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The New York Times

The New York Times

BUSINESS

Oil Companies File Arbitration Against Yemen
By ERIC O’KEEFE
Published: November 24, 2005

Two United States oil companies, taking an unusual tack, filed arbitration proceedings this week against the government of Yemen for expropriating an oil-producing block with output worth more than $1 billion a year.

A venture owned by the Hunt Oil Company and Exxon Mobil sought arbitration before the International Chamber of Commerce in Paris, a rare instance of oil companies taking action in an international forum against a sovereign nation.

Last week, the Yemeni government said that a government-owned company would replace the American companies' venture, the Yemen Exploration and Production Company, or Y.E.P.C., as the operator of the area, known as Block 18.

"Unfortunately, Y.E.P.C. is now forced to respond to the Yemen government's failure to honor the sanctity of our legal contract by filing this arbitration," Ray L. Hunt, chief executive of Hunt Oil, said in a statement.

Sarah Tays, a spokeswoman for Exxon Mobil, said in a phone conversation from Austin, Tex., that "Exxon Mobil supports the position of Hunt Oil as the operator of Block 18."

At Yemen's embassy in Washington, Mohammed al-Basha, a spokesman, was not available for comment Wednesday. But on the Yemen News Agency, Prime Minister Abd al-Qadir Ba Jamal said last week that the government company would run the block for the next 20 years.

The partnership and Yemen entered into a 20-year production-sharing agreement in 1982, Hunt Oil said. Two years later, the venture discovered the country's first oil reserves of commercial significance.

A five-year extension to the original agreement was signed in 2004, but the Yemeni Parliament rejected that agreement in April, according to Dow Jones news wires. Hunt Oil, however, contends that the agreement went into effect Nov. 15, the day that its venture was replaced.

"Since 2004, Y.E.P.C. has invested millions of dollars at the direction of the Yemeni government," said Michael Goldberg, a partner in the Houston law firm of Baker Botts, which is representing the venture. "Up until Nov. 15, we fully expected that they would honor the contract. The government of Yemen had no right to take over this operation, and although we did not want to file an arbitration, they gave us no choice."

The Yemeni decision to replace the Hunt venture with a government-owned company may be linked to the recent surge in oil prices. With production averaging over 75,000 barrels a day, revenues from Block 18 would total $1.6 billion a year, at $58.71 a barrel, Wednesday's closing price on the New York Mercantile Exchange.

"The present oil price climate can put tremendous political pressure on more populist governments with regard to foreign investors," said James Loftis, a partner at the firm of Vinson & Elkins in Houston. "We've seen that recently in Bolivia and Venezuela, among others, and it may be the reason in Yemen."

Mr. Loftis is also the United States delegate to the International Chamber of Commerce's Commission on Arbitration.

A decision on an award by the International Chamber of Commerce's tribunal is expected late next year or in 2007. The rise in the number of arbitration cases by private companies against sovereign nations is a recent phenomenon, he said.

"For most of the modern period, it was rare for a private investor to seek arbitration directly with the state, usually because they had no right to do so," Mr. Loftis said.

Even so, although there are hundreds of cases in international arbitration, only a small portion of those are against sovereign nations, and a minuscule part involve oil, a commodity in the ground that a company cannot easily walk away from.