Originally from Journal of Damages in International Arbitration

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The Parties 

Phillips Petroleum Company Venezuela Limited (“CPH”), Conocophillips Petrozuata B.V. (“CPZ”) (collectively the “Claimants”); Petroleos de Venezuela, S.A. (“PDVSA”), Corpoguanipa, S.A. (“Corpoguanipa”), PDVSA Petroleo, S.A. (“PDVSA Petroleo”) (collectively the “Respondents”) 

Sector 

Oil & Gas 

Applicable Treaty 

N/A 

Members of the Tribunal 

Dr. Laurent Lévy (President), Prof. Laurent Aynès (Claimants’ appointee), and Prof. Andrea Giardina (Respondent’s appointee) 

I.  Background 

In the face of declining oil production, Venezuela invited foreign oil companies to enter into joint ventures for developing the extra-heavy crude oil (“EHCO”) reserves in Venezuela in the 1990s. To make investment more commercially attractive, Venezuela implemented measures that offered investors financial incentives.  These measures included reduced income tax rates, reduced royalty payments, and other legal protections against government measures that might harm the investments.2 

Against this backdrop, on November 10, 1995, the Petrozuata Association Agreement (“Petrozuata AA”) was concluded between PDVSA Petroleo (a subsidiary of PDVSA) and CPZ, which established the corporate structure for the Petrozuata Project.  The objective of the Petrozuata Project was to “produce, transport and upgrade extra-heavy crude oil, and to market and sell the resulting synthetic crude oil as well as other by-products”.3  On the same date, PDVSA executed the Petrozuata Guaranty in favor of CPZ, essentially guaranteeing the observance of the obligations PDVSA Petroleo assumed in the Petrozuata AA.4  Similar to the Petrozuata AA, the Hamaca Association Agreement (“Hamaca AA”) was concluded on July 9, 1997 between CPH and Corpoguanipa, and the Hamaca Guarantee was concluded on the same date. Both the Petrozuata AA and the Hamaca AA incorporated provisions which obligated the concerned PDVSA subsidiary to indemnify the concerned Claimant against any Discriminatory Actions (“DA”) by the Government.