PRIVILEGED AND CONFIDENTIAL — SUBJECT TO LITIGATION PRIVILEGE
CALDERWOOD & HARKNESS LLP 55 Bishopsgate London EC2N 3AH United Kingdom
Tel: +44 (0)20 7429 6000
Fax: +44 (0)20 7429 6001
www.calderwoodharkness.com
March 25, 2022
Dr. Elaine Cho, CFA, ASA Managing Director Pemberton Valuation Advisory LLC 300 Park Avenue, Suite 2200 New York, NY 10022 United States
BY HAND AND SECURE EMAIL (e.cho@pembertonvaluation.com)
Dear Dr. Cho,
EXPERT ENGAGEMENT LETTER Re: Dunmore Energy Holdings Ltd. v. Republic of Valderia ICSID Case No. ARB/22/11 Calderwood & Harkness LLP Matter No. 1016-00002
1. Introduction and Purpose of Engagement
Calderwood & Harkness LLP ("C&H" or the "Firm") acts as lead counsel for Dunmore Energy Holdings Ltd. ("DEH"), a Cayman Islands exempted company with registered office at 4th Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman KY1-1002, Cayman Islands, and principal business office at 27 Curzon Street, London W1J 5HT, United Kingdom.
The purpose of this letter is to retain Pemberton Valuation Advisory LLC ("Pemberton") as an independent damages and quantum expert in connection with the matter of Dunmore Energy Holdings Ltd. v. Republic of Valderia, ICSID Case No. ARB/22/11 (the "Arbitration"). This engagement letter (the "Engagement Letter") sets out the terms and conditions upon which Pemberton is retained, the scope of work to be undertaken, the fees and billing arrangements, and the mutual obligations of the parties.
For the avoidance of doubt, C&H's internal matter reference for this engagement is 1016-00002. Pemberton is requested to reference this matter number, together with the ICSID Case Number ARB/22/11, on all correspondence, invoices, and deliverables relating to this engagement.
A Request for Arbitration was filed by DEH on March 15, 2022 before the International Centre for Settlement of Investment Disputes ("ICSID"), an institution of the World Bank Group established under the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (the "ICSID Convention"). The Request for Arbitration was registered by the ICSID Secretary-General on April 8, 2022, in accordance with Article 36(3) of the ICSID Convention and Rule 6(1) of the ICSID Institution Rules.
The Arbitration arises 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 on May 22, 2006 and entered into force on November 1, 2006 (the "UK-Valderia BIT"). DEH invokes the protections afforded to covered investments under Article 5 (Expropriation), Article 2 (Fair and Equitable Treatment), and Article 4 (Free Transfer of Capital) of the UK-Valderia BIT.
The claim concerns the expropriation by the Republic of Valderia (the "Respondent") of DEH's investment in a 30-year oil and gas concession designated as Concession No. HYD-2012-047, commonly referred to as "Bloque Orinoco Sur," located in the Valderian Orinoco Basin. The expropriation was effected through a series of presidential decrees and ministerial resolutions promulgated in 2021, as further described in Section 2 below. DEH's claim encompasses the full compensation owed for the unlawful taking of its investment, including the fair market value of the expropriated assets, lost future profits, and consequential damages.
2. Background to the Dispute
The following summary of the factual background is provided for the purposes of informing Pemberton's engagement and identifying the principal issues that the expert report will need to address. C&H will provide Pemberton with a comprehensive set of documents, data, and legal submissions as the proceedings develop.
2.1 The Claimant's Investment Structure
DEH holds one hundred percent (100%) of the issued and outstanding share capital of Dunmore Valderia upstream S.A. ("DVU"), a sociedad anónima incorporated under the laws of the Republic of Valderia, with registered office at Avenida Libertador 1480, Piso 12, Puerto Valdés, Valderia. DVU was established as the special-purpose vehicle through which DEH made and held its investment in the Valderian upstream oil and gas sector. DVU was at all material times the named concessionaire under Concession No. HYD-2012-047.
2.2 The Concession
Concession No. HYD-2012-047 was granted to DVU on September 12, 2013 by the Ministry of Energy and Natural Resources of the Republic of Valderia (the "Ministry") under the Valderian Hydrocarbons Law of 2009 (Ley de Hidrocarburos de 2009). The principal terms of the concession are as follows:
(a) Concession area: 1,240 km² onshore in the Valderian Orinoco Basin;
(b) Term: 30 years from the date of grant, expiring on September 12, 2043;
(c) Royalty rate: 12.5% of the gross production value, payable to the Ministry;
(d) Corporate income tax: 34%, as assessed under the Valderian corporate income tax regime applicable to hydrocarbons companies;
(e) Carried interest: A 10% carried interest held by PetroValderia S.A. ("PetroValderia"), the state-owned national oil company of the Republic of Valderia, entitling PetroValderia to 10% of net production revenues without contribution to exploration, development, or operating costs; and
(f) Work program obligations: A minimum work program including seismic acquisition, exploration drilling, and development of any commercial discoveries, as specified in Annexes 1 through 4 of the concession agreement.
2.3 Capital Expenditure
DEH's total capital expenditure in the Republic of Valderia through its wholly-owned subsidiary DVU amounted to approximately USD 347 million. This investment was deployed over the period from 2013 through 2021 and comprised the following principal components:
(a) Exploration and development drilling: Approximately USD 211 million, encompassing the drilling, completion, and equipping of seven (7) exploration wells and twenty-two (22) development wells, together with associated wellsite infrastructure, completions equipment, and artificial lift systems;
(b) Surface infrastructure and pipeline construction: Approximately USD 89 million, including the design, procurement, construction, and commissioning of: (i) a 68-kilometre gathering pipeline connecting the Bloque Orinoco Sur field to the national pipeline network; and (ii) the Central Processing Facility "Orinoco Sur" ("CPF Orinoco Sur"), a multi-phase separation and treatment facility with a design capacity of 35,000 barrels per day; and
(c) Seismic acquisition and geological studies: Approximately USD 47 million, including the acquisition and processing of 3D seismic data over approximately 800 km² within the concession area, together with geological, geophysical, and reservoir engineering studies.
2.4 Operational History
Following the grant of the concession in September 2013, DVU undertook an aggressive exploration and appraisal program. Seven exploration wells were drilled between 2014 and 2017, of which five were commercially viable, confirming the presence of significant hydrocarbon accumulations within the Bloque Orinoco Sur concession area. Development drilling commenced in late 2017 and continued through 2020, with a total of twenty-two development wells brought on stream.
Production from the concession achieved a peak rate of 24,800 barrels per day ("bbl/day") in September 2020. The average production rate for fiscal year 2020 was approximately 21,200 bbl/day. At the time of the expropriation in April 2021, production stood at approximately 18,600 bbl/day, reflecting the natural decline of producing wells in the absence of further infill drilling, which had been suspended due to the deteriorating political environment in Valderia and escalating government interference with DVU's operations.
For fiscal year 2020, DVU reported gross revenue of USD 128.6 million and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of USD 41.3 million.
2.5 Reserves. As of December 31, 2020, the proved reserves attributable to the Bloque Orinoco Sur concession amounted to 87.4 million barrels of oil equivalent ("mmboe"), as independently certified by Ridgewell Subsurface Consultants Ltd. ("Ridgewell") in their reserves evaluation report dated February 15, 2021. In addition, Ridgewell estimated probable reserves of an additional 42.1 mmboe, representing upside potential from infill drilling, field extension, and enhanced recovery techniques. The reserve classifications follow the definitions established by the Canadian Oil and Gas Evaluation Handbook and are consistent with the SPE/WPC/AAPG Petroleum Resources Management System.
2.6 Equity Structure
DEH's equity is held as follows:
2.7 The Expropriation
The Republic of Valderia expropriated DEH's investment through a series of coordinated governmental actions over the period from April to September 2021. The principal measures are summarised below in chronological order:
(a) Presidential Decree No. 2021-0417 (April 17, 2021): The President of the Republic of Valderia issued a decree declaring the nationalization of all strategic hydrocarbon assets held by foreign investors operating in the Valderian Orinoco Basin. The decree cited "national sovereignty over natural resources" and "the public interest" as the basis for the taking. No mention was made of compensation, and no process was established for the assessment or payment of compensation to affected investors.
(b) Physical occupation (May 3, 2021): Units of the Valderian Armed Forces, accompanied by operational personnel from PetroValderia, physically occupied CPF Orinoco Sur and took operational control of all wellsites, gathering pipelines, and associated infrastructure within the Bloque Orinoco Sur concession area. DVU's expatriate staff were ordered to leave the premises and were escorted from the facility under military supervision. Local Valderian employees of DVU were subsequently absorbed into PetroValderia's workforce without DVU's consent.
(c) Presidential Decree No. 2021-0623 (June 23, 2021): A second presidential decree formally transferred Concession No. HYD-2012-047, together with all associated rights, permits, authorisations, and infrastructure, from DVU to PetroValderia S.A. The decree purported to vest in PetroValderia full ownership and operational rights over all assets formerly held by DVU under the concession.
(d) Ministerial Resolution No. MEN-2021-089 (August 5, 2021): The Ministry of Energy and Natural Resources issued a resolution revoking all operating licenses, environmental permits, and regulatory authorisations held by DVU in the Republic of Valderia. The resolution made no provision for compensation.
(e) Freezing of bank accounts (September 1, 2021): DVU's bank accounts held at the Banco Nacional de Valderia, containing working capital and receivables, were frozen pursuant to an order of the Valderian Financial Superintendency, rendering DVU unable to meet its local obligations, pay its remaining employees, or remit funds to DEH.
2.8 Pre-Arbitration Steps
In response to the above measures, DEH, through C&H, sent a formal Notice of Dispute to the Republic of Valderia on October 14, 2021, pursuant to Article 8 of the UK-Valderia BIT. The Notice of Dispute described the measures taken by the Republic of Valderia, asserted that those measures constituted an unlawful expropriation in breach of the UK-Valderia BIT, and invited the Republic of Valderia to enter into consultations with a view to resolving the dispute amicably within the six-month cooling-off period prescribed by the treaty. The cooling-off period expired on April 14, 2022, without any substantive response from the Republic of Valderia or any offer of compensation. DEH accordingly filed its Request for Arbitration on March 15, 2022, as noted in Section 1 above.
3. Identification of Expert Personnel
3.1 Lead Expert
The lead expert for this engagement shall be Dr. Elaine Cho, CFA, ASA, Managing Director of Pemberton Valuation Advisory LLC. Dr. Cho shall serve as the testifying expert and shall be the principal author of all expert reports submitted in connection with the Arbitration. Dr. Cho's curriculum vitae, setting out her qualifications, professional experience, representative prior engagements in international arbitration quantum matters, publications, and testimony history, is appended to this Engagement Letter as Appendix A.
3.2 Supporting Analyst
Dr. Cho shall be supported by Marcus Whitfield, an analyst at Pemberton, who shall assist Dr. Cho in data analysis, financial modeling, report preparation, and such other analytical tasks as may be required. Mr. Whitfield shall work under Dr. Cho's direction and supervision at all times.
3.3 Restrictions on Personnel Changes
Pemberton shall not substitute or reassign the lead expert, Dr. Elaine Cho, without the prior written consent of C&H. The selection of Dr. Cho as lead expert is a material consideration in C&H's decision to engage Pemberton, and any change in the lead expert without C&H's prior approval would constitute a material breach of this Engagement Letter.
Any additional personnel whom Pemberton proposes to deploy on this engagement must be notified to C&H in advance and approved in writing before such personnel commence any work on the matter. C&H reserves the right to withhold approval for any proposed additional personnel at its sole discretion.
4. Scope of Engagement
4.1 Preparation of Damages Report
Pemberton shall prepare a comprehensive independent expert report (the "Damages Report") quantifying the losses suffered by DEH as a result of the Republic of Valderia's expropriation of Concession No. HYD-2012-047 and related assets. The Damages Report shall be prepared to a standard suitable for submission to the ICSID tribunal and shall comply with any procedural orders or directions issued by the tribunal regarding the form, content, and length of expert evidence.
The Damages Report should address the total claim quantum of USD 867 million, comprising the three components described in Sections 4.1.1 through 4.1.3 below. The figures set out below represent C&H's preliminary assessment of the quantum of DEH's claim; Pemberton's task is to arrive at its own independent assessment, which may differ from these preliminary figures.
4.1.1 Sunk Capital Expenditure (Preliminary Estimate: USD 347 Million). Pemberton shall assess the historical cost of DEH's invested capital in the Bloque Orinoco Sur concession, adjusted for depreciation, amortisation, and any recoveries, as at the date of expropriation. The breakdown of capital expenditure to be analysed is as follows:
(a) Exploration and development drilling: USD 211 million, encompassing all costs associated with the drilling, completion, equipping, and workover of the seven exploration wells and twenty-two development wells drilled by DVU during the period from 2014 to 2021;
(b) Surface infrastructure and pipeline construction: USD 89 million, encompassing all costs associated with the design, procurement, construction, commissioning, and maintenance of the CPF Orinoco Sur (35,000 bbl/day capacity) and the 68-kilometre gathering pipeline, together with ancillary surface infrastructure including access roads, power generation facilities, water disposal systems, and camp facilities; and
(c) Seismic acquisition and geological studies: USD 47 million, encompassing all costs associated with the acquisition, processing, and interpretation of 3D seismic data over approximately 800 km², together with geological, geophysical, petrophysical, and reservoir engineering studies.
In conducting this assessment, Pemberton shall:
(i) Review the audited financial statements of DEH and DVU, prepared by Ashworth & Palliser LLP, for the fiscal years 2013 through 2021;
(ii) Verify capital expenditure records against source documentation, including invoices, contracts with drilling contractors and service companies, purchase orders, field development plans, and authority for expenditure ("AFE") approvals;
(iii) Consider the appropriate depreciation methodology and any adjustments for inflation, asset impairment, or residual value; and
(iv) Express the sunk capital expenditure in both nominal and present value terms as at the valuation date.
4.1.2 Lost Future Profits — Discounted Cash Flow Analysis (Preliminary Estimate: USD 312 Million). Pemberton shall develop a discounted cash flow ("DCF") model to estimate the net present value of the future cash flows that DEH would have received from the Bloque Orinoco Sur concession over the remaining term of the concession, "but for" the expropriation. The remaining concession term runs approximately 22.4 years from the date of expropriation (April 17, 2021) to the contractual expiry of the concession on September 12, 2043.
The following key assumptions and parameters shall be evaluated, validated, and, where appropriate, independently derived by Pemberton:
(a) Oil price assumption: The preliminary assumption is USD 65 per barrel for Brent crude oil. Pemberton shall benchmark this assumption against forward curves, futures prices, and analyst consensus forecasts prevailing at or near the valuation date, and shall consider the sensitivity of the damages estimate to variations in the oil price assumption;
(b) Weighted average cost of capital (WACC): The preliminary assumption is 10%. Pemberton shall independently derive and justify the appropriate WACC, taking into account the cost of equity (using the Capital Asset Pricing Model or other accepted methodology), the cost of debt, the target capital structure, and the country risk premium applicable to investments in the Republic of Valderia;
(c) Production profile: The production profile to be used in the DCF model shall be based on the proved reserves of 87.4 mmboe and, in an alternative scenario, the proved plus probable reserves of 129.5 mmboe (87.4 mmboe proved plus 42.1 mmboe probable), as certified by Ridgewell Subsurface Consultants Ltd. The production profile shall take into account the production rate at the date of expropriation (18,600 bbl/day), the design capacity of CPF Orinoco Sur (35,000 bbl/day), the planned infill drilling program, and the expected production decline rates;
(d) Fiscal terms: The royalty rate of 12.5% and the Valderian corporate income tax rate of 34% shall be applied in accordance with the terms of the concession and applicable Valderian law;
(e) Operating costs: Pemberton shall assess unit operating costs on the basis of DVU's historical operating cost performance, adjusted for expected future changes in cost structure, inflation, and economies of scale;
(f) Decline rates: Natural production decline rates shall be estimated on the basis of historical well performance data and reservoir simulation outputs provided by Ridgewell; and
(g) Reinvestment requirements: Pemberton shall estimate the capital expenditure required to sustain and develop production over the remaining concession term, including infill drilling, workovers, facility upgrades, and maintenance capital.
Pemberton shall prepare alternative scenarios incorporating high and low oil price assumptions, the inclusion and exclusion of probable reserves, and variations in the WACC, to provide the tribunal with a range of damages estimates and a transparent sensitivity analysis.
4.1.3 Consequential Damages (Preliminary Estimate: USD 208 Million). In addition to the sunk capital expenditure and lost future profits, DEH claims consequential damages totalling an estimated USD 208 million, comprising the following three sub-components:
(a) Financing Costs (Preliminary Estimate: USD 87 Million)
DEH's investment in Valderia was partially funded by a USD 175 million senior secured project finance facility provided by Commonwealth Capital Bank plc (the "Facility"), pursuant to a Facility Agreement dated March 20, 2016. At the time of the expropriation, the outstanding principal balance under the Facility was approximately USD 112,400,000. The Facility bore interest at a rate of SOFR plus 4.25% per annum. Following the expropriation and the resulting cessation of cash flows from the Bloque Orinoco Sur concession, DVU was unable to meet its debt service obligations, and Commonwealth Capital Bank plc declared a technical default on November 1, 2021.
Pemberton shall assess the incremental financing costs suffered by DEH as a consequence of the expropriation, including but not limited to: (i) default interest accruing under the Facility at the applicable default rate; (ii) penalty charges, fees, and costs imposed by Commonwealth Capital Bank plc as a result of the technical default; (iii) the cost of any replacement financing that DEH has been required to arrange; and (iv) the opportunity cost of capital that DEH has been compelled to divert from other investment opportunities to address the consequences of the default.
(b) Reputational Harm (Preliminary Estimate: USD 74 Million)
DEH contends that the expropriation has caused significant and quantifiable reputational harm to its business. Pemberton shall quantify, to the extent feasible and supportable by evidence, the impact of the expropriation on DEH's broader business prospects, including: (i) the impairment of DEH's ability to raise equity and debt capital for its operations in other jurisdictions; (ii) the loss of specific business opportunities that DEH was pursuing at the time of the expropriation and that were abandoned or lost as a direct consequence of the reputational damage associated with the Valderian expropriation; and (iii) the increased cost of capital applicable to DEH's remaining portfolio as a result of the perceived elevation of political risk. Pemberton should note that the quantification of reputational harm is inherently challenging and should address the methodological limitations and degree of certainty associated with any estimate.
(c) Sunk Phase II Renewable Energy Pre-Development Expenditure (Preliminary Estimate: USD 47 Million)
As part of its integrated investment in Valderia, DEH had commenced pre-development activities for a Phase II renewable energy project (a 200 MW solar photovoltaic installation and associated battery storage facility) adjacent to the Bloque Orinoco Sur concession area. Prior to the expropriation, DEH had expended approximately USD 47 million on feasibility studies, environmental and social impact assessments, permitting applications, engineering design work, land surveys, and stakeholder engagement for the Phase II project. The expropriation rendered this expenditure entirely worthless, as DVU's ability to operate in Valderia was extinguished and the renewable energy project could not proceed.
Pemberton shall verify the quantum of this expenditure and assess whether, and to what extent, it constitutes a recoverable element of DEH's damages claim.
4.2 Valuation Methodologies
Pemberton shall employ the following valuation methodologies in preparing the Damages Report:
(a) Primary methodology — Discounted cash flow (DCF): The DCF analysis shall be the primary methodology used to assess the fair market value of DEH's investment on a "but for" basis, i.e., the value that the investment would have had in the absence of the expropriation. This is the methodology most commonly accepted by international investment tribunals for the valuation of going-concern enterprises with established cash flows and proved reserves.
(b) Secondary / cross-check methodology — Comparable transactions: Pemberton shall conduct an analysis of precedent transactions in the upstream oil and gas sector in comparable jurisdictions, with a focus on transactions involving onshore conventional oil assets in Latin America and other emerging market jurisdictions. The comparable transactions analysis shall serve as a cross-check on the reasonableness of the DCF-derived valuation.
(c) Additional methodologies: Pemberton may consider any additional valuation methodologies that it deems appropriate in the circumstances, including but not limited to: (i) an asset-based (or net asset value) approach; (ii) a market multiples approach based on publicly traded comparable companies; and (iii) a book value or adjusted book value approach. The selection and weighting of methodologies shall be explained and justified in the Damages Report.
Pemberton shall address the appropriate valuation date in the Damages Report. The preliminary valuation date is April 17, 2021, being the date of Presidential Decree No. 2021-0417, which initiated the expropriation. C&H reserves the right to instruct Pemberton to adopt an alternative valuation date should the legal analysis or the tribunal's procedural directions so require.
4.3 Review of Reserve Reports
Pemberton shall review and rely upon the reserve reports and technical assessments prepared by Ridgewell Subsurface Consultants Ltd. in preparing the Damages Report. The lead expert at Ridgewell is Dr. Alistair Greaves, P.Eng., and Ridgewell's office address is 700 – 6th Avenue SW, Suite 1400, Calgary, Alberta T2P 0T8, Canada.
The most recent reserves certification by Ridgewell, dated February 15, 2021, as of an effective date of December 31, 2020, provides the following reserve estimates for the Bloque Orinoco Sur concession:
Pemberton shall coordinate with Ridgewell on production profiles, decline curves, resource estimates, and any other technical parameters to be used in the DCF model. Pemberton is not expected to independently assess subsurface geology, reservoir characteristics, or the technical validity of Ridgewell's reserve estimates. However, Pemberton shall satisfy itself that Ridgewell's methodology and classifications are consistent with industry standards and shall clearly state in the Damages Report the extent of its reliance on Ridgewell's technical expertise.
4.4 Response to Respondent's Expert
C&H advises Pemberton that the Republic of Valderia has retained Northbridge Economic Consulting Ltd. as its quantum expert in the Arbitration. The lead expert at Northbridge is Dr. Henrik Johansson, and Northbridge's office address is 4 More London Riverside, London SE1 2AU, United Kingdom. The Respondent is represented by Harcastle Fenton LLP (London) and Ortega & Bernal, Abogados (Puerto Valdés, Valderia).
It is anticipated that Northbridge will prepare a damages report on behalf of the Respondent that may challenge the quantum of DEH's claim, the valuation methodologies employed, the key assumptions adopted, and the data relied upon. Pemberton may be required to prepare a rebuttal report (the "Rebuttal Report") responding to Northbridge's damages analysis. The specific scope and terms of reference for any Rebuttal Report shall be defined by separate instruction from C&H following receipt of Northbridge's report. Pemberton's fees for the preparation of any Rebuttal Report shall be scoped and agreed separately at that time.
4.5 Expert Testimony
Dr. Cho shall make herself available to testify as an expert witness before the ICSID tribunal, once constituted, in connection with the Damages Report and any Rebuttal Report. Expert testimony may include:
(a) An oral presentation and summary of the Damages Report to the tribunal;
(b) Cross-examination by counsel for the Respondent, which C&H understands will be conducted by Harcastle Fenton LLP and/or Ortega & Bernal, Abogados;
(c) Questions from the members of the tribunal; and
(d) Participation in any expert "hot-tubbing" or concurrent evidence procedure that the tribunal may direct, involving a joint session with Dr. Henrik Johansson of Northbridge.
The location and dates of the merits hearing have not yet been determined. C&H notes that the proceedings are currently dormant pending state-to-state diplomatic consultations between the United Kingdom and the Republic of Valderia. C&H will communicate the hearing schedule to Pemberton as soon as it is known.
Dr. Cho shall comply with any procedural orders, practice directions, or tribunal-specific guidelines regarding the form, content, and presentation of expert evidence issued by the ICSID tribunal or agreed between the parties.
5. Expert Independence and Duties
Pemberton and Dr. Cho shall at all times maintain full independence and objectivity in the performance of their duties under this engagement. The role of an expert witness in international arbitration proceedings carries with it particular responsibilities that transcend the ordinary obligations of a retained consultant.
Dr. Cho acknowledges and accepts that her overriding duty is to the ICSID tribunal, not to the party retaining her. Her expert report must assist the tribunal in reaching a just and well-informed determination of the quantum of damages, and must not be prepared or presented in a manner designed to advocate for the position of either party.
Specifically, the Damages Report and any Rebuttal Report must:
(a) Set out Dr. Cho's qualifications, professional experience, and basis for acting as an expert in the relevant field;
(b) Identify the data, documents, and information upon which she has relied;
(c) Describe the methodology or methodologies employed and explain why they are appropriate;
(d) State clearly all assumptions made and the basis for those assumptions;
(e) Present the analysis and conclusions in an impartial and objective manner;
(f) Identify the matters that fall outside Dr. Cho's area of expertise and upon which she has relied on other experts (in particular, Ridgewell Subsurface Consultants Ltd.); and
(g) Contain a signed declaration confirming Dr. Cho's independence, the completeness and accuracy of the report, and her understanding of her duties as an expert witness.
Pemberton shall promptly disclose to C&H any circumstance that could give rise to a reasonable perception of bias, partiality, or lack of independence on the part of Dr. Cho or any other member of the engagement team.
6. Conflicts of Interest
Pemberton confirms that it has conducted a thorough conflicts check across its firm and that, as of the date of this Engagement Letter, it has no current engagement with any of the following parties:
(a) The Republic of Valderia, or any ministry, agency, or instrumentality thereof;
(b) PetroValderia S.A.;
(c) Ortega & Bernal, Abogados;
(d) Harcastle Fenton LLP; or
(e) Northbridge Economic Consulting Ltd.
Pemberton further represents that neither Dr. Elaine Cho nor Marcus Whitfield has any personal, financial, or professional relationship with Dr. Henrik Johansson of Northbridge Economic Consulting Ltd., or with any known representative of the Respondent or its counsel.
Pemberton shall immediately notify C&H in writing if any potential conflict of interest arises during the course of the engagement. This obligation extends to the disclosure of:
(i) Any prior engagements involving any party to the Arbitration, including DEH, DVU, the Republic of Valderia, PetroValderia, Meridian Growth Partners, or Commonwealth Capital Bank plc;
(ii) Any prior work performed by Pemberton or any of its principals for or against the Republic of Valderia in any context;
(iii) Any professional or personal relationship between any member of the Pemberton engagement team and Dr. Henrik Johansson or any other representative of Northbridge Economic Consulting Ltd.; and
(iv) Any other circumstance that a reasonable and informed observer might consider could compromise the independence or objectivity of Pemberton's expert evidence.
7. Confidentiality and Privilege
All information provided to Pemberton by C&H, DEH, DVU, or any agent, officer, employee, or representative of the Claimant in connection with this engagement is confidential and is provided under, and subject to, litigation privilege (also known as legal professional privilege as it applies to communications made for the dominant purpose of litigation).
Pemberton shall not disclose any information relating to the engagement, the Arbitration, the underlying dispute, or any aspect of DEH's business, operations, financial position, or strategy to any third party without the prior written consent of C&H. This obligation of confidentiality extends to, without limitation:
(a) All working papers, draft reports, internal memoranda, and preliminary analyses prepared by Pemberton in connection with the engagement;
(b) All communications (written, oral, and electronic) between Pemberton and C&H, DEH, Ridgewell, or any other member of the Claimant's advisory team;
(c) All data, documents, and materials provided to Pemberton in connection with the engagement; and
(d) The fact and terms of Pemberton's retention, except to the extent that such information is required to be disclosed in the Damages Report, any Rebuttal Report, or in the course of expert testimony before the tribunal.
Pemberton shall implement appropriate information barriers and data security measures to protect the confidentiality of all information received in connection with this engagement. Such measures shall include, at a minimum, the restriction of access to engagement materials to members of the approved engagement team, the use of encrypted electronic communications and secure file-sharing platforms, and the secure storage of physical documents.
The obligations of confidentiality set out in this Section 7 shall survive the termination of this engagement, howsoever occurring, and shall continue in full force and effect indefinitely.
C&H notes that DEH's legal costs and disbursements in connection with the Arbitration may be funded in part by Beaufort Litigation Capital LLP ("Beaufort"), a third-party litigation funder. Beaufort may, pursuant to the terms of its funding agreement with DEH, receive summary information regarding the quantum assessment, including high-level damages estimates and progress updates. Any such disclosure to Beaufort shall be coordinated exclusively through C&H, and Pemberton shall not communicate directly with Beaufort or provide any information to Beaufort without C&H's prior written authorisation.
8. Document and Data Management
C&H will provide Pemberton with the relevant documents and data required for the preparation of the Damages Report. The principal categories of documents and data to be furnished are as follows:
(a) Audited financial statements of DEH and DVU for the fiscal years 2013 through 2021, as prepared by Ashworth & Palliser LLP (DEH's independent auditors);
(b) Concession agreement: Concession No. HYD-2012-047, together with all related government approvals, permits, licences, and regulatory authorisations;
(c) Reserve reports from Ridgewell Subsurface Consultants Ltd., including the reserves evaluation report dated February 15, 2021 (effective date: December 31, 2020) and any prior reserve reports;
(d) Production data: Historical daily, monthly, and annual production data for the Bloque Orinoco Sur concession, including well-by-well production records, fluid composition data, and water cut data;
(e) Operating cost records: Detailed operating cost breakdowns by category (lifting costs, transportation costs, processing costs, general and administrative expenses, and workover costs) for each fiscal year of operations;
(f) Capital expenditure breakdowns: AFE records, invoices, contracts, and payment records supporting the capital expenditure figures set out in Section 2.3 above;
(g) Project finance facility documentation: The Facility Agreement dated March 20, 2016 between DVU (as borrower), DEH (as guarantor), and Commonwealth Capital Bank plc (as lender), together with all amendments, waivers, default notices, and related correspondence;
(h) Phase II renewable energy pre-development expenditure records: Feasibility studies, engineering reports, environmental and social impact assessments, permitting applications, consultant invoices, and internal cost records relating to DEH's Phase II renewable energy project in Valderia;
(i) Expropriation instruments: Copies of Presidential Decree No. 2021-0417, Presidential Decree No. 2021-0623, and Ministerial Resolution No. MEN-2021-089, together with English translations certified by a qualified translator; and
(j) Such additional documents and data as Pemberton may reasonably request and C&H is able to provide.
A preliminary list of documents to be provided, together with expected delivery dates, is set out in Appendix C to this Engagement Letter.
Pemberton shall maintain a comprehensive document log recording all materials received from C&H or any other source in connection with the engagement. Pemberton shall preserve all such materials in an organised and secure manner throughout the duration of the engagement.
Upon termination of the engagement, all documents, data, and materials provided by C&H to Pemberton shall be returned to C&H or destroyed at C&H's direction. Pemberton shall certify in writing that all such materials have been returned or destroyed, as applicable, save for any copies that Pemberton is required by law or professional regulation to retain.
9. Fee Arrangements
9.1 Hourly Rates
Pemberton's professional fees shall be charged on an hourly basis at the following rates, which are effective as of the date of this Engagement Letter:
Any additional personnel whom Pemberton may deploy on the engagement with C&H's prior written approval shall be billed at hourly rates to be agreed in advance in writing between the parties. No work shall be performed by any person not listed above or not subsequently approved in writing by C&H.
9.2 Billing and Payment
Pemberton shall submit invoices to C&H on a monthly basis for professional fees accrued and disbursements incurred during the preceding calendar month. Each invoice shall contain a reasonable level of detail, including a summary of hours worked by each member of the engagement team, a brief description of the tasks performed, and an itemisation of any disbursements.
All invoices shall prominently reference C&H matter number 1016-00002 and ICSID Case No. ARB/22/11.
Invoices shall be payable within thirty (30) days of receipt by C&H. C&H shall notify Pemberton within ten (10) business days of receipt of any invoice if C&H disputes any item on the invoice, and the parties shall use reasonable efforts to resolve any such dispute promptly.
Reasonable travel, accommodation, and out-of-pocket expenses incurred by Pemberton in connection with the engagement shall be reimbursed at cost, provided that such expenses have been pre-approved by C&H in writing. Pemberton shall submit receipts or other supporting documentation for all disbursements exceeding USD 50. Air travel shall be at economy class for flights of less than six hours and business class for flights of six hours or more, unless otherwise agreed.
9.3 Fee Estimates
The following are good-faith estimates of the professional fees likely to be incurred for each phase of the engagement. These estimates are provided for budgeting and planning purposes only and do not constitute a fee cap or fixed-price quotation:
Pemberton shall notify C&H promptly if actual fees incurred or expected to be incurred are likely to exceed the applicable fee estimate by more than 10%. Such notification shall include an explanation of the reasons for the anticipated overrun and a revised fee estimate. C&H and Pemberton shall discuss and agree upon any appropriate measures to manage costs within acceptable parameters.
9.4 Third-Party Funding
C&H notes that DEH's legal costs and disbursements in connection with the Arbitration, including Pemberton's professional fees, may be funded in part by Beaufort Litigation Capital LLP pursuant to the terms of a litigation funding agreement between DEH and Beaufort. The existence of third-party funding does not alter Pemberton's obligations under this Engagement Letter, its duties of independence and objectivity as an expert witness, or the fee and billing arrangements set out herein. Pemberton shall issue its invoices to C&H in the ordinary course, and C&H (on behalf of DEH) shall be responsible for the timely payment of all invoices in accordance with Section 9.2 above.
10. Deliverables and Timeline
The principal deliverable under this engagement is the Damages Report. The anticipated timeline for the preparation and delivery of the Damages Report is as follows:
(a) Draft Damages Report: Pemberton shall deliver a complete draft of the Damages Report to C&H within twelve (12) weeks of receipt of all material data and documents identified in Section 8 and Appendix C. The draft shall be in substantially final form, suitable for review and comment by C&H and DEH.
(b) C&H review period: C&H shall provide its comments, corrections, and requests for clarification on the draft Damages Report within three (3) weeks of receipt thereof. C&H's comments may address matters of factual accuracy, legal context, clarity of presentation, and consistency with the Claimant's legal submissions, but shall not seek to influence the substance of Pemberton's independent expert opinion.
(c) Final Damages Report: Pemberton shall deliver the final Damages Report to C&H within four (4) weeks after receiving C&H's comments on the draft. The final Damages Report shall incorporate Pemberton's responses to C&H's comments and shall be in a form suitable for filing with the ICSID tribunal.
C&H notes that the above timeline may need to be extended given that the ICSID proceedings are currently dormant. The tribunal has not yet been constituted, and the Respondent has not yet nominated an arbitrator. The next dormancy review date is December 12, 2024. C&H will communicate any adjusted timeline to Pemberton as the proceedings develop and the procedural calendar for the Arbitration is established by the tribunal.
The timeline for any Rebuttal Report shall be agreed between C&H and Pemberton upon receipt of the Respondent's expert report from Northbridge Economic Consulting Ltd. The Rebuttal Report timeline will be governed by the procedural timetable set by the tribunal, and Pemberton shall make best efforts to accommodate the tribunal's deadlines.
11. Coordination with Other Experts and Advisors
11.1 Ridgewell Subsurface Consultants Ltd.
Pemberton shall coordinate with Ridgewell Subsurface Consultants Ltd. (lead expert: Dr. Alistair Greaves, P.Eng.) on all matters relating to reserves data, production profiles, decline curves, and technical parameters to be used in the DCF model and the Damages Report. Pemberton may communicate directly with Ridgewell on technical matters, provided that all written communications (including emails) between Pemberton and Ridgewell are copied to the C&H team identified in Section 11.3 below. Oral communications shall be followed up with a written summary copied to C&H.
11.2 Valderian Local Counsel
Pemberton may be asked to coordinate with C&H's local Valderian counsel, Castaño Herrera & Asociados (principal contacts: Dr. Gabriel Castaño Herrera and Lic. Isabella Montoya Ruiz), on matters relating to the Valderian tax and regulatory framework, including the application of the Valderian corporate income tax, royalty regime, and any other fiscal or regulatory matters relevant to the DCF model or the damages analysis. Any such coordination shall be arranged and supervised by C&H.
11.3 C&H Team
All substantive communications relating to the expert engagement shall be channeled through or copied to the following members of the C&H team:
Pemberton's day-to-day contact at C&H shall be Jeffrey Park, Lead Associate, unless otherwise advised.
12. Limitation of Liability and Indemnification
12.1 Limitation of Liability
Pemberton's aggregate liability to C&H and/or DEH arising out of or in connection with this engagement, whether in contract, tort (including negligence), breach of statutory duty, or otherwise, shall not exceed an amount equal to the total professional fees actually paid to Pemberton under this Engagement Letter as of the date on which any claim is first asserted.
12.2 Exclusion of Indirect Damages
In no event shall Pemberton be liable to C&H, DEH, or any other party for any indirect, consequential, special, incidental, or punitive damages arising out of or in connection with this engagement, including but not limited to loss of profit, loss of revenue, loss of business opportunity, loss of goodwill, or loss of anticipated savings, regardless of whether such damages were foreseeable or whether Pemberton was advised of the possibility of such damages.
12.3 Indemnification. DEH (acting through C&H as its authorised representative) shall indemnify, defend, and hold harmless Pemberton, its officers, directors, employees, and agents from and against any and all third-party claims, demands, actions, proceedings, losses, damages, costs, and expenses (including reasonable legal fees) arising out of or in connection with the engagement or Pemberton's provision of services hereunder, except to the extent that such claims, losses, or damages are caused by or attributable to Pemberton's negligence, wilful misconduct, or material breach of its obligations under this Engagement Letter.
12.4 Professional Indemnity Insurance
Pemberton shall maintain in force throughout the term of this engagement, and for a period of not less than two (2) years following its termination, professional indemnity insurance (errors and omissions insurance) with a reputable insurer, in an amount of not less than USD 10,000,000 per claim and in the aggregate per policy year. Pemberton shall, upon request, provide C&H with a certificate of insurance or other evidence of coverage.
13. Term and Termination
13.1 Commencement. This engagement shall commence on the date on which this Engagement Letter is countersigned by an authorised representative of Pemberton and returned to C&H.