notice to DVU, without any court order or administrative warrant, and without any legal basis identified at the time of the seizure. Second, the occupation preceded the formal transfer decree (Presidential Decree No. 2021-0623) by nearly two months. At the time the military arrived at CPF Orinoco Sur, DVU was still the lawful concessionaire under Valderian law, and no decree had yet been issued transferring the concession rights to PetroValderia. The occupation was therefore a fait accompli — a physical seizure of the investment that preceded and pre-empted the formal legal process. Third, the use of military force to seize a foreign investor's assets is among the most egregious forms of expropriation recognized in international law, and is likely to be viewed with particular disfavor by the Tribunal.
C. Assessment of Article 5 Conditions
1. Public Purpose
Article 5 of the BIT requires that an expropriation be undertaken "for a public purpose related to the internal needs" of the expropriating state. The public purpose requirement is generally interpreted broadly in investment treaty jurisprudence, and tribunals have traditionally accorded a measure of deference to the host state's characterization of the public purpose served by the expropriation.
Valderia may argue that the nationalization of strategic hydrocarbon assets serves a legitimate public purpose, invoking the concepts of "resource sovereignty" and "energy security" that were central to President Montalvo's political platform. We acknowledge that resource sovereignty and energy security are, in the abstract, recognized as legitimate public interests. However, the particular circumstances of this case raise significant doubts about the genuineness of the asserted public purpose. The primary effect of the nationalization was not to remove the concession from commercial exploitation — the concession continues to be operated by PetroValderia for commercial profit — but rather to transfer a profitable, cash-generating investment from a foreign private operator to a state-owned commercial entity. The nationalization did not shut down operations, restrict production, or serve any environmental or safety purpose. It was, in substance, a commercial transfer of wealth from a private investor to the state.
Nevertheless, even if a public purpose were to be conceded for the sake of argument, this concession would not advance the Respondent's position, because the public purpose requirement is only one of four cumulative conditions. Even where a legitimate public purpose exists, the expropriation is unlawful if any of the remaining three conditions — non-discrimination, due process, and compensation — is not met. As demonstrated below, all three remaining conditions are unsatisfied, rendering any debate about public purpose academic.
2. Non-Discrimination. The measures at issue were expressly and facially discriminatory. The Notice of Review issued on March 2, 2021 by the Ministry of Energy and Natural Resources targeted "all foreign-held hydrocarbon concessions" — an explicitly nationality-based criterion. Domestically owned concessions were not subject to the review. The nationalization decree (Presidential Decree No. 2021-0417) similarly applied to hydrocarbon concessions held by foreign investors, while leaving concessions held by Valderian nationals and entities, including PetroValderia's existing operations, unaffected.
This express targeting of foreign investors raises strong evidence of discriminatory intent. The classification criterion used by the Valderian government was not the nature, size, or performance of the concession, nor any objective regulatory or environmental criterion, but rather the nationality of the concession holder. A more transparently discriminatory criterion is difficult to imagine.
The discriminatory character of the measures is reinforced by the political context. President Montalvo's "resource sovereignty" campaign was directed specifically against the presence of foreign companies in the Valderian hydrocarbon sector. His public statements during the campaign explicitly framed the issue in terms of foreign versus domestic ownership of national resources. The subsequent governmental actions faithfully carried out this campaign promise, targeting foreign-held concessions for nationalization while leaving domestically held concessions in place.
3. Due Process
The expropriation measures were undertaken without any semblance of due process, in violation of both Article 5 of the BIT and the procedural requirements of Valderian domestic law.
No prior notice of the intended expropriation was provided to DVU or DEH before the issuance of Presidential Decree No. 2021-0417. DEH and DVU learned of the nationalization from the publication of the Decree in the Gaceta Oficial de Valderia, not from any prior communication by the government.
No hearing was afforded to DEH or DVU at any stage of the process — not before the nationalization decree, not before the physical occupation, not before the transfer decree, not before the license revocation, and not before the bank account freeze. At no point was DEH or DVU given an opportunity to appear before any governmental body, to present evidence, to make legal submissions, or to challenge any aspect of the expropriation.
No reasoned decision was issued explaining the specific factual or legal basis for the expropriation of DVU's concession. The nationalization decree invoked broad concepts of "resource sovereignty" and "energy security" but did not identify any specific deficiency, non-compliance, or other ground justifying the taking of DVU's particular concession.
The physical occupation of CPF Orinoco Sur on May 3, 2021 preceded the formal transfer decree by nearly two months, indicating that the Valderian government regarded the formal legal process as an afterthought to a fait accompli achieved by military force.
The Ministerial Resolution revoking DVU's operating licenses did not comply with the procedural requirements of the Valderian Hydrocarbons Law of 2009, which mandates a formal hearing, a reasoned decision, and a compensation valuation process before any revocation of a hydrocarbon concession or operating license. This has been confirmed by our local Valderian counsel, Dr. Gabriel Castaño Herrera, in his opinion memorandum dated March 10, 2022.
DVU's bank accounts at Banco Nacional de Valderia were frozen on September 1, 2021 by order of Attorney General Dr. Renata Villamizar Ochoa. The freezing order was issued without judicial oversight — no court order was obtained, no hearing was held, and no opportunity to challenge the measure was afforded to DVU. The freezing of DVU's bank accounts effectively prevented DVU from winding down its affairs, meeting its obligations to creditors and employees, or recovering any of its financial assets in Valderia.
The totality of these facts establishes a clear and comprehensive failure of due process, both under the BIT and under Valderian domestic law.
4. Compensation. The failure to provide compensation is the single most significant element of the Article 5 analysis. Article 5 of the BIT requires that expropriation be accompanied by "prompt, adequate, and effective compensation" at "fair market value." The language of the provision is mandatory and unequivocal: compensation is a condition of lawful expropriation, not an optional accompaniment.
No compensation of any kind has been offered, assessed, or paid to DEH or DVU. No compensation mechanism or valuation process has been established. No communication has been received from the Valderian government acknowledging any obligation to compensate DEH for the taking of its investment. The total and absolute failure to provide any compensation renders the expropriation per se unlawful under Article 5 of the BIT.
This point cannot be overstated. The absence of compensation is not a technical deficiency or a matter of inadequate quantum — it is a total and deliberate refusal to pay anything at all for the seizure of a USD 347 million investment. In our assessment, this fact alone is dispositive of the lawfulness question. Even if the Respondent could demonstrate a legitimate public purpose, non-discriminatory intent, and compliance with due process (which, as shown above, it cannot), the complete absence of compensation would be sufficient to render the expropriation unlawful.
D. Conclusion on Direct Expropriation
The series of presidential decrees, ministerial resolutions, and coercive physical measures undertaken by the Republic of Valderia between March and September 2021 constitutes a clear and unambiguous case of direct expropriation in violation of Article 5 of the UK-Valderia BIT. The expropriation fails to satisfy at least three of the four cumulative conditions required for lawful expropriation:
• Non-discrimination: The measures expressly targeted foreign-held concessions on a nationality-based criterion.
• Due process: No notice, no hearing, no reasoned decision, no compliance with the domestic procedural requirements of the Valderian Hydrocarbons Law of 2009.
• Compensation: No compensation of any kind has been offered, assessed, or paid.
Assessment of strength: Very strong. The direct expropriation claim is the primary cause of action and is the strongest of DEH's four claims. The facts are overwhelming, the applicable legal standard is well-established, and the Respondent's violation of each condition is clear on the record. This is as close to a straightforward direct expropriation case as an investment treaty tribunal is likely to encounter.
V. Indirect Expropriation
A. Legal Standard
Indirect expropriation — also termed "creeping expropriation," "regulatory expropriation," or "measures tantamount to expropriation" — occurs where a state, through a series of acts, omissions, or regulatory measures, substantially deprives an investor of the value, use, or enjoyment of its investment without a formal transfer of legal title. Article 5 of the BIT expressly encompasses measures "having effect equivalent to nationalization or expropriation," thereby covering indirect expropriation in addition to direct expropriation.
The legal test for indirect expropriation, as articulated in ICSID jurisprudence, focuses on the cumulative effect of the measures rather than on any single act in isolation. The relevant factors include: (i) the degree of economic deprivation suffered by the investor — whether the investor has been substantially deprived of the economic use, benefit, or value of its investment; (ii) the duration and permanence of the deprivation — whether the measures are temporary or permanent in effect; (iii) the interference with the investor's reasonable expectations of economic use and benefit; and (iv) the character of the governmental measures — whether they constitute a bona fide exercise of regulatory authority or, rather, a disguised taking for the benefit of the state.
In this case, the indirect expropriation claim is advanced in the alternative and cumulatively to the direct expropriation claim. If the Tribunal were to find, for any reason, that any individual decree or governmental act did not, standing alone, constitute a direct expropriation — for example, if the Tribunal were to characterize the Notice of Review as a mere administrative measure or the physical occupation as an interim security measure — the cumulative effect of all measures taken together between March and September 2021 undeniably amounts to an indirect, or "creeping," expropriation of DEH's entire investment.
B. Application to the Facts
The sequence of state actions from March 2, 2021 through September 1, 2021 constitutes a progressive and systematic course of conduct that, step by step, stripped DEH and DVU of every attribute of their investment. Each individual measure removed a further element of ownership, control, or economic benefit, and the cumulative effect was the total and permanent dispossession of the investor. The progression was as follows:
1. March 2, 2021 — Notice of Review. The Ministry of Energy and Natural Resources issued its Notice of Review of all foreign-held hydrocarbon concessions. While this act did not, in itself, constitute a formal expropriation, it created pervasive regulatory uncertainty and effectively froze DEH's investment and operational planning. Contractors and suppliers ceased work. Financing counterparties expressed concern. The Notice signaled the beginning of the end for foreign-held concessions in Valderia.
2. April 17, 2021 — Nationalization Decree (Presidential Decree No. 2021-0417). The formal nationalization decree declared the taking of the concession. This act formally stripped DVU of its legal entitlement to the concession under Valderian law, even though the mechanics of the transfer had not yet been effectuated.
3. May 3, 2021 — Physical Occupation. Valderian military forces and PetroValderia personnel physically occupied CPF Orinoco Sur, removing DEH/DVU's physical control over the primary production asset.
4. June 23, 2021 — Transfer Decree (Presidential Decree No. 2021-0623). The formal transfer of concession rights to PetroValderia removed DVU's legal title to the concession and all associated assets.
5. August 5, 2021 — License Revocation (Ministerial Resolution No. MEN-2021-089). The revocation of all operating licenses removed any residual administrative authorization to conduct hydrocarbon activities in Valderia.
6. September 1, 2021 — Bank Account Freeze. The freezing of DVU's bank accounts by order of the Attorney General removed access to financial assets and production revenues.
After September 1, 2021, DEH and DVU were left with no physical access to their assets, no legal title to the concession, no operating licenses, no administrative authorizations, and no access to their bank accounts or financial assets. Every element of the investment — the concession rights, the physical infrastructure, the operating authority, and the financial assets — had been taken. The investment had been rendered entirely valueless.
Even if any individual act within this sequence were characterized by the Respondent as a legitimate regulatory measure — an argument that we regard as untenable given the facts — the totality of the measures, taken together, would constitute a classic case of indirect or creeping expropriation. The progressive nature of the taking, the absence of any genuine regulatory justification, and the comprehensive deprivation of all economic value are precisely the hallmarks of indirect expropriation as recognized in international investment law.
C. Conclusion on Indirect Expropriation
Assessment of strength: Strong. The indirect expropriation claim provides a robust alternative and cumulative basis for liability. It reinforces the direct expropriation analysis and addresses potential efforts by the Respondent to characterize individual measures as regulatory in nature. The claim ensures that, regardless of how the Tribunal characterizes any individual governmental act, the overall course of conduct will be recognized as an expropriatory taking in violation of Article 5 of the BIT.
VI. Breach of Fair and Equitable Treatment Under Article 3 of the BIT
A. Legal Standard
Article 3 of the UK-Valderia BIT requires that investments of nationals or companies of each Contracting Party be accorded fair and equitable treatment ("FET") in the territory of the other Contracting Party. The FET standard is one of the most important and frequently invoked standards of protection in international investment law. It is an autonomous treaty standard — independent of and additional to the expropriation protection under Article 5 — and may be breached even in the absence of a formal expropriation.
Investment treaty jurisprudence has identified several sub-elements or components of the FET standard, each of which may independently support a finding of breach:
• Protection of the investor's legitimate expectations. An investor is entitled to rely on the legal and regulatory framework in place at the time it makes its investment. Where the host state has made specific commitments or representations to the investor — whether through legislation, contractual instruments, or the investment treaty itself — the frustration of those expectations through subsequent governmental action constitutes a breach of FET.
• Prohibition on arbitrary, discriminatory, or unreasonable conduct. The host state must not subject the investor to governmental conduct that is arbitrary (lacking a rational basis or proper purpose), discriminatory (based on nationality or other impermissible criteria), or unreasonable (disproportionate to any legitimate objective).
• Obligation of transparency and due process. The host state must act with transparency in its dealings with the investor and must afford the investor procedural fairness, including the right to be heard, the right to a reasoned decision, and access to an effective remedy.
• Good faith in the exercise of sovereign powers. The host state must exercise its sovereign powers in good faith and may not use its regulatory authority as a pretext for the taking of investment assets.
• Stability and consistency of the legal and regulatory framework. The host state must maintain a reasonably stable and predictable legal environment for the investor's activities. While the FET standard does not freeze the regulatory framework in perpetuity, it does protect against wholesale, arbitrary, or politically motivated changes that fundamentally alter the conditions under which the investment was made.
The FET standard is independent of and cumulative with the expropriation claims under Article 5. A finding of expropriation and a finding of FET breach are not mutually exclusive; they may coexist and may support enhanced damages, particularly where the manner of the taking — as distinguished from the taking itself — involved aggravating conduct such as bad faith, discrimination, or denial of due process.
B. Frustration of Legitimate Expectations
DEH and DVU made their investment in the Bloque Orinoco Sur concession in reliance on the legal and regulatory framework in place at the time of the concession grant on September 12, 2013. This framework included the following elements, each of which constituted a specific commitment or assurance by the Republic of Valderia:
• The Valderian Hydrocarbons Law of 2009. This statute established a comprehensive and ostensibly stable legal regime for foreign investment in the Valderian hydrocarbon sector. It set out the framework for the grant of concessions, defined the fiscal terms applicable to concessionaires, and established procedural protections — including the right to a formal hearing and a compensation valuation process — in the event of revocation or termination. DEH and DVU made their investment in reliance on this legal framework.
• Concession No. HYD-2012-047. The 30-year concession granted by the Ministry of Energy and Natural Resources represented a specific, individualized commitment by the Valderian government. The concession included defined fiscal terms — a 12.5% royalty on gross production value, a 34% corporate income tax rate, and a 10% PetroValderia carried interest — that formed the economic basis for DEH's investment decision and were incorporated into the financial projections, feasibility studies, and project finance documentation that supported the investment.
• The UK-Valderia BIT. The BIT itself constituted a commitment by Valderia to promote and protect foreign investment