Memorial - 25 March 2022
TABLE OF CONTENTS
II. FACTUAL BACKGROUND
A. Mr. Kuczynski Was Elected President in 2016, and Was Forced To Resign in 2018
B. Mr. Kuczynski Had a Long History of Conflict with Blue Oil and Mr. Rojas
C. The Government's Control Over and History of Political Interference in PERUPETRO and Petroperú
1. The Government's Control Over PERUPETRO
2. The Government's Control Over Petroperú
3. Petroperú's Subsidiary Role as the Supplier of Last Resort
4. Political Interference in PERUPETRO and Petroperú
5. Mr. Kuczynski's History of Interference in PERUPETRO and Petroperú
D. Maple Gas Had Successfully Operated in Peru Since 1994
1. The Aguaytía Integrated Project
2. The AIP Was Split into Two Operations
3. The Blue Oil Investment Group Acquired Maple Gas in October 2015
E. Before Acquiring Maple Gas, the Blue Oil Investment Group Took Steps To Ensure It Had Sufficient Feedstock To Operate at Full Capacity
1. Petroperú Supplied Refined Products to the Ucayali Region as Maple Gas's Sources of Feedstock Declined
2. Before Investing in Maple Gas, the Blue Oil Investment Group Entered into Discussions with CEPSA for Feedstock To Supply the Pucallpa Refinery
F. After the Acquisition, Petroperú Blocked Maple Gas from Obtaining New Feedstock for the Pucallpa Refinery
1. Petroperú Demanded RAD Services in December 2015
2. Petroperú Continued To Acquire CEPSA's Crude, Even Though Maple Gas Was Willing To Agree to Better Terms
3. Petroperú's Conduct Led to Complaints and Protests in the Ucayali Region
4. Petroperú Continued To Threaten To Take the Pucallpa Refinery If Maple Gas Did Not Agree to Its Demands for RAD Services
G. As the Result of Petroperú's Conduct Following Its Acquisition of Maple Gas, the Blue Oil Investment Group Decided To Sell Maple Gas
H. Maple Gas Identified Additional Sources of Feedstock, Which Increased Its Value as an Investment
1. Maple Gas Had Renewed Discussions with CEPSA About Supplying the Pucallpa Refinery After the Blue Oil Investment Group Sold Its Interest
2. Maple Gas Identified the Opportunity To Obtain the Block 126 License
3. PERUPETRO and the MINEM Supported the Transfer of the Block 126 License to Maple Gas After It Was Acquired by a New Shareholder
I. Worth Capital Completes Its Acquisition of Maple Gas
J. Despite the Sale of Maple Gas to Worth Capital, Petroperú Continued To Target Maple Gas and Starve It of Feedstock
1. Petroperú Contracted to Purchase All of CEPSA's Production, Depriving Maple Gas of a Critical Source of Feedstock
2. Petroperú Intervened to Buy Aguaytía Energy's Supply of Natural Gasoline
K. PERUPETRO Approved All the Substantive Steps Necessary for the Assignment of the Block 126 License
1. Maple Gas Conducted Additional Due Diligence on Block 126
2. Maple Gas and Frontera Negotiated a Farmout Agreement for the Transfer of the Block 126 License
3. PERUPETRO Provided Maple Gas with Key Approvals for the Transfer of the Block 126 License
a) Maple Gas and Frontera submitted their application to transfer the Block 126 License in June 2017
b) PERUPETRO qualified Maple Gas to operate Block 126 in August 2017
c) Maple Gas, Frontera and PERUPETRO agreed on the modifications to the Block 126 License
4. PERUPETRO Provided a Final Version of the Modified Block 126 License, Which Maple Gas and Frontera Signed
5. PERUPETRO Told Maple Gas that the Block 126 License Would Be Approved at the 2 November Directorate Meeting
L. Without Any Explanation, PERUPETRO's Directorate Refused To Approve the Block 126 License
M. PERUPETRO Nullified Maple Gas's Qualification as an Oil Company Capable of Operating Block 126
N. PERUPETRO Rejected Maple Gas's Appeal of the Nullification of Its Qualification as an Oil Company
O. Petroperú and the MINEM Publicly Made False and Misleading Allegations Against Maple Gas in Early 2018
1. Petroperú and the MINEM Publicly Made False and Misleading Allegations Against Maple Gas
2. Petroperú's Public Attacks Caused Other Companies To Cut Off Negotiations With Maple Gas
P. Petroperú and PERUPETRO Took Further Steps that Blocked Maple Gas's Attempts To Obtain Feedstock
1. Maple Gas Sought Temporary Access to the Sheshea 1X Well in Block 126
2. Maple Gas Agreed to PERUPETRO's Request To Withdraw Its Administrative Lawsuit
3. Petroperú Sought To Terminate the Pucallpa Refinery Lease Agreement and PERUPETRO Discontinued Discussions About Access to Feedstock
4. Worth Capital's Attempt To Resolve the Dispute Amicably with Peru Failed
Q. Maple Gas Was Forced Out of Business, and Its Assets Were Seized by Petroperú and PERUPETRO
1. Maple Gas Was Forced to Shut Down Its Operations
2. Petroperú and PERUPETRO Seized Maple Gas's Assets
3. PERUPETRO Re-Tendered the Block 126 License, but Received No Bids62
4. Petroperú's Claim Regarding Its Demands for RAD Services Was Rejected by the Arbitral Tribunal
III. THE TRIBUNAL HAS JURISDICTION OVER WORTH CAPITAL'S CLAIMS UNDER THE TREATY
A. Worth Capital Is a Protected Investor Under the Treaty and the ICSID Convention
B. Worth Capital's Claims Arise out of Protected Investments Under the Treaty and the ICSID Convention
C. Worth Capital Has Complied with the Other Formal Requirements Under the Treaty To Commence Arbitration
IV. PERU IS RESPONSIBLE FOR THE CONDUCT OF PERUPETRO AND PETROPERÚ
A. Attribution Under Customary International Law and the Treaty
1. Attribution Under Article 4 of the ILC Articles
2. Attribution Under Article 5 of the ILC Articles and Article 10 of the Treaty
3. Attribution Under Article 8 of the ILC Articles
B. PERUPETRO's Conduct Is Attributable to Peru
1. PERUPETRO Is an Organ of Peru
a) PERUPETRO exercises Peru's governmental functions
b) Like other Peruvian organs, PERUPETRO is an entity of public administration under Peruvian law
c) PERUPETRO is obliged to act in the public interest
d) Peru exercises operational control over PERUPETRO
e) Peru exercises financial control over PERUPETRO
2. PERUPETRO Exercises Governmental Authority
3. PERUPETRO Acted Under the Instructions, Direction or Control of Peru
C. Petroperú's Conduct Is Attributable to Peru
1. Petroperú Exercises Governmental Authority
2. Petroperú Acted Under the Instructions, Direction or Control of Peru
a) Petroperú is under the direction and control of the government
b) Petroperú was acting under the instructions of the government in this case
V. PERU FAILED TO ACCORD THE MINIMUM STANDARD OF TREATMENT TO WORTH CAPITAL'S INVESTMENT
A. The Minimum Standard of Treatment Under the Treaty
1. Article 10.5 of the Treaty Protects Against Arbitrary Conduct
2. Article 10.5 of the Treaty Prohibits Conduct that Lacks Due Process
3. Article 10.5 of the Treaty Protects Against Bad Faith Conduct
B. Peru Failed To Accord the Minimum Standard of Treatment to Worth Capital's Investment in Maple Gas
1. Petroperú Abused Its Role as Supplier of Last Resort
2. PERUPETRO's Decision To Block the Transfer of the Block 126 License Was Arbitrary and Pretextual and Lacked Due Process
a) There was no legitimate basis for PERUPETRO's decision not to approve the transfer of the Block 126 License
b) PERUPETRO's nullification decision was a top-down directive that was pretextual and issued in violation of fundamental principles of due process
c) PERUPETRO's rejection of Maple Gas's appeal of the nullification decision was pretextual and violated due process
3. Peru Acted in Bad Faith
VI. PERU UNLAWFULLY EXPROPRIATED WORTH CAPITAL'S INVESTMENT
A. Article 10.7 of the Treaty Prohibits Unlawful Expropriation
B. Peru Unlawfully Expropriated Worth Capital's Investment in Breach of Article 10.7 of the Treaty
1. Peru Expropriated Worth Capital's Investment in Maple Gas
a) Peru's actions substantially deprived Worth Capital of the value of its investment
b) Peru interfered with Worth Capital's reasonable investment-backed expectations
c) Peru's actions were arbitrary, pretextual and abusive
2. Peru's Expropriation of Worth Capital's Investment Was Unlawful. ........117
VII. WORTH CAPITAL IS ENTITLED TO SUBSTANTIAL DAMAGES AS A RESULT OF PERU'S BREACHES OF THE TREATY
A. Worth Capital Is Entitled to Full Reparation for Peru's Failure to Provide the MST and for Its Unlawful Expropriation of Worth Capital's Investment
1. The Customary International Law Standard of Full Reparation Applies to Compensation for Unlawful Expropriation and Breach of the MST
2. Fair Market Value Is the Accepted Measure of Full Reparation Where the Investor Loses the Value of Its Investment
3. Worth Capital Is Entitled to Both Pre- and Post-Award Interest Under the Full Reparation Standard
B. Worth Capital Is Entitled to Compensation for All of Its Losses Resulting from Peru's Unlawful Conduct
1. Worth Capital Is Entitled to Compensation for the Loss in Value of Its Investment in Maple Gas
a) Valuation of Block 126
b) Valuation of the Pucallpa Refinery
c) Valuation as of the date of the award
2. Worth Capital Is Entitled to Pre- and Post-Award Interest
VIII. REQUESTED RELIEF
1. This Memorial is submitted on behalf of Worth Capital Holdings 27 LLC ("Worth Capital") against the Republic of Peru in accordance with the Arbitration Rules of the International Centre for Settlement of Investment Disputes and the Tribunal's Procedural Order No. 1 dated 30 September 2021, as amended on 11 March 2022.
2. In accordance with Procedural Order No. 1, Worth Capital is submitting to the Tribunal secretary by e-mail electronic copies of this pleading, the accompanying witness statements and expert reports and the indexes of all supporting documentation attached to the pleading and expert reports. Worth Capital will submit further electronic and hard copies of the submission to the Tribunal secretary, the Tribunal members and the Respondent, as the case may be, in the formats and according to the methods specified in paragraph 13 of Procedural Order No. 1. This Memorial will be accompanied by 187 fact exhibits and 104 legal authorities
3. Peru's breaches of its obligations in this case arise out of the conduct of Petroperú S.A., Peru's State-owned oil company, PERUPETRO S.A., the holder of Peru's sovereign rights over hydrocarbons, and the Ministry of Energy and Mines (the "MINEM") toward Worth Capital's investment, Maple Gas Corporation Del Peru S.R.L. ("Maple Gas"), during the presidency of Pedro Pablo Kuczynski.
4. Maple Gas had been successfully operating in the Ucayali department, a remote region in the Amazon jungle, for more than twenty years, and it had a history of profitable operations.
Maple Gas had the exploration, operation, and extraction rights to a number of local oil fields, and it operated the Pucallpa Refinery, which was the only refinery in the southern Amazon region. The Pucallpa Refinery was the primary supplier of refined products such as gasoline, diesel, and jet fuel to the city of Pucallpa and the rest of the Ucayali region.
5. Mr. Kuczynski, who was a powerful lobbyist, former Minister of Energy and Mines and Minister of Economy and Finance, former Prime Minister, and President of Peru from 2016 to 2018, had a very public dispute with Blue Oil Trading Ltd ("Blue Oil") and the founder of Blue Oil, Matias Rojas, who were among the shareholders who took over Maple Gas in October (referred to collectively below as the "Blue Oil Investment Group").
6. Both as President and in his prior governmental roles, Mr. Kuczynski had a history of political interference in the governance and decision-making of Petroperú and PERUPETRO.
Among other examples, Mr. Kuczynski blocked appointments to Petroperú that were politically inconvenient for him and has been repeatedly criticized for approving licenses issued by PERUPETRO for oil concessions without any public bidding process, including where he was linked to the party involved. This interference was facilitated by the control the government exercises over both State-owned entities through the composition of their governing bodies, and also reflects the historical practice in Peru of inappropriate governmental influence over decisions by Petroperú and PERUPETRO. Mr. Kuczynski was ultimately forced out of office in
a) Valuation of Block
570. Hidrocarburos is a preeminent Peruvian consulting firm that specializes in preparing integrated geological and petroleum engineering studies for the exploration and exploitation of oil and gas. It has specific expertise in the Amazon region of Peru, and undertook a geological study of Block 126 for Maple Gas in 2017 (the "2017 Study") as part of Maple Gas's due diligence before entering into the farmout agreement with Frontera.732 That 2017 study estimated the volume of contingent resources (oil potentially recoverable from a known oil deposit) in Block 126. Hidrocarburos was able to build on the 2017 Study to estimate production profiles for Block 126.
571. Hidrocarburos considered production profiles for three scenarios considered in the Study: the P90 scenario (most conservative); the P50 scenario (most probable); and the P10 scenario (most optimistic). Consistent with industry practice, it chose the P50 production profile to value Block 126
572. In the P50 scenario, 64 million barrels of oil are estimated to be in place, and 9.7 million barrels can be recovered taking into account risk factors.734 Hidrocarburos estimated the annual production volume at which these 9.7 million barrels would be produced. This production volume is shown below.
573. Next, Hidrocarburos estimated future revenues from the sale of this production. As noted above, the revenues from the sale of these barrels of crude were based on a forecast of Brent prices. Hidrocarburos estimated future revenues to be $550.6 million
574. The production of these 9.7 million barrels would require an investment of $79.6 million.
This investment includes the rehabilitation of the Sheshea 1X well, and the drilling of five new wells. It also includes the pavement of a road from the wells to the Ucayali River and an initial seismic study, which would permit more efficient placement of those wells and maximize recovery
575. In addition to the investments described above, Hidrocarburos considered the operating costs of producing these estimated volumes. These costs include fixed costs, such as payment of personnel, and variable costs per barrel, such as extraction (lifting) costs for the transportation by road from the field to the Ucayali River and by barge to the Pucallpa Refinery. Hidrocarburos estimated fixed costs on the basis of Maple's existing cost structure for its existing oil operations, and the variable costs based on Hidrocarburos' experience and data from analogous fields.
Hidrocarburos also took into account applicable taxes and royalties
576. Taking into account the estimated future revenues and deducting the above investment and operating costs, taxes and royalties, Hidrocarburos calculated the free cash flows for Block 126, totaling $209.8 million. These cash flows are shown in the figure below.
577. The net cash flows shown above were discounted using a 10% discount rate, which is the weighted average cost of capital (WACC) that Hidrocarburos calculated for a project like Block 126. Based on these discounted cash flows, Hidrocarburos calculated the net present value of Block 126 to be $99 million
b) Valuation of the Pucallpa Refinery
578. Compass Lexecon is one of the world's leading economic consulting firms, with extensive experience in preparing valuation reports. Compass Lexecon calculated the future cash flows of the Pucallpa Refinery starting in 2017 based on projections of the Refinery's sale of refined products.739 These projections are based on the capacity of the Refinery, the feedstock the Refinery would have had available absent Peru's breaches of the Treaty, and analyses by Maple Gas in 2016 and 2017 regarding the yield of products for each type of feedstock
579. Absent Petroperú's breaches, Maple Gas would have been able to access feedstock from Aguaytía Energy and CEPSA. These sources would have allowed Maple Gas to operate the Refinery at capacity even before production from Block 126 began. Given the feedstock available, Maple Gas would have operated the Refinery at capacity every year until the lease expired in March 2024, as shown in the figure below.
580. This mixture of feedstock would have produced the refined products shown below.
581. The price forecast used by Compass Lexecon for these resulting products is based on Maple Gas's actual average sales prices for each product in 2017. Using these actual prices, Compass Lexecon computed the spread (i.e., the difference in dollars per barrel terms) over the 2017 average price of Brent. Compass Lexecon assumed that this spread would remain constant in real terms in future years and was therefore able to calculate the prices of these products in the future based on the Brent forecast referenced above. Compass Lexecon then calculated the Refinery's revenues each year based on the production in terms of barrels multiplied by the price per barrel for that year
582. To calculate the cash flow resulting from these revenues Compass Lexecon subtracted the cost of goods sold. This included the cost of the feedstock and additives and operating expenses.
Compass Lexecon made additional adjustments to take into account Maple Gas's operating expenses, yearly capital expenditures, taxes and working capital needs.742 The resulting cash flows totalled $54.8 million and are shown in the graph below.
583. Compass Lexecon discounted these cash flows by using the appropriate WACC, which Compass Lexecon calculated as 7.9%.743 Applying this discount rate to the free cash flows results in a valuation of the Pacullpa Refinery of $44.7 million. This value is reduced to $37 million after deducting Maple Gas's debts to third parties
c) Valuation as of the date of the award
584. As has been recognized by tribunals in investment cases, when a State unlawfully expropriates an investor's asset, the investor has a choice of claiming compensation based on the value of the asset at the date of expropriation and the value of the asset as of the date of the award.745 The valuation at the time of the award is not limited to information available as of the date of the expropriation but instead takes into account relevant events, such as actual prices of oil, that have occurred up to the date of the award. While this is a different model than the model used by Hidrocarburos and Compass Lexecon, as a proxy, Maple Gas requested that the experts consider the effect on their valuation model of using actual Brent prices until today and forecasted Brent prices going forward.
585. Using these prices materially affects the valuation of Block 126 and, to a lesser extent, of the Pucallpa Refinery. The value of the Pucallpa Refinery increases to $40.5 million as of today.
The value of Block 126 increases to $113.7 million as of today. These changes in the valuation show that the value of the Refinery and Block 126 on the date of the award may be higher than that calculated by the experts with expectations of Brent prices as of 31 December 2017.
Accordingly, Worth Capital reserves its right to choose a valuation as of the date of the award.
2. Worth Capital Is Entitled to Pre- and Post-Award Interest
586. As explained above, the full reparation standard requires that Worth Capital receive pre- and post-award interest in order to restore it to the position it would have been in absent Peru's unlawful actions. Compass Lexecon has calculated Worth Capital's damages as of the valuation date of 31 December 2017. Thus, to be made whole, Worth Capital must be compensated for the delay in receiving these funds, i.e., the delay from 31 December 2017 until the date damages will be awarded in this arbitration.
587. The appropriate pre-award and post-award interest rate in this case is a commercial rate, i.e., the rates paid by corporations to obtain debt financing in the market. Since, the Refinery is in Peru, the cost of debt of the Refinery is an appropriate indication of what a reasonable commercial rate is in this case.746 Tribunals have recognized the appropriateness of pre-tax cost of debt as the rate for pre-award interest
588. Compass Lexecon has calculated the relevant pre-tax cost of debt as of December as 6.1%. This rate is consistent with a prejudgment interest based on LIBOR+4%.748 This interest rate must be compounded to ensure full reparation for Worth Capital's losses. Compound interest "is based on the economic principle that interest proceeds can be reinvested at the prevailing interest rate."749
589. Both experts used 6.1%, compounded annually, to calculate pre-award interest. Pre- award interest on $136.3 million (the combined value of the Refinery and Block 126 as of December 2017) totals $39.3 million as of today
590. As a result of Peru's unlawful actions, Worth Capital has suffered significant losses. To ensure full reparation for Peru's unlawful measures, Worth Capital is entitled to total damages of $136.3 million, plus pre-award interest calculated as of the date of the award, as well as post- award interest.
VIII. REQUESTED RELIEF
591. For the reasons outlined above, Worth Capital respectfully requests an award:
a. declaring that Peru failed to accord the minimum standard of treatment to Worth Capital's investment in breach of Article 10.5 of the Treaty;
b. declaring that Peru expropriated Worth Capital's investment in breach of Article 10.7 of the Treaty;
c. directing Peru to make full reparation to Worth Capital for any and all losses resulting from Peru's breaches of the Treaty, currently quantified at $136.3 million, plus interest;
d. directing Peru to pay to Worth Capital costs associated with this arbitration;
e. directing Peru to pay pre-award and post-award interest on all sums due, at a rate of 6.1%; and
f. granting such additional and other relief as may be just.