World Bank Arbitration Panel Orders Ecuador to Pay $1.8 Billion to US Company

The World Bank’s arbitration panel has ordered the Latin American nation of Ecuador to pay $1.8 billion (plus interest) to an American oil company Occidental Petroleum for cancelling a contract. Occidental sued Ecuador for $3.37 billion in May 2006, one day after it received notice from Ecuador regarding the cancellation of a contract to extract 100,000 barrels of oil a day from Ecuador’s Amazon basin. That amount equates to about 20 percent of Ecuador’s output of oil.

The World Bank’s arbitration panel has ordered the Latin American nation of Ecuador to pay $1.8 billion (plus interest) to an American oil company Occidental Petroleum for cancelling a contract. Occidental sued Ecuador for $3.37 billion in May 2006, one day after it received notice from Ecuador regarding the cancellation of a contract to extract 100,000 barrels of oil a day from Ecuador’s Amazon basin. That amount equates to about 20 percent of Ecuador’s output of oil.

According to a report by The Tico Times, the International Centre for Settlement of Investment Disputes (ICSID), a branch of the World Bank, ordered the nation of Ecuador to pay Occidental (also known as Oxy), $1.77 billion plus interest in 2012. Following the adverse ruling, Ecuador’s leftist President, Rafael Correa, tried to find a way to have the ruling annulled. Correa is an economist by training.

Correa opted not to take the adverse ruling lying down. He promptly took to Twitter where he described the ruling as “Another attack on our sovereignty.” He vowed to continue negotiating with Oxy in an effort to further reduce the payout, which (at present) amounts to 3.3 percent of Ecuador’s national budget for 2016.

Ecuador argued that it acted within its rights when it opted to cancel the contract after Oxy sold a 40 percent stake in the company to Canadian firm Encana in 2000 without Ecuador’s authorization. Oxy, on the other hand, says that Ecuador further violated the law when it ignored its investment treaty with the United States.

The adverse ruling further deepens the economic hole Ecuador has dug for itself. Ecuador, OPEC’s smallest member nation, has been struggling with several budget concerns, and the ruling merely adds to those budget woes. However, the smallest member of oil cartel OPEC, Ecuador also derives a significant portion of its gross domestic product (GDP) from crude oil. With the decline in oil prices, Ecuador’s fortunes have also dipped.

The World Bank’s tribunal ultimately reduced the ruling to around $1 Billion. The tribunal released a statement to explain the reduction: “The Committee has found that the Tribunal manifestly exceeded its powers by wrongly assuming jurisdiction with regard to the investment now beneficially owned by the Chinese investor Andes.”

Ecuador countered, saying, “We managed to invalidate 40 percent of the original ruling, that is, US$700 million less. But they are still ordering us to pay US$1 billion.”