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INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT
DISPUTES
ICSID CASE NO. ARB/21/51
BETWEEN:
| DISCOVERY GLOBAL LLC | Claimant |
| -v- | |
| THE SLOVAK REPUBLIC | Respondent |
30 September 2022
Members of the Tribunal:
Professor Gabrielle Kaufmann-Kohler, President of the Tribunal
Mr Stephen L. Drymer, Arbitrator
Professor Philippe Sands KC, Arbitrator
Secretary of the Tribunal: Ms Jara Minguez Almeida
Assistant to the Tribunal: Dr Magnus Jesko Langer
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1. This Memorial is submitted by the Claimant, Discovery Global LLC ("Discovery"), pursuant to the procedural timetable set out in Annex B of Procedural Order No. 1 (as amended), and sets out Discovery's claim against the Respondent, the Slovak Republic.
2. In brief summary:
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* * *
3. This Memorial is submitted on behalf of Discovery and is accompanied by:
1 Exhibits C-1 to C-26 were filed with the Claimant's Request for Arbitration. ↩
2 Exhibits CL-1 to CL-11 were filed the Claimant's letter dated 5 April 2022. ↩
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and then separately for both oil and gas, generate representative most-likely production profiles for the prospects in the Licence areas and outline a feasible development scheme.
(Atkinson 1, Moy 1 and Howard 1 are collectively referred to as the “Rockflow Expert Reports”)
4. This Memorial is structured as follows:
* * *
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6. For many decades, oil and gas have both been major energy sources in the Slovak Republic,³ the vast majority of which is imported from the Russian Federation. As a result, the issue of energy security has been high on the domestic policy agenda in the Slovak Republic for many decades.
7. For example, a 2012 report issued by the International Energy Agency ("IEA") stated as follows:⁴
"Because of high dependence on oil and gas imports, energy security is very high on the policy agenda in the Slovak Republic. Natural gas is currently the most significant energy source, accounting for about 30% of the country's primary energy supply. [...]
Energy policy is also driven by high dependence on energy imports from Russia. Gas imports from Russia are 98% of consumption and oil imports, 99%. The government is aware of inherent risks of such dependence and energy security is a dominant theme of Slovak energy policy.”
8. The Slovak Republic's desire to diversify its energy supplies, reduce its dependence on Russian imports and improve its energy security was acknowledged in successive energy policies adopted by the Slovak Government from at least 2006 onwards. For example:
3 Exhibit C-208. ↩
4 Exhibit C-203, p. 11 and p. 26. See also Exhibit C-183, p. 13, p. 31 and p. 44. ↩
5 Exhibit C-63, p. 9. ↩
6 Exhibit C-63, p. 9. ↩
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"Thanks to major investments made by private companies into geological research, new gas reserves have been discovered and opened, which has helped to stabilise overall gas extraction in recent years. [...]
The future of gas extraction efforts in Slovakia depends on the verification of new exploration concepts (deep exploration) that are financially intensive and associated with significant geological and technical risks. The feasibility of such projects fully depends on the clarity provided in geological and mining legislation and on the enforcement of exploration rights on the basis of this legislation.”
9. Successive reports issued by the European Commission reached substantially the same conclusions as the Slovak Government's own energy policies. For example, a 2013 report by the European Commission stated that "Slovakia has an import dependency which is ten points above the EU average [...] the high import dependency for gas and oil gives rise to some concerns because it is combined with a very limited pool of import sources, mainly non-EEA countries”. The same report concluded that:¹⁰
“Slovakia is among the most vulnerable Member States as far as energy and carbon intensities are concerned, due to the high share of energy-intensive sectors in the economy and the high energy- and carbon-intensive transport sector."
10. Discovery was one of a few private companies which made a substantial investment from 2014 onwards to assist Slovakia to achieve its stated goal of diversifying its primary energy sources and increasing domestic supplies
7 Exhibit C-63, p. 23. The 2014 Energy Policy was subsequently approved by the Slovak
Government on 30 October 2014: see https://rokovania.gov.sk/RVL/Material/11327/1 ↩
8 Exhibit C-63, p. 23. ↩
9 Exhibit C-63, p. 56. ↩
10 Exhibit C-48, p. 259. ↩
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of oil and gas. As Discovery pointed out in a contemporaneous presentation, “Slovakia's heavy dependence on imported hydrocarbons is a cause of concern to Brussels [...] Slovakia thus has a strong incentive to develop domestic sources of hydrocarbons where possible”.¹¹
11. Discovery invested based on specific commitments contained (inter alia) in exploration licences (described below). Slovakia subsequently acted in breach of the obligations it owed to Discovery under the BIT by consistently thwarting Discovery's attempts to explore for oil and gas from 2015 onwards. By so doing, Slovakia (i) prevented Discovery from reaping the benefits of the substantial investment it had made and (ii) ultimately destroyed the value of its investment.
12. The domestic oil and gas sector in Slovakia is dominated by entities which are ultimately owned by the Slovak Republic. There are two key players in the domestic oil and gas market: Slovenský Plynárenský Priemysel a.s. (“SPP”) and NAFTA a.s. (“NAFTA”).
13. SPP has been the leading domestic supplier and importer of natural gas in Slovakia for many decades. SPP is 100% owned by the Slovak Republic.¹² SPP holds a 56.15% stake in NAFTA. The remaining 40.45% stake in NAFTA is held by Czech Gas Holding Investment BV,¹³ a company which is beneficially owned by Peter Kretinsky, a Czech billionaire.¹⁴
11 Exhibit C-178, p. 15. ↩
12 Exhibit C-54, p. 5. ↩
13 Exhibit C-226. ↩
14 Exhibit C-202. ↩
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14. NAFTA has a long history of oil and gas exploration and production in the Slovak Republic. NAFTA describes itself as “the most important player in Slovakia's oil and gas exploration and production sector”.¹⁵
15. NAFTA (together with its partners) holds exploration and production licences issued by the Slovak Ministry of Environment¹⁶ (“MoE”) in western and eastern Slovakia. The exploration licences held by NAFTA (and its partners) cover an area of some 3,040 km², as shown in the following map:¹⁷
[Image of a map of Slovakia showing exploration licenses]
| NAFTA IN SLOVAKIA Exploration licences obtained in Slovakia |
|
| Legend: | |
| ■ | NAFTA |
| ■ | NAFTA & Vermilion Energy |
| ■ | Slovakian Horizon Energy |
16. Pursuant to exploration licences, NAFTA and other entities had successfully drilled thousands of exploration wells across Slovakia without any environmental problems having been identified by the MoE (see further at [179] below). Yet when Discovery (via its subsidiary) attempted to drill its own exploration wells, Slovakia consistently prevented Discovery from doing so, as explained in further detail below.
15 Exhibit C-210. ↩
16 In Slovak: Ministerstvo životného protredia. ↩
17 Exhibit C-209, p. 26 and p. 30. ↩
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17. Discovery is a privately held company incorporated in the State of Texas, USA which operates in the oil and gas sector.¹⁸ Discovery is solely owned by its President and CEO, Michael P. Lewis, who has extensive experience in the oil and gas sector. From 1979 to 1996, he developed numerous conventional oil and gas prospects in Texas and the Midcontinental areas of the U.S., managing all aspects of exploration and development. From 1996 to 2004, he was responsible for the initiation and development of the highly successful unconventional Middle Bakken Play in Montana; from 2004 to 2008 he developed numerous prospects for Brigham Exploration and others in the Middle Bakken Play. In Europe, as Chief Geologist for 3Legs Resources plc from 2007 to 2012, he developed and operated the first four shale gas exploration wells in Poland, in conjunction with ConocoPhillips.¹⁹
18. In 2012-2013, Mr Lewis began to investigate further oil and gas opportunities in southern Poland as well as Slovakia.²⁰ In particular, Mr Lewis identified that an Irish-based company— San Leon Energy plc, listed on the AIM market in London (“San Leon”)—held oil and gas exploration licences in northern Slovakia as a result of its recent acquisition of an English publicly-listed company Aurelian Oil & Gas plc, later renamed Aurelian Oil & Gas Limited (“Aurelian”).²¹ The licences, which were held through a local subsidiary, Aurelian Oil and Gas Slovakia s.r.o., had been granted to Aurelian by the MoE in 2006 and they were subsequently extended, as explained below.
18 Exhibit C-28. ↩
19 Lewis 1 at [8]. ↩
20 Lewis 1 at [11]. ↩
21 Lewis 1 at [14]. ↩
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19. The exploration licences granted and extended by the MoE from 2006 onwards are referred to collectively in this Memorial as the “Licences”. In the following sections, Discovery explains:
20. In 2006, the MoE granted Aurelian its first set of exploration Licences pursuant to Act No. 313/1999 (the “Old Geology Act").²² From 2010 onwards, the Licences were extended by the MoE pursuant to Act No. 569/2007 (the "Geology Act"),²³ which replaced the Old Geology Act. At the time of the key events in this arbitration, the Geology Act was in force.
21. The Geology Act was designed to encourage oil and gas exploration within the Slovak Republic under exploration licences granted by the MoE. The Geology Act established a clear legislative framework which set out (inter alia) (i) the conditions for performing geological works in Slovakia, (ii) the design and evaluation of those geological works, (iii) the areas in which geological works may be carried out, and (iv) the grant of compulsory access orders over land in order to carry out geological works.
22. As to (i), geological works can be carried out by a “contractor of geological works” which includes a “legal person holding a geological licence”.²⁴ A
22 Exhibit C-217. ↩
23 Exhibits C-218 and C-219. Exhibit C-218 is the Geology Act as in force from 1 November
2009, while Exhibit C-219 is a slightly amended version in force from 1 November 2013.
For the purposes of this section, the latter is used being the legislation in force at the time of
Discovery's acquisition of AOG, as set out below. ↩
24 Exhibit C-219, Geology Act, §4(1)(a). ↩
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geological licence is issued by the MoE upon an application submitted by the contractor.²⁵
23. As to (ii), a contractor of geological works is responsible for designing and evaluating the “geological task” namely the “subject-matter, local and temporal definition of a range of questions that convey an economic, scientific or technical objective of the task”.²⁶ In particular:
25 Exhibit C-219, Geology Act, §§5-6. ↩
26 Exhibit C-219, Geology Act, §11. ↩
27 Exhibit C-219, Geology Act, §12(1). ↩
28 Exhibit C-219, Geology Act, §14(1) and §14(2). ↩
29 Exhibit C-219, Geology Act, §16(1), §16(2) and §16(3). ↩
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24. As to (iii), the MoE determines the areas in which geological exploration for oil and natural gas may be carried out by granting exploration licences.³¹ In particular:
30 Exhibit C-219, Geology Act, §19(1). ↩
31 Exhibit C-219, Geology Act, §24(1). ↩
32 Exhibit C-219, Geology Act, §24(1)-(8). ↩
33 Exhibit C-219, Geology Act, §24(8). ↩
34 Exhibit C-219, Geology Act, §24(10)-(11). ↩
35 Exhibit C-219, Geology Act, §25(1). ↩
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25. As to (iv), the Geology Act established a mechanism to enable a contractor to apply to the MoE in order to obtain a compulsory access order (also known as a §29 order) over land in order to carry out geological works in the public interest³⁶ if the owner of the land does not agree on the scope, method and duration of the proposed geological works. When an application for a §29 order is made, “a decision shall be taken by the Ministry on request filed by the geological contractor”.³⁷
26. An important feature of the legislative scheme is that §24(2) of the Mining Act (as defined below) and §25(2) of the Geology Act grant the licence holder a pre-emptive right to move from exploration to production of hydrocarbons, i.e. to apply for the designation of a mining area: see further at [30]-[32].
27. By the Geology Act, the Slovak Republic implemented Directive 94/22/EC of the European Parliament and Council on the conditions for granting and using authorizations for the prospection, exploration and production of hydrocarbons (“Directive 94/22/EC").³⁸
28. The recitals to Directive 94/22/EC recorded (inter alia) as follows:
36 Exhibit C-219, Geology Act, §29(1). ↩
37 Exhibit C-219, Geology Act, §29(4). ↩
38 Exhibit C-27; Exhibit C-219, Geology Act, §46 (adopting the legally binding acts listed in
Annex 2, which includes Directive 94/22/EC). ↩
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29. The Geology Act set up the rules which were applicable in the Slovak Republic for granting authorisations for the exploration of hydrocarbons. The objectives of Directive 94/22/EC (i.e. to reduce dependence on imports of hydrocarbons by diversifying domestic supplies of energy) were fully consistent with the objectives established in the domestic energy policies adopted by the Slovak Government from at least 2006 onwards: see [8] above.
30. In order to extract any hydrocarbons which are discovered under an exploration licence, the holder of an exploration licence must apply for and obtain a further licence, a “Mining Area Licence", pursuant to Act No. 44/1988 (the "Mining Act").³⁹
31. Slovak law confers a priority right to the holder of an exploration licence to apply for a Mining Area Licence, in recognition of the costs and risks
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associated with carrying out exploration activities under an exploration licence. In this regard:
32. The Main Mining Office is an agency integrated into the structure of the Ministry of Economy of the Slovak Republic. There are five District Mining Offices located in cities across the Slovak Republic.⁴³
33. In July 2006, the MoE granted three exploration licences to Aurelian to explore for crude oil and natural gas in three specified blocks located in the Prešov region in northern Slovakia, namely:⁴⁴
40 Exhibit C-219, Geology Act, §25(2). ↩
41 Exhibit C-216, Mining Act, §24(2). ↩
42 Exhibit C-216, Mining Act, §24(3). ↩
43 Exhibit C-29. ↩
44 Exhibit C-2 (Svidník); Exhibit C-3 (Medzilaborce); Exhibit C-4 (Snina). ↩
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(together, the “2006 Licences").
34. The express terms of the 2006 Licences were materially identical. They recorded that the MoE had issued the 2006 Licences after having received (i) a written application by Aurelian, (ii) positive responses from other Slovak State organs, and (iii) further comments from Aurelian at an oral hearing.
35. The 2006 Licences identified Aurelian as the “holder of the exploration area" and stated that the holder “[w]ill carry out the geological works in accordance with the project of geological work, which has to be worked out in accordance with the [Geology Act] and other legal regulations” (condition no. 1).⁴⁵ The 2006 Licences were issued for an (initial) period of four years and obliged the holder to pay an annual licence fee to the Slovak Republic. Furthermore, it is Discovery's understanding that a portion of those funds is then allocated to the local communities. In particular, section 26(4) of the Geology Act provides that the municipality or municipalities in which the exploration area is located receives or receive 50%. (Where the area covers more than one municipality, this is shared in accordance with their size.)
36. The three blocks covered by the 2006 Licences (Svidník, Medzilaborce and Snina) were located near the Carpathian mountain range which runs from the Czech Republic, through southern Poland and northern Slovakia, and into Ukraine and Romania.⁴⁶ The areas surrounding the Carpathians have a long history of oil and gas production, dating back to the late 19th century.⁴⁷
45 Exhibit C-2, p. 5; Exhibit C-3, p. 5; Exhibit C-4, p. 4. ↩
46 Lewis 1 at [13]. ↩
47 Lewis 1 at [23(a)]. ↩
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Poland, Ukraine and Romania each have a large number of existing oil and gas fields in the areas surrounding the Carpathians.⁴⁸
37. Between the 1890s and 1990s, a number of exploration wells had been drilled on the blocks covered by the 2006 Licences. These wells had reported strong showings of oil and gas.⁴⁹ The following diagram shows the location of the Svidník, Medzilaborce and Snina blocks (circled in blue), the existing gas fields (shown in red) and the existing oil fields (shown in green) located in neighbouring Poland, Ukraine and the Czech Republic:⁵⁰
[Image of a map of Poland, Slovakia and surrounding areas showing oil and gas fields and exploration blocks]
38. Between 2008 and 2011, Aurelian (i) carried out exploration activities in each block covered by the 2006 Licences, including by obtaining some 770 km of 2D seismic data,⁵¹ (ii) carried out geological fieldwork and analysis
48 Exhibit C-39, pp. 4-18; Exhibit C-159, pp. 3-7. ↩
49 Lewis 1 at [23(d)] and [23(e)]. See also Exhibit C-53, pp. 54-59 (referring to the Mikova
Oil Field situated in the Medzilaborce block). ↩
50 Exhibit C-39, p. 5. ↩
51 Lewis 1 at [24]. ↩
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in each block,⁵² (iii) submitted annual reports to the MoE describing its exploration activities, and (iv) paid substantial annual licence fees to the Slovak Republic.
39. In 2008, two important players in the international oil and gas sector joined Aurelian as joint venture (“JV”) partners in the quest to explore for oil and gas deposits in Slovakia, namely:
40. The decision by each of JKX and Romgaz to join Aurelian as a JV partner was effected by two separate Farm-In Agreements (“FIAs”) concluded in April and June 2008:
52 See e.g. the summary of the work carried out by Aurelian between 2006-2010 in Exhibit C-
40, p. 27. ↩
53 For relevant background on JKX, see C-042. ↩
54 Exhibit C-211. ↩
55 Namely Radusa Oil & Gas s.r.o (for Svidník), Magura Oil & Gas, s.r.o (for Medzilaborce)
and Dukla Oil & Gas, s.r.o (for Snina). The 2006 Licences were transferred to these three
operating subsidiaries by resolutions issued by the MoE in 2007. ↩
56 [Redacted] ↩
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41. The acquisition by each of JKX and Romgaz of a 25% interest in the 2006 Licences was later confirmed by the MoE and reported in each of the annual reports submitted by Aurelian to the MoE from 2008 onwards.⁵⁸ As a result, from 2008 onwards, Aurelian held a 50% interest in the Licences; JKX and Romgaz held the remaining 50% interest in equal shares.
42. In July 2010, a new Slovak entity called Aurelian Oil & Gas Slovakia s.r.o. (“AOG”) was incorporated. Slovak limited liability companies do not issue shares; instead, they issue participation interests to their owners. AOG's participation interests were held solely by Aurelian and a related company (AOG Finance Ltd).⁵⁹
43. On 20 July 2010, AOG entered into a Merger Agreement with Aurelian's operating subsidiaries in Slovakia pursuant to which AOG (as the successor company) merged with each of those operating subsidiaries. Following the conclusion of the Merger Agreement, the operating subsidiaries were wound up and ceased to exist.⁶⁰ Thereafter, AOG (together with JKX and Romgaz) became the entity which held the exploration rights under the Licences.
44. On 26 July 2010, following an application submitted by Aurelian/AOG, the MoE extended the 2006 Licences for a further term of four years each until
57 [Redacted] ↩
58 See e.g. Exhibit C-36 . ↩
59 Exhibit C-34. ↩
60 Exhibit C-33. ↩
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2014 (the "2010 Licences”). The express terms of the 2010 Licences were materially identical. They identified AOG, JKX and Romgaz as a “group of permit holders”. They stated (inter alia) that:⁶¹
45. The 2010 Licences also obliged the permit holders to pay annual licence fees to the Slovak Republic. Following the grant of the 2010 Licences, AOG, JKX and Romgaz continued to (i) carry out exploration activities and geological fieldwork in each of the blocks,⁶² (ii) submit annual reports to the MoE, and (iii) pay substantial annual licence fees to the Slovak Republic.
46. On 25 January 2013, San Leon acquired Aurelian for a total price of €62m.⁶³ Between the date of this transaction and the date of Discovery's subsequent acquisition of AOG in 2014 (see below), Aurelian and AOG Finance Ltd continued to hold the entirety of the participation interests in AOG.
47. In late 2013, as part of its desire to expand into the oil and gas sector in Central Europe (see [18] above), Mr Lewis entered into negotiations with San Leon to acquire AOG.
61 Exhibit C-5; Exhibit C-6; Exhibit C-7. ↩
62 See e.g. C-45. ↩
63 C-228, p. 83. ↩
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48. In September 2013, an affiliate of Discovery entered into a Confidentiality Agreement with San Leon and obtained access to certain information relating to AOG's interests in the Svidník, Medzilaborce and Snina blocks (including the Licences and certain geological data).⁶⁴
49. Thereafter, Mr Lewis and his team carried out a detailed assessment of the information provided by San Leon. Mr Lewis concluded that the geological data was promising, and he identified the prospects which he thought were “worth spending money on to refine and develop the data further for the purpose of identifying and prioritising well drilling locations”.⁶⁵
50. On 1 December 2013, Discovery and San Leon entered into a Non-Binding Letter of Intent (“LOI”).⁶⁶ The LOI set out the terms upon which Discovery would acquire AOG. The transaction was subject to various conditions, including obtaining written confirmation from JKX and Romgaz (who were described in the LOI as the “JV Partners") waiving their right of first refusal to acquire AOG's interest in the Licences.
51. On 3 and 9 December 2013, JKX and Romgaz (respectively) informed San Leon that they did not wish to acquire AOG's interest in the Licences.⁶⁷ Discovery therefore had a clear path to acquire AOG.
52. On 24 March 2014, Aurelian and AOG Finance Ltd (as “Sellers”) entered into a Sale and Purchase Agreement (“SPA”) with Discovery (as the “Buyer”). The SPA recorded (inter alia) that:⁶⁸
64 C-49. ↩
65 Lewis 1 at [25]. ↩
66 C-50. ↩
67 Exhibit C-51; Exhibit C-52. ↩
68 Exhibit C-56. ↩
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53. On 24 March 2014, Aurelian and AOG Finance Limited (as “Transferors") entered into an Agreement on Transfer of Participation Interests (“ATPI") with Discovery (as “Transferee”). The ATPI recorded (inter alia) that:⁶⁹
54. On 24 March 2014, the consideration payable under the SPA (€153,054.50) was paid to Aurelian and the transaction was completed.
55. As a result of this transaction (i) Discovery became the sole owner of AOG and (ii) Discovery (via AOG) held a 50% interest in the Licences. The remaining 50% interest in the Licences was held by JKX and Romgaz in equal shares.
56. In April 2014, AOG changed its name to Alpine Oil & Gas Slovakia s.r.o.⁷⁰
57. Following the acquisition of AOG, Discovery/AOG undertook a significant amount of work (i) reviewing and reworking the exploration data which Aurelian/AOG had already obtained, and (ii) devising a strategy for future exploration activities on the three blocks covered by the Licences. It also acquired, processed and interpreted MT surveys.⁷¹
69 Exhibit C-55. ↩
70 Exhibit C-236. ↩
71 Lewis 1 [47]; Fraser 1 [21]. ↩
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58. In March 2014, Discovery/AOG prepared a presentation to discuss with JKX and Romgaz. This presentation described a “[n]ew exploration concept” consisting of the use of magneto-telluric (“MT”) surveys.⁷² MT surveys involve the non-invasive use of magnetic and electric frequencies to identify oil and gas reservoirs.⁷³ Mr Lewis had successfully used MT surveys in previous projects. He was confident that they could be used in the Slovak Republic to successfully identify suitable prospects for exploration drilling.⁷⁴
59. On 10 April 2014, Mr Lewis met with representatives of San Leon, JKX and Romgaz as part of a hand-over meeting following the completion of Discovery's acquisition of AOG in March 2014. At this meeting, the parties:⁷⁵
60. On 10 July 2014, and following an application submitted by AOG, the MoE granted further extensions to each of the Licences for further terms of two years (the "2014 Licences”). The 2014 Licences identified AOG, JKX and Romgaz as the “holders of the Exploration Area”.
72 Exhibit C-53. ↩
73 Lewis 1 at [27]. ↩
74 Lewis 1 at [27]. ↩
75 Exhibit C-58. ↩
76 All three areas had already been reduced in 2013. ↩
77 Exhibit C-57. ↩
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61. The terms of the 2014 Licences were materially identical. They provided (inter alia) that:⁷⁸
78 Exhibit C-8; Exhibit C-9; Exhibit C-10. ↩
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62. The 2014 Licences obliged the permit holders to pay an annual licence fee to the Slovak Republic and to submit annual reports to the MoE.
63. Following the grant of the 2014 Licences, Discovery/AOG undertook a significant amount of work and effort:⁷⁹
79 Lewis 1 at [24]-[29]; Fraser 1 at [21]; Exhibit C-62; Exhibit C-61. ↩
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64. Discovery/AOG also assembled a team of highly experienced staff and contractors, including Mr Lewis (as Discovery/AOG's President), Ron Crow (AOG's Chief Operating Officer), Alex Fraser (Discovery/AOG's Chief Financial Officer), Stanislav Benada (AOG's Country Manager who had been working on the project for Aurelian/AOG since 2006), Maciej Karabin (AOG's Project Manager/Engineering Geologist), Łukasz Sopel (AOG's Team Geologist) and others.
65. What is more, AOG continued to pay substantial annual licence fees to the Slovak Republic and submitted detailed annual reports to the MoE describing (i) the activities it had performed in respect of each block in each year from 2014 onwards, and (ii) the substantial expenditures which had been incurred in connection with those activities on an annual basis.
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66. In a report dated 24 June 2015 addressed to AOG's JV partners (JXK and Romgaz) Mr Lewis set out an estimated timeline for AOG to drill three exploration wells, namely:⁸⁰
67. By 25 August 2015, AOG had submitted a Detailed Drilling Program for all three exploratory wells to the Mining Authority for review.⁸²
68. By November 2015, AOG had prepared the following documents for each exploratory well:
69. By December 2015, AOG, JKX and Romgaz had settled on a firm plan to drill the three exploratory wells identified at [66] above.⁸⁶ Based on the detailed geological analysis carried out over the preceding months,
80 Exhibit C-78. ↩
81 Prior to 2015, this proposed well was referred to as "Stromy-1": see Fraser 1 at [22]. ↩
82 Exhibit C-79. ↩
83 Exhibit C-88 (Smilno 1); Exhibit C-83 (Poruba 1); Exhibit C-82 (Krivá Ol'ka-1). ↩
84 Exhibit C-95 (Smilno-1); Exhibit C-91 (Krivá Ol'ka-1); Exhibit C-94 (Poruba-1). ↩
85 Exhibit C-86 (Smilno-1); Exhibit C-85 (Krivá Ol'ka-1); Exhibit C-98 (Poruba-1). ↩
86 Exhibit C-80; Exhibit C-81; Exhibit C-87; Exhibit C-100; Exhibit C-101. ↩
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Discovery/AOG anticipated that (i) the Smilno well would predominantly produce gas, and (ii) the Krivá Ol'ka and Ruská Poruba wells would predominantly produce oil.⁸⁷
70. The Project of Geological Works and Detailed Drilling Program which AOG had prepared for each well described in great detail the process that AOG would follow when drilling each of the exploratory wells.
71. Each Detailed Drilling Program recorded (inter alia) that:⁸⁸
72. Despite having secured the necessary Licences and prepared and submitted the Detailed Drilling Plans, organs of the Slovak Republic prevented AOG from drilling any of the three exploratory wells referred to at [66] above. In particular, as explained below, the Slovak Republic prevented AOG from:
87 Exhibit C-80, p. 82. ↩
88 Exhibit C-95 (Smilno-1); Exhibit C-91 (Krivá Ol'ka-1); Exhibit C-94 (Poruba-1). ↩
89 Igor Melus is a well engineer from eastern Slovakia. ↩
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73. These are the three key events which give rise to Discovery's claims in this arbitration. The factual background relating to each key event is addressed in turn below. Before doing so, it is necessary to consider the MoE's decision in 2016 to further extend the Licences. This provides the relevant background, against which each of the complaints has to be assessed.
74. In June 2016, following an application submitted by AOG to the MoE which was accompanied by the Detailed Drilling Programs for each exploratory well, the MoE granted extensions to each of the Licences for a further term of five years until August 2021 (the “2016 Licences”).⁹⁰ The express terms of the 2016 Licences were materially identical. In particular:
90 Exhibit C-12; Exhibit C-13; Exhibit C-14. AOG had requested the MoE to modify the Licence area for the Svidník block because MT surveys had indicated "excellent results" in these specific areas, indicating the presence of hydrocarbons: see Exhibit C-128. ↩
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"Whereas the Community largely depends on imports for its hydrocarbon supply; whereas it is consequently advisable to encourage the best possible prospection, exploration and production of the resources located in the Community;"
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under Directive 94/22/EC and that the extension of the Licences would fulfil the objectives set out in Directive 94/22/EC.
75. Importantly, the 2016 Licences did not include a condition requiring AOG to conduct a preliminary EIA prior to drilling any exploration wells.
76. The express terms of the 2016 Licences demonstrate that (i) Slovakia was satisfied with the geological exploration activities AOG had carried out to date, and (ii) Slovakia was eager to approve the extension to enable AOG to complete its geological exploration by 2021 (which included drilling boreholes of up to 1,500m in the exploration wells AOG had identified).
77. In the 2016 Licences, Slovakia also acknowledged that AOG's exploration activities were “beneficial", in that those activities would (i) result in Slovakia gaining valuable knowledge about its territory and the location of hydrocarbons, and (ii) assist Slovakia to achieve its stated policy goal of reducing its reliance on imports of hydrocarbons by encourage domestic exploration of oil and gas deposits. Indeed, these acknowledgements are all the more significant because the protests (described further below) are also mentioned in the very same 2016 Licences.
78. Between December 2015 and November 2016, AOG made three separate attempts to drill an exploration well at the Smilno site which AOG had identified as part of its work program: see [66]-[71] above. As explained below, AOG was prevented from drilling the exploration well by the acts and omissions of Slovakia's organs and agents, including (i) the judiciary, (ii) the Police, (iii) a State Prosecutor, (iv) the Parliament of the Prešov region, and (v) the Ministry of the Interior. Such conduct is attributable to
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Slovakia under international law and placed Slovakia in breach of its obligations towards Discovery under the BIT.
79. The Program of Geological Works for the Smilno well had been prepared by Mr Karabin and Mr Sopel, both of whom worked for AOG.⁹² It explained that "[t]he aim of the planned geological works is to explore and test the potential gas accumulation within the structure called the Smilno tectonic window”. The Program described the basic steps that would be taken during the exploration phase, namely:⁹³
80. The Program acknowledged that the area of planned works was situated “in close proximity to the village Smilno” but that the well site would be “situated near the south east boundary of the village on the crop field”. The Program also stated that “[n]o environmental protected areas are situated within the planned drilling location”.⁹⁴ Discovery/AOG had selected the Smilno well site due to its proximity to existing infrastructure and roads in order to “minimize both costs and environmental impact".⁹⁵
92 Lewis 1 at [53]. ↩
93 Exhibit C-88, pp. 3-4. ↩
94 Exhibit C-88, pp. 15-16. ↩
95 Lewis 1 at [54]. ↩
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81. In June 2015, AOG entered into the necessary leases with the owners of the land on which the Smilno well site was located.⁹⁶ On 4 November 2014, AOG also obtained a permit from the Bardejov District Office (with the consent of the previous lessee, Biodruzstvo Smilno), to enable AOG to use what was otherwise agricultural land for a non-agricultural purpose, i.e. geological exploration.⁹⁷ Moreover, upon an application dated 1 June 2015,⁹⁸ a further permit was issued by the Bardejov District Office for the same purpose on 17 June 2015.⁹⁹ When taken together with the express terms of the Licences, Discovery/AOG therefore had all the necessary permits and approvals from Slovakia to enable it to drill an exploration well at the Smilno site.
82. The Smilno well site was accessible via a road which runs from Smilno village (the "Road”). The following pictures show the location of the well site (the red dot in the first picture) and the location of the Road (the two curved green lines in the second picture):¹⁰⁰
96 Exhibits C-74 and C-76. ↩
97 Exhibits C-64 and C-65. ↩
98 Exhibit C-75. ↩
99 Exhibit C-77 ↩
100 Exhibit C-88, p.18; Exhibit C-227. ↩
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Project of Geological Works AOG Smilno # 1 well November 2015
[Image of an aerial view of a village and surrounding fields, with a marker indicating a well location.]
AOG-Smilno-1 well location
[Image of an aerial view of a village and surrounding fields, with two green lines highlighting a road.]
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83. The Road is situated on a plot of land which is registered on Slovakia's land registry, namely “E” No. 2721/780 (which is co-owned by 166 individual landowners). The same plot is also registered as “C” No. 945, but this plot does not have a title deed.¹⁰¹
84. According to a statement issued by the Smilno municipality on 6 June 2016, the Road "has been used by the general public for many decades (100 – 200 years) as an access road to access the adjacent plots of land [...] and is publicly accessible."¹⁰² Slovakia's land registry for the plot of land on which the Road is located states that the “way of using the plot" for this plot includes “[l]and on which an engineering structure is built – road, local and special-purpose road, forest road, field road, sidewalk [...]".¹⁰³
85. Under Slovak law,¹⁰⁴ the fact that the Road is used by vehicles and pedestrians in order to access other plots of land (and is not in an enclosed area) means that the Road is classified as a public special purpose road.¹⁰⁵ This classification operates automatically by operation of Slovak law and is not dependent on any decision from any Slovak authority or other body.
86. Further, a 2011 decision of the Prešov Regional Court confirmed that a public special purpose road may be used by the public and its use is not restricted only to the registered co-owners of the plot where the road is situated.¹⁰⁶ The owners of any land on which a public special purpose road is situated are therefore bound to respect the public nature of the road. It is
101 Exhibits C-139 and C-140. ↩
102 Exhibit C-18. ↩
103 Exhibit C-139. ↩
104 Exhibit C-221 §1(2)(d), §22(1) and §22(3) of Act No. 135/1961 (the "Road Act"); Exhibit
C-223 §22 of Decree No. 35/1984 (the “Road Decree"). ↩
105 In Slovak: účelova cesta. ↩
106 Exhibit C-16 Resolution of the Regional Court in Prešov dated 17 October 2011, file no.
6C0/85/2011. ↩
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contrary to Slovak law for landowners to attempt to prohibit members of the public from accessing such a road.
87. Under Slovak law,107 the Slovak Police Force (the “Police”) are obliged to ensure that public special purpose roads (including the Road) remain open for use by members of the public. AOG was a member of the public. If any vehicles are obstructing traffic on a public special purpose road, the Police are also authorised to remove these vehicles, in order to keep the road open for use by the public.
88. On each occasion when AOG attempted to access the Smilno well site via the Road, AOG was prevented from doing so and the Police did nothing to enable AOG to access the well site via the Road. Indeed, the actions taken by the Police and other State personnel and authorities (as described below) effectively sought to prevent AOG from accessing the site. As a result, AOG was prevented from drilling its exploration well at Smilno.
89. On 6 December 2015, AOG mobilised contractors—Trans-Wiert sp. z o.o. (“Trans-Wiert”)—who started levelling and preparing the Smilno site for drilling operations. The site was prepared using earth-moving equipment without incident.108 However, problems began on 14 December 2015 when AOG found that a vehicle had been parked across the entrance to the Road.109 The Road was the only viable access route for AOG in due course to move the drilling rig and other heavy machinery to the Smilno well site.110
107 See e.g. Exhibit C-222 §2(1)(a), §2(1)(i), §2(1)(j) and §27(a) of Act No. 171/1993 (the "Police Act"); Exhibit C-214 §2(1), §43(4), §43(5) of Act No. 8/2009 (the "Road Traffic Act"). ↩
108 Fraser 1 at [35]; Lewis 1 at [55]. ↩
109 Lewis 1 at [55]. ↩
110 Lewis 1 at [56]. ↩
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90. The vehicle belonged to Marianna Varjanová, a local resident who owned a neighbouring ski resort. Ms Varjanová was an activist who was opposed to AOG's activities. This was reported to the Police who were called, but they took no action to remove the vehicle.111
91. Thereafter, AOG agreed to buy a share in the plot of land on which the Road was situated to try to secure additional access rights, notwithstanding the fact that (under Slovak law and as a member of the public) AOG was already entitled to use the Road. This purchase completed on 28 December 2015.112 However, the Road continued to be blocked by the activists' vehicles after 28 December 2015. Once again, the Police declined to remove any of the vehicles.113
92. In mid-January 2016, one of the activists' vehicles was parked across the Road near the entrance to the well site. As well as being chained down, a warning sign had been placed on the vehicle which stated that the vehicle might explode. This posed a serious threat to the safety of the local population and to AOG's workforce. The Police were called, but once again they took no steps to remove the vehicle.114
93. After concluding that the sign on the vehicle was not genuine, and since the Police were refusing to remove the vehicle, AOG (with the assistance of Trans-Wiert) was forced to remove the vehicle itself in order to provide a clear route of access for the conductor drilling rig to reach the well site. However, after this vehicle was removed, further vehicles were parked across the Road by the activists. As a result, AOG was unable to move the conductor drilling rig to the Smilno well site.115
111 Lewis 1 at [57]; Fraser 1 at [36]. ↩
112 Fraser 1 at [38]; Exhibit C-105. ↩
113 Lewis 1 at [59]; Fraser 1 at [38]. ↩
114 Lewis 1 at [59]; Fraser 1 at [40]. ↩
115 Lewis 1 at [61]; Fraser 1 at [41]. ↩
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94. Throughout this entire period, AOG was engaging with the local mayor (who supported AOG's activities) and with the local community.116 However, AOG continued to encounter resistance from the activists, led by Ms Varjanová who escalated matters by applying for an interim injunction against AOG.
95. On 21 January 2016, Ms Varjanová brought a civil action against AOG in the Bardejov District Court claiming that the sale of the share of the land to AOG in December 2015 (see [91] above) was in breach of the existing co-owners' pre-emption rights under Slovak law.117 Judge Hanuščaková was allocated to hear Ms Varjanová's claim against AOG. Even though the substantive proceedings related to the question of whether the sale was voidable as a result, she also applied for an interim injunction that prevented AOG from using the Road, which had nothing to do with the contested ownership over a parcel of land.
96. On 18 February 2016, and upon Ms Varjanová's application, Judge Hanuščaková granted an interim injunction against AOG (the “Interim Injunction"):118
116 Lewis 1 at [39]; Fraser 1 at [34]. ↩
117 Case Number 1C/29/2016. ↩
118 Exhibit C-125. ↩
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of the specified documentation no. 2721/780, arable land with an area of 11,660 m²”.
97. The grant of the Interim Injunction had a profound and wholly unjustified effect on AOG's business. AOG was prevented from using the Road to bring the drilling rig and other heavy machinery to the well site despite the fact that (i) AOG held a Licence from the MoE which expressly permitted AOG to explore for oil and gas at the Smilno well site, (ii) AOG had entered into leases over the well site and had secured permits to enable it to carry out its exploration activities, (iii) AOG had mobilised contractors to carry out the drilling operation at significant expense, and (iv) AOG was a member of the public and thus automatically entitled to use the Road (since it was a public special purpose road).
98. As a result of the Interim Injunction, AOG was prevented from drilling its exploration well at the Smilno well site.
99. The Interim Injunction should, as a matter of Slovak law, never have been granted. As set out in the expert report of Prof Števček, “the interim injunction should not have been granted: the conditions for granting an interim injunction were not met and the issue of road use is not within the jurisdiction of the court but of the municipality”:119
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defendant on the road”120 (the Court having noted that the claimant was preventing the defendant, AOG, from using the Road).
100. In March 2016, AOG appealed against the grant of the Interim Injunction. However, AOG's appeal was rejected in a decision issued by the Prešov Regional Court on 14 April 2016.123 Since the Interim Injunction should never have been granted, the appeal court should have reversed it.124
101. There is no rational explanation for why the Bardejov District Court or the Prešov Regional Court acted in the way they did. As explained further in Section IV below, the decisions of the Bardejov District Court and the Prešov Regional Court amounted to a denial of justice.
102. In June 2016, AOG made a second attempt to drill at the Smilno well site. On this occasion, AOG was prevented from drilling an exploration well not
120 Števček 1 at [21]. ↩
121 Števček 1 at [22]. ↩
122 Števček 1 at [23]. ↩
123 Exhibit C-17. ↩
124 Števček 1 at [33]. ↩
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only by the conduct of the Police but also by the intervention of a State Prosecutor.
103. In early June 2016, AOG had mobilised a local Slovak contractor (GMT projekt, spol. s.r.o.) to complete certain construction work at the Smilno well site, including upgrading the Road to the well site. As noted in an internal AOG report dated 15 June 2016, this work was completed without significant delay.125 The same report also stated:126
“Although we continue to meet opposition from the same local protestor (Ms. Varjanova) and her immediate family, the village as a whole, and the mayor in particular have been very supportive. Public Relations efforts such as contacts with the local press and a fact-finding trip to the Czech Republic have clearly helped. We continue to coordinate closely with security, legal and Public Relations advisors."
104. This fact-finding trip to the Czech Republic had been led by AOG's Country Manager (Mr Benada) who had arranged for approximately 40 people (including residents of Smilno village) to visit well sites in the Czech Republic in April 2016 to demonstrate how the proposed well would look and operate at Smilno. The fact-finding visit was very well-received and illustrated clearly, to those participating, the wider benefits to the local community, which in this case had been able to secure additional investment in social infrastructure such as roads and schools.127
105. Serious problems arose between 16-18 June 2016 when a group of activists (led by Ms Varjanová) prevented AOG once again from using the Road and carrying out drilling operations at the well site. Over this period, the activists (i) gained access to the well site, (ii) laid down on the ground under trucks and machinery belonging to AOG's contractor, (iii) sat on the Road and parked vehicles on the Road in an attempt to block further equipment from
125 Exhibit C-135, pp. 1-2. ↩
126 Exhibit C-135, pp. 3. ↩
127 Fraser 1 at [48]. ↩
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passing, and (iv) attempted physically to damage the equipment belonging to AOG's contractor. This conduct posed a serious danger to the activists and to AOG's workforce who were placed in a difficult and compromising situation.
106. On Saturday, 18 June 2016 a State Prosecutor (JUDr. Vladislava Slosarčíková) arrived at the scene. Intervening in this situation was not within her responsibilities or authority.128 As explained in a report prepared by AOG's attorney (JUDr. Pavol Vargaeštok) who was present at the scene on 17-18 June 2016:129
128 Fraser 1 at [56]. ↩
129 Exhibit C-161. ↩
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107. As Mr Fraser observed in an internal email sent to his colleagues at AOG on 18 June 2016 (emphasis added):130
"Yesterday afternoon the police were removing protesters from in front of vehicles so that seemed quite encouraging. Today we decided we needed to get just one vehicle onto the location but there were 10 vehicles blocking the entrance to the access road and there were protesters blocking the side route round the road. The police came and would have helped out save that the local prosecutor [...] then showed up and told the police to stop. We think she was cross because she was dragged out on a Saturday.”
108. Discovery/AOG could not understand why a State Prosecutor had (i) arrived on the scene since this situation was outside of her authority, (ii) had come on a Saturday (outside of normal working hours) and (ii) instructed the Police to stop its policing operation, against the background of the serious and concerning events described at [105] above. As a direct result of the State Prosecutor's intervention, and the subsequent failure by the Police to disperse the activists, AOG was unable to bring the drilling rig and other heavy machinery to the Smilno well site and AOG was forced to abandon the second drilling attempt, at considerable cost.131
109. Against the background of these events, the Parliament of the Prešov region (one of eight self-governing regions in Slovakia which form part of the public administration132 of the Slovak Republic, and which included the areas under the 2016 Licences), approved the following resolution on 24 June 2016:133
“The Council of the Prešov Self-Governing Region hereby fully supports the citizens and councils of villages/municipalities in North-Eastern Slovakia that
130 Exhibit C-137. ↩
131 Fraser 1 at [57]. ↩
132 In Slovak: verejná správa. ↩
133 Exhibit C-20. ↩
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do not agree with exploration works in the exploration area for production of oil and natural combustible gas associated with the activities of the company Alpine Oil and Gas s.r.o.
Exploration areas of Svidník, Medzilaborce, Snina, Pakostov and Klenová situated in the Districts of Bardejov, Svidník, Stropkov, Medzilaborce and Snina are concerned.
The Council of the Prešov Self-Governing Region will apply their best efforts and abilities to achieve that the affected municipalities/villages be excluded from the exploration and production areas.”
110. This resolution was approved and published (i) at around the same time that the MoE had granted the 2016 Licences in June 2016 (see [74] above); and (ii) at a time when AOG was in active dialogue with a range of contractors, landowners, local authorities and other parties in the region, regarding its exploration activities. The resolution represented a public, official condemnation of Discovery/AOG's proposed activities in the region, from the principal regional elected body (and thus attributable to Slovakia), and was moreover intended to impair Discovery's ability to reap the benefits of its investment. Regardless of whether or not the Parliament of the Prešov self-governing region had any direct legal capacity to impose obligations or restrictions on AOG, on the Licences or on any other State authorities (for example, the Police)—or whether or not those State authorities, and particularly the Police, considered themselves bound to abide by resolutions of the Parliament of the Prešov self-governing region—there can be no doubt that the resolution would have had a substantial negative impact on AOG's reputation and standing in the eyes of the local population, including members of the local Police. Its intention and effect, therefore, can only have been to harm AOG's ability to do business in the region and it thus represented a serious infringement by the self-governing regional parliament of AOG's rights under the Licences. Moreover, at no stage subsequently was any effort made by any part of the central government of the Slovak Republic to reverse, or in any other way mitigate the effect of, this resolution of the Parliament of the Prešov self-governing region.
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111. AOG had a sound legal basis for using the Road, on the basis that the Road was a public special purpose road and therefore accessible by any member of the public. However, the activists, the Police and the State Prosecutor were able to exploit the existence of the (wrongly granted) Interim Injunction to prevent AOG from using the Road in order to conduct is exploration activities.134
112. AOG understood that if it conceded Ms Varjanová's claim (viz. that the share of the land to AOG in December 2015 was in breach of the existing owners' pre-emption rights) this would result in the discharge of the Interim Injunction (which would have otherwise continued until the substantive dispute was resolved). AOG's hope was that the discharge of the Interim Injunction would enable it to use the Road once again, as a member of the public, to bring the drilling rig and other heavy machinery to the well site to perform the necessary exploratory drilling.
113. In June 2016, AOG therefore filed an application in the Bardejov District Court to concede Ms Varjanová's claim in full. However, it took until October 2016 for Judge Hanuščaková to issue a judgment and order in favour of Ms Varjanová following AOG's concession of the claim.135 From this point onwards, the Interim Injunction should have been of no further effect.
114. Nevertheless, on 23 November 2016, Ms Varjanová filed an appeal to the Prešov Regional Court against Judge Hanuščaková’s judgment, even though her claim had already been conceded by AOG in full and none of the reasons
134 Fraser 1 at [59]. ↩
135 Exhibit C-147. ↩
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allowing an appeal were applicable to her case or were relied upon in her appeal.136
115. The fact that AOG had conceded Ms Varjanová's claim meant there was no decision or issue against which she could, as a matter of Slovak law, appeal.137 Her appeal was clearly inadmissible under §358 and §359 of the Civil Procedure Act.138 Yet the effect of the appeal was to keep the Interim Injunction alive for the duration of the appeal, and this was evidently the reason why Ms Varjanová had filed the appeal. The appeal was an abuse of the court's processes in an attempt to prolong the existence of the Interim Injunction to the detriment of AOG.
116. On 8 December 2016, AOG filed an application to have Ms Varjanová’s appeal struck out. This application was not determined until 27 February 2017 when the notice of appeal was indeed struck out.139 Further delays then ensued. It took until 4 April 2017 for the Prešov Regional Court to deliver the decision to the Bardejov District Court, which in turn sent it to both parties only on 2 May 2017.140 This decision only came into effect when the parties had been served. As a result, the Interim Injunction had been kept in force by the Slovak judiciary for almost exactly one year after the date when AOG had conceded Ms Varjanová's claim (i.e. from June 2016 until May 2017).
117. In July 2016, following on from the second drilling attempt, the Police indicated that if AOG could arrange for the Smilno municipality to erect a road sign at the entrance to the Road, which acknowledged that the Road was a public special purpose road, they would keep the Road open.
136 Exhibit C-155. ↩
137 Števček 1 at [40]-[42]. ↩
138 Exhibit C-229. ↩
139 Exhibit C-170. ↩
140 Exhibit C-170. ↩
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Extensive discussions took place between AOG, the Mayor of Smilno and the Police, which were initially very positive.141 As Mr Lewis explained in an email to JKX and Romgaz on 29 September 2016:142
“It appears that we have finally broken through the bureaucratic log-jam. The revised signage proposal for Smilno was finalised today and the mayor will deliver it to the Bardejov police on Monday. We expect that Mr. Silva (the head of the traffic police) will sign it promptly, following which the mayor can proceed to install the signs (there are 5-7 in total in various spots in Smilno).
The mayor has his own staff who can install the signs. However, we are going to try to have our folks do it, since they would be much faster. If our folks do it, it would cost an estimated €2,000."
118. In early October 2016, the proposed signage scheme was submitted by the Mayor to the Police for approval. AOG was then led to believe that the signage scheme would be approved by the Police. As Mr Lewis stated in an email sent on 3 October 2016 to JKX and Romgaz:143
“I am happy to confirm that the Smilno mayor has executed the signage proposal and delivered it to the police, as expected. The police have already informally approved it, and should do so formally in the next couple of days. We are now trying to line up the installation of the signs so that this can be performed as quickly as possible. We will keep you posted."
119. On the basis of the positive responses AOG had received from the Mayor and the Police, AOG decided to mobilise contractors in order to attempt to drill the exploration well at the Smilno well site. As AOG explained in a report dated 11 October 2016 and sent to JKX and Romgaz (emphasis added):144
“The documents were modified and approved by the mayor, and are in the hands of the police for final approval. But, unfortunately, they are taking their time. Once these final documents are approved by the police, the signs will be installed. On condition of the signs being in place, the police have promised
141 Fraser 1 at [66]. ↩
142 Exhibit C-145. ↩
143 Exhibit C-145. ↩
144 Exhibit C-148, p. 1. ↩
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complete support for our access. As the trucks from Trans Wiert are rolling from Poland, we plan a meeting with the police, our security team, the mayor and the Smilno town council to review all procedures and make sure everyone knows their job. [...] Trans Wiert (main location contractor) is ready to proceed with finalizing construction.”
120. On 12 October 2016, AOG was informed that (i) the Police had “approved the signage scheme and the document has gone back to the mayor to initiate installation” and (ii) the Mayor had also agreed to allow AOG's contractor to install the signs, which could be completed within a matter of days.145
121. It subsequently transpired that—without informing AOG at the time—the Police had approved every other sign in the scheme apart from the sign at the entrance of the Road (the only sign AOG was concerned about) ostensibly on the basis that the Road was a “field track”. (This, of course, misses the point that a field track can nevertheless be a public special purpose road.) AOG learned about the Police's decision for the first time on 14 October 2016 when it was provided with a copy of a letter sent by the Police to the Smilno municipality.146 However, to the extent the position adopted by the Police was based on its understanding that the Road was not a public special purpose road, this understanding was subsequently proven to be incorrect.
122. On 22 November 2016, AOG submitted a freedom of information request to the Ministry of Transport and to the Police Praesidium to enquire whether a field track, if registered on the land registry, was a public special purpose road. On 29 November 2016, the Ministry of Transport confirmed that field tracks are indeed special purpose roads.147 In a subsequent clarification issued on 9 December 2016, the Ministry of Transport confirmed that if a field track was recorded on the land registry of the Slovak Republic, then it
145 Exhibit C-150. ↩
146 Exhibit C-151; Exhibit C-153. ↩
147 Exhibit C-21. ↩
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is classified as a public special purpose road.148 The Road meets these conditions and is therefore a public special purpose road.
123. Notwithstanding this clarification from the Ministry of Transport, on 23 November 2016, the Police separately sought directions from the Ministry of the Interior as to how the Road should be classified (i.e. whether a public special purpose road or some other category of road). The Ministry of the Interior issued an instruction to the Police on 19 December 2016, stating that the Road was not a public special purpose road.149 The instruction issued by the Ministry of Interior directly contradicted the position adopted by the Ministry of Transport as referred to at [122] above.
124. The Ministry of Interior then issued a subsequent opinion on 30 December 2016 declaring that, with regard to the question of field tracks and special purpose roads, the competent authority was not the Ministry of Interior but rather the Ministry of Transport.150 Thus the Ministry of the Interior, by its own admission, had no competence to issue its instruction to the Police.
125. The result of this protracted exercise was that AOG had wasted many months (from July 2016 onwards) negotiating in good faith with the Police and the Mayor to erect a road sign at the entrance of the Road which would have:
148 Exhibit C-22. ↩
149 Exhibit C-23. ↩
150 Exhibit C-24. ↩
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126. The proposal to erect a road sign originated with the Police: see [117] above. AOG pursued all ensuing discussions over the following months (with the Police and the Mayor) in good faith. The Police led AOG to believe that the signage scheme had been approved, which encouraged AOG to mobilise its contractors to recommence construction activities at the well site: see [118]-[120] above. But without informing AOG at the time, the Police declined to approve the erection of the crucial sign at the entrance of the Road: see [121] above. And then, when prompted by the Police, the Ministry of Interior issued an invalid instruction to the Police as to the status of the Road which contradicted the Ministry of Transport and undermined AOG's lawful right to use the Road: see [122]-[124] above.
127. On 15-17 November 2016, AOG and its contractors made a third attempt to bring the necessary heavy machinery to the Smilno well site in order to drill the exploration well. Once again, however, AOG was prevented from drilling the well by (i) the Police's refusal to accept that the Road was a public special purpose road, (ii) the Police's refusal to remove any of the vehicles which the activists had parked across the Road (which prevented AOG's contractors from transporting heavy machinery to the well site), (iii) the Police's instruction to AOG to remove its own trucks off the Road, and (iv) the Police's refusal to disperse the activists who were aggressive towards AOG's employees.151 AOG was therefore unable to conduct its drilling operations at the well site and substantial costs were wasted in the process.
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128. Discovery/AOG had made three attempts to drill an exploratory well at the Smilno site between 2015-2016, but it was prevented from drilling an exploration well by:
129. The conduct summarised at [128] above was exacerbated by:
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130. In addition to the Smilno well, Discovery/AOG had also planned to drill an exploration well at Krivá Ol’ka on the Medzilaborce block: see [66]-[71] above. The detailed and extensive geological surveys which Discovery/AOG had carried out since 2014 had revealed that the Krivá Ol'ka well had good prospects of producing oil. Discovery/AOG were therefore keen to move forward to drill this exploration well.
131. As explained below, Discovery/AOG was prevented from drilling the Krivá Ol'ka well by the acts and omissions of Slovakia's organs including the MoE and the Ministry of Agriculture152 (“MoA"). Such conduct is attributable to Slovakia under international law and placed Slovakia in breach of its obligations towards Discovery under the BIT. Moreover, and as explained below, Discovery/AOG was treated less favourably than NAFTA in like circumstances.
132. The Krivá Ol’ka well site was situated outside the village of Krivá Oľka on land owned by the Slovak Republic and managed by LESY Slovenskej republiky ("State Forestry”). State Forestry is a state-owned enterprise responsible for managing forests owned by the Slovak Republic. State Forestry is controlled by the MoA. According to its own website, the General Director of State Forestry (i) is appointed by the Minister of Agriculture, (ii) works “directly under his supervision” and (iii) implements the “instructions of the Minister of Agriculture”.153
133. On 27 April 2015, AOG met with a negotiator for the General Director of State Forestry to discuss the proposed lease to enable AOG to drill the Krivá
152 In Slovak: Ministvo pôdohospodárstva a rozvoja vidieka. ↩
153 Exhibit C-230. ↩
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Ol'ka well. The negotiator informed AOG that State Forestry had previously entered into leases with NAFTA to enable it to drill exploration wells.154 Such leases had to be approved by the Minister of Agriculture, but this was considered a mere formality. Discovery does not know precisely (i) how many leases (or lease extensions) State Forestry had concluded with NAFTA, and (ii) how many of those leases (or lease extensions) were approved by the MoA. However, it was apparent from the meeting held with AOG on 27 April 2015 that State Forestry was familiar with such leases and that the MoA had previously approved those leases for NAFTA.
134. On 4 May 2015, AOG entered into a lease with State Forestry (the “Lease”). The express purpose of the Lease was to enable AOG to carry out “geological survey and possible extraction of natural hydrocarbons” at the Krivá Oľka well site.155 The area covered by the Lease was approximately 1 hectare. The initial period of the Lease expired on 15 January 2016. AOG had a right to request an extension of the Lease from State Forestry, but any such extension had to be approved by the MoA.156
135. On 19 October 2015, MoA approved the grant of the Lease. The MoA acknowledged that the Lease had been granted to AOG “for the purpose of geological exploration and possible subsequent extraction of natural hydrocarbons".157 Slovakia was therefore well aware of the purpose of the Lease and evidently content, at this stage, for AOG to carry out geological exploration at the Krivá Ol'ka well site. As explained below, the MoA subsequently performed a volte face in 2016.
136. In December 2015, following the MoA's decision to approve the Lease, certain standing timber located at the well site was felled after State Forestry
154 Exhibit C-72. ↩
155 Exhibit C-73, Article II and Article VII(1)-(3). ↩
156 Exhibit C-73, Article III. ↩
157 Exhibit C-73, pp. 6-7. ↩
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had granted approval for this timber felling to take place.158 Over the preceding months, AOG had also taken a number of steps to prepare the Krivá Oľka well site for drilling operations. However, as a result of the delay in the MoA approving the grant of the Lease between May and October 2015, the initial term of the Lease was due to expire in January 2016. AOG therefore needed to obtain an extension of the Lease.
137. On 14 January 2016, AOG and State Forestry entered into Addendum No. 1, extending the term of the Lease until 1 August 2016. Addendum No. 1 provided that the extension would enter into force after the MoA had approved the extension of the Lease.159 Addendum No. 1 was signed on behalf of State Forestry by Peter Morong, the-then General Director. Having regard to the matters set out at [132(i)–(iii)] above, and pending disclosure from Slovakia, it is reasonable to infer that the General Director would have:
138. By letter dated 17 January 2016, AOG applied for the necessary consent from the MoA.160 On 22 January 2016, the MoA responded to inform AOG that granting the relevant consent was within the competence of the Head of the Service Office of the Ministry.161 AOG then waited for the MoA formally to communicate its approval of the extension of the Lease. Without MoA approval, AOG was unable to conduct drilling operations at the Krivá Oľka well site. The approval process dragged on for many months and the
158 Fraser 1 at [32]. ↩
159 Exhibit C-116, Articles I-II. ↩
160 Exhibit C-118. ↩
161 Exhibit C-121. ↩
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MoA postponed its decision to approve the extension. Pending disclosure from Slovakia, it is reasonable to infer that the MoA was giving extensive internal consideration to the approval of Addendum No. 1 from January 2016 onwards. However, AOG was kept completely in the dark regarding the approval process.
139. At the end of May 2016, AOG wrote to the Minister of Agriculture (Gabriela Matečná) expressing its frustration at the lack of approval. AOG sought a meeting with Minister Matečná to discuss the situation. In its letter, AOG noted that the total amount invested by AOG and its partners was “approximately €18 million over the period ending 31 December 2014, including €3.8 million which was paid to the Government as license fees”. In its letter, AOG continued:162
“AOG's new lease agreement with the State Forestry for this site is not valid until approved by the Ministry of Agriculture. However, approval of the lease has been postponed by the Minister of Agriculture numerous times since January 2016, without explanation.
AOG has invested considerable time and expense in fulfilling its license commitments and preparing to drill at this site, and is highly concerned that its investment is in jeopardy. We therefore urgently request a meeting with you to explain our concerns in more detail, clarify our position, and seek your help in attempting to remedy this situation."
140. On 7 June 2016, the MoA wrote to AOG stating that it was “unfortunately not possible in the near future to carry out this meeting with Madam Minister”.163 On 23 June 2016, Minister Matečná wrote directly to AOG. Minister Matečná asserted that the MoA would not consent to the extension of the Lease because “the contractually agreed requirements were not fulfilled". Minister Matečná did not explain (i) what the alleged requirements were or (ii) why they were allegedly not fulfilled (or by whom). Minister Matečná did, however, “recommend” that AOG make an
162 Exhibit C-132. ↩
163 Exhibit C-134. ↩
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application to the MoE under §29 of the Geology Act for a compulsory access order instead.
141. The timing of the Minister's letter was significant for two reasons:
142. It is clear that (i) Discovery/AOG was not being treated fairly or transparently (and, indeed, AOG was being treated arbitrarily) by the MoA in connection with its application for an extension of the Lease and (ii) Discovery/AOG was being treated less favourably than NAFTA in connection with the leases which it had concluded with State Forestry to
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carry out exploration drilling (which leases were evidently approved by the MoA without any issue – see [133] above).
143. Under §29 of the Geology Act, an entity may apply to the MoE for a compulsory access order over land for the purposes of carrying out geological works.164 It is not necessary to apply for a compulsory access order if the landowner consents to the contractor carrying out geological works on the land (e.g. by granting a lease for this purpose). In this case, the Krivá Oľka well site was located on land owned by the Slovak Republic and managed by State Forestry. State Forestry was evidently content for AOG to carry out the geological works (having entered into the Lease and Addendum No. 1). However, since the MoA had refused to approve the extension of the Lease, AOG was left with no other option but to apply for a compulsory access order under §29.
144. By a detailed application dated 30 August 2016, AOG applied for a compulsory access order under §29 of the Geology Act in respect of three parcels of land owned by the Slovak Republic and managed by State Forestry.165 The application was made principally on the basis that:
164 Exhibit C-219. ↩
165 Exhibit C-143. ↩
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Humenne166 had already consented to the land being used for exploration activities.
145. In an initial response dated 20 September 2016,167 the MoE asserted that AOG had failed to demonstrate that the owner of the relevant land had not consented to AOG using the land for exploration activities. In particular, the MoE asserted that it was not apparent that AOG had attempted to enter into an agreement with the landowner. Against the background of AOG already having entered into a Lease and Addendum No. 1 (which the MoA had refused to approve) the MoE's initial response made no sense.
146. This is despite AOG sending a letter to State Forestry dated 18 July 2016, by which it sought State Forestry's agreement to enter into a lease following the MoA's refusal to consent.168
147. On 27 September 2016, and in an attempt to demonstrate to the MoE as part of the §29 application that the landowner had not consented to AOG using the land for exploration activities, AOG wrote a letter to the State Forestry's General Director asking State Forestry to enter into a further lease and attached a draft lease agreement. However, State Forestry never responded to this request. Pending disclosure by Slovakia, AOG infers that the MoA refused to authorise State Forestry to enter into a further lease with AOG, hence the reason for State Forestry's non-response to AOG's request.
148. Having been invited to respond to AOG's §29 application by letter dated 9 November 2016, the MoA responded to the MoE by letter dated 23 November 2016. In that letter, the MoA asserted that it was not a “party to the proceedings" on the basis that State Forestry (and not the MoA) had an interest in the land.169 This response was confusing since it was the MoA
166 Exhibit C-104. ↩
167 Exhibit C-144. ↩
168 Exhibit C-142. ↩
169 Exhibit C-156, pg.1. ↩
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who had encouraged AOG to apply for a §29 order in the first place: see [140] above.
149. A statement issued by State Forestry on 25 October 2016 was equally non-committal. State Forestry asserted that “the state-owned enterprise cannot assess whether the oil and gas prospecting is of greater interest to society than the function of the forest in question.”.170 State Forestry's suggestion was that "the subject-matter be decided pursuant to the applicable law”.
150. On 9 February 2017 (i.e. more than six months after AOG's initial application was submitted) the MoE sought further input from AOG, in particular relating to the length of time required to carry out the exploration activities at Krivá Ol'ka.171 AOG responded on 15 February 2017 with a detailed timeline for the various steps.172
151. By a decision dated 6 March 2017,173 the MoE rejected AOG's application for a §29 order. In essence, the MoE concluded that because the MoA had not consented to an extension of the Lease under Addendum No. 1, §29 of the Geology Act should not be used to "replace” such consent. This decision was all the more surprising in circumstances where the MoA had recommended that AOG make an application under §29 and the MoA itself also said that it did not consider it to be a participant in the procedure under §29. Furthermore, the MoE made no finding that the application had not been in the public interest. On the contrary, the MoE had itself determined that exploration was in the public interest; that is, after all, why it had granted and then extended the Licences as recently as June 2016.
152. Discovery's understanding at the time was that the relevant department of the MoE was initially minded to grant the §29 application. However, this
170 Exhibit C-156, pg.5. ↩
171 Exhibit C-165. ↩
172 Exhibit C-167. ↩
173 Exhibit C-25. ↩
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was reversed after an order had come from "above" that it should be refused. As AOG noted in a report dated 10 March 2017 sent to JKX and Romgaz:174
“On 9 March we were advised by the Ministry of Environment that our application for a compulsory access order under s. 29 of the Geology Act would be rejected. The legal department indicated to us that they had been preparing to issue an order in our favor when they received an instruction from 'above' to refuse the order, instead. We are awaiting formal confirmation and some clarification, and will then consider our next steps. This is most unexpected."
153. Discovery was not privy to internal communications between the MoA and the MoE in connection with its §29 application. Pending disclosure by Slovakia, and having regard to the MoA's opposition to the extension of the Lease, it is not clear who (within either the MoE or the MoA) issued this instruction from “above”. Discovery reserves the right to plead further as to this matter in its Reply once Slovakia has provided disclosure. Whoever issued this instruction from “above”, it is clear that Discovery/AOG was not being treated fairly or transparently by the MoE (and, indeed, AOG was being treated arbitrarily) in connection with its application under §29.
154. On 24 March 2017, AOG appealed the MoE's decision, and, by a decision dated 13 June 2017, the Minister of Environment quashed the previous decision dated 6 March 2017 and remitted it for reconsideration. This meant that, over nine months after it had initially made an application, AOG was exactly where it had started. As a result, AOG was prevented from drilling the Krivá Ol'ka well.
155. AOG's experience of applying for a compulsory access order under §29 of the Geology Act stands in stark contrast to the favourable treatment afforded
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by the MoE to NAFTA in like circumstances. Having regard to these comparable applications, it is clear that AOG was treated less favourably and that AOG was the victim of arbitrary and discriminatory treatment.
156. Pending disclosure by Slovakia of all such applications, Discovery is aware of at least one such application issued by NAFTA in May 2010 for a compulsory access order under §29 of the Geology Act against a private landowner near Malacky in western Slovakia. That application was contested vigorously but the MoE issued a decision in favour of NAFTA and granted a compulsory access order in April 2012. The landowner then appealed against the decision, but his appeal was rejected in March 2013.175
157. AOG's justification for a compulsory access order was essentially the same as the justification offered by NAFTA. In NAFTA's case, a private landowner disputed the grant of an order, and asserted its property rights in a vigorous and sustained manner, but was still overruled, both at first instance and on appeal. In AOG's case, the MoA barely engaged with the adjudication process at all. The MoA never suggested that AOG was not entitled to a compulsory access order. To the contrary: the MoA had “recommend[ed]” that AOG should apply to the MoE for a compulsory access order under §29: see [140] above.
158. Despite the MoE having extended each of the Licences in June 2016 for a further five years, the Slovak Republic prevented AOG from drilling its exploration wells at Smilno and Krivá Oľka as explained above. The final nail in the coffin occurred when the Slovak Republic required AOG to carry out a preliminary EIA before it could drill any exploration wells under any of the Licences, which would have added significant additional delay and
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cost to an already long-delayed project. By requiring AOG to conduct a preliminary EIA, the Slovak Republic (i) reneged on clear and specific representations that AOG was not legally required to conduct a preliminary EIA, (ii) caused JKX and Romgaz to withdraw from the joint venture, and (iii) treated AOG less favourably than NAFTA and other entities.
159. On 25 November 2016, the National Council of the Slovak Republic (i.e. the Slovak legislature) passed an amendment to Act No. 24/2006 (the “EIA Act")176 which changed the list of proposed activities which were subject to a requirement to conduct a preliminary EIA (described in the legislation as a “screening procedure"177) and a full EIA (described in the legislation as a “compulsory assessment”178).
160. The amendment to the EIA Act took effect on 1 January 2017, but it did not apply to AOG's exploration activities because (i) those activities had been authorised by the MoE since 2006 when the Licences were first granted and successively extended (as recently as June 2016) and (ii) the amended EIA Act could not apply retroactively to those already-authorised activities.179
161. Prior to 1 January 2017, (i) the EIA Act did not require AOG to conduct a preliminary EIA or a full EIA in respect of any of its exploration activities, and (ii) no investigation procedures had even been started in respect of those activities. Under the provisions of the EIA Act which were effective until 31 December 2016:180
176 Exhibit C-225. ↩
177 In Slovak: zisťovacie konanie. ↩
178 In Slovak: povinné hodnotenie. ↩
179 See e.g. Slovak Constitution, Article 1(1). ↩
180 Exhibit C-224. ↩
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162. By contrast, under the provisions of the EIA Act which became effective on 1 January 2017, Part 1 of Annex No. 8 was amended so as to require a preliminary EIA to be conducted before drilling “boreholes" to a depth greater than 600m.182
163. As explained below, the fact that AOG was under no legal obligation under the amended EIA Act to conduct a preliminary EIA was confirmed by the Minister of Environment (László Sólymos) and the MoE in numerous clear and specific representations issued from November 2016 onwards, upon which AOG reasonably relied.
164. On 29 November 2016—just four days after the legislature had passed the amendment to the EIA Act—Minister Sólymos held a press conference. After the press conference, the MoE issued a press release on its website which stated (inter alia) as follows (emphasis added):183
"With the license holder – Alpine Oil & Gas – [the Minister] plans to agree a compromise step, ‘I would like to ask them that they themselves offer to
181 In Slovak: Ťažobné vrty. ↩
182 In Slovak: vrty. ↩
183 Exhibit C-157. ↩
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carry out an environmental impact assessment (EIA), ' added Sólymos. A legal analysis has shown that the current legislative and procedural does not give rise to a legal obligation on the license holder to carry out an EIA. The new and stricter – EIA legislation becomes effective as of 1 January 2017.
Alpine Oil & Gas first acquired exploration license to explore oil and natural gas deposits in the Svidník, Medzilaborce and Snina area ten years ago. This year, the company has applied to extend the license for a period of 8 more years and, at the same time, applied for the reduction of the exploration license area by some 88 percent on average. After thorough review, the Ministry has legitimately extended the exploration license by 5 years.
The aim of geological exploration is to determine the presence of mineral deposits, in this case deposits of oil and natural gas, located under the Earth's surface. Pursuant to the Geology Act, each such exploration license application is thoroughly reviewed by the Ministry.
Currently, there are 80 exploration licenses in Slovakia where there is no statutory obligation to assess their environmental impact. In Slovakia, oil and natural gas is produced in the region of Zahorie as well as in the region of East Slovakia (e.g. in Michalovce and Trebisov districts).”
165. The MoE and Minister Sólymos were therefore publicly acknowledging that AOG was under no legal obligation to carry out an EIA in respect of its exploration activities under the amended EIA Act. This conclusion had been reached a result of a “legal analysis” undertaken by the MoE.
166. On 15 December 2016, AOG attended a meeting with Minister Sólymos and five other State officials, namely:
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167. AOG was represented at the meeting by Mr Lewis, Mr Fraser, Mr Benada, Katarina Mihalikova (AOG's lawyer) and an interpreter.184 In advance of the meeting, AOG had sent a presentation to the Minister which was discussed at the meeting.185 AOG's presentation noted that:186
184 Lewis 1 at [80]; Fraser 1 at [91]. ↩
185 Exhibit C-160. ↩
186 Exhibit C-159. ↩
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168. During the meeting, AOG made it clear that it was under no legal obligation to conduct a preliminary EIA in respect of its exploration activities. Minister Sólymos agreed with AOG. However, he asked AOG (as he had done during his press conference held on 29 November 2016) to agree voluntarily to conduct a preliminary EIA.
169. AOG explained that it could not agree to conduct a preliminary EIA because this would add significant cost and delay to a project which had already been delayed for over a year as a result of the obstacles created by the Slovak
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Republic in response to AOG's attempts to drill at Smilno and Krivá Ol'ka.187
170. On 21 December 2016, AOG wrote to Minister Sólymos (following on from the meeting) and set out a proposal.188 AOG began by noting that it was willing to provide the MoE with “all necessary cooperation, even beyond the scope of our legal obligations". But AOG stated it also had a “responsibility to our investors” (i.e. JKX and Romgaz) and that AOG would need to consider very carefully "whether further obstacles and delays to our operations in Slovakia will still be acceptable to the investors". AOG continued:
"We understand that in the Ministry's opinion, voluntary submission to [a preliminary EIA] [...] would be the most convincing argument in favour of improving the public opinion in relation to drilling in the north-east of Slovakia. However, we do not entirely share this opinion, as the most radical opponents of drilling are even now accusing the Ministry officials of acting in favour of the company Alpine Oil and Gas (“Alpine”). These opponents are already questioning the transparency of the administrative procedures in which the exploration areas were designated to Alpine. We are therefore convinced that, even if the environmental impact assessment (EIA) clearly demonstrates that there is no need for a full environmental impact assessment and that all of Alpine's activities are perfectly safe from an environmental perspective, these radical opponents will once again challenge the results of the fact-finding process, as well as the independence and impartiality of the Ministry. In addition, this environmental impact assessment (EIA) would mean to Alpine approximately 6 months of further delay and additional costs of up to EUR 450,000."
171. In its letter, AOG explained that it could not agree voluntarily to carry out a preliminary EIA in respect of the Smilno well or the Krivá Ol'ka well because (i) the drilling of these wells was supposed to have started more than 1 year ago and (ii) AOG had already experienced “significant delay” due to the “actions of the drilling opponents and actions or inactions of the
187 Lewis 1 at [81]. ↩
188 Exhibit C-162. ↩
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police, courts and the Ministry of Agriculture and Rural Development of the Slovak Republic”.
172. AOG then proposed, as a compromise, that it would agree voluntarily to conduct a preliminary EIA in respect of its other planned wells in Zborov, Habura, Ruská Poruba and Oľka189 provided that:
173. AOG confirmed in its letter that it was eager to assist the MoE to “improve the reputation of exploration and drilling in the eyes of the public”. In its letter, AOG noted that it had made several proposals as to how best to achieve this goal during the meeting with Minister Sólymos. AOG concluded its letter by stating as follows:
"We will be happy to provide the Ministry with all necessary assistance. At the same time, we would like the Slovak authorities to treat us the same way as other foreign investors in the Slovak Republic, as currently we do not consider the approach by the Slovak Republic as such. Therefore, we much appreciate the meeting at the Ministry and see it as a positive sign and an attempt to reach a mutually acceptable solution.”
174. Following on from the meeting held with AOG in December 2016, Minister Sólymos (i) met with a range of individuals and bodies in an attempt to assuage their concerns about AOG's exploration activities, (ii) reiterated
189 AOG had identified additional proposed exploration wells over the preceding months as a result of the delays caused at Smilno and Krivá Ol'ka: see Lewis 1 at [69] and Fraser at [106]-[107]. ↩
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that AOG was under no legal obligation to conduct an EIA, and (iii) sought to persuade AOG to agree voluntarily to conduct a preliminary EIA.
175. On 17 January 2017, Minister Sólymos met with Church leaders in Prešov to discuss AOG's exploration activities in Smilno. Minister Sólymos stressed the importance of keeping "discussion on the issue at a professional level and without hateful emotions”. Minister Sólymos also informed Church leaders about the “new stricter rules” which applied to new geological surveys. The MoE's press release about the meeting stated (emphasis added):190
"An amendment to the Environmental Impact Assessment Act has been in effect since the beginning of this year, according to which new exploratory wells are subject to an environmental impact assessment process. However, this does not apply to surveys [i.e. explorations] that have already been approved."
176. In AOG's case, the MoE had approved the geological exploration surveys as long ago as 2006 when the Licences were first issued. Moreover, as recently as June 2016, the MoE had extended the Licences which permitted AOG to continue to carry out the geological exploration surveys until 2021 without any requirement to conduct a preliminary EIA.
177. On 27 January 2017, the regional newspaper Korzár published an interview with Minister Sólymos. The article noted that some local activists were opposed to AOG's plan to drill an exploration well in Smilno. When asked about the MoE's position, Minister Sólymos was quoted as stating as follows (emphasis added):191
“There is a company that has obtained the licence back in 2006. According to the applicable legislation, the company had complied with all the conditions and has been here since then. This is like a driving licence. Their driving license has been granted in 2006 and there is no legal or legitimate reason for its revocation, unless they do something illegal. This [is] what the
190 Exhibit C-163. ↩
191 Exhibit C-164. ↩
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Ministry has on its desk."
178. When asked about the concerns raised by local residents, Minister Sólymos was quoted as stating as follows (emphasis added):
"Those concerns are the product of the way the communication happened, and that is the core of the problem. I negotiated with activists and the mining company in order to calm the situation and to get the issue back to the expert level. What matters is that local people can be assured that the activities will not have any unfavourable impacts on their surroundings and the environment in general."
179. In the same interview, Minister Sólymos also stressed that approximately 8,000 exploratory wells had been drilled in the Slovak Republic (including a previous well in Smilno) and “[t]o this day, we at the Ministry are not aware of even a single environment-related problem occurring as the consequence of those 8,000 prospector bore holes”. Minister Sólymos also reiterated that— although AOG was not legally obliged to carry out a preliminary EIA—he had asked AOG voluntarily to agree to conduct a preliminary EIA during his meeting at the end of 2016.
180. On 15 February 2017, the MoE released a statement summarising the results of an in-depth Ministerial inspection of AOG's activities to date at Smilno. In its statement, the MoE:192
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the MoE “currently has no legal option to stop the exploratory drilling in Smilno";
181. In early 2017, against the background of the repeated requests by Minister Sólymos to agree voluntarily to conduct a preliminary EIA, AOG held a number of meetings with the activists who were invariably accompanied by representatives of a Slovak environmental NGO called Forest Protection Movement VLK (“VLK”).193 The activists initially demanded that no exploration wells should be drilled until AOG had conducted a full EIA. AOG explained that (i) this was not required under Slovak law (as the MoE had repeatedly confirmed in its public statements – see above) and (ii) this would neither be customary nor feasible in the case of exploration wells.194
182. AOG recognised, however, that unless it took some voluntary steps “beyond the scope of the law" (to use the MoE's words in its February 2017
193 In Slovak: Lesoochranárske zoskupenie VLK. ↩
194 Fraser 1 at [94]; Lewis 1 at [79]. ↩
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statement – see [180(5)] above) its future drilling attempts were likely to be thwarted by the same conduct which it had experienced at the hands of the Slovak authorities from December 2015 onwards. AOG therefore agreed voluntarily to conduct a preliminary EIA for each of the proposed exploration wells in order to (i) satisfy Minister Sólymos' repeated demands, (ii) respond to the concerns raised by the activists about AOG's activities and (iii) encourage the Slovak Republic to support (rather than block) AOG's activities.195 AOG agreed to do so on a voluntary basis and in reliance on the clear and specific statements made by the MoE and Minister Sólymos (see [164]-[180] above).
183. In April 2017, AOG released a public statement which set out eight key principles demonstrating AOG's commitment to the environment and to the local communities where it was intending to drill exploration wells.196 Key principle (1) embodied AOG's commitment voluntarily to conduct a preliminary EIA for its exploration wells. AOG stated that it was “not obliged by law to follow this procedure” but that AOG had agreed to carry out a preliminary EIA “as a sign of good faith”. AOG also set out other key principles demonstrating its commitment to the environment and to the local community, including:
“(4) If AOG makes a discovery and proceeds to apply for a production licence over the discovery, then a full environmental impact assessment will be conducted as part of that process.
[...]
(7) AOG is committed to supporting the local economy and will, wherever possible, (a) invite local contractors and suppliers to tender for work (although a number of specialised oilfield services are not currently provided by Slovak contractors), and (b) seek to hire local staff."
195 Fraser 1 at [95]; Lewis 1 at [81]. ↩
196 Exhibit C-171. ↩
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184. Thereafter, AOG engaged expert consultants (ChemPro a.s.) to prepare preliminary EIAs for each exploration well. AOG then submitted applications for preliminary EIA clearance for each exploration well between June and September 2017 to the relevant District Offices. As explained at [185]-[187] below, the District Offices inexplicably ordered AOG to conduct a full EIA for each exploration well. The order to conduct a full EIA:197
185. In relation to the Smilno well:
197 Fraser 1 at [97]-[102]; Lewis 1 at [86]. ↩
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186. In relation to the Ruská Poruba well:
198 Exhibit C-173. ↩
199 Exhibit C-176. ↩
200 Exhibit C-175. ↩
201 Exhibit C-179. ↩
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187. In relation to the Krivá Ol'ka well:
188. In February 2018, and against the background of the Slovak Republic's conduct including the decision to order a full EIA, JKX informed AOG and Romgaz that it had decided to relinquish its exploration interests in Slovakia.205 On 22 February 2018, Romgaz's representative emailed AOG and JKX stating as follows (emphasis added):206
202 Exhibit C-177. ↩
203 Fraser 1 at [102]; Exhibit C-182. ↩
204 Exhibit C-186. ↩
205 Exhibit C-185. ↩
206 Exhibit C-185. ↩
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"I am sorry to hear that but it was to be expected. Slovakia seems to be a bad place to do business after all. Just to let you know Romgaz is still committed to have at least one well drilled in Slovakia."
189. On 16 March 2018, JKX emailed AOG and Romgaz attaching formal notices withdrawing from each of the three Licences.207 In its covering email, JKX's representative stated as follows (emphasis added):208
“It's been over ten years since JKX acquired its interest in these licences and the technical work completed has gone a long way to derisking drilling targets in this internal section of the Carpathian Fold Belt. I only wish that we have been able to drill the three wells as agreed back in 2015. I would have dearly loved to have seen the calibration for the MT versus the seismic versus the drilling.
Thanks to you and the Alpine team for ploughing ahead through considerable and unfair opposition. Perhaps the possible change of government that seem likely in Slovakia will help the exploration process – but I have to say that the uncertainty only grows. I can only wish you and Romgaz the best of luck going forward – getting any well drilled in the current climate will be a major achievement.”
190. On 22 March 2018, AOG proposed (i) to relinquish the Licences for the Medzilaborce and Snina blocks and (ii) to reduce the area of the Licence for the Svidník block.209 Under the Geology Act, AOG enjoyed a preferential right to re-apply for the Licences at a future date.210 The fact that AOG was proposing to relinquish the Licences was the only realistic decision available to mitigate AOG's losses, to save the annual licence fees payable to the Slovak Republic and to salvage what remained of the project on the
207 Exhibit C-188; Exhibit C-189; Exhibit C-190. ↩
208 Exhibit C-187. ↩
209 Exhibit C-192. ↩
210 Exhibit C-219, Geology Act, §24(7). ↩
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Svidník block in the face of the Slovak Republic's conduct described above.211
191. On 13 April 2018, AOG, JKX and Romgaz notified the MoE of their decision to withdraw from the Licences for the Medzilaborce and Snina blocks.212 On 25 May 2018, the MoE confirmed the decision to relinquish the Licences for the Medzilaborce and Snina blocks.213
192. In April 2018, AOG submitted a separate application to the MoE to reduce the area of the Licence for the Svidník block and to remove JKX as a participant.
193. On 8 June 2018, MoE notified AOG of its decision to confirm the reduction of the area of the Licence.214 However, the MoE imposed a new condition on the Licences requiring AOG to carry out a preliminary EIA prior to drilling any exploration wells to a depth of over 600m. This decision:
211 Fraser 1 at [110]. ↩
212 Exhibit C-193; Exhibit C-194; Exhibit C-195; Exhibit C-196; Exhibit C-197; Exhibit C-
198. ↩
213 Exhibit C-199; Exhibit C-200. ↩
214 Exhibit C-15. ↩
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194. Moreover, as a matter of Slovak law, any decision to amend the area of an exploration licence should only consist of the delimitation of the exploration area itself and should not seek to impose additional conditions which are not relevant or requested as part of the application.215 Indeed, in the MoE's decision dated 8 June 2018, the terms and conditions dictate that the geological works were to be carried out in accordance with the terms and conditions as set out in the 2006 Licence. The retrospective imposition of the preliminary EIA condition on the Svidník Licence was inconsistent with those terms and conditions, and was a clear case of arbitrary discrimination against AOG.
195. Prior to the MoE's decision in June 2018, AOG had been investigating alternative exploration wells to drill on the Svidník block, including the Zborov well and the Šarišské Čierne well. However, the MoE's requirement to conduct a preliminary EIA prior to drilling any new exploration wells on the Svidník block made these proposed exploration wells commercially and economically unviable. By April 2020, and against this background, Romgaz had notified AOG that it had decided to withdraw from the joint venture.216
196. By the MoE's decision to impose a condition requiring AOG to carry out a preliminary EIA on its Licences, the Slovak Republic not only acted inconsistently with the clear and repeated specific statements by the MoE and Minister Sólymos in late 2016 and early 2017; the Slovak Republic also
215 Exhibit C-219, Geology Act §23(14). ↩
216 Exhibit C-207. ↩
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treated AOG less favourably than other entities which also applied to extend their exploration licences or modify their licence areas.
197. Discovery is aware of at least 64 applications to the MoE between 2017- 2021 (including multiple applications submitted by NAFTA) concerning the extension of exploration licences and/or the modification of the licence area.217 Of these 64 applications, it was only in AOG's case that the MoE imposed additional EIA conditions on the Licence when the application was merely to reduce the Licence area.218
* * *
217 There are, of course, many other applications made to the MoE concerning such licences;
these 64 applications relate specifically to applications to extend and/or modify exploration
licence areas. ↩
218 Exhibit C-212. ↩
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198. The Tribunal has jurisdiction under the BIT for the reasons set out below.
199. Article VI(1) of the BIT provides:219
"For purposes of this Article, an investment dispute is a dispute between a Party and a national or company of the other Party arising out of or relating to(a) an investment agreement between that Party and such national or company;
(b) an investment authorization granted by that Party's foreign investment authority to such national or company; or
(c) an alleged breach of any right conferred or created by this Treaty with respect to an investment.”
200. Discovery is a “company of a Party” within the meaning of Article VI(1), because it is constituted under the laws of a political subdivision of the United States, Texas: see Article I(1)(b) and see [17] above.
201. The present dispute arises out of or relates to an alleged breach of rights conferred or created by the BIT with respect to an investment. As to that:
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202. Article VI(2) of the Treaty provides that
"In the event of an investment dispute between a Party and a national or company of the other Party, the parties to the dispute shall initially seek to resolve the dispute by consultation and negotiation, which may include the use of non-binding, third party procedures. Subject to paragraph 3 of this Article, if the dispute cannot be resolved through consultation and negotiation, the dispute shall be submitted for settlement in accordance with previously agreed, applicable dispute-settlement procedures; any dispute- settlement procedures, including those relating to expropriation, specified in the investment agreement shall remain binding and shall be enforceable in accordance with the terms of the investment agreement, relevant provisions of domestic laws and applicable international agreements regarding enforcement of arbitral awards.."
203. In accordance with Article VI(2), Discovery initially sought to resolve this dispute by consultation and negotiation. Specifically, Discovery's lawyers, Signature Litigation LLP, sent a notice of dispute to the Slovak Republic by letter dated 2 October 2020.
204. Article VI(3)(a) provides that:
"At any time after six months from the date on which the dispute arose, the national or company concerned may choose to consent in writing to the submission of the dispute for settlement by conciliation or binding arbitration to the International Centre for the Settlement of Investment Disputes ('Centre') or to the Additional Facility of the Centre of pursuant to the Arbitration Rules of the United Nationals Commission on International Trade Law (‘UNICTRAL') or pursuant to the arbitration rules of any arbitral institution mutually agreed between the parties to the dispute."
220 See [54] above and see also Lewis 1 at [24]-[25]. ↩
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205. More than six months after October 2020, Discovery consented in writing to the submission of this dispute for settlement by binding arbitration to ICSID by filing its Request for Arbitration dated 30 September 2021.
206. The Tribunal also has jurisdiction under the ICSID Convention for the reasons set out below.
207. Article 25(1) of the ICSID Convention has four conditions:
208. Each of these conditions is satisfied, and the Tribunal therefore has jurisdiction under the ICSID arbitration. Indeed, the Respondent does not appear to take issue with this proposition. Nonetheless, for completeness:
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Parties set forth in the definition of an ‘investment' under the BIT as long as such will is compatible with Article 25 of the ICSID Convention".221 There is no inconsistency between the definition of an “investment” set out at [201] above and Article 25 of the ICSID Convention. In any event, Discovery's investment also fulfils the alternative 'Salini test' of contribution, duration and risk (as interpreted in subsequent authorities):222
* * *
221 Hassan Awdi, Enterprise Business Consultants, Inc. and Alfa El Corporation v. Romania,
ICSID Case No. ARB/10/13, Award, 2 March 2015 at [197] Exhibit CL-012. ↩
222 See e.g. Ickale Insaat Limited Sirketi v Turkmenistan, ICSID Case No. ARB/10/24, Award,
8 March 2016 at [289]-[291] Exhibit CL-013. ↩
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209. Article II(2)(a) of the BIT provides that “[i]nvestment shall at all times be accorded fair and equitable treatment”.
210. In order to determine the content of the relevant standard, i.e. fair and equitable treatment (“FET”), the starting point is the ordinary meaning of the words of Article II(2)(a).223 However, this “is of limited assistance”.224
211. The ordinary words of Article II(2)(a) also have to be read in their context:
223 Vienna Convention on the Law of Treaties (“VCLT”), Article 31.1 Exhibit CL-014. ↩
224 Infinito Gold Ltd. v. Republic of Costa Rica, ICSID Case No. ARB/14/5, Award, 03 June
2021 ("Infinito Gold") at [351] Exhibit CL-015. ↩
225 MTD Equity Sdn Bhd and MTD Chile SA v. Republic of Chile, ICSID Case No. ARB/01/7,
Award, 25 May 2004 (“MTD”) at [113] Exhibit CL-016. ↩
226 Saluka Investments BV (The Netherlands) v. Czech Republic, UNCITRAL, Partial Award,
17 March 2006 (“Saluka”) at [297] Exhibit CL-017. ↩
227 S.D. Myers Inc. v. Government of Canada, UNCITRAL, Partial Award, 13 November 2000
("SD Myers") at [263] Exhibit CL-018. ↩
228 Saluka at [297] Exhibit CL-017. ↩
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212. The FET standard is “a flexible one which must be adapted to the circumstances of each case”.230 In the frequently cited words of the tribunal in Técnicas Medioambientales Tecmed SA v Mexico:231
229 Vivendi v Argentina, ICSID Case No ARB/97/3, Award, 20 August 2007 (“Vivendi") at
[7.4.8] Exhibit CL-019 citing FA Mann, British Treaties for the Promotion and Protection
of Investments (1981) 52 British Yearbook of International Law 241, 244. ↩
230 Waste Management, Inc. v. Mexico, ICSID Case No ARB(AF)/00/3, Award, 30 April 2004,
at [99] Exhibit CL-020. ↩
231 Tecnicas Medioambientales Tecmed SA v Mexico ICSID Case No. ARB (AF)/00/2, Award,
29 May 2003 (“Tecmed”) at [154] Exhibit CL-021. ↩
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"The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations. Any and all State actions conforming to such criteria should relate not only to the guidelines, directives or requirements issued, or the resolutions approved thereunder, but also to the goals underlying such regulations. The foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any preexisting decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities."
213. Accordingly, the “broad requirement”232 of the FET standard encompasses several related but distinct legal standards:233
232 Waguih Elie George Siag and Clorinda Vecchi v. The Arab Republic of Egypt, ICSID Case
No. ARB/05/15, Award, 1 June 2009, at [450] Exhibit CL-022. ↩
233 Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22,
Award dated 24 July 2008, (“Biwater") at [602] Exhibit CL-023 (“The general standard of
'fair and equitable treatment' ... comprises a number of different components..."). ↩
234 El Paso Energy International Company v Argentina, ICSID Case No ARB/03/15, Award, 31
October 2011 ("El Paso") at [348] Exhibit CL-025. See also EDF (Services) Limited v.
Romania, ICSID Case No ARB/05/13, Award, 8 October 2009, at [216] Exhibit CL-024
("one of the major components of the FET standard is the parties' legitimate and reasonable
expectations with respect to the investment they have made. Claimant has specifically
referred to this component"). ↩
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investor”.235 For example, the tribunal in Garanti Koza v Turkmenistan held that the inconsistency of behaviour between one agency of the Turkmenistan Governemnt and the other arms of the same Government “would alone have been sufficient to call into question whether the Claimant had been treated fairly and equitably”.236
214. Discovery elaborates below on each legal standard summarised at [213] above.
235 EnCana Corporation v. Republic of Ecuador, LCIA Case No. UN 3481, Award, 3 February
2006, at [158] Exhibit CL-027, cited with approval in Crystallex International Corporation
v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award, 4 April 2016
("Crystallex") at [579] Exhibit CL-026. ↩
236 Garanti Koza LLP v. Turkmenistan, ICSID Case No. ARB/11/20, Award, 19 December 2016
at [382] Exhibit CL-028. ↩
237 OOO Manolium Processing v. Republic of Belarus, PCA Case No. 2018-06, Final Award,
22 June 2021, at [534] CL-030. See also Jan de Nul N.V. and Dredging International N.V. v.
Arab Republic of Egypt, ICSID Case No. ARB/04/13, Award, 6 November 2008, at [188]
Exhibit CL-029 ("the fair and equitable treatment standard encompasses the notion of
denial of justice") and Infinito Gold at [437] Exhibit CL-015 ("the Parties agree – and
rightly so – that it [i.e. the concept of denial of justice] is comprised in the FET standard..."). ↩
238 Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v, Republic of
Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008, at [609] Exhibit CL-032.
See also Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on
Jurisdiction and Liability, 14 January 2010 (“Lemire"), at [284] Exhibit CL-031. ↩
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(i) Legitimate Expectations
215. As to legitimate expectations, the purpose of this standard “is to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment, as long as these expectations are reasonable and legitimate and have been relied upon by the investor to make the investment”.239
216. The basic elements of a legitimate expectation that must not be violated (at least not in a more than de minimis fashion) by a host State240 are as follows:
239 Biwater at [602] Exhibit CL-023. ↩
240 Photovoltaik Knopf Betriebs-GmbH v. Czech Republic, PCA Case No. 2014-21, Award, 15
May 2019 ("Photovoltaik Knopf") at [496] Exhibit CL-033. ↩
241 Antaris Solar GmbH and Dr. Michael Göde v The Czech Republic, PCA Case No. 2014-01,
Award, 2 May 2018, at [360(3)] Exhibit CL-034. ↩
242 Tecmed at [154] Exhibit CL-021. See also Metalclad Corp v United Mexican States, ICSID
Case No ARB(AF)/97/1, Award, 30 August 2000, at [85]-[93] Exhibit CL-035. ↩
243 El Paso at [395] Exhibit CL-025. ↩
244 R Dolzer and C Schreuer, Principles of International Investment Law (OUP, 2022) at p.209
Exhibit CL-052 (p.14). ↩
245 Ioan Micula and others v. Romania I, ICSID Case No. ARB/05/20, Award, 11 December
2013 at [668] Exhibit CL-036; Photovoltaik Knopf at [496] Exhibit CL-033. ↩
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(ii) Consistency
217. As to the State's obligation to act consistently, under international law the host State “needs to be considered by the Tribunal as a unit”.246 Thus, where two branches of the State act inconsistently, a State may breach the FET standard in a BIT. In MTD Equity v Chile, an investor with whom Chile's foreign investment commission had signed an investment contract for the construction of an urban development was denied the necessary permits pursuant to applicable zoning regulations. Although the relevant agencies were separate as a matter of municipal law, they constituted a “unit” or “monolith” for the “purposes of the obligations of Chile under the BIT".247
218. The tribunal in Glencore v Colombia248 articulated the relevant principles as follows:
“The Tribunal agrees with Claimants that an investor may legitimately hold the expectation that different branches of government will not take inconsistent actions affecting the investment: a government agency should not make a decision that contradicts a prior decision made by the same or another agency, acting within the same sphere of powers, on which the investor has relied, causing harm to the investor. This is part of the core meaning of the FET standard.
There is no inconsistency and no breach of legitimate expectations, however, when the second agency, applying substantive legal criteria established in a pre-existing legal framework, takes a decision which diverges from that previously adopted by another agency. The reason is simple: The modern nation-state typically endows different agencies with different legal and policy responsibilities and objectives.”
246 MTD at [165] Exhibit CL-016. ↩
247 MTD at [166] Exhibit CL-016. ↩
248 Glencore International A.G. and C.I. Prodeco S.A. v. Republic of Colombia, ICSID Case No.
ARB/16/6, Award, 27 August 2019 (“Glencore") at [1419]-[1420] Exhibit CL-037. ↩
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(iii) Denial of Justice
219. As to denial of justice, the Tribunal in Infinito Gold authoritatively summarised the legal test as follows:249
"[...] a denial of justice occurs when there is a fundamental failure in the host's State's administration of justice. The following elements can lead to this conclusion (i) the State has denied the investor access to domestic courts; (ii) the courts have engaged in unwarranted delay; (iii) the courts have failed to provide those guarantees which are generally considered indispensable to the proper administration of justice (such as the independence and impartiality of judges, due process and the right to be heard); or (iv) the decision is manifestly arbitrary, unjust or idiosyncratic.”
220. Although the “threshold of the international delict of denial of justice is high and goes far beyond the mere application of domestic law”,250 bad faith and malicious intent are not necessary. As the tribunal in Loewen v USA put it: “[n]either State practice, the decisions of international tribunals nor the opinion of commentators support the view that bad faith or malicious intention is an essential element of unfair and inequitable treatment or denial of justice”.251
221. At the same time, “[i]nternational law does [...] attach special importance to discriminatory violations of municipal law”.252
222. For completeness, in this case, the Infinito Gold test should be applied instead of e.g. the alternative reasoning in Lion Mexico Consolidated LP v Mexico where the NAFTA tribunal concluded that “there is no ‘substantive denial of justice'”.253 This is for at least the following reasons:
249 Infinito Gold at [445] Exhibit CL-015. ↩
250 Liman Caspian v Kazakhstan, ICSID Case No ARB-07-14, Excepts of Award, 22 June 2010,
at [274] Exhibit CL-038. ↩
251 Loewen v USA, ICSID Case No ARB(AF)/98/3, Final Award, 26 June 2003, at [132]
("Loewen") Exhibit CL-039. ↩
252 Loewen at [135] Exhibit CL-039. ↩
253 Lion Mexico Consolidated L.P. v. United Mexican States, ICSID Case No. ARB(AF)/15/2,
Award, 20 September 2021 (“Lion Mexico") at [217] Exhibit CL-040. ↩
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223. If it is necessary for this Tribunal to decide between the two strands of reasoning, the Infinito Gold reasoning is to be preferred. As a matter of principle and authority, the better analysis is that adopted by the Infinito
254 Lion Mexico at [210] Exhibit CL-040. ↩
255 Lion Mexico at [218] Exhibit CL-040. ↩
256 Lion Mexico at [218] Exhibit CL-040. ↩
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Gold tribunal, which avoids needless line-drawing and instead accepts that “a denial of justice may be procedural or substantive”.257 In this regard:
"Denial of justice exists when there is[i] a denial, unwarranted delay or obstruction of access to courts,
[ii] gross deficiency in the administration of judicial or remedial process,
[iii] failure to provide those guarantees which are generally considered indispensable to the proper administration of justice, or
[iv] a manifestly unjust judgment. An error of a national court which does not produce manifest injustice is not a denial of justice."
257 Infinito Gold at [445] Exhibit CL-015. ↩
258 Lion Mexico at [200] Exhibit CL-040. ↩
259 As quoted in Lion Mexico at [213] Exhibit CL-040. ↩
260 Liman Caspian Oil BV and NCL Dutch Investment BV v. Republic of Kazakhstan, ICSID
Case No. ARB/07/14, Excerpts of Award, 22 June 2010 at [274] Exhibit CL-038. ↩
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261 Lion Mexico at [217] Exhibit CL-040. ↩
262 As cited in Lion Mexico at [219] Exhibit CL-040. ↩
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224. The Licences granted to AOG (before and after Discovery became an investor) all contained representations to the licence holder that it would be permitted to carry out geological deposit exploration in respect of oil and gas in the blocks covered by each Licence. These representations were both clear and specific to AOG. It was therefore legitimate for Discovery (and AOG) to rely on them, and they did so rely on them.
225. Discovery relied on the terms of the Licences when deciding to invest in AOG and continued to rely on them when it funded the exploration activities after its investment in 2014.263
226. What, then, was the content of these expectations? At a minimum,264 Discovery legitimately expected the following:
263 Lewis 1 at [19]; Fraser 1 at [64]. ↩
264 As to the additional legitimate expectation generated by the Slovak Republic's specific
representations in relation to the EIA process, see [236] below. ↩
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227. When Discovery/AOG attempted to drill at the Smilno well site, numerous Slovak State organs frustrated the legitimate expectations that the Slovak Republic had created and upon which Discovery reasonably relied. Those state organs included (in particular) the Police and the Ministry of Interior, whose conduct was exacerbated by the conduct of other State organs as summarised at [129] above. By their conduct summarised at [128(2)]- [128(4)] above, the Police frustrated all of Discovery's legitimate expectations at [226] above. In particular, having been granted the Licences, Discovery legitimately expected no other organ of the Slovak state would prevent AOG from carrying out all of the exploration activities which it was expressly permitted to undertake. Yet the Police's conduct frustrated that legitimate expectation and ultimately prevented Discovery/AOG from being able to drill an exploratory well at Smilno.
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228. What is more, Discovery suffered a denial of justice by (i) the conduct of the Bardejov District Court in issuing the Interim Injunction and (ii) the decision of the Prešov Regional Court in declining to overturn the Interim Injunction. Those decisions were manifestly arbitrary, unjust or idiosyncratic and again prevented Discovery/AOG from being able to drill an exploratory well at Smilno. In the words of Prof Števček, both decisions are “inexplicable" and contain errors that he “cannot explain”.265 In particular:
229. Alternatively, the decisions of the Bardejov District Court and the Prešov Regional Court were sufficiently arbitrary, unjust or idiosyncratic that they
265 Števček 1 at [33]. ↩
266 Števček 1 at [16]. ↩
267 Števček 1 at [21]. ↩
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should compel the Tribunal to conclude that the decisions could not have been reached by an impartial judicial body worthy of its name. It is reasonable to infer that, by their decisions, the Bardejov District Court and the Prešov Regional Court were biased against AOG and biased in favour of Ms Varjanová. Once again, such conduct prevented Discovery/AOG from being able to drill an exploratory well at Smilno.
230. Furthermore, the Slovak Republic also failed to act consistently; and such conduct again prevented Discovery/AOG from being able to drill an exploratory well at Smilno. In particular, the Ministry of Interior and Ministry of Transport reached inconsistent conclusions regarding the status of the Road (see [122]-[126] above). This is all the more problematic in circumstances where, albeit belatedly, the Ministry of the Interior acknowledged that the competent authority was not the Ministry of Interior but rather the Ministry of Transport (see [124] above).
231. Further, the Police in the event failed to act in accordance with the guidance issued by the Ministry of Transport (see [122]) and adopted a position which was patently inconsistent with that of the Smilno municipality (see [84]) viz. that the Road was “publicly accessible” and had been used by the public for “100-200 years”. By refusing to disperse the protesters and refusing to put up the relevant sign clarifying that the Road was a public special purpose road, the Police's actions were at odds with the clear position of the Ministry of Transport and the Smilno municipality, namely that the Road was publicly accessible. This is a further instance of inconsistent behaviour by organs of the Slovak State which prevented Discovery/AOG from being able to drill an exploratory well at Smilno.
232. Numerous Slovak State organs also frustrated the legitimate expectations that the Slovak Republic had created and upon which Discovery reasonably relied in connection with its attempts to drill an exploratory well at Krivá
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Ol'ka. Those state organs included (in particular) the MoA and the MoE. Their conduct as described above frustrated all of Discovery's legitimate expectations at [226] above. In particular, having been granted the relevant Licence and then the Lease in respect of the land owned by the State Forestry, Discovery/AOG had a legitimate expectation that the MoA would not actively prevent them from doing what both the MoE (as the relevant Ministry) and the MoA (who had granted its consent to enter into the Lease) had previously approved: namely, exploratory drilling. Yet that is precisely what the MoA did: it refused to approve Addendum No. 1 to the Lease and did not treat Discovery/AOG fairly or transparently (see [137]-[142]).
233. What is more, by refusing to approve Addendum No. 1 to the Lease, the MoA acted inconsistently with both with (i) the MoE's prior conduct (in granting the 2016 Licences – see [74] and [141(1)] above) and (ii) the MoA's own prior conduct (in approving the Lease in October 2015 – see [135] above). Having originally approved the Lease (which included a right to request an extension – see [134] above) Discovery legitimately expected that the MoA would not perform a volte face and decline to approve an extension and thereby prevent AOG from completing its exploration activities. Yet the MoA frustrated Discovery's legitimate expectation by refusing to approve Addendum No. 1.
234. Furthermore, the MoE itself failed to act consistently by refusing AOG's §29 application (see [151] above). Having determined in the Licences, which were periodicially extended and culminating in the 2016 Licences, that AOG was permitted to carry out exploration activities on the very land that was the subject of the §29 application (see [74] above), and that it was in the public interest for AOG to do so, it was inconsistent for the MoE then to dismiss the §29 application and thereby prevent AOG from carrying out those exploration activities.
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235. The preamble of the BIT expressly acknowledges that “fair and equitable treatment of investment is desirable in order to maintain a stable framework for investment".268 This stability was destroyed by the Slovak Republic's conduct in (i) requiring AOG to carry out a full EIA in respect of the Smilno well, the Ruská Poruba well and the Krivá Ol'ka well (see [184]-[187] above) and (ii) requiring AOG to carry out a preliminary EIA prior to drilling any future exploration wells (see [193] above).
236. As explained at [164]-[180] above, the MoE and Minister Sólymos had made it entirely clear that, notwithstanding the amendment to the EIA Act in November 2016, AOG was under no legal obligation to conduct an EΙΑ prior to drilling its exploration wells under the Licences. The representations to this effect were clear, and they were made to AOG directly. The representations generated a further legitimate expectation (in addition to the legitimate expectations set out at [226] above, and which existed as a result of the terms of the Licences, and the relevant legislation in force, at the time of Discovery's investment) upon which Discovery reasonably relied, namely that AOG would not be required to conduct a preliminary EIA.
237. In reliance on those representations:
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in the reasonable belief that no requirement to conduct an EIA was going to be imposed by the MoE.
238. By its conduct in (i) requiring AOG to carry out a full EIA in respect of the Smilno well, the Ruská Poruba well and the Krivá Ol’ka well (see [184]- [187] above) and (ii) requiring AOG to carry out a preliminary EIA prior to drilling any future exploration wells (see [193] above), the Slovak Republic frustrated Discovery's legitimate expectations at [226] and [236] above. Such conduct was the last nail in the coffin of Discovery's investment and (as explained at [188]-[195] above) precipitated the withdrawal of AOG's JV partners and ultimately destroyed the value of Discovery's investment.
239. Article II(1) of the BIT provides that:269
“Each Party shall permit and treat investment, and activities associated therewith, on a basis no less favourable that that accorded in like situations to investment [...] of its own nationals or companies, or of nationals or companies of any third country, whichever is the most favourable”
240. This protection expressly extends to “activities associated” with investment, and Article II(10) provides that, “(a) the granting of franchises or rights under licenses” and “(b) access to registrations, licenses, permits and other approvals (which shall in any event be issued expeditiously)” constituted such "associated” activities.
241. The purpose of this BIT standard is that “foreigners should be afforded treatment no less favourable than the one granted to local citizens”.270 The content of the standard is that “there shall be no treatment less favourable
269 Exhibit C-1. ↩
270 Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8, Award, 11
September 2007 (“Parkerings") at [367] Exhibit CL-041. ↩
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– i.e. no discrimination – between foreign and national investments when they are in like situations”.271 However:272
"[w]hether discrimination is objectionable does not [...] depend on subjective requirements such as the bad faith or the malicious intent of the State [...] to violate international law, discrimination must be unreasonable or lacking proportionality, for instance, it must be inapposite or excessive to achieve an otherwise legitimate objective of the State. An objective justification may justify differentiated treatments of similar cases. It would be necessary, in each case, to evaluate the exact circumstances and the context".
242. The relevant analytical framework to assessing whether the State has violated the arbitrary and discriminatory treatment standard in a BIT is as follows:273
"[A]s a first step, the treatment accorded a foreign owned investment [...] should be compared with that accorded domestic investment in the same business or economic sector.
Once it is established that a foreign and domestic investor are in the same business or economic sector, ‘[d]ifference in treatment will presumptively violate [the principle] unless they have a reasonable nexus to rational government policies that (1) do not distinguish, on their face or de facto, between foreign-owned and domestic companies, and (2) do not otherwise unduly undermine the investment liberalizing of [the BIT]'”.
243. Furthermore, Article II(2)(b) of the BIT provides that:
"Neither Party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investments.”
244. Article II(2)(b) has two prongs: (i) arbitrariness and (ii) non-discrimination. Those two prongs are to be read disjunctively. In Lemire v Ukraine II, the tribunal construed a materially identical clause in the Ukraine-US bilateral
271 Champion Trading Company and Ameritrade International, Inc. v. Arab Republic of Egypt,
ICSID Case No. ARB/02/9, Award, 27 October 2006, at [128] Exhibit CL-042. ↩
272 Parkerings at [368] Exhibit CL-041. ↩
273 Parkerings at [370] Exhibit CL-041, citing Pope & Talbot Inc. v. The Government of
Canada, NAFTA Case, Award on the Merits of Phase 2, 10 April 2001, at [78]-[79]. ↩
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investment treaty274 and held that “for a measure to violate the BIT it is sufficient if it is either arbitrary or discriminatory; it need not be both".275
245. As to the first prong of Article II(2)(b)—arbitrariness—the tribunal in Lemire summarised the notion of arbitrariness as the substitution of prejudice, preference or bias for the rule of law:276
"Arbitrariness has been described as 'founded on prejudice or preference rather than on reason or fact';277 '...contrary to the law because...[it] shocks, or at least surprises, a sense of juridical propriety';278 or 'wilful disregard of due process of law, an act which shocks, or at least surprises a sense of judicial propriety';279 or conduct which 'manifestly violate[s] the requirements of consistency, transparency, even-handedness and non-discrimination'.280 Professor Schreuer has defined (and the Tribunal in EDF v. Romania281 has accepted) as ‘arbitrary':'a. a measure that inflicts damage on the investor without serving any apparent legitimate purpose;
b. a measure that is not based on legal standards but on discretion, prejudice or personal preference;
c. a measure taken for reasons that are different from those put forward by the decision maker;
d. a measure taken in wilful disregard of due process and proper procedure.
Summing up, the underlying notion of arbitrariness is that prejudice, preference or bias is substituted for the rule of law."
274 Article II.3 of which provides that “Neither party shall in any way impair by arbitrary or
discriminatory measures the management, operation, maintenance, use, enjoyment,
acquisition, expansion or disposal of investments”: see Lemire at [256] Exhibit CL-031. ↩
275 Lemire at [260] Exhibit CL-031. ↩
276 Lemire at [262]-[263] Exhibit CL-031. ↩
277 Ronald S. Lauder v. Czech Republic, UNCITRAL, Award of 3 September 2001, at [221]
Exhibit CL-043. ↩
278 Tecmed at [154] Exhibit CL-021. ↩
279 Loewen at [131] Exhibit CL-039. ↩
280 Saluka at [307] Exhibit CL-017. ↩
281 See EDF(Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award of 8 October
2009 at [303] Exhibit CL-024 (Professor Schreuer acted as expert and his opinion was
quoted and accepted by the tribunal in that case). ↩
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246. This test has been subsequently applied by numerous tribunals.282
247. As to the second prong of Article II(2)(b)—discrimination—the Lemire tribunal held that "[t]o amount to discrimination, a case must be treated differently from similar cases without justification”.283 Similarly, the tribunal in Saluka held that:284
"A foreign investor protected by the Treaty may in any case properly expect that the Czech Republic implements its policies bona fide by conduct that is, as far as it affects the investors' investment, reasonably justifiable by public policies and that such conduct does not manifestly violate the requirements of consistency, transparency, even-handedness and nondiscrimination. In particular, any differential treatment of a foreign investor must not be based on unreasonable distinctions and demands, and must be justified by showing that it bears a reasonable relationship to rational policies not motivated by a preference for other investments over the foreign-owned investment”.
248. Consistently with this, the elements of a claim for unlawful discrimination were summarised in Pawlowski v Czechia as follows:285
"First, an appropriate comparator must be identified, i.e., an investor which is in a situation similar to that of Claimants (or an investment which is in a situation similar to investment in the Czech Republic);
Second, Claimant must prove that the Czech Republic has applied to this comparator a treatment more favourable than that accorded to Pawlowski AG and Projekt Sever, or to their investment in the Czech Republic;
Third, there must be a lack of a reasonable or objective justification for the difference of treatment."
249. The clearest instance of Slovakia's conduct in failing to treat Discovery as favourably as a domestic investor (NAFTA) and its discriminatory
282 Glencore at [1448]-[1450] Exhibit CL-037; Infinito Gold at [549] Exhibit CL-015. ↩
283 Lemire at [261] Exhibit CL-031. ↩
284 Saluka at [307] Exhibit CL-017. ↩
285 Pawlowski AG and Project Sever s.r.o. v. Czech Republic, ICSID Case No. ARB/17/11,
Award, 01 November 2021, at [534] Exhibit CL-044. ↩
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treatment was the MoE's refusal of AOG's application for a compulsory access order under §29 of the Geology Act (see [143]-[157] above). In so doing, Slovakia violated Article II(2)(b) of the BIT. In particular:
“The Ministry's view is that, if license holders have a right to perform geological works in exploration areas that had been granted by decisions of state orders and over long periods of time invest not insignificant financial means for geological exploration, the Ministry considers it undesirable for the investigation of the parts with the best prospects to be made impossible by the owner of the affected land by a refusal for purely subjective reasons. ...”
250. Pending disclosure, it is not presently clear whether there were either other applications by NAFTA or other relevantly similar applications that were
286 Exhibit C-206, p.30 (SVK), pg.8 (ENG). ↩
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granted. If so, those would be further instances of the Slovak Republic treating Discovery less favourably and discriminating against it and thereby violating its obligations under Article II(2)(b) of the BIT. Those decisions inflicted damage on Discovery without serving any apparent legitimate purpose. They were also not based on any legal standards but on discretion, prejudice or personal preference.
251. Another instance of Slovakia's conduct in failing to treat Discovery as favourably as a domestic investor (NAFTA) and its discriminatory treatment was the MoA's refusal to approve the extension of the Lease under Addendum No. 1 in respect of the Krivá Ol'ka well (see [137]-[142] above). In so doing, Slovakia violated Article II(2)(b) of the BIT. In particular:
252. In the absence of any rational purpose, the MoA and MoE also acted arbitrarily—and hence in breach of Article II(2)(b) of the BIT—by,
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respectively, refusing to consent to the extension of the Lease and by dismissing the §29 application.
253. As to the MoA's refusal to consent to the extension of the Lease, Discovery understands that the Head of the Service Office of the MoA (Mr Regec) refused to sign the extension on the basis of “a personal decision based on the fact that he himself comes from the area”.287 In so doing, the MoA substituted prejudice, preference and bias for the rule of law and due process. Such conduct was self-evidently arbitrary.
254. The MoE also acted arbitrarily. It had already decided that exploratory activities were in the public interest, but nonetheless refused the application on the basis that the lack of consent by the MoA in and of itself predetermined the application. This was not only at odds with the MoA's own position (as it was the MoA's suggestion that an application be made) but also lacked any proper rationalisation.
255. In any event, the initial application for the MoA's consent as well as the subsequent §29 application both constituted “permits” or “other approvals” within the meaning of Article II(10)(b). Those “shall in any event be issued expeditiously". On both occasions, the respondent State has failed to do so:
256. Failing to resolve these entirely straight-forward applications within less than 5 and 6 months respectively amounts to a failure to act expeditiously.
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257. By its conduct in (i) requiring AOG to carry out a full EIA in respect of the Smilno well, the Ruská Poruba well and the Krivá Ol'ka well (see [184]- [187] above) and (ii) requiring AOG to carry out a preliminary EIA prior to drilling any future exploration wells (see [193] above), the Slovak Republic also violated both prongs of Article II(2)(b) of the BIT. In particular:
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258. Article II(6) of the BIT provides:288
“Each Party shall provide effective means of asserting claims and enforcing rights with respect to investments and authorizations relating thereto and investment agreements."
259. Article II(6) imposes the following obligation on the Slovak Republic:289
“The fundamental criteria of an ‘effective means' for the assertion of claims and the enforcement of rights within the meaning of Article 10(2) is law and the rule of law. There must be legislation for the recognition and enforcement of property and contractual rights. This legislation must be made in accordance with the constitution, and be publicly available. An effective means of the assertion of claims and the enforcement of rights also requires secondary rules of the procedure so that the principles and objectives of the legislation can be translated by the investor into effective action in the domestic tribunals."
260. Article II(6) therefore imposes “a positive obligation [on] the host State to provide effective means, as opposed to a negative obligation not to interfere in the functioning of those means”.290
261. There is an overlap between the effective means standard and denial of justice (as protected by the FET standard) at least insofar as unwarranted delay is concerned. The tribunal in Chevron v Ecuador cited Paulsson's opinion that:291
"The delict of denial of justice by unreasonable delay is fully consummated at the point in time at which the length of the delay, in the circumstances of the case, rises to the level of a breach of the international standard. The
288 Exhibit C-1. ↩
289 Limited Liability Company Amto v. Ukraine, Arbitration No. 080/2005, Final Award, 26
March 2008, at [87] Exhibit CL-045. ↩
290 Chevron Corporation (U.S.A.) and Texaco Petroleum Corporation (U.S.A.) v. Republic of
Ecuador I, PCA Case No. 2007-02/AA277, Partial Award on the Merits, 30 March 2010
("Chevron") at [248] Exhibit CL-046. ↩
291 Chevron at [278] Exhibit CL-046. ↩
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obligation on the part of the state is to provide justice within a reasonable period. Once the period of reasonableness has lapsed, the alien has been definitively deprived of an opportunity to have his/her rights properly vindicated in the domestic courts; time cannot be recaptured."
262. There were a number of instances where, in breach of Article II(6), Slovakia failed to provide effective means of asserting claims and enforcing rights:
263. Article III(1) of the BIT provides that:292
“Investments shall not be expropriated or nationalized either directly or indirectly through measures tantamount to expropriation or nationalization (‘expropriation') except for a public purpose; in accordance with due process of law; in a nondiscriminatory manner; upon payment of prompt, adequate and effective compensation and in accordance with the general principles of treatment provided for in Article II(2).”
264. The effect of the express language in Article III(1) is that:293
“When measures are taken by a State the effect of which is to deprive the investor of the use and benefit of his investment even though he may retain nominal ownership of the respective rights being the investment, the measures are often referred to as a ‘creeping' or 'indirect' expropriation or, as in the BIT, as measures 'the effect of which is tantamount to expropriation.' As a matter of fact, the investor is deprived by such measures of parts of the value
292 Exhibit C-1. ↩
293 Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case
No. ARB/99/6, Award, 12 April 2002, at [107] Exhibit CL-047. ↩
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of his investment."
265. A well-established definition of an indirect expropriation is the definition articulated in the Tippetts, Abbett, McCarthy, Stratton case before the Iran- US Claims Tribunal:294
“A deprivation or taking of property may occur under international law through interference by a state in the use of that property or with the enjoyment of its benefits, even where legal title to the property is not affected.
While assumption of control over property by a government does not automatically and immediately justify a conclusion that the property has been taken by the government, thus requiring compensation under international law, such a conclusion is warranted whenever events demonstrate that the owner was deprived of the fundamental rights of ownership and it appears that this deprivation is not merely ephemeral. The intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact."
266. This definition was cited by, amongst many others, the tribunal in Compañia del Desarrollo de Santa Elena v Costa Rica, which articulated the relevant principles in the following terms:295
“As is well known, there is a wide spectrum of measures that a state may take in asserting control over property, extending from limited regulation of its use to a complete and formal deprivation of the owner's legal title. Likewise, the period of time involved in the process may vary from an immediate and comprehensive taking to one that only gradually and by small steps reaches a condition in which it can be said that the owner has truly lost all the attributes of ownership. It is clear, however, that a measure or series of measures can still eventually amount to a taking, though the individual steps in the process do not formally purport to amount to a taking or to a transfer of title. [...]
There is ample authority for the proposition that a property has been expropriated when the effect of the measures taken by the state has been to deprive the owner of title, possession or access to the benefit and economic use of his property. [...]"
294 Award No. ITL 141-7-2 (29 June 1984), pgs. 11 - 12 Exhibit CL-048. ↩
295 Compañia del Desarrollo de Santa Elena v Costa Rica, ICSID Case No. ARB/96/1, Award,
17 February 2000, at [76]-[77] Exhibit CL-049. ↩
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267. The critical “benchmark for testing indirect expropriation is whether a measure taken by the state results in a substantial deprivation of the value, use or enjoyment of the investor's investment”.296
268. Where, however, none of the challenged measures separately constitutes expropriation, the expropriation may be creeping even where none of the measures individually constitutes an expropriation in and of itself.297 In other words, a creeping expropriation is “a specific form of expropriation that results from a series of measures taken over time that cumulatively have an expropriatory effect, rather than from a single measure or group of measures that occur at one time".298
269. In the present case, the following measures, either individually or cumulatively, amounted to an indirect expropriation of Discovery's investments which placed Slovakia in breach of Article III(1) of the BIT:
296 Olympic Entertainment Group AS v. Republic of Ukraine, PCA Case No. 2019-18, Award,
15 April 2021, at [104] Exhibit CL-050. ↩
297 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on
Liability, 14 December 2012, at [538] Exhibit CL-051, where the tribunal held that
"creeping expropriation only exists when 'none' of the challenged measures separately
constitutes expropriation". ↩
298 Crystallex at [667] Exhibit CL-026. ↩
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also deprived AOG of the benefit of the Licence it held to explore for oil and gas: see [130]-[157] above.
* * *
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270. Slovakia's breaches of the BIT, as described above, destroyed the value of Discovery's investment and rendered its exploration activities commercially and economically unviable. This has caused significant damage to Discovery for which Slovakia is responsible to pay full reparation under international law. As set out below and in more detail in the Rockflow Expert Reports, the amount to be paid to Discovery by Slovakia in order to provide full reparation, including damages for lost profits, is no less than USD 568.2 million. Discovery also claims interest, as well as all legal and arbitration costs incurred.
271. Article III(1) of the BIT299 specifies the compensation which is payable in the event of a lawful expropriation: “prompt, adequate and effective compensation” which is “equivalent to the fair market value of the expropriated investment immediately before the expropriatory action was taken or became known."
272. The BIT does not, however, specify the compensation payable in the event of (i) an unlawful expropriation (ie an expropriation which does not meet the 'conduct' requirements in Article III(1) of the BIT such as public purpose or due process), or (ii) any other breach of the BIT (eg the FET provision contained in Article II(2) of the BIT).
273. As set out in Section IV above, Slovakia's breaches of the BIT are primarily breaches of the FET standard and/or the prohibition on arbitrary and discriminatory treatment.300 In addition, the breaches constitute an unlawful
299 Exhibit C-1. ↩
300 See [209]-[257] above. ↩
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indirect expropriation.301 Although it is Discovery's position that Slovakia committed all of the violations set out above, any one of them would entitle Discovery to full compensation in circumstances where they have deprived Discovery of the total value of its investment.
274. As the BIT does not provide the compensation method applicable to such violations, the amount of compensation to be paid by Slovakia is to be established by reference to customary international law. The leading authority applied by investment tribunals is the Permanent Court of International Justice (“PCIJ") decision in Chorzów Factory which established the requirement for a State to make “full reparation” for a violation of international law. In Chorzów Factory, the PCIJ established (emphasis added):
“The essential principle contained in the actual notion of an illegal act – a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals – is that reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it. "302
275. This standard of full reparation has since been codified in Articles 31 and 36 of the International Law Commission Articles on the Responsibility of States for Internationally Wrongful Acts (“ILC Articles”).303 The ILC Articles are
301 See [263]-[269] above. ↩
302 Case Concerning the Factory at Chorzów (Germany v. Poland), 1928 PCIJ, Series A, No.
17 (Merits), Judgment No. 13 of 13 September 1928 (“Chorzów Factory") at [125] Exhibit
CL-053. ↩
303 International Law Commission, "Draft Articles on Responsibility of States for Internationally
Wrongful Acts, with commentaries", in Yearbook of the International Law Commission,
2001, Vol. II, Part Two Exhibit CL-054. ↩
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considered to reflect customary international law and, specifically, with regard to “full reparation”, provide the following:
276. The full reparation standard, therefore, requires a tribunal to restore the injured party to the situation which, in all probability,304 it would have been in had the wrongful act not been committed by the responsible State.305 This essential principle of customary international law, known also as the ‘but for’ principle, has been affirmed and applied in a substantial number of investor- State dispute proceedings since its inception in the PCIJ's decision in Chorzów Factory decision in 1928.306
277. As noted above, Article 36(2) of the ILC Articles confirms that, where restitution is not available (which it is not in this case), full reparation requires
304 While Chorzów Factory refers to the situation which would “in all probability" have existed,
it is generally accepted that the standard of proof for damages is the same as for any other
fact, ie it must be more probable than not. See, for example, Gold Reserve Inc. v. Bolivarian
Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award of 22 September 2014
("Gold Reserve") at [685] Exhibit CL-055. ↩
305 Chorzów Factory at [125] Exhibit CL-053. ↩
306 See, for example, Gold Reserve at [685] Exhibit CL-055; Vivendi at [8.2.5] Exhibit CL-
019; "Calculation of Compensation and Damages in International Investment Law",
Marboe, Second Edition (2017), at [2.73] and [2.102] Exhibit CL-056. ↩
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compensation of “any financially assessable damage including loss of profits insofar as it is established.”307
278. The assessment of such damage in a case such as Discovery's where there has been a total loss of the investment, regardless of whether that has been by way of expropriation or some other breach of the BIT,308 is generally accepted as being on the basis of the fair market value of the property lost.309 Fair market value (“FMV”) is frequently defined as “the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm's length in an open and unrestricted market, when neither is under an obligation to buy or sell and when both have reasonable knowledge of the relevant facts".310
279. There are three main approaches to determining the FMV of a lost investment – an income-based approach, a market-based (or comparables) approach, and an asset- based (or cost) approach.311 The appropriate approach is to be determined according to the facts of each case; as set out by the tribunal in Lemire v Ukraine:
"The aim of compensation is the elimination of all negative consequences of the wrongful act, through the payment to the injured party of an amount sufficient to cover 'any financially assessable damage including loss of profits insofar as it is established' (Article 36.2 ILC Articles) ... But this is only a
307 International Law Commission, “Draft Articles on Responsibility of States for Internationally Wrongful Acts, with commentaries", in Yearbook of the International Law Commission, 2001, Vol. II, Part Two Exhibit CL-054. ↩
308 Vivendi at [8.2.8] to [8.2.10] Exhibit CL-019. ↩
309 See Comment 22 on Article 36 in International Law Commission, “Draft Articles on Responsibility of States for Internationally Wrongful Acts, with commentaries", in Yearbook of the International Law Commission, 2001, Vol. II, Part Two, page 102 Exhibit CL-054. ↩
310 International Glossary of Business Valuation Terms, in AICPA (ed.), "Statement of Standards on Valuation Services" (New York: American Institute for Certified Public Accountants, Inc, 2015) 33, as cited in “Calculation of Compensation and Damages in International Investment Law", Marboe, Second Edition (2017), at [2.65] Exhibit CL-056. ↩
311 "Calculation of Compensation and Damages in International Investment Law", Marboe, Second Edition (2017), at [4.74] Exhibit CL-056. ↩
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theoretical definition of a general standard; the actual calculation of damages cannot be made in the abstract, it must be case specific: it requires the definition of a financial methodology for the determination of a sum of money which, delivered to the investor, produces the equivalent economic value which, in all probability, the investor would enjoy, 'but for' the State's breach.”312
280. In considering which approach to adopt to determine the FMV, Discovery contends that the Tribunal is not to be constrained by the ‘willing buyer-willing seller' analogy. As found by the tribunal in Burlington v Ecuador:
"[...] as the standard of compensation is full reparation, the Tribunal must value what Burlington lost as a result of the expropriation. What Burlington lost was a contract with a full set of rights, each of which must be given its value. While the Parties agree that the Tribunal must search for the FMV of these rights, the Tribunal is not bound by the "willing buyer-willing seller" analogy. This analogy is only a tool to calculate the FMV of the expropriated investment, to be used if and when it helps to appropriately quantify the investor's loss. As Burlington argued at the Hearing, as a result of the expropriation, Burlington did not lose an opportunity to sell its contract rights; it lost an opportunity to exercise them. The relevant question is thus not whether a hypothetical buyer would have paid full value for the PSCs, it is what value Burlington would have derived from exercising the rights under the PSCs, but for their expropriation.”313
281. For the reasons set out further below and in Howard 1, Discovery contends that an income-based approach is the only approach that will result in an FMV equivalent to full reparation which will “wipe out” the consequences of Slovakia's wrongful conduct and put Discovery in the position it would have been but for that conduct.
282. The method typically adopted for calculating damages under an income-based approach is the discounted cash flow (“DCF”) method, which has been “constantly used by tribunals in establishing the fair market value of assets
312 Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award of 28 March 2011, at [151-2] Exhibit CL-057. ↩
313 Burlington Resources Inc. v. The Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Reconsideration and Award of 7 February 2017, at [366] Exhibit CL-058. ↩
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to determine compensation of breaches of international law”.314 The DCF method seeks to identify the present value of future cash flows, and is used not only for damages valuations, but also commonly by potential purchasers in valuing targets.
283. DCF is particularly appropriate where the future cash flow is reasonably ascertainable, for example in the case of commodities for which a market exists, and thus to cases where the investor has been deprived of its long-term future rights under licences or concessions (as is the case for Discovery), regardless of whether or not there is any record of past production or profitability.
284. In Crystallex International Corporation v Bolivarian Republic of Venezuela, which related to a gold mining operation, the Tribunal found that gold “is an asset whose costs and future profits can be estimated with greater certainty. The Tribunal thus accepts that predicting future income from ascertained reserves to be extracted by the use of traditional mining techniques... can be done with a significant degree of certainty, even without a record of past production."315
285. Similarly, in Gold Reserve Inc. v. Bolivarian Republic of Venezuela, where the State cancelled the investor's construction permits to develop a gold and copper mine and ultimately terminated its mining concessions, the tribunal awarded substantial damages for loss of future profits notwithstanding that the mine had never functioned and therefore had no history of cashflow.316 The tribunal concluded that “a DCF method can be reliably used in the instant
314 Enron Corporation and Ponderosa Assets L.P v. Argentine Republic, ICSID Case No. ARB/01/3, Award of 22 May 2007, at [385] Exhibit CL-059. ↩
315 Crystallex at [879] Exhibit CL-026. ↩
316 Gold Reserve at [830] and [863] Exhibit CL-055. ↩
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case because of the commodity nature of the product and detailed mining cash flow analysis previously performed".317
286. In East Mediterranean Gas S.A.E. v Egyptian General Petroleum Corporation, concerning contracts for the purchase, sale and supply of gas, the tribunal again found that the DCF method was appropriate despite a lack of a past record of profitability. The tribunal found that "[t]he important fact is not whether EMG can prove its profitability in the past, but rather whether it is reasonable to presume that, were it not for EGAS' wrongdoing, it would have obtained a foreseeable stream of income in the future”.318
287. A further example where the tribunal decided to apply the DCF method, and awarded significant lost profits notwithstanding that there was no past history of production is the case of Tethyan Copper Company Pty Limited v Islamic Republic of Pakistan.319 Indeed, in that case, the claimant had never even been able to commence the exploitation of the mine.
288. While many of the cases cited in the previous paragraphs refer to mining investments and commodities such as gold and copper, Discovery contends that the position is no different for oil and gas. An example in this regard is cited in the Tethyan award from Sergey Ripinsky's and Kevin Williams' text on the subject of damages in international investment law, as follows:
“Consider a situation where an investor obtains a concession for the exploration and exploitation of oil: the investor will carry a risk of not discovering oil and thus losing the totality of its investment. At the same time, once the exploration campaign proves successful, the major risk of the investment is gone, and one should be able to predict with reasonable certainty the range of revenues that the concession will generate, even without a prior record of profitable operations. Perhaps with such situations in mind,
318 East Mediterranean Gas S.A.E. v. Egyptian General Petroleum Corporation, Egyptian Natural Gas Holding Company and Israel Electric Corporation Ltd, ICC Case No. 18215/GZ/MHM, Award of 4 December 2015, at [1344] Exhibit CL-060. ↩
319 Tethyan Copper Company Pty Limited v. Islamic Republic of Pakistan, ICSID Case No. ARB/12/1, Award of 12 July 2019 ("Tethyan") Exhibit CL-061. ↩
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it has been suggested that lost profits should be awarded where they can be proven with reasonable certainty and calculated on a 'rational basis,' even if the claimant is a new business ... This argument makes sense; however, it remains for a tribunal in each particular case to decide whether the evidence on the record is sufficient.”320
289. Valuers also agree that the absence of a historical track record does not render the DCF method inappropriate: “although a track record may give the valuer greater confidence that a similar level of expected future cash flows will be achieved, it is not a necessary requirement for a reasonable valuation because it can be compensated for through the discount rate.”321
290. In calculating the FMV using the DCF method, a valuer can take an ex-ante approach (i.e. calculating the value as at the date of breach), or an ex-post approach (i.e. calculating the value as at the date of award).
291. It is submitted that the most appropriate approach to achieve full reparation in this case is the ex-post approach. Marboe supports this, noting that in the calculation of compensation payable after a violation of international law, "the choice of a valuation date as late as possible ensures that all information available until that date may and can be used in order to arrive as closely as possible at full reparation”.322 It has also been noted that this approach is appropriate in cases “in which the asset is appreciating (such as a natural resource)” in order to compensate the claimant “for the increase in value from which it is unable to benefit” and to avoid a situation where “the respondent will otherwise benefit from an unjust enrichment”.323
320 Sergey Ripinsky & Kevin Williams, “Damages in International Investment Law" (2008), pp. 283-284, as cited in Tethyan at [220] Exhibit CL-061. ↩
321 Philip Haberman and Liz Perks, "Overview of Methodologies for Assessing Fair Market Value" (2021), in The Guide to Damages in International Arbitration, Fourth Edition, Global Arbitration Review Exhibit CL-062. ↩
322 "Calculation of Compensation and Damages in International Investment Law", Marboe, Second Edition (2017), at [3.323-3.324] Exhibit CL-056. ↩
323 Philip Haberman and Liz Perks, “Overview of Methodologies for Assessing Fair Market Value" (2021), in The Guide to Damages in International Arbitration, Fourth Edition, Global Arbitration Review Exhibit CL-062. ↩
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292. As a matter of principle and authority, applying the Chorzów Factory approach, post-breach events should be taken into account when valuing the fair market value of an investment, regardless of whether those post-breach events are a consequence of the State's unlawful act. Thus:
293. The requirement of causation for Discovery's losses has been established. As described in Section IV above, Slovakia's breaches of the BIT caused Discovery to be deprived of its ability to exercise its rights under the Licences, and its opportunity to achieve profits, resulting in a total loss of the value of its investment.
294. Having earned nothing at all from its investment, Discovery contends (as set out at paragraph 276 above) that the Tribunal must consider what the situation would have been had Slovakia not acted in violation of the BIT. In this regard, it is Discovery's case that, “but for" Slovakia's unlawful conduct, AOG would have been able to commence drilling exploration wells no later than 1 January 2017 (the “But For Scenario”), and to thereafter earn profits from production arising from the development of oil and gas prospects within the Licence areas.
295. Indeed, it is likely that exploration drilling would have started much sooner than 1 January 2017 had Slovakia acted in accordance with its international law obligations, given that the first drilling attempt at the Smilno site took
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place in December 2015/January 2016, and ought to have been able to be carried out had the police acted as required. At the very least, drilling should have taken place at the Smilno site by no later than the end of 2016 as (i) the Interim Injunction should not have been granted and/or should have been dismissed on appeal and/or should have been discharged upon AOG's concession of the underlying claim, (ii) the Ministry of Transport had confirmed to the police that the Road was a public special purpose road, and (iii) moreover, the relevant authorities, including the police, ought to have upheld the rights granted under the Licence.
296. In addition, exploration drilling at Krivá Ol’ka ought to have been able to take place during 2016 as the Ministry of Agriculture should have approved the extension of the term of the Lease (having already approved the original Lease) and in timely fashion and/or the Ministry of Environment ought to have a granted a compulsory access order under §29 of the Geology Act (there being no opposition to it from the Ministry of Agriculture).
297. Accordingly, although exploration drilling should have been able to commence during 2016, Discovery has taken a conservative approach and assumed for the purposes of the But For Scenario that drilling would have commenced no later than 1 January 2017.
298. The But For Scenario also assumes the following facts:
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witness evidence of Mr Lewis and Mr Fraser, that: (i) Mr Lewis had sufficient resources to cover the initial drilling program,324 and (ii) additional funding would have been provided by Akard (who would not have withdrawn from the project, as they did so only because of the delays and opposition encountered) and/or an alternative equivalent investor/funder;325
324 Fraser 1 at [12] and [15]; Lewis 1 at [34]. ↩
325 Fraser 1 at [15]; Lewis 1 at [35]. ↩
326 See also Fraser 1 at [62]. ↩
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299. To calculate Discovery's economic position in the But For Scenario, the Rockflow Expert Reports therefore:
300. The conclusions of each of these reports is summarised below.
301. Mr Atkinson has first reviewed the exploration history in the region in which the Licences are situated, finding that there is a long history of exploration and production, particularly in the area just over the border in Poland. Notably, he finds the Licence areas are “on trend” (i.e. they share characteristics) with oil fields occupying a similar geological setting in Poland.327 Mr Atkinson also notes that historic drilling has been carried out on the Licence areas, with both oil and gas having been found.328 Mr Atkinson concludes that “the oil and gas production history in the neighbouring area
327 Atkinson 1 at [30]-[31]. ↩
328 Atkinson 1 at [35]-[47] and Section 3.2. ↩
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of Poland, and drilling results in Slovakia show that the Claimant's licence areas are prospective for oil and gas".329
302. Having then considered the regional geology, and finding that it has “all of the necessary components of a working petroleum system in the Claimant's licence areas",330 Mr Atkinson subsequently analyses the geological data available in the Licence areas, combined with data from analogous Polish fields, in order to identify prospects. Mr Atkinson proceeds to define 40 prospects (i.e. areas that may be expected to contain hydrocarbons), 18 of which are oil prospects and 22 are gas prospects.331
303. Mr Atkinson has compared those defined prospects to AOG's planned wells, and has confirmed that both the Smilno and Krivá Ol’ka planned wells would target prospects that he has identified, as would the alternative Zborov well that AOG had been considering (prior to the MoE's decision in June 2018 to impose a requirement in the Svidník Licence that an EIA must be conducted prior any exploration wells being drilled – see [195] above).332
304. As such, Atkinson 1 confirms that, had AOG been able to proceed with its exploration drilling as planned, it is highly likely that hydrocarbons would have been discovered.
305. For the purposes of ultimately being able to calculate the economic value of the Licences, Mr Atkinson has then estimated the volume of hydrocarbons in-place potentially available to be produced (known as the Petroleum Initially In Place or “PIIP”) for each prospect, using a probabilistic method to determine a potential range of volumes and then calculating the mean volume. He estimates the total unrisked mean oil PIIP across the 18 oil prospects to be 697 million stock tank barrels and the total unrisked mean gas PIIP across
330 Atkinson 1 at [65] and Section 3.3. ↩
331 Atkinson 1 at [19], [107], [119] and Sections 3.4-3.5. ↩
332 Atkinson 1 at [19] and [109]-[113]. ↩
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the 22 gas prospects to be 836 billion cubic feet.333 In this regard, Mr Atkinson notes that his estimates are conservative, and that significant volumes remain to be discovered in this area, a view supported by a wholly independent US Geological Survey study.334
306. As these figures are, however, unrisked, the PIIP needs to be multiplied by the geological chance of success (“GCOS”), i.e. the chance of discovering hydrocarbons which are capable of flowing to surface, in order to determine the risked volumes. These risked volumes can then be used to establish commercial value.335 Mr Atkinson has calculated the GCOS for each of the 40 identified prospects in Section 3.7 of Atkinson 1. These GCOS figures have then been used by Mr Howard in his decision tree analysis, as discussed further below.
307. Using the in-place volume estimates prepared by Mr Atkinson, Dr Moy has calculated a production profile for each of the prospects, assuming an exploration well is drilled and that hydrocarbons are discovered.
308. In preparing that production profile, Dr Moy has analysed data from wells drilled in the Licence areas in the 1970s and 1980s as well as the performance of analogue fields in Poland. Dr Moy notes, however, that the performance of those wells “appears to have been compromised by the poor and inefficient drilling practices of the time”.336
309. Dr Moy has then relied on Mr Howard's decision tree analysis, which has determined that of the 40 prospects identified by Mr Atkinson, six gas and three oil prospects would be considered successful in the ‘P50' scenario (which Dr Moy notes “represents the 'best' estimate and is the most
333 Atkinson 1 at [20] and [179] and Section 3.6. ↩
334 Atkinson 1 at [114]-[118]. ↩
336 Moy 1 at [33] and Section 4. ↩
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appropriate for determining an economic evaluation"337) and subsequently developed. These nine prospects are then used as part of Dr Moy's oil and gas development plans to determine the likely maximum production rates from a successful development of those prospects.338
310. Dr Moy has then determined the best, or mid, case technically recoverable volumes for each of these nine prospects.339
311. Dr Moy has also considered Discovery's actions at the time and concluded that they had a clear intention to drill, and that they were planning an early gas production scheme to allow them to export and sell gas had the initial exploration well been successful.340 He has also identified that there was a viable export route for large amounts of gas via the Polish-Slovakian gas interconnector which will open in October 2022.341 This was known to Discovery at the time.342
312. Dr Moy has then concluded, in respect of the technically recoverable volumes determined, that there is a 100% chance of commerciality: “Considering the clear intention of Discovery Global to drill the initial exploration wells and their senior management's significant operational experience, combined with the fact that the development would be on-shore, in an area with good infrastructure, using stock components, I believe that the chance of development and therefore the chance of commerciality, would be 100%.”343
313. As such, Dr Moy considers that “the recoverable volumes of oil and gas arising from the development of the prospects within the Discovery Global
338 Moy 1 at [44] and Section 10. ↩
339 Moy 1 at Sections 10.1 and 10.2. ↩
340 Moy 1 at [46]-[49] and Sections 6 and 7. ↩
341 Moy 1 at [52] and Section 7. ↩
342 Fraser 1 at [46]; Lewis 1 at [32]. ↩
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licence area would be considered as, and therefore valued as, reserves”.344 These recoverable volumes/reserves are then considered by Mr Howard for the purposes of determining an economic value.
314. Mr Howard has prepared an economic analysis of the recoverable volumes in order to determine the FMV of the Licences. As a first step, he has considered the appropriate approach to take with regard to valuation (noting, as set out above, that there are three commonly used approaches: the income approach, the market approach and the cost approach).345
315. Mr Howard has determined that the income approach, and specifically a DCF valuation method, is appropriate in this case, noting that it is in fact “the usual starting point for the valuation of an oil and gas project”, not least as the products are commodities and easily tradeable. This is particularly the case for reserves which, by definition, have met the relevant commercial criteria (as set out in Dr Moy's analysis, described above), but Mr Howard notes that the Petroleum Resource Management System (“PRMS") guidelines, published by the Society of Petroleum Engineers, provide that “equally valid cash flow-based economic evaluations can be performed on contingent and prospective resources”. As such, Mr Howard concludes that DCF can also be used in oil and gas projects which are in the exploration phase.
316. In contrast, Mr Howard considers that a market approach based on comparable transactions would not be appropriate as you would need to find a transaction that is genuinely comparable, and most oil and gas assets have many unique factors. Mr Howard sets out some of the facts that would need to be similar to be comparable, such as the nature of the resources, the reservoir rock properties, the production profiles, the export methods, the fiscal regime, etc. Mr Howard notes that he has not been able to find any such
344 Moy 1 at [208] and Section 11. ↩
345 Howard 1 at Section 4.2. ↩
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transactions other than Discovery's own acquisition of AOG in 2014; however, this is not a comparable transaction not least because of the significant work undertaken since that acquisition which has increased the value.346
317. Similarly Mr Howard does not consider a cost approach to be appropriate. This is not simply a calculation of the historical costs incurred, but is rather the calculation of the ‘replacement' cost of the investment. As Mr Howard notes, in the context of an oil and gas asset, this is either a variation of the market-based approach by looking at the cost of acquiring another comparable asset, or it requires finding another asset of comparable value, which in turn requires the use of a DCF model. Mr Howard also notes that historical costs “do not indicate the potential for the project to generate future after tax free cash flow", and refers to the Canadian Oil and Gas Evaluation Handbook which states that using such costs is not usually a valid way to determine the value of land available for exploration.347
318. Having determined the DCF approach to be the most appropriate valuation approach in this case, Mr Howard has conducted the decision tree analysis mentioned above in order to determine the 'best' estimate of which of the prospects identified by Mr Atkinson would be successfully drilled and subsequently developed.348
319. As noted above, Dr Moy has used the results of that decision tree analysis to complete his production profiles and determine the recoverable volumes from the nine successful prospects. Mr Howard has then used those recoverable volumes to carry out his DCF valuation.
320. In order to carry out his DCF valuation, Mr Howard has compiled a model to calculate the net present value of the oil and gas exploration and development
346 Howard 1 at Section 4.3. ↩
347 Howard 1 at Section 4.4. ↩
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projects, based on the recoverable volumes calculated by Dr Moy. Mr Howard has adopted a discount rate, based on a weighted average cost of capital, of 12.5%, which he has used as an input in his DCF model.349
321. Mr Howard has also set out the assumptions input into his DCF model, including costs, the development schedule, and the relevant Slovakian fiscal terms applicable to oil and gas extraction.350
322. Mr Howard has then used his DCF model to independently calculate that the FMV of the Licences, in the But For Scenario, as at 1 January 2023, is USD 2,264,948,217.351
323. As noted at [298(1)] above, for the purposes of the But For Scenario, it is assumed that JKX and Romgaz would have remained in the project. They each held a 25% interest in the Licences and AOG held the remaining 50%.
324. In addition, as set out at [298(2)] above, for the purposes of the But For Scenario, it is assumed that additional funding would have been made available to AOG through external investment from Akard or an alternative equivalent. As set out in Fraser 1, the terms on which that funding was to be provided were such that each of Discovery and Akard would own 50% of AOG.352 Accordingly, Mr Howard has calculated that Discovery's share of the calculated FMV (i.e. 25%, being 50% of AOG's share) would be USD 566,237,054.
325. As set out in Fraser 1, Akard did provide some funding pursuant to the arrangements agreed with Discovery.353 Following Akard's withdrawal from
351 Howard 1 at Section 10, and Table 10-1. ↩
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the project as a result of the delays and opposition encountered, it was agreed that the sum of USD 1,965,198.39 would be repaid from any monies earned by Discovery from the Licences. Discovery would therefore be required to repay that amount from the sums awarded in this arbitration.
326. Ordinarily, however, that amount would have been repaid to Akard as part of its share of the profits earned by AOG. Accordingly, Discovery should not be required to pay this sum from its share of those profits. In order to put Discovery in the position it would have been had Slovakia not breached the BIT, therefore, it must receive the amount calculated by Mr Howard (USD 566,237,054, as set out above) net of the payment to Akard.
327. As a result, Discovery claims the sum of USD 1,965,198.39 in addition to the amount of USD 566,237,054 calculated by Mr Howard as representing Discovery's share of the calculated FMV.
328. Taking into account the analysis conducted in the Rockflow Expert Reports and particularly Mr Howard's independent calculations of the FMV of the Licences in the But For Scenario, and the additional sum claimed in respect of the amount due to be repaid to Akard, Discovery claims damages in the total sum of no less than USD 568.2 million.
329. Article 38 of the ILC Articles provides that interest is payable “when necessary in order to ensure full reparation”.354
354 International Law Commission, “Draft Articles on Responsibility of States for Internationally Wrongful Acts, with commentaries", in Yearbook of the International Law Commission, 2001, Vol. II, Part Two Exhibit CL-054. See also Crystallex at [932] Exhibit CL-026: “[A]n award of interest is an integral component of the full reparation principle under international law, because, in addition to losing its property and other rights, an investor loses the opportunity to invest funds or to pay debts using the money to which that investor was rightfully entitled." ↩
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330. The Tribunal has a wide discretion to award interest, including compound interest, up to the date of the award (pre-award interest) and from the date of award up to the date of payment (post-award interest).
331. Pre-award interest has not been included in the Rockflow Expert Reports, because the FMV has been calculated on an ex-post basis, i.e. as at the date of award (or, more accurately for present purposes, as at 1 January 2023 as a proxy for the date of award, and to be updated as the arbitration progresses), with the result that no pre-award interest has accrued in that scenario. Should, however, the Tribunal consider that an ex-ante approach should be taken to the calculation of damages, then Discovery reserves the right to claim appropriate pre-award interest.
332. Discovery does claim post-award interest on all sums awarded from the date of award to the date of payment, at a rate to determined by the Tribunal, and Discovery reserves the right to make further submissions in this regard as may be required.
333. Rules 28 and 47 of the ICSID Arbitration Rules grant the Tribunal a broad discretion to determine who should pay the costs of the proceeding and in what amount. Discovery respectfully requests that the Tribunal order Slovakia to reimburse Discovery for all of its costs and expenses related to this arbitration.
334. Discovery respectfully reserves the right to submit additional information in due course with respect to the costs and expenses incurred in relation to this arbitration, including, but not limited to: the fees and expenses of the Tribunal and of ICSID; all legal fees and other expenses incurred by Discovery (including, for example, fees and disbursements of legal counsel, experts, consultants, and fees associated with third party funding); and administrative and overhead costs, including the cost of management time.
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335. For the reasons set out above, Discovery requests the Tribunal to:
336. Discovery hereby expressly reserves its right to introduce (at a subsequent stage of this arbitration) additional claims, arguments, and evidence.
Respectfully submitted by Counsel for the Claimant
Signature Litigation LLP
Twenty Essex