Member Info for DeusExMachina

Lots of interesting posts.

On page 122 of the 'ICSID CONVENTION, REGULATIONS AND RULES' Rule 48 Clause 4 states: '(4) The Centre shall not publish the award without the consent of the parties. The Centre shall, however, promptly include in its publications excerpts of the legal reasoning of the Tribunal’.

https://icsid.worldbank.org/sites/default/files/ICSID%20Convention%20English.pdf

As any Award in favour of Rockhopper would create a valuable precedent for other parties considering legal action against the Italian State - it seems very likely that Italy will refuse consent for ICSID to publish the Award. Whilst RKH will be required to issue an RNS informing its shareholders that it has won the case might it be a redacted version of the Award with the financial details omitted?

One other point. Assuming that RKH win the case and the Arbiters agree that there should be compensation for lost profits – the quantum will hinge on several variables of which the most difficult will surely be the price of oil over the next 20 years. In Q1 2020 around the time a decision may have been made, RoI would have probably argued that the price of oil was under $20 and clearly in terminal decline. RKH would have argued that it was simply a low point in the cycle. A compromise may have been struck to take an average in the price of oil over the next 24 months - which might account for the inexplicable two year delay. By Q4 2021 with the price of oil soaring over $80 – RoI panics and instructs their lawyers to have another attempt to challenge the jurisdiction of ICSID - which might account for the Eleventh Hour last ditch attempt to derail the case.

Just a thought!
DEM

Italy has two problems - the likely payment to RKH of a substantial sum as compensation for OM costs and lost profits + setting a very expensive precedent which other energy companies may use to win similar claims.

However, IMHO Italy does have an alternative option, which I hope RKH has discussed with the other side.

Italy to pay RKH $150m. Immediate payment with no delays. This would be sufficient to cover all RKH Non SL costs (say $25m) + payment to Harbour Litigation (say $50m) with remainder ($75m) to strengthen bank balance*.

Italy to grant with immediate effect Drilling / Production licences to RKH for Ombrina Mare and Monte Grosso.

Italy to 'Suggest' to Eni that they might like to purchase all of RKH's Italian licences (incl OM, MG, Civita etc) for say $150m - payable in 12m.

There could even be an opportunity offered to ENI to join the Sea Lion JV, as part of the deal. Eni SpA is one of the seven global "supermajor" oil companies with a MC of $36bn with 30% of the shares - incl a 'Golden Share' - owned by the RoI.

Ensure there is a clause in contract which voids Agreement if RKH has any change of ownership in next 12m.

Benefits:

RKH gets $150m with no delays or costs for enforcement + further $150m lump sum in 12m to pay share of Sea Lion costs + poison pill to discourage any short term predatory bids.

Eni get two excellent Production licences (Eni already has 77% of Monte Grosso but no current share in Ombrina Mare) + other 'Research' licences, with nothing to pay for 12 months.

Cost to Italy is only $150m with no precedents set, so substantial future savings. Italy gets two large O&G fields into production to ease domestic energy crisis + related tax income.

Mario Draghi can blame RKH for forcing Italy into a corner. Green lobby will hate it but it will save Italian taxpayers hundreds of millions, by avoiding future payments based on precedent.

DEM

*Sufficient to fund $25m dollars ‘loyalty payment’ payable to Long Term RKH Shareholders !

Morning Cyan
Thank you for the clarification re Turkish Non Exec Directors not being Kurdistan nominees. I stand corrected.

It still concerns me that Genel is an Anglo – Turkish company with operations in Kurdistan, which is itself not a Sovereign State but is a territory encompassing SE Turkey, N Iraq, NE Iran and N Syria, according to Wiki. I would not personally regard either Turkey or Iraq, Iran & Syria as model democracies where the Rule of Law could be relied upon to prevail.

Any decision to change the Sea Lion JV Partners and vary the Licences and Operatorship will need to be agreed by FIG. I am 100% certain that FIG will be guided in this by the FCO. As a British Overseas Territory, the Falklands have internal self-governance, and the United Kingdom takes responsibility for their defence and foreign affairs. This would certainly include which companies are involved in the long term development of the multiple off shore oil fields beneath the waters around the Falklands.

In an earlier post you comment that Genel becoming a third partner is ‘an outside chance, maybe’ – IMHO I think that is a very optimistic assessment. But who knows – stranger things have happened in Heaven and Earth !

DEM

https://www.youtube.com/watch?v=GO_FiLt0q_U

Genel has many attractions – 32,000 bopd, $200m free cash flow in 2022, £425m MC. However, all the production is in Kurdistan (Iraq) which reminds me of the old trope – Never invest in countries which end in ‘stan’. I note that at least 3 – possibly 4 – of the Non Execs are from Turkey and are presumably Kurdistan nominees.

I am very doubtful that Israel or FIG (or FCO) would be comfortable with Genel as a JV Partner. I can think of a few alternative candidates.

Delek (Israel) – Most of the Senior Mngt of Navitas previously worked for Delek – one of Israel's largest companies, a conglomerate with investments in upstream and downstream energy, water desalination, power plants, insurance and financial services. Assets include the two massive gas fields with 33TCF in the Eastern Med. In 2017 they bought Ithaca Energy and then used the company as a vehicle for buying Chevron's UK North Sea business. Apparently excellent access to finance.

Repsol (Spain) – In 2012 President Kirchner proposed the expropriation of 51% of Repsol shares in YPF. Long court case ensued and eventually Argentina were compelled to pay $5bn compensation.

https://www.forbes.com/sites/afontevecchia/2012/04/18/us-condemns-ypf-expropriation-as-spain-argentina-trade-war-nears/?sh=316fb9127352

Hess (USA) – US major global independent energy company, still run by the Hess family (one of the leading Jewish companies in NY). Never forgiven Argentina for the Hercules incident in 1982.

https://www.nytimes.com/1982/06/09/world/tanker-attacked-in-south-atlantic.html

Cairn (UK) – often cited as the underbidder to Premier. About to receive $1bn + tax rebate from India, which even after a generous Divi. will still leave plenty for a Farm In.

DEM

ps There does seem to be a natural progression of RKH Directors moving across to Genel – surprised Sir Michael Fallon somehow missed RKH off his CV. I note that the Esa Ikaheimonen (Genel CFO) has recently resigned and leaves shortly – now I wonder if the Genel Directors know of an experienced FD (ex RKH) who is available and eager to progress his career !?

From 2014 - useful reminder of facts & figures.
https://rockhopperexploration.co.uk/wp-content/uploads/2016/05/Acq.-of-Mediterranean-Oil-Gas-Pres.pdf
DEM

Mogger – thank you for two more outstanding links. May I also thank you for the numerous other high quality ‘technical’ articles you have tracked down, several of which I have quoted in recent posts. Much obliged.

The Duane Morris article is reassuring – in short ICSID trumps ECJ when it comes to ensuring adherence to Global Treaties (ECT). RKH has always said that it is extremely unlikely that the Award would be presented in an EU Court. As ICSID is part of and funded by the World Bank headquartered in Washington – the USA always seemed the most appropriate jurisdiction to serve the Award. Failing that Canada, Australia and numerous other States would be fine.

I am intrigued by the Abruzzo Web article – seems that the small RKH teams in Italy and Salisbury have been busy. Also, the first time I’ve ever read a sympathetic comment about Ombrina Mare in the Italian press:

“Faced with the predictable counter-offensive of the pro-drill front, the minority environmental front is now in great difficulty, the same that after years of battles managed in 2017 to wreck the construction of the Ombrina Mare 2 oil platform off the coast of the Trabocchi, in the province of Chieti”.

DEM

Thanks MAM for your comments – appreciated and helpful. Agree that the interest element may be key but the ICSID website bars access to the section on interest calculations.

https://icsid.worldbank.org/search?f%5B0%5D=languages%3Aen&search=interest+

There are a couple of recent articles by Aceris Law which I found helpful – it would seem that the interest rate methodology is far from simple! I would be very happy with your suggested 7%.

https://www.acerislaw.com/interest-in-international-investment-arbitration/

https://www.acerislaw.com/calculating-interest-in-international-arbitration-how-is-interest-determined/

“There is no uniform practice on awarding interest in international investment law.[8] Thus, the tribunals may use a number of methods in order to determine the applicable interest rate:

- a borrowing rate approach, which relies on the interest the investor had to pay on borrowed funds.
- a host State rate approach, which uses the statutory rate in the host State as a ‘helpful benchmark’, since it is the legal minimum recognized by the State itself.
- a ‘coerced loan’ approach – under this method, the investor is turned into an ‘unwilling lender’ to the State, and therefore is entitled to interest equal to ‘the State’s short-term borrowing rate’.
- an ‘investment alternatives’ approach, which reflects the additional sum that the investor’s money would have earned, had it been reinvested each year at generally prevailing rates of interest. When applying this approach, tribunals often award interest at a rate equal to the short-term United States Treasury Bills or US six-month certificates of deposit or at the LIBOR rate”.

DEM

Over the past year there have been a number of suggested figures mentioned in News Articles. At the Retail Investors Day in Salisbury (30-09-2021) Sam gave out some ballpark figures – for a Maximum, Reduced and Base Award, assuming an Ombrina Mare win. So, take your pick!

Maximum Award
OM rig costs/removal $50m, lost profits $225m = $275m + interest. No idea how the interest element might be calculated.

In Feb 2021, Giacomo Aiello, Italian State Attorney commented: 'The (Rockhopper) judgement is expected soon. The company has demanded USD 275 million plus probably interest. They pretend they have spent until now USD 29 million ­ $23m for predeveloping and $6m for the decommissioning. The rest is loss of earnings, that the Treaty allows to ask for'.

In Aug 2021 Al Jazeera published an article berating the use of The Energy Charter by oil companies to obtain compensation from Governments trying to defend the Environment. The article commences with: 'Any day now, Italy expects to be ordered to hand millions of dollars over to an oil exploration corporation, following the Italian government’s decision to ban such exploration off its coast'. And later comments 'The “compensation” being claimed totals about $350 million – seven times what the corporation invested in the exploration project'.

The figure of $450m mentioned on the Charles River Associates (CRA) website in the quotation found by Falky on Sunday – seems very high and may be there to demonstrate what a good job CRA has done in reducing it to ‘only’ $XYZ.

Reduced Award
The Arbiters may decide to reduce the Award if they feel there are mitigating circumstances (eg the suggested 50% reduction in the Kluwer Arbitration Blog 2018). If the Arbiters decide to ‘tweak’ the various assumptions underpinning the risk factors (eg average price of oil, time period relating to future lost profits etc), award might be reduced to say $100m.

Base Award
No lost profits element, rig costs only, around $50m.

Best guess
Somehow I doubt that we will get a Max Award and suspect that some of the very optimistic figures quotes quoted in the press are designed to ramp up the righteous indignation of their readers.

A base award seems a bit mean and I really do think that Italy may have alienated the Arbiters. As mentioned in a previous post even their own Lawyer and nominated Arbiter seemed to think that it was a lost cause. A case of the Politicians insisting on the second Jurisdiction objection even though it may have resulted in a bigger payout to RKH.

So, a 'Reduced Award' of say $150m would be very acceptable - even after the Harbour 'No Win - No Fee' deduction.

DEM

Thanks Buzz for the Jus Mundi doc, detailing the first attempt by Italy to halt proceedings on Jurisdiction grounds. Well found! Best bit is at the end. (The Claimant is Rockhopper and the Respondent is Italy).

B. THE CLAIMANTS' POSITION
203. The Claimants submit that the Respondent's Request for Suspension must be denied.226 In Claimants' view, the Respondent's request is not only "unjustifiably late, it also has no legal merit."227

And paras 204 to 209 explain precisely why the Request should be denied.

C. THE TRIBUNAL'S ANALYSIS
210. In light of the Parties' submissions, the Tribunal at this stage sees no reason to suspend the proceedings. First, on the basis of the evidence provided, the Tribunal is not convinced that the present ICSID arbitration proceeding and the cases pending before the CJEU would lead to conflicting decisions. As described by the Respondent in its Request for Suspension, the present proceeding and the cases pending before the CJEU appear to be fully distinct; the parties involved and the subject-matter at issue are different. Second, as mentioned by the Claimants, the Respondent had the opportunity to present such request since November 2018. Therefore, the Respondent's Request for Suspension is denied.

Despite the fairly terse dismissal – Italy then tried again in 2021 to challenge ICSID Jurisdiction, using the same arguments as before. This provoked the ‘5 pages in 5 days’ retort from ICSID. That Decision, when released should be a fun read !

DEM

Sorry - SB not SP.

PD – I would be surprised if we do not hear something within the next 30 days.

As SP comments in his earlier post I think the most compelling reason to be optimistic that RKH have won is that Italy has been employing delaying tactics at every stage - challenging ICSID’s jurisdiction (twice) and even failing to pay their share of the Arbitration costs. These were actually paid into ICSID by Harbour Litigation to ensure the case proceeded - as detailed in the Case Study section of the Harbour brochure.

https://harbourlitigationfunding.com/wp-content/uploads/2020/11/Harbour-Investment-Commercial-Treaty-Arbitration.pdf

If Italy were confident of winning, they would have been happy to allow the case to run its natural course. As it is, they have probably irritated the Arbiters and increased the chance of a ‘decent’ compensation award. Whilst the decision whether the case is Won or Lost is based on objective criteria – I think the Quantum is a much more subjective process and the shenanigans of the past two years will not have endeared the Italians to ICSID.

My take, for what it’s worth, is that ICSID probably reached its decision by Jan 2021 latest – the two articles in Investigate Europe were both in Feb 2021 and there were similar pieces in a couple of other publications. Seems very unlikely that the senior Italian lawyer and Italian nominated Arbiter would risk publishing two articles both suggesting that the case was hopeless but they had done their best – if the deliberations were still sub judice (ie still under consideration by the ICSID ‘court’). The past 12 months have been all about Italy trying to delay the formal written Award being issued – helped of course by COVID.

Italy’s best hope of avoiding an expensive payday to RKH and an even more expensive precedent for the other energy companies waiting in the wings – would be if Rockhopper became insolvent or at least was forced to accept a much lower and Non Precedent Setting out-of-court settlement.

Stewart’s timely departure combined with the sub-let of the London offices plus other economies should reduce ongoing G&A expenses. The removal of the ‘Noble Barge’ may well be delayed until 2023 when the FIPASS structure is removed (SM at Investors Day). The Italian decom will only be required when RKH declare that they have ceased production which with gas at record highs will not happen for a while. Most importantly, I think we will have a binding commitment from Navitas by the end of January as per the NAV RNS, which should take care of the SL costs. Incidentally, if a third party is about to join the JV, then it does not seem unreasonable that a modest payment be made to the licence holder ?

DEM

SecretBlueprint’s explanation is certainly my understanding.

As the party responsible for paying a lawyer’s fee is usually regarded as the Client – I wonder if Harbour Litigation are for practical purposes the Client of King & Spalding – not Rockhopper. As such, Harbour will presumably make any key decisions regarding settlement and terms – although I would be surprised if Rockhopper are not involved in the discussion. (BTW Harbour Litigation is a totally different firm to Harbour Energy).

So, what chance of Rockhopper winning?

It is both interesting and encouraging that Harbour chose to ‘showcase’ the Ombrina Mare claim in their Corporate Brochure outlining ‘Commercial & Investment Treaty Arbitration’ services, dated Nov 2020. Surely they would only pick a case where they were very sure of a positive outcome! (See page 5):

https://harbourlitigationfunding.com/wp-content/uploads/2020/11/Harbour-Investment-Commercial-Treaty-Arbitration.pdf

The two interviews published in Investigate Europe with Giacomo Aiello, Italian State Attorney and Pierre-Marie Dupuy, arbitrator nominated by the Italian State – both read as rambling apologies to the home audience in advance of bad news with much whining about how ‘Anglo-Saxon super law firms manage to find funding from investment funds to push companies into arbitration that they could not otherwise afford’.

The ICSID Board were scathing in their dismissal of the ‘Achmea jurisdiction objection’ in 2019 and their demand that the Italian lawyers state the relevance of the Komstroy Decision within 5 days on 5 sheets of A4 - suggests that it was regarded as just another time wasting ploy.

All encouraging signs but I appreciate that OM pales into insignificance compared with whether our CEO has a cold or perhaps a mild case of Omicron Mare ?
DEM

Sorry - should have said 'first post since 2013' !

I rarely post on BBs of any sort and I think this might be my Maiden post on LSE - but thought this might be of interest to other PIs invested in ESO. All two of you! Last month sold out my modest ESO holding at 318p for small loss. Noticed sharp drop this morning but no news items or RNS to explain reason for fall, so tel MHP Communications and spoke to Sam Modlin who is Account Exec for Luceco. He sent me the following email. Bought 1,000 at 239p and will probably buy again on Monday. QUOTE "Luceco plc, the manufacturer and distributor of high quality and innovative LED lighting products, wiring accessories and portable power products, is today issuing the following trading update for the year to 31 December 2017. The Group has seen gross margins weaken during the second half of the year and will now deliver gross margin of approximately 33%, leading to a £3.5m reduction in profit after tax to £13.2m, versus current market expectations of £16.7m. Regrettably, the gross margin weakness was not identified sooner due to an incorrect assessment of the value of the Group's stock. The Group's Financial Controller has resigned as a result of this error. System improvements are being put in place to make sure this issue does not recur. The principal reasons for the gross margin weakness have been the strengthening of the Chinese RMB versus the US Dollar, alongside the ongoing weakness in GBP and increased commodity costs. The Group will be able to mitigate some of these headwinds through internal efficiency savings and overhead reductions, with margins expected to recover to long term expectations in H2 2018 as a result of these actions. The Group also intends to increase its foreign exchange and commodity price hedging activities with particular focus on the Chinese RMB versus the US Dollar. Luceco's revenue forecasts for 2017 and 2018 remain in line with market expectations. We continue to expand the Group's product ranges and our geographic reach. Luceco's balance sheet remains strong and the Board continues to assess opportunities to invest in the future growth of the business." ENDQUOTE Suspect the two 'regular' posters here may be familiar with the above, but thought it might be of interest to anyone passing through. BTW my portfolio is split between O&G AIM & Mid Cap producers + as a counterbalance a broad range of Investment Trusts incl several 'High Conviction Activist Funds' where the Mngt Team/BOD have substantial equity in the business (RII, IIT, NAS, CRS, ESO & RIT) DEM

Asked Phipps whether he and his family had considered delisting DES and taking the company private ? Definately not – costs of drilling etc mean that having a public listing is virtually the only way to raise finance. After the meeting I asked SP and KB whether they knew when FIG might be releasing new license areas for companies to bid for. Both agreed that it was a long time since the last licensing round in 2005, but thought that FIG felt that all the FI companies had more than enough on their plate at present. DES would definitely bid for any new areas. SP commented that they were only interested in the FI and had no ambitions in Africa or elsewhere. Both Ian Duncan and Stephen Phipps commented over coffee, that the AIM market will only take an interest in any E&P company once they start drilling, although both agreed that by 2014 the improvement in the FT main market may have spread to small caps etc. I suspect that a Farm In announcement might do the SP no harm either ! Hope to see more of you next year – SP seems to be expecting a bumper attendance in 2014. DEM

Responses to Questions – including those raised after meeting KB asked re Farm In? DES will ideally be taking a farm in partner to cover the company’s share of the appraisal costs of PL004B – whilst attempting to retain the maximum percentage possible for the company. Unitisation discussions will commence once farm in process is complete (H2 2013). KB asked whether DES would just sell their share of SL to PMO. KB said that whilst other options, such as this, have not been ruled out – obtaining a farm in partner is definately the preferred option. In a later discussion with SP where I asked whether DES would hold onto its share of SL right up to production in 2017/18. I got the distinct impression that DES will sell at some point – but probably not until the Appraisal process is complete and production is much closer. KB commented that DES is an exploration company (this mantra was repeated several times by different Directors) and as such are keen to participate in the next drilling round. Hope to be ‘carried’ by farm in partner, whilst retaining max equity etc. Follow on Question to KB re Data Room timescales. Opened in Feb and is still open. Process was expected to take around 6 months. Farm Out process should come to a conclusion ‘fairly soon’. After the meeting I asked SP re timescales, bearing in mind that negotiations with farm in partner could take another 6m. Whilst reluctant to commit, he did say that he hoped/expected that the farm in partner will be ‘all signed up’ by the end of 2013. This all suggests that DES may be quite close to announcing who their partner will be. KB was asked whether the license requirement by FIG for DES to drill a well by 2016 would be discharged if an appraisal well was drilled on PL004B by PMO as Operator. Answer – yes. KB was asked whether PMO might not wish to drill the Appraisal wells and not be prepared to share any of the drilling slots? KB thought this scenario was extremely unlikely and stressed good relationship with both PMO and RKH. I asked whether DES and other FI companies were concerned at delays by FIG in sorting out arrangements for temporary harbour and new harbour at Port William. Both Stephen Phipps and Bob Lyons commented at length. This has clearly been a major issue and is still ongoing. Now the responsibility of PMO to sort. Cost of £200m mentioned – unclear whether FIG expects any contribution from oil companies. I asked why MOD had not been approached regarding shared use of naval base at Mare Harbour. See Google Earth image: http://screencast.com/t/nnle6n7ptZoD Sounds like Bob Lyons has already had this discussion but MOD not keen on idea. (In the unlikely event that Philip Hammond reads this BB – please sort !) Asked Phipps whether he and his family had considered delisting DES and taking the company private ? Definately not – costs of drilling etc mean that havin

Morning All - time for my annual LSE post ! Intro Jottings on the 2013 Desire AGM, based on notes taken at the meeting. Have tried to convey a ‘feel’ for the meeting. Hope I have not duplicated too much info already provided in Kisuli’s earlier excellent post on the iii BB. Apologies for any E&O and misinterpretations – just my view on the day! Really glad I went – my second DES AGM and like last year quite impressed by attitude of BOD. I know they get a right hammering on the BBs but in reality are very approachable and happy to chat. Both Ian Duncan and Stephen Phipps remembered me from last year, so I must be on some sort of troublemakers black list! Had a right moan about the lack of food again – was promised next year there will be some. Meeting held at the Cheapside offices of Buchanan – Desires PR company. All 4 DES Directors + the 3 Non Execs present. Of the 30 or so other attendees, I would guess around 22 were private investors, the others being analysts etc plus representatives from PWC and the company Nomad, Peel Hunt. For comparison, there were around a dozen PIs present at the 2012 AGM and over 100 the year before. All very relaxed and friendly. All of the Directors were chatting to investors for around 30 mins before the AGM and for a similar time after. Voting There was a slide on screen showing proxies etc already received – over 98% votes in favour of each resolution, so it was clear the 20 of us in the room were not going to change things. So, the six resolutions were all carried ‘nem con’. The guy from Peel Hunt commented that Desire have over 12,000 shareholders – far more than one might expect for a small E&P company. Of these only 5%-10% are Institutional Investors. Definately not your average investor profile ! With 342m shares in issue, average holding would be around 30,000 – but allowing for Phipps family holdings of approx third of company, probably nearer 20,000. Presentation After the formal business – which took less than 10 minutes – Ken Black (Exploration Dir) delivered a 20 min Power Point Presentation. The 18 slides were clearly a shortened version of the 33 slide pack produced for the Technical Presentation in April. No new material as far as I could see. The PDF is on their website. http://www.desireplc.co.uk/presentations.php