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Cablegate: 2007 Report On Investment Disputes and Expropriation

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RR RUEHWEB

DE RUEHBU #1128/01 1582008
ZNR UUUUU ZZH
R 072008Z JUN 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 8362
RUCPDOC/USDOC WASHINGTON DC
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6229
RUEHCV/AMEMBASSY CARACAS 1291
RUEHMN/AMEMBASSY MONTEVIDEO 6506
RUEHSG/AMEMBASSY SANTIAGO 0466
RUEHBR/AMEMBASSY BRASILIA 6094
RUEHGT/AMEMBASSY GUATEMALA 0269
RUEHLP/AMEMBASSY LA PAZ JUN STOCKHOLM 0061
RUEHVL/AMEMBASSY VILNIUS 0107
RUEHFR/AMEMBASSY PARIS 1263
RUEHSO/AMCONSUL SAO PAULO 3325
RUEHRI/AMCONSUL RIO DE JANEIRO 2249

UNCLAS BUENOS AIRES 001128

SIPDIS

SIPDIS
SENSITIVE

EB/OIA FOR WSCHOLZ, JFINN
PARIS FOR OECD
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
PASS NSC FOR JOSE CARDENAS, ROD HUNTER
PASS USTR FOR EEISSENSTAT, SCRONIN
TREASURY FOR TRAN

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV PGOV KIDE PREL OPIC AR
SUBJECT: 2007 REPORT ON INVESTMENT DISPUTES AND EXPROPRIATION
CLAIMS: ARGENTINA

This cable is Sensitive But Unclassified - Not for Internet
Distribution

REF: A. SECSTATE 55422
B. 2004 BUENOS AIRES 1725
C. 2005 BUENOS AIRES 1519
D. 2006 BUENOS AIRES 1362

1. (U) The following report outlines new and ongoing investment
disputes between the GOA and US investors, following an action
request cable (Ref A), and updating Post's 2004 Investment Disputes
Report (Ref B), and its subsequent 2005 and 2006 updates (Refs C and
D). There were no new disputes filed in during 2006. Post is aware
of 13 active disputes. During 2006, two disputes were formally
settled (Claimants B and I). One dispute has been suspended
formally, but remains active (Claimant F). Finally, another dispute
was settled (Claimant M), but because its discontinuance is yet to
be formally registered, the case is still reported active.

2. (SBU) Many of these claims arise in whole or in part from the
GOA's implementation of Emergency Law 25,561 on January 6, 2002.
This law (among other things) converted contract provisions
denominated in US dollars into Argentine pesos at a 1:1 rate and
rescinded previously-sanctioned indexation of contracts to US
inflation indices. US investors contend that such measures
unilaterally derogate contractual agreements and effectively
expropriate US investor capital.

3. (SBU) (a) Claimant A

(b) 2002

(c) Claimant A is a US energy sector utility with gas distribution
assets in Argentina. Its dollar-based gas distribution contracts in
Argentina were linked to the US producer price index. In March
2002, Claimant A initiated consultations under ICSID, claiming that
various provisions of Emergency Law 25,561 voided its distribution
contracts and effectively expropriated its capital investment.
Claimant A also charged that the GOA had failed to pay contractually
mandated subsidy payments in compensation for pricing its gas at
below market rates. Claimant A filed for ICSID arbitration on
September 10, 2002. Its request for arbitration was accepted on
December 6, 2002. On February 27, 2003, Claimant A's business
partner filed an arbitration claim under a bilateral investment
treaty between Luxembourg and Argentina. The two claims will be
treated jointly. ICSID ruled against GOA's objections to its
jurisdiction. Both parties filed post-hearing briefings on April 3,
2006. In April 2007, the GOA and Claimant A's business partner
reached an agreement on tariff increases and domestic investment,
which included a settlement to discontinue all ICSID cases.
Formally, the portion of the dispute brought by Claimant A's
business partner, which was to be treated jointly with that of
Claimant A's, has not been suspended before ICSID, but it is
expected to be discontinued shortly. However, Claimant A has
continued with the case.

4. (SBU)(a) Claimant B, first case

(b) 2001

(c) Claimant B, a US energy sector firm, has a substantial minority
investment in an Argentine gas pipeline whose dollar-based
transmission contract was linked to the US producer price index.
Claimant B initiated preliminary consultations under ICSID
arbitration guidelines in September 2001 following a GOA decision to
cease approving index-related increases in gas transmission fees.
In May 2002, Claimant B began a process to expand its ICSID claim to


address certain provisions of Emergency Law 25,561. Claimant B
filed for ICSID arbitration on March 19, 2003. ICSID agreed that
this dispute would be heard by the same arbitration panel hearing
Claimant B's second arbitration claim against the GOA (see below).
ICSID issued a ruling on jurisdiction in January 2004 in favor of
Claimant B. The tribunal held a final hearing on the merits in
November 2005. On May 22, 2007, ICSID ruled against Argentina in
this case. The ruling was for $106.2 million in damages. In
addition to the compensation award, the ICSID arbitral panel ruled
that the GoA must pay interest of Libor plus 2%, retroactive to
January 2002.

5. (SBU)(a) Claimant B, Second Case - SETTLED

(b) 1996

(c) Six western Argentine provinces are attempting to collect over
$3 billion in retroactive stamp tax and gross receipts tax duties
from international energy companies operating in their
jurisdictions. Claimant B registered its claim with ICSID on April
11, 2001. Because Claimant B asserts that it does not have any
stamp tax liability, there is no information on the amount of this
claim. In April, 2004, in a separate but similar case, the
Argentine Supreme Court ruled that the stamp tax levies imposed by a
province not linked to this case were invalid. Thereafter, Claimant
B and the GOA agreed to suspend the case. On December 8, 2005, the
ICSID tribunal issued a procedural order on discontinuance of the
stamp tax claim embodying the parties' agreement on the
discontinuance.

6. (SBU)(a) Claimant C

(b) 2000

(c) Claimant C is a US energy sector infrastructure firm, which
operates natural gas pipelines in Argentina through a local company,
under a licensed granted to the local company by the GOA. The
Argentine gas legal framework and the local company's license linked
the tariffs for gas transmission services to the US producer price
index. On October 20, 2000, following a decision by the GOA to
cease approving index-related increases in gas transmission tariffs,
Claimant C initiated preliminary consultations with the GOA under
the US-Argentine Bilateral Investment Treaty. On July 24, 2001,
Claimant C filed for ICSID arbitration, claiming over $100 million
in compensation. On January 6, 2002, the GOA passed Emergency Law
25, 561, which abolished adjustments and indexation clauses in
contracts contained in licenses, and converted all
dollar-denominated tariffs into pesos at the mandatory rate of 1
peso per USD. On February 13, 2002, Claimant C wrote to the GOA,
saying these measures further affected Claimant C's property rights
and were tantamount to an expropriation. On July 5, 2002, Claimant
C submitted its Memorial seeking $261.1 million in damages from the
GOA for expropriation of its investment. On May 12, 2005, Claimant
C received an award of $133.2 million from the ICSID tribunal, with
interest to date of payment, and granting a right to the GOA to
purchase Claimant C's interest in the local subsidiary for an
additional payment. On September 27, 2005, the GOA filed an
application for institution of annulment proceedings. An annulment
panel has been formed and the first hearing in the annulment process
was held June 5, 2006.

7. (SBU)(a) Claimant D

(b) 2000

(c) Claimant D is a diversified US energy sector firm with gas
transmission assets in Argentina, whose dollar-based transmission

contract was linked to the US producer price index. In October
2000, following a GOA decision to no longer approve index-related
increases in gas transmission fees, Claimant D initiated preliminary
consultations under ICSID arbitration guidelines. It formally filed
for ICSID arbitration in March 2001. In May 2002, Claimant D began
a process to expand its ICSID claim to include provisions of
Emergency Law 25,561. On April 30, 2004, the arbitral panel issued
its decision on jurisdiction, ruling in favor of Claimant D on all
jurisdictional issues. In September 2006, the Tribunal decided on
liability, based upon the GOA's assertion that provisions of
Emergency Law 25,561 were adopted pursuant to a "state of necessity"
that reflected the rights of the GOA to pursue "measures necessary
for the maintenance of public order...or the protection of its own
essential security interests" as recognized under Article XI of the
U.S. - Argentine Bilateral Investment Treaty. The Tribunal
concluded that the GOA underwent a "state of necessity" starting
December 1, 2001 and ending April 26, 2003. The tribunal said a)
that the claim for expropriation of the investment was dismissed; b)
that Argentina breached the standard of fair and equitable
treatment, no less favorable treatment than that to be accorded
under the international law, and adopted discriminatory measures,
causing damage to Claimant D; and c) that the standard prohibiting
the adoption of arbitrary measures was not deemed to have been
violated. During the state of necessity, the tribunal ruled the
Argentine Republic was exempted from the payment of compensation for
damages incurred; however, the Argentine Republic was liable for
damages outside that period. Damages, including interest, as well
as specification of the periods during which the respondent incurred
in violation of its international obligations, are to be determined
in a next phase of the arbitration.

8. (SBU)(a) Claimant E, First Claim

(b) 2001

(c) Claimant E is a water resource management company that, through
a local subsidiary, won a 30-year concession in 1999 to manage a
significant share of Buenos Aires province's water and wastewater
management facilities. Many of its tariff rights under the
Concession Contract were effectively repudiated by the Province when
the water in one city turned sour in April 2000 because of algae in
the local reservoir, which was under the Province's exclusive
control. According to Claimant E, provincial officials blamed
Claimant E for the problems, refused to allow the company to bill
for its services, required the company to provide bottled water to
the town at the company's expense, and publicly announced that
people should not pay their water bills. The Province also
allegedly repudiated Claimant E's right to amortize its bid payment.
In January 2001, Claimant E filed for ICSID arbitration. Following
unsuccessful settlement efforts, an ICSID panel was constituted in
July 2001, and the case was formally accepted by the panel in
September 2001. While the arbitration case remains in process,
Claimant E filed for bankruptcy in December 2001 and returned
operation of all its water and wastewater management facilities to
provincial authorities in March 2002. The final hearing on the
merits was held in March 2005. In June 2006, the Tribunal decided
that the Respondent failed to accord full protection and security to
the investment and that the respondent breached the BIT by taking
arbitrary measures that impaired the claimant's use and enjoyment of
its investment. Therefore, it awarded compensation to Claimant E of
US$165.2 million. The Argentine Republic registered an annulment
proceeding on December 11, 2006 to contest the award.

9. (SBU)(a) Claimant E, second claim

(b) 2003


(c) Claimant E held, through a local subsidiary, a concession to
manage a significant share of Mendoza province's water and
wastewater management facilities. Claimant E filed for ICSID
arbitration in 2003, alleging that by interfering with Claimant E's
contractual rights, the province effectively repudiated its
concession. ICSID
registered the claim on December 8, 2003. Each side has appointed
an arbitrator, but a panel president has not yet been selected.

10. (SBU) (a) Claimant F

(b) 2002

(c) Claimant F owns and operates several hydrocarbon and
hydroelectric power plants in Argentina, and has electricity
distribution concessions in the Province of Buenos Aires. In March
2002, Claimant F pursued informal negotiations, claiming that the
pesification of its dollar-denominated distribution contracts and
the devaluation of the peso, have resulted in the effective
expropriation of a large portion of the value of Claimant F's
investment. In April 2005, one of Claimant F's subsidiaries signed
a definitive agreement on re-negotiation of its concession agreement
with the GOA. The agreement was ratified by the Argentine Congress
in May. As part of that agreement, Claimant F agreed to suspend its
claim, and to definitively drop its claim if a tariff agreement were
approved. Parties requested the suspension of proceedings, which
the Tribunal accepted on December 29, 2006. Additionally, the
portions of the proceedings referring to the Claimant's other two
distribution subsidiaries, were discontinued after Claimant F
reached an agreement with the provincial government.

11. (SBU)(a) Claimant G

(b) 2001

(c) Claimant owned an interest in an oil and gas company involved
in the exploration for and production of hydrocarbons in Neuquen,
Rio Negro, Santa Cruz, Tierra del Fuego and Mendoza Provinces of
Argentina. On February 25, 2002, Claimant G requested
consultations, claiming over $100 million in damages allegedly
resulting from the pesification of its contracts, the dilution of
fiscal credits, the imposition of export taxes, the losses on sales
due to the exchange rate, and the imposition of an oil export tax in
alleged violation of 1992 decrees guaranteeing export tax stability.
On October 16, 2002, Claimant G filed notice of its intention to
negotiate before beginning formal ICSID arbitration. ICSID formally
registered the claim on June 5, 2003. On April 4, 2005, both sides
filed a request with ICSID for the discontinuance of proceedings
based on a final settlement agreement between the parties. On June
23, 2005, the Tribunal issued an order taking note of the
discontinuance pursuant to Arbitration Rule 43(1) issued by the
Tribunal on June 23, 2005.

12. (SBU)(a) Claimant H

(b) 2001

(c) Claimant H is an information systems provider that won a $37
million public bid contract to provide information services to the
judicial branch. The contract amount was payable in 36 equal,
monthly installments beginning when the system was completed. Work
started in early 1998. 85 percent of the work had been completed by
November 1999, and the remaining 15 percent was completed in
December 2000. During work on the contract, Claimant H agreed to do
$30 million in additional information systems work for the GOA. It
also provided the GOA with $3.5 million in postal machinery. In
January 2001, the GOA began paying for the 85 percent work completed

in November 1999, and in February 2001, on the remaining 15 percent.
In December 2001, the contract was pesified by law when Argentina
did away with its fixed, 1-to-1 conversion system with the US
dollar. From January 2002 through April 2003, the GOA made no
payments under the contract, even after it had been pesified.

Claimant H filed notice of its intention to pursue ICSID arbitration
in October 2002. It held friendly consultations with the GOA in
February 2003 without success. ICSID formally registered Claimant
H's claim on October 15, 2003. The claim is based on allegations of
the pesification of the original contract, the refusal to recognize
the additional work done under the contract, and the non-payment
from February 2002 through April 2003. Total claim amount is
approximately $55 million. According to Claimant H, it did not
include a claim for the value of the postal machinery because the
GOA has recognized that debt and repeatedly promised to pay it.
Before an arbitral panel was constituted to hear the claim, the
parties signed an agreement in August 2005 to postpone the case and
jointly appointed accounting and technical experts to examine the
facts. In July 31, 2006, the accounting expert issued a report
establishing a compensation for Claimant H in the range of ARP 21.6
million and ARP 38.4 million. Once the parties agree on this range,
a technical expert will begin its part of the analysis. These
reports will be used as the basis for final settlement
negotiations.

13. (SBU)(a) Claimant I - SETTLED

(b) 2004

(c) Claimant I is a US reinsurance company that underwrote
Argentina's privatized pension system between 1994 and 2001.
Claimant I's liability is based upon the market value of the pension
system's assets. In 2002, the GOA implemented measures that fix the
price of certain pension fund assets (Argentine Government bonds) at
above-market prices. Because reinsurance contract benefits were
linked to the value of these assets, this regulatory measure
allegedly increased Claimant I's financial obligations by 45
percent. The Claimant contended that it was entitled to
compensation for the substantial losses suffered because of the
manipulation of asset values and filed a request for ICSID
arbitration. After holding a hearing on witnesses in September 2005,
the ICSID held its first session on November 22, 2005. In March
2006, the Claimant presented a letter of discontinuance to ICSID
because it had mitigated damages through negotiations with local
insurance companies. The parties agreed on a settlement and
proceedings were discontinued at their request on September 14.
2006.

14. (SBU)(a) Claimant J

(b) 2003

(c) Claimant J owned an interest in electrical generating plants
and in an oil and gas company operating in Argentina. In January
2002, Argentina pesified dollar-denominated oil and gas supply
contracts, imposed an oil export tax in alleged violation of decrees
from 1992 that guaranteed export tax stability, and changed the
electrical generation regulatory and legal framework based on which
the company invested. Claimant filed for ICSID arbitration in June
2003. On April 27, 2006, the panel issued a decision on
jurisdiction in favor of Claimant J. The Claimant filed a reply on
the merits November 28, 2006.

15. (SBU)(a) Claimant K

(b) 2003


(c) Claimant K is a provider of leasing services in Argentina.
Claimant K's claim was registered with ICSID on February 27, 2004.
The claim asserts that various actions by the Government of
Argentina effectively expropriated the value of its investment. On
October 13, 2005, Claimant filed a memorial on the merits of the
case. On December 28, 2005, the GOA filed its objections to
jurisdiction. Claimant K filed a counter-memorial on jurisdiction
in March 2006. A final resolution on jurisdiction is expected
shortly.

16. (SBU)(a) Claimant L

(b) 2003

(c) Claimant is an insurance company with operations in Argentina.
ICSID registered Claimant L's complaint on May 22, 2003. Post has
not been able to obtain details about the substance of Claimant's
dispute. An arbitration panel has been selected, and the Claimant
filed its Memorial on the Merits on April 28, 2004. According to
the ICSID website, the panel held a hearing on jurisdiction in
February 2005 and that it had jurisdiction over the claim.
Argentina has filed a counter-memorial, and the ICSID website refers
to a hearing on the merits in late 2006.

17. (SBU)(a) Claimant M

(b) 2003

(c) Claimant M are two companies, an Argentine energy firm and its
largest foreign shareholder who owned interests in electrical
generating plants and hydrocarbon development assets in Argentina.
In January 2002, Argentina pesified dollar-denominated oil and gas
supply contracts, imposed an oil export tax in violation of decrees
from 1992 that guaranteed export tax stability, and changed the
electrical generation regulatory and legal framework on which the
company was induced to invest by pesifying dollar-denominated
capacity payments and regulating the previously unregulated
electrical generation industry in a way that does not allow it to be
profitable. Claimants M filed their claims with ICSID in June 2003,

and the two claims are being heard jointly by one arbitration panel.
The panel held a hearing on jurisdiction in March 2005. Meanwhile,
the Province of Chubut Government renegotiated its hydrocarbon
exploration and development concession contract with Claimant M. A
provision of this concession extension agreement required Claimant M
to discontinue its ICSID claim. Claimant M did so after in mid May
2007 ICSID has not yet officially announced the termination of the
claim. A case has been filed before provincial courts to review the
legality and the constitutionality of the new contract.

18. (SBU)(a) Claimant N

(b) 2004

(c) Claimant N is an oil and gas exploration and development
company. Claimant N contends that its investment was effectively
expropriated following the 2002 pesification of its
dollar-denominated oil and gas supply contracts. Claimant N also
complains that the imposition of export taxes in 2002 violated the
decrees that were in force at the time of its investment. Claimant
N's claim was formally registered August 5, 2004. A panel has not
yet been constituted; both sides have named an arbitrator, but a
president has not yet been chosen. Claimant N filed an ancillary
claim to expand the case on February 14, 2006.

19. (SBU)(a) Claimant O


(b) 2005

(c) Claimant O is an Argentina-based company with US and German
investors. It formally registered its claim on June 23, 2005.
Claimant has sought $20 million from the GOA, claiming that a local
bank illegally canceled a contract in 2003 and expropriated its
funds. An arbitral panel was constituted on March 27, 2006. The
Tribunal held a first session March 2, 2007.

20. (SBU) Identification of claimants

Claimant A = Sempra

Claimant B = Enron-TGS

Claimant C = CMS - TGN

Claimant D = Louisville Gas and Electricity (LG&E Energy Corp., LG&E
Capital Corp., and LG&E International Inc.) This firms assets are
now held by German-owned E-On America Inc.

Claimant E = Enron Azurix. Post Chapter XI, this firm's assets were
purchased by Satellite Asset Management

Claimant F = AES

Claimant G = Pioneer

Claimant H = Unisys

Claimant I = RGA Reinsurance

Claimant J = El Paso Energy

Claimant K = CIT Group

Claimant L = Continental Casualty Company

Claimant M = Pan American Energy/BP America

Claimant N = Mobil Oil Company

Claimant O = Asset Recovery Trust

MATERA

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