THE LEGALITY OF INCREASES IN ROYALTY RATES AND/OR …...before the committee on fiscal policy...

BEFORE THE COMMITTEE ON FISCAL POLICY

CONCERNING OIL AND NATURAL GAS IN ISRAEL

THE LEGALITY OF INCREASES IN ROYALTY RATES AND/OR TAXES

APPLICABLE TO EXISTING OIL AND NATURAL GAS RIGHTS IN

ISRAEL UNDER THE U.S.-ISRAEL FCN TREATY

OPINION AND MEMORANDUM OF LAW

ABRAHAM D. SOFAER

August 23, 2010

Committee Members:

Prof. Eytan Sheshinski (Chairman) Budget Director of the Finance Ministry, Udi Nissan Head of the Israel Tax Authority, Yehuda Nasradishi

Head of the National Economic Council, Prof. Eugene Kandel Director-General of the National Infrastructures Ministry, Shmuel Tzemach

TABLE OF CONTENTS

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I. INTRODUCTION ............................................................................................................. 1

A. Relevant Qualifications.......................................................................................... 1

B. Scope of Work ....................................................................................................... 3

II. EXECUTIVE SUMMARY ............................................................................................... 4

III. BACKGROUND ............................................................................................................... 9

A. The Fundamentals of Energy Exploration and Development................................ 9

B. Israel’s Efforts to Encourage Energy Investment ................................................ 11

C. The Investment Process and Discoveries of Noble.............................................. 14

D. The Petroleum-Law Review ................................................................................ 17

IV. THE FCN TREATY ........................................................................................................ 19

A. Historical Perspectives......................................................................................... 19

1. The American Perspective ....................................................................... 19

2. The Israeli Perspective............................................................................. 21

B. U.S. and Israel Sign the Treaty ............................................................................ 23

V. APPLICATION OF THE FCN TREATY....................................................................... 24

A. Noble Has Protected Interests under the FCN Treaty.......................................... 24

B. The Substantive Provisions of the FCN Treaty ................................................... 26

1. The “Equitable Treatment” Standard in Article I .................................... 27

i. Israel’s Obligation to Treat Noble’s Investment Transparently and to Provide Noble Due Process ....................... 31

ii. The Treaty Requires Israel to Act Reasonably and in the Highest Good Faith ...................................................................... 32

iii. The Treaty Requires Israel to Protect Noble’s Legitimate Expectations................................................................................. 33

iv. The Treaty Requires Israel to Maintain a Stable and Predictable Environment for Noble’s Investment........................ 37

2. The “Most Constant Protection and Security” Standard in Article VI(1)......................................................................................................... 40

3. The Expropriation Standard in Article VI(3)........................................... 43

4. The Reasonableness and Non-Discrimination Standard in Article VI(4)......................................................................................................... 50

5. The National Treatment and MFN Standards of the FCN Treaty ........... 54

TABLE OF CONTENTS (continued)

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a. National Treatment ...................................................................... 56

b. MFN Protection ........................................................................... 57

VI. NOBLE’S REMEDIES IF ISRAEL BREACHES THE TREATY................................. 60

VII. CONCLUSION................................................................................................................ 61

VIII. MY DUTY TO THE COMMITTEE ............................................................................... 62

APPENDIX I - CURRICULUM VITAE OF ABRAHAM D. SOFAER .............................. A-1

TABLE OF AUTHORITIES

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International Law Decisions and Awards ADC Affiliate Ltd. v. The Republic of Hungary,

ICSID Case No. ARB/03/16, Award of October 2, 2006...................................... 34, 60-61

Aguas del Tunari S.A. v. Bolivia, ICSID Case No. ARB/02/3, Partial Award of October 21, 2005....................................................................................................................................23

Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v. The Republic of Estonia, ICSID Case No. ARB/99/2, Award of June 25, 2001 ................................................. 28-29

AMCO Asia Corp. and Others v. The Republic of Indonesia, ICSID, Award of November 21, 1984...............................................................................61

American Manufacturing & Trading, Inc. v. Republic of Zaire, ICSID Case No. ARB/93/1, Award of February 21, 1997 .......................................... 40-41

Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Jurisdiction of December 8, 2003....................................................................................................................................27

Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award of July 14, 2006 ...............................27, 29-30, 41-42

BG Group Plc. v. The Republic of Argentina, UNCITRAL, Final Award of December 24, 2007 ................................................ 32, 50-51

Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo), ICJ Reports 2007................................................................................................................25

Case Concerning Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy), ICJ Reports 1989................................................................................................................25

Case Concerning The Barcelona Traction, Light and Power Co., Ltd. (Belgium v. Spain), ICJ Reports 1970..........................................................................................................24, 25

CME Czech Republic B.V. (The Netherlands) v. The Czech Republic, UNCITRAL, Partial Award of September 13, 2001...................... 28, 32, 36-37, 42, 46, 50

TABLE OF AUTHORITIES (continued)

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CMS Gas Transmission Co. v. The Argentine Republic, ICSID Case No. ARB/01/8, Objections to Jurisdiction of July 17, 2003................................................................................................................ 38-39

CMS Gas Transmission Co. v. The Argentine Republic, ICSID Case No. ARB/01/8, Award of May 12, 2005 ...........................................31, 37, 61

Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Award of August 20, 2007 ................................. 29, 42, 60-61

Compañía del Desarrollo de Santa Elena, S.A. v. The Republic of Costa Rica, ICSID Case No. ARB/96/1, Final Award of February 17, 2000........................................................................................................................45, 47, 49

Continental Casualty Co. v. Argentine Republic, ICSID Case No ARB/03/9, Award of September 5, 2008.................................................27

Duke EnergyElectroquil Partners v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award of August 18, 2008 .................................................31

EnCana Corp. v. Ecuador, LCIA Case No. UN3481, Award of February 3, 2006 ................................................ 44-46

EnCana Corp. v. Ecuador, LCIA Case No. UN3481, Partial Dissenting Opinion of Dr. Horacio A. Grigera Naón of December 30, 2005 ..............................................................45

Enron Corp. Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award of May 22, 2007 .................................................29, 38

Eureko B.V. v. Republic of Poland, UNCITRAL, Partial Award and Dissenting Opinion of August 19, 2005................................................................................................36-37, 46-48

Factory at Chorzow, 1928 P.C.I.J. (Sel. A) No. 17, Decision of September 13, 1928.............................................................................................................................. 60-61

Feldman v. Mexico, ICSID Case No. ARB(AF)/99/1, Award of December 16, 2002........................................................................................................................ 44, 56-57


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GAMI Investments, Inc. v. The Government of The United Mexican States, UNCITRAL, Final Award of November 15, 2004 ................................................45, 47, 49

Gas Natural SDG, S.A. v. The Argentine Republic, ICSID Case No. ARB/03/10, Decision on Jurisdiction of June 17, 2005 .....................................................................................................................59

Goetz v. Burundi, ICSID Case ARB/95/03, Award of February 10, 1999 .....................................................43

Lauder v. Czech Republic, UNCITRAL, Final Award of September 3, 2001..............................................................28

LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/1, Award on Liability of October 3, 2006.......................................................................................................................... 37-39

Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7, Decision on Jurisdiction of January 25, 2000 .......................................................................................................... 58-60

Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7, Award of November 9, 2000................................................28

Metalclad Corp. v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award of August 30, 2000....................................................................................................................................47

Methanex Corp. v. United States of America, UNCITRAL, Final Award on Jurisdiction of August 3, 2005....................................................................................................................................23

Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/99/6, Award of April 12, 2002 ................................................46, 47

Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2, Award of October 11, 2002........................................................................................................................27, 28, 30

MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award of May 25, 2004 ...........................................29, 38, 57


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National Grid P.L.C. v. Argentine Republic, UNCITRAL Case No. 1:09-cv-00248-RBW (2008), Award of November 3, 2008 ................................................................................................... 41-42

Occidental Exploration and Production Co. v. The Republic of Ecuador, LCIA, Final Award of July 1, 2004 .................................................37-40, 42, 52-53, 56-57

Pope & Talbot Inc. v. The Government of Canada, UNCITRAL, Interim Award of June 26, 2000 ............................................................46, 49

Pope & Talbot Inc. v. The Government of Canada, UNCITRAL, Award on the Merits of Phase 2 of April 10, 2001....................................................................................................................................28

PSEG Global Inc., The North American Coal Corp. Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, Award of January 19, 2007 ..................................................37

Revere Copper and Brass Inc. v. Oversees Private Investment Corp., AAA Case No. 16 10 0137 76, Award of August 24, 1978 ..............................................43

RoslnvestCo UK Ltd. v. The Russian Federation, SCC Case No. Arb. V079/2005, Award on Jurisdiction of October 5, 2007 ....................59

Rumeli Telekom A.S. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award of July 29, 2008 ................................................ 30-31

Saluka Investments BV (The Netherlands) v. The Czech Republic, UNCITRAL, Partial Award of March 17, 2006 .............................................. 28, 32, 50-51

S.D. Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award of November 13, 2000........................................28, 46, 48, 61

Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16, Award of September 28, 2007............................................37

Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Award of February 6, 2007 .......................... 41-42, 51, 53, 61


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Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction of August 3, 2004.......................................................................................................26, 56, 59

Starrett Housing Corp. v. The Government of the Islamic Republic of Iran, Case No. 24, Final Award of August 14, 1987..................................................................61

Suez and InterAguas v. The Argentine Republic, ICSID Case No. ARB/03/17. Decision on Jurisdiction of May 16, 2006 .....................................................................................................................59

Técnicas Medioambientales Tecmed S.A. v. The United Mexican States, ICSID Case No. ARB (AF)/00/2, Award of May 29, 2003.............................31, 33, 46, 51

Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran, UNCITRAL, Award No. 141-7-2 of June 29, 1984, reprinted in 6 Iran-U.S. C.T.R. 219.............................................................................47, 49

Waste Management, Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3, Award of April 30, 2004......................................... 46-48

Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award of December 8, 2000 ................................................46

Wickes v. Olympic Airways 745 F.2d 363 (6th Cir. 1984) .............................................................................................20

Zenith Radio Corp. v. Matsushita Electric Industrial Co., Ltd., 494 F. Supp. 1263 (E.D. Pa.1980) .....................................................................................23

International Law Commentary (Treaties, Books, Articles)

American Law Institute, Restatement of the Law Third, Foreign Relations of the United States, American Law Institute Publishers, Vol. 1, 1987, Section 712.......................................................................... 43-44

Commercial Treaties: Hearings on Treaties of Friendship, Commerce and Navigation with Israel, Ethiopia, Italy, Denmark, Greece, Finland, Germany and Japan Before the


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Subcomm. on Commercial Treaties of the Senate Foreign Relations Comm., 83d CONG., 1st SESS. 6 (1953) ...........................................................................................19

DANIEL JOHNSON, INTERNATIONAL PETROLEUM FISCAL SYSTEMS

AND PRODUCTION SHARING CONTRACTS (PENNWELL PUB. CO. 1994) ...........................................................................................................................10

Herman Walker, Jr., Modern Treaties of Friendship, Commerce and Navigation, 42 MINN. L. REV. 805 (1958)....................................................................................... 20-21

Herman Walker, Jr., The Post-War Commercial Treaty Program of the United States, 73 POL. SCI. Q. 57 (1958) ............................................................................................19, 21

Herman Walker, Jr., Treaties for the Encouragement and Protection of Foreign Investment: Present United States Practice, 5 AM. J. COMP. L. 229 (1956)....................................................................... 20-21

Jeswald W. Salacuse & Nicholas P. Sullivan, Do BITs Really Work?: An Evaluation of Bilateral Investment Treaties and Their Grand Bargain, 46 HARV. INT’L L.J. 67 (2005)...........................................................................................27

Joshua Robbins, The Emergence of Positive Obligations in Bilateral Investment Treaties, 13 U. MIAMI INT’L & COMP. L. REV. 403 (2006).............................................................................................................40

KENNETH J. VANDEVELDE, UNITED STATES INVESTMENT TREATIES: POLICY AND PRACTICE (Kluwer 1992)............................................................. 27-28, 40, 50

LUCY REED, ET AL., GUIDE TO ICSID ARBITRATION (Kluwer Law Int’l 2004) ..........................................................................................................................49

President’s Message to the Senate Transmitting The Treaty of Friendship, Commerce and Navigation Between the United States of America and Israel, 82d CONG. REC 1 (Oct. 18, 1951)......................................................................................23

Robert Wilson, Postwar Commercial Treaties of the United States, 43 AM. J. INT’L L. 262 (1949) ............................................................................................20


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Rudolf Dolzer, Fair and Equitable Treatment: A Key Standard in Investment Treaties, 39 INT’L LAWYER 87 (2005) ..............................................................................................30

RUDOLF DOLZER AND CHRISTOPH SCHREUER, PRINCIPLES OF

INTERNATIONAL INVESTMENT LAW (Oxford Univ. Press 2008) ..................................................................................................................................34

Samuel M. Levin, Some Problems of the Economy of Israel, 3 AM. J. ECON. & SOC. 231 (1953) ...............................................................................................21

Vienna Convention on the Law of Treaties adopted on May 22, 1969....................................................................................................................5, 23, 29, 34

Israeli Laws and Regulations

Israel Petroleum Law, 5712-1952.......................................................................................... passim

Israel-U.S. Friendship, Commerce and Navigation Treaty.................................................... passim

x

TABLE OF ABBREVIATED TERMS

AAA American Arbitration Association

BIT Bilateral Investment Treaty

CPR International Institute for Conflict Prevention & Resolution

FCN Friendship, Commerce and Navigation

ICC International Chamber of Commerce

ICJ International Court of Justice

ICSID International Centre for Settlement of Investment Disputes

LCIA London Court of International Arbitration

MFN Most-Favored Nation

NAFTA North American Free Trade Agreement

NEM Noble Energy Mediterranean, Ltd.

UNCITRAL United Nations Commission on International Trade Law

1

I, Abraham D. Sofaer, declare as follows:

I. INTRODUCTION

1. I am the George P. Shultz Senior Fellow at The Hoover Institution, Stanford University,

Stanford, California, USA, 94305-6010. I have been asked by Noble Energy Inc.

(“Noble”) to provide an Opinion and Memorandum of Law concerning the legality of

increases in royalty rates and/or taxes applicable to existing oil and natural gas interests

owned by a U.S. national in Israel under the Friendship, Commerce and Navigation

(“FCN”) Treaty between the State of Israel and the United States of America (the “FCN

Treaty” or “Treaty”) and other related issues. On behalf of Noble, I respectfully submit

this Opinion and Memorandum of Law to the Committee on Fiscal Policy Concerning

Oil and Natural Gas in Israel (the “Committee”).

A. RELEVANT QUALIFICATIONS

2. A resume that summarizes my career is attached to this Opinion and Memorandum of

Law as Appendix I. I am an attorney by training, having received my B.A. degree from

Yeshiva University in History in 1962, and my law degree from the New York University

School of Law in 1965, where I was editor-in-chief of the law review. Soon after

graduating law school, I became a member of the New York bar, having been admitted in

the First Appellate Division.

3. From 1965 to 1967, I served as a law clerk, first to Judge J. Skelly Wright of the U.S.

Court of Appeals for the District of Columbia, and then to Associate Justice William J.

Brennan, Jr. of the U.S. Supreme Court. From 1967 to 1969, I was an Assistant U.S.

Attorney in the Southern District of New York. From 1969 to 1979, I taught at the

Columbia University School of Law, where my principal subjects were Property and

Administrative Law.

4. In 1979, I was appointed a U.S. District Judge for the Southern District of New York,

where I served for six years. My duties as a trial judge included deciding and presiding

over cases involving a variety of subjects, including the interpretation of treaties and

international law. See, e.g., Ariel Sharon v. Time, Inc., 599 F. Supp. 538 (S.D.N.Y. 1984)

(determining the “act-of-state” doctrine does not preclude a court from exercising

2

jurisdiction over a libel suit brought by a high-level Israeli state official regarding alleged

acts performed in the course of his official service); Hener v. United States, 525 F. Supp.

350 (S.D.N.Y. 1981) (interpreting general principles of maritime and international law

over ownership of property lost at sea); Mahmoud v. Alitalia Airlines, 1982 U.S. Dist.

Lexis 16635 (applying provisions of the Warsaw Convention in determining liability for

lost passenger property on an airline); Braka v. Bancomer, S.A., 589 F. Supp. 1465

(S.D.N.Y. 1984) (upholding defendant foreign bank’s argument that the act-of-state

doctrine makes the foreign nation’s alleged breach of the IMF Breton Woods Agreement

nonjusticiable in a U.S. court). I have served as an expert in proceedings in Australia,

Ireland, Israel, and the United Kingdom.

5. I resigned my position as District Judge in 1985 to accept the position of Legal Adviser to

the U.S. Department of State, where for five years I was in charge of the Office of Legal

Adviser. The Department of State is responsible for negotiating commercial treaties on

behalf of the U.S., including bilateral investment treaties. During my tenure as Legal

Adviser, my office negotiated or presented to the Senate several bilateral investment

treaties and was involved in litigating the scope of FCN treaties in the International Court

of Justice (“ICJ”). I was Agent for and argued on behalf of the U.S. in FCN litigation

before the ICJ in a suit against Italy concerning the Raytheon Company, discussed below.

6. From 1990 to 1994, I was Senior Partner at the Washington, D.C. office of the law firm

of Hughes, Hubbard & Reed. My practice there consisted largely of litigation and legal

advice to companies, especially concerning international commercial affairs.

7. From 1994 to the present, I have been the George P. Shultz Senior Fellow at The Hoover

Institution, Stanford University. My work at Stanford consists primarily of scholarship

on subjects related to international law. I also hold the position of Professor of Law (by

courtesy) at the Stanford Law School, where I have taught a course in Transnational Law.

8. During the last 20 years, I have often been appointed to serve as an arbitrator in

commercial matters under the rules of the ICC, the AAA, and the CPR. These cases

often have involved issues requiring application of international law. I have appeared as

an expert witness on international law in two arbitrations under the Bilateral Investment

3

Treaty (“BIT”) between the U.S. and Argentina before the International Centre for

Settlement of Investment Disputes (“ICSID”). I am also a member of the College of

Commercial Arbitrators.

9. In addition to being a member of the bar of New York since 1965, I am a member of the

bars of the District of Columbia and the State of California. I am also qualified to

practice before several federal courts, including the Southern District of New York, the

Court of Appeals for the Second Circuit, and the U.S. Supreme Court. I have been a

member for many years of the American Law Institute. I am also a member of the U.S.

Secretary of State’s Advisory Committee on Public International Law and of the Council

on Foreign Relations.

B. SCOPE OF WORK

10. I have been asked to provide my opinion on the following question: To what extent does

the FCN Treaty limit Israel’s ability to increase royalty rates and/or taxes, or to reduce or

cancel tax benefits, applicable to existing oil and natural gas property rights in which

Noble has an interest in Israel? In providing my answer to that question, I will review the

relevant, substantive provisions of the FCN Treaty, analyze decisions from international

investment tribunals interpreting those provisions, and then provide my views on the

question presented.

11. These are complicated issues, however, and I have advised Noble that my ability to

evaluate the current situation is severely constrained. First, I have been afforded a very

short time within which to prepare my opinion given the complexity of the subject and

the special circumstances surrounding Noble’s activities. Even more significantly, I have

been informed that my opinion must be given before this Committee has indicated what

measures it plans to recommend, and that I may be given no opportunity at all to address

the Committee orally or in writing after it specifies the proposals it intends to make.

12. My opinion would be far more meaningful if the Committee permits me to address, not

only the possible issues, but those actually raised by specified proposals. The obligation

to proceed in a manner consistent with due process and transparency requires, in my

judgment, providing Noble an opportunity to address the Committee after it has

4

announced its intended proposal, if any, for a retroactive change to the royalty rate and/or

taxes applicable to existing oil and natural gas rights. Given that the current royalty rate

has remained unchanged since its enactment 58 years ago, and because no emergency of

any sort exists that would justify a departure from conventional “notice and comment”

procedures generally applicable to administrative agency actions, any change in this

regard should be taken only after full and fair consideration of the legal, economic, and

policy impacts thereof. As discussed below, Israel has accepted legal obligations in the

FCN Treaty regarding transparency, highest good faith, and due process.

II. EXECUTIVE SUMMARY

13. Under the FCN Treaty, Israel undertook to limit its exercise of sovereign powers with

respect to foreign investments made by U.S. nationals. In particular, the FCN Treaty

limits Israel’s ability to retroactively increase royalty rates and/or taxes, or to reduce or

cancel tax benefits, applicable to existing oil and natural gas rights and interests (such as

those granted by existing licenses and leases) held by U.S. nationals.

14. The FCN Treaty applies to Noble’s interests in Israel. Noble is a company incorporated

in the U.S. and is therefore a “company” within the meaning of Article XXII(3) of the

Treaty. It is the 100% owner of Noble Energy Mediterranean, Ltd. (“NEM”), an entity

incorporated in the Cayman Islands and registered for doing business in Israel under the

Israeli Companies Ordinance. NEM is the direct owner of rights in licenses and leases

for the exploration and production of petroleum in Israel. According to ICJ jurisprudence

(discussed below), NEM thus has “rights” in the licenses and leases, and Noble has

corresponding “interests” in those licenses and leases. The relevant provisions in the

FCN Treaty expressly state that they cover both “rights” and “interests” of U.S.

companies in Israel, and the Protocol section of the Treaty expressly states that

expropriation protection applies to both “direct and indirect” investments. Accordingly,

the FCN Treaty limits Israel’s ability to retroactively increase royalty rates and/or taxes,

or to reduce or cancel tax benefits, applicable to Noble’s “interests” in Israel, including

oil and natural gas rights under existing licenses and leases held by NEM.

5

15. The FCN Treaty prevails over the domestic laws of Israel, at least in the absence of a

clear legislative intention to the contrary. As a public international law treaty between

two sovereign States, the FCN Treaty must be interpreted in accordance with the

customary rules of international law codified in the Vienna Convention on the Law of

Treaties adopted on May 22, 1969 (the “Vienna Convention”). Article 27 of the Vienna

Convention provides that “[a] party may not invoke the provisions of its internal law as

justification for its failure to perform a treaty.” International investment tribunals have

recognized that a host State cannot rely on its domestic law to escape its obligations

under international law.

16. In the FCN Treaty, Israel undertook to accord U.S. investments the following protections:

(a) Equitable treatment (Article I), which encompasses the discrete principles of:

! transparency;

! highest good faith;

! due process;

! protection of an investor’s legitimate expectations;

! maintaining a stable and predictable regulatory framework;

! non-arbitrariness;

! reasonableness; and

! non-discrimination;

(b) Most constant protection and security (Article VI(1));

(c) Protection against unlawful expropriation (Article VI(3)), including:

! direct expropriation, where the host State takes legal title of the

investment; and

6

! indirect or “creeping” expropriation, where the host State achieves the

same result by taxation and regulatory measures that makes continued

operation of the investment uneconomical;

(d) Reasonable and non-discriminatory treatment (Article VI(4));

(e) National treatment (Articles V(1), VI(5), VII, and XVI), assuring U.S. investors

no less favorable treatment than treatment extended to Israeli nationals and

companies; and

(f) Most-favored nation (“MFN”) treatment (Articles V(1), VI(5), and XI(3)),

assuring U.S. investors no less favorable treatment than treatment extended to

other foreign investors.

17. Transparency, Highest Good Faith, and Due Process. International tribunals have

interpreted the “equitable treatment” standard in Article I of the Treaty to require the host

State (here, Israel) to act transparently and in the highest good faith with respect to the

protected foreign investment and to afford the investor due process. Consistent with

these standards, Noble should be provided notice and a meaningful opportunity to be

heard after the Committee has announced specific proposals for any changes to royalty

rates and/or taxes applicable to Noble’s interests. The highest good faith standard also

requires that any retroactive changes to existing royalty rates and/or taxes must relate to a

“rational policy,” such as a newly-discovered public need or emergency—and not be

undertaken simply to increase revenues.

18. Protected Expectations and Stable and Predictable Legal Framework. The “equitable

treatment” standard further requires Israel (i) to protect Noble’s legitimate expectations

and (ii) to maintain a stable and predictable legal framework for Noble’s investment.

When Noble invested in Israel, it did so in the face of great uncertainties and risks. No

major oil or natural gas discovery had been made in Israel until Noble discovered

commercially exploitable deposits in 2009 and 2010. Relying on Israel’s royalty rate of

12.5% and the fact that this royalty rate had remained stable for over 50 years, Noble

invested in Israel on the basis of forecasts that reflected its expectation to pay that royalty

7

rate (with no increase in taxes aimed at deriving the same result as an increased royalty

rate). By retroactively1 increasing royalty rates and/or taxes, Israel would undermine

Noble’s reliance and legitimate expectations and would upset the stable and predictable

legal framework that Israel is obligated to provide under the Treaty.

19. Full protection and security. For the same reasons, a retroactive increase in royalty rates

and/or taxes applicable to Noble’s interests would violate the full protection and security

standard in Article VI(1) of the Treaty. International investment tribunals have held that

treatment that is not “equitable” automatically entails an absence of full protection and

security of the investment.

20. Expropriation. Article VI(3) of the Treaty prohibits Israel from expropriating Noble’s

investment without prompt and adequate compensation. International investment

tribunals have ruled that this standard encompasses both direct and indirect expropriation,

the latter where the host State achieves the same result as direct expropriation by taxation

and regulatory measures that make continued operation of the investment uneconomical.

21. Reasonableness. Like the principle of good faith, the reasonableness standard in

Article VI(4) of the Treaty requires that any change in Israeli law affecting Noble’s

interests in Israel be related to a rational public policy. Here, however, it was not until

Noble’s exploration revealed commercially exploitable deposits in the Tamar and Dalit

fields that Israeli officials began to call for increased royalty rates and/or taxes. They did

so only a few months after NEM received two 30-year leases. The reasonableness

standard under the Treaty does not permit Israel to retroactively raise royalty rates and/or

taxes purely for monetary gain, thereby reflecting nothing more than an intent to change

the terms of a protected investment.

22. Non-Discrimination. The non-discrimination standard in Article VI(4) of the Treaty

prohibits Israel from treating Noble’s interests differently than other similarly-situated

companies. International tribunals have held that this standard requires a tax (or the

1 The term “retroactive” in this Opinion and Memorandum of Law refers to the application of royalty rates

and/or taxes to existing oil and natural gas rights in Israel, including licenses and leases and, in some circumstances, permits granted under the Israeli Petroleum Law.

8

reduction or cancellation in tax benefits) be applied “across-the-board”—i.e., not just to

the petroleum sector, but to other natural resource industries as well. Further, I am

informed that an Egyptian company, East Mediterranean Gas Company (“EMG”), is

exempt from paying taxes on the sale and transportation of natural gas pursuant to a

Memorandum of Understanding between Israel and Egypt. While I express no opinion

on that agreement, discriminatory treatment of Noble compared to other foreign investors

would violate Article VI(4) of the FCN Treaty.

23. National Treatment. The FCN Treaty also accords U.S. investors in Israel two contingent

protections: national treatment protection and MFN protection. The former assures non-

discrimination as compared with nationals of the host State; the latter, as compared with

other foreign investors. International tribunals have held that in some circumstances

increased taxes (or the reduction of tax benefits) applicable to only the petroleum

industry, rather than to all natural resource industries, violate the national treatment

standard.

24. MFN Treatment. The MFN protection has been applied to grant both substantive and

procedural rights. Substantively, MFN protection prohibits Israel from treating Noble

less favorably than other foreign investors. For example, discriminatory treatment of

Noble relative to EMG regarding taxes applicable to natural gas sales and transportation

would violate Article XI(3) of the Treaty. Procedurally, MFN clauses have been

interpreted by some tribunals to incorporate procedural rights from other treaties to which

Israel is a party, such as the dispute resolution options available to other foreign

investors.

25. Enforcement of Rights. Article XXIV of the FCN Treaty provides that the U.S. may

bring an action against Israel for a breach of the FCN Treaty before the ICJ, which the

U.S. may do if necessary. Noble may also attempt to use the MFN clause in the Treaty to

avail itself of a dispute resolution clause in another Israeli treaty, such as the Israel-

Ethiopia BIT, which allows a protected investor to bring a direct claim against Israel

before an international tribunal, such as an ICSID tribunal in Washington D.C or an

9

international tribunal established under the Arbitration Rules of the United Nations

Commission on International Trade Law (“UNCITRAL”).

26. Damages. Under international law, Noble would be entitled to damages under the FCN

Treaty that “wipe out all the consequences” of Israel’s breach of the Treaty. Thus, Israel

would be required to put Noble in the same position as it would have been “but for” its

breach. Israel would thus be liable for reimbursement of all royalties and/or taxes that it

collected from NEM in violation of the Treaty, together with any other proximate

damages that result from unlawful royalties and taxes.

III. BACKGROUND

A. THE FUNDAMENTALS OF ENERGY EXPLORATION AND DEVELOPMENT

27. Oil and natural gas exploration and development requires privately-owned companies or

public entities, with the proper equipment and technical ability, to invest enormous funds

to identify commercially exploitable deposits. The prospect of success of any major

project in an area of unproven potential is low. Nine out of ten exploration ventures are

unsuccessful, either finding insufficient resources to market economically or none at all.

Profits are secured only after a long and costly effort. Projects sometimes take five to ten

years from the start of exploration to the point of bringing oil and natural gas to market;

subsequent contracts commonly extend for decades.

28. The total cost of prospecting, developing, and marketing oil and natural gas—especially

from deep, off-shore reserves—is extremely high in both absolute terms and relative to

annual industry net income. A survey of 21 major global oil and natural gas companies,

including Noble, shows that the cost of new investments in the years 1996-2007 reached

117% of cumulative net income for those years.2 Anticipating costs accurately, therefore,

is essential in the oil and natural gas prospecting business.

2 See Investment and Other Uses of Cash Flow by the Oil Industry, 1996-2007, Prepared by Ernst & Young

LLP for the American Petroleum Institute (July 2008), p. ii, available at http://www.api.org/aboutoilgas/upload/EY_Investment_Trend_CY2007_Update_July_2008.pdf.

10

29. Given these risks and uncertainties, the process by which companies determine whether

to invest in petroleum exploration and development depends heavily on financial

projections based on the likelihood of success, the costs of development, the production

levels anticipated, and the profit margins that will result.

30. In forming models for determining whether to invest in undiscovered fields, oil and

natural gas companies consider the following factors, among others:

(a) Capital expenditures on property, plants, and equipment (“PP&E”).3 Without the

requisite technologies, equipment, infrastructure, and personnel, later stages of

exploration and production are unattainable. PP&E costs include company

research and development expenses.

(b) Drilling and exploration expenses. This depends on both the unique

characteristics of the geography of the site and the variable risks associated with

expected and unexpected finds. The cost of operating deepwater drilling

drillships and semisubs, for example, are significant—costing upwards of

$300,000 per day.4

(c) Production costs associated with a particular venture. Production costs include

geography, market commodity prices, regional production history, the existing

regulatory scheme, and contracted royalty requirements. The difference between

the value of production and the cost of extraction is key for determining company

profits.5

(d) Marketing and transportation. A commodity so closely linked to global politics

often finds itself shut out from certain markets due to political tensions. Israel’s

limited trading relationship with its regional neighbors serves as a case in point.

3 Id., see p. 2.

4 See Rigzone Data Center, available at http://www.rigzone.com/data.

5 See DANIEL JOHNSON, INTERNATIONAL PETROLEUM FISCAL SYSTEMS AND PRODUCTION SHARING

CONTRACTS, p. 6, (PennWell Pub. Co. 1994).

11

The absence of pipelines or liquefaction terminals in Israel adds substantially to

transportation costs.6

(e) Total cost of an oil or natural gas well. The total cost of an oil or natural gas well

must factor in the costs associated with the risk of explosion and or environmental

contamination. Protecting against such disasters and the cost of a cleanup effort

may skyrocket, and insurance to cover such risks is costly and limited.

31. On a global scale, the 21 largest oil and natural gas exploration companies spend some

65% of their annual cash flow on PP&E, exploration, research, and development alone.7

When these overhead costs are added to taxation on existing production, the resulting

earnings on an average per U.S. company in the first quarter of 2010 was only 7.3%

(net income/sales).8

B. ISRAEL’S EFFORTS TO ENCOURAGE ENERGY INVESTMENT

32. Since its establishment, Israel has been almost entirely dependent on foreign sources for

oil and natural gas to fuel its growing economy and defense infrastructure. Recognizing

the role played by private investment in the development of energy resources in most

areas of the world, Israel has encouraged foreign investment in the exploration of national

resources by establishing rules to govern such efforts, including commitments regarding

the royalty rate and taxes that would be imposed upon companies issued licenses that

result in leases and production.

33. The Israeli Petroleum Law, 5712-1952 (the “Petroleum Law”) governs exploration and

production of oil and natural gas in Israel, including the royalty rate applicable to such

6 See Putting Earnings Into Perspective: Facts for Addressing Energy Policy, prepared by the American

Petroleum Institute, p. 7 (July 2, 2010), http://www.api.org/statistics/earnings/upload/earnings_perspective.pdf.

7 See Investment and Other Uses of Cash Flow by the Oil Industry, 1996-2007, Prepared by Ernst & Young LLP for the American Petroleum Institute (July 2008), p. 8, available at http://www.api.org/aboutoilgas/upload/EY_Investment_Trend_CY2007_Update_July_2008.pdf.

8 See Putting Earnings Into Perspective: Facts for Addressing Energy Policy, prepared by the American Petroleum Institute, at p. 2 (July 2, 2010), available at http://www.api.org/statistics/earnings/upload/earnings_perspective.pdf.

12

production. Under Article 1 of the Petroleum Law, both licenses and leases are

“petroleum rights.” Article 26 of the Petroleum Law provides that an existing license

must be converted into a lease so long as the licensee has made a discovery in the

licensed area and has made a timely application for the lease. The government has no

discretion to deny the lease in such circumstances. Thus, licenses, along with leases

issued pursuant to them, are sufficient property and economic interests under Israeli law

to qualify for protection under the FCN Treaty. As a result, the Treaty’s constraints on

Israel’s retroactive application of increased royalties and/or taxes to Noble’s interests in

the applicable leases apply with equal force to Noble’s interests in any licenses issued for

exploration purposes.

34. Since its enactment over a half-century ago, the Petroleum Law has provided a consistent

statutory royalty rate on which investors have relied in allocating capital for exploration

and production.9 Article 32 of the Petroleum Law requires the payment of a 12.5%

royalty on the production of petroleum. It provides:

(a) A lessee is liable for a royalty of one-eighth of the quantity of petroleum produced from the leased area and saved, excluding the quantity of petroleum used by the lessee in operating the leased area; and he shall also be liable to a leasehold fee for the leased area at a rate equal to the highest rate of the license fee prescribed by Section 19(a1). A lessee who pays a royalty under sub-section (a) shall be exempt from a leasehold fee for a continuous area of fifty thousand dunams, to be selected by him, around each new well in the leased area and the configuration of which shall be approved by the Commissioner (hereinafter production area) provided that no new production area or part thereof shall anywhere coincide with an earlier production area or part thereof.

(b) The lessee shall pay to the Treasury, at such periods of payment as shall be prescribed by the regulations, the market value at the wellhead of the royalties due from him.

9 The law underwent substantial amendments in 1965, but the royalty provision was unchanged. In 2002,

amendments to increase both taxes and the royalty rate were proposed but ultimately rejected. See, e.g., Zvi Zrahiya & Avi Bar-Eli, State wants higher royalties on gas, oil, Haaretz (April 14, 2010) (“In 2002 the cabinet decided to levy additional taxes of 10% to 50% on profits from sales of natural gas and oil, on top of the 12.5% royalties. . . . But this entire move was halted completely in Novemebr [sic] 2002, when then infrastructures minister Effi Eitam objected and the Knesset Economic Affairs Committee voted down the proposals unanimously. Energy companies also lobbied heavily against, and the U.S. ambassador to Israel at the time also strongly denounced the changes.”) (available at http://www.haaretz.com/print-edition/business/state-wants-higher-royalties-on-gas-oil-1.284235).

13

(c) In the first month of any period of payment, the Commissioner may notify the lessee that in the next following period of payment he wishes to receive the royalty or part thereof in kind in lieu of payment therefor under sub-section (b); in this case, the lessee shall deliver to the Commissioner the quantity of petroleum due to the Treasury in tankage or pipelines designated by the Commissioner and not farther from the well than those of the lessee. Where facilities are available for the conveyance of the petroleum produced by the lessee, the Commissioner may require him to deliver all or part of the petroleum due to the Treasury as royalty in kind at such terminal point as the Commissioner may designate, provided that the cost of conveyance in excess of the cost of delivery as prescribed above shall be borne by the Treasury. The lessee is not bound to store gaseous petroleum due to the Treasury as royalty in kind or to store liquid petroleum due to the Treasury as aforesaid in his own tankage or storage for more than thirty days from the date of production.

(d) Notwithstanding as above provided, the royalty due from the lessee shall not, in any year, be less than the minimum amount prescribed for such year under sub-section (e); and if it appears that it is less than such minimum amount, the lessee shall, after such year within such time as shall be prescribed by the regulations, pay the difference between the royalty and the minimum amount. For the purpose of this provision, the royalty due from the lessee is the amount due from him under subsection (b) plus the market value at the wellhead of the petroleum due from him under sub-section (c).

(e) (1) The minimum amounts payable by the lessee for a particular year, in respect of each one thousand dunams of his production area, shall be the value at the end of that year of a number of barrels of petroleum as specified hereunder:

For the 1st year of the lease - 4 barrels

For the 2nd year of the lease - 6 barrels

For the 3rd year of the lease - 12 barrels

For the 4th year of the lease - 20 barrels

For the 5th and each succeeding year of the lease - 32 barrels

(2) For the purpose of this provision, the number of dunams in respect of a particular year shall be the number of dunams in the production area at the end of that year; and the value of a barrel of petroleum shall be the price of a barrel of Middle East crude oil at the terminal point of a pipeline on the eastern coast of the Mediterranean.

35. The royalty imposed by Article 32 is in addition to the taxes imposed on oil and natural

gas companies. Although the royalty rate is lower than that of States in which oil and

14

natural gas is known to be plentiful, no major oil or natural gas discovery had been made

in Israel until Noble’s efforts resulted in the Tamar and Dalit discoveries and the

prospects already identified in the Leviathan area. A relatively low royalty rate

encouraged potential investors to risk vast sums in territories subject to Israel’s economic

regulatory control.

C. THE INVESTMENT PROCESS AND DISCOVERIES OF NOBLE

36. It is against the backdrop of this specific and well-established regulatory regime that

Noble made a huge long-term investment in Israel by undertaking to explore and develop

oil and natural gas reserves within Israel’s claimed zone of economic control. Noble’s

cost-analysis for development and production included the following elements:

(a) the cost of conducting both 2D and 3D seismic testing;

(b) the drilling of appraisal wells; and

(c) the attendant costs of manning and conducting these intensive off-shore surveys.

37. Incurring these costs, Noble explored for viable sites—many of which proved

commercially unproductive and resulted in substantial losses. Indeed, “there were some

500 previous drills which yielded nothing and caused massive losses in

funds. . . . American partners invested massive amounts of money in the State of Israel

against all odds . . . .”10

38. In July 2006, after these exploration activities, Noble’s wholly owned subsidiary, NEM,

entered into a license to explore an area in the Mediterranean Sea off the coast of Haifa.11

After conducting 3D seismic testing, Noble developed appraisal wells to gauge the

reserves of areas known as the Tamar field (“Tamar”) and the Dalit field (“Dalit”). The

cost of drilling the first exploration well was initially estimated at USD 40 million, but

10 See Roni Sofer, Steinitz: Natural gas profits belong to people, Ynetnews.com (July 6, 2010),

http://www.ynet.co.il/english/articles/0,7340,L-3899626,00.html.

11 “The prospect falls under the Matan licence, which Noble Energy has been operating since July 2006.” Tamar Field, Offshore Technology, http://www.offshore-technology.com/projects/tamar-field/.

15

escalated to more than USD 145 million.12 Noble collected additional 3D seismic data

for over 1,600 square miles of the Tamar region in the second half of 2009, after the

drilling of the second exploration well Dalit-1 and the Tamar-2 appraisal well was

completed in July 2009.13

39. The wells sufficiently defined the petroleum fields at Tamar and Dalit to satisfy Articles

18 and 26 of the Petroleum Law. In December 2009, the Ministry of National

Infrastructure issued two 30-year Leases for Exploration and Production of Oil and

Natural Gas No. I/12 (the “Leases”) to a consortium of companies (the “Lease Holders”),

one for the exploration and production of oil and natural gas in Tamar, and the other for

the exploration and production of oil and natural gas in Dalit. The Leases provide that

the Lease Holders are as follows (with their respective holdings):14

Noble Energy Mediterranean Ltd. 36.0%

Isramco Negev 2, limited partnership 28.75%

Avner Oil Explorations, limited partnership 15.6250%

Delek Drilling, limited partnership 15.6250%

Dor Gas Explorations, limited partnership 4.0%

40. The Leases further provide that NEM is the “operator” of Tamar and Dalit and shall

manage the operations required under the Leases and under the Petroleum Law on behalf

of the Lease Holders.

41. These investments reflect a trade-off in risk allocation. The investors accepted a

calculated risk of petroleum exploration in Israel, including specified contractual, legal,

regulatory, and taxation obligations imposed by contract and/or law (including the

established royalty). At the same time, Israel conferred upon NEM and its partners the

right to produce and sell any commercial quantities or oil or natural gas that they found,

while avoiding the costs and risks of resource development, and retaining the right to

benefit through the established royalty from Noble’s exploration investments and from its

12 Id. 13 See id.

14 Tamar and Dalit Leases, § 4.

16

positive consequences to the Israeli economy. Israel thus reaped guaranteed benefits in

an explicit and public exchange that included a clear understanding of the amount of any

royalty rate set by law at the time of the investment.

42. The Leases, like the Petroleum Law itself, place the entire financial burden of production

on the Lease Holders.15 The Leases make clear, for example, that the “Lease Holder

shall, at its liability only, plan, finance, set up and operate the Production System and the

Lease Holder’s Transmission System . . . .” 16 They also contain an additional,

prospective bank guarantee to the Government on the Lease Holders’ performance:

In order to ensure compliance with the terms of this Lease and as a condition for its granting, the Lease Holder shall produce an unconditional and irrevocable autonomous bank guarantee . . . . The Guarantee shall be valid for the entire Possession Period and for two years after the date on which the Possession Period shall be terminated for any reason whatsoever . . . . The sum of the Guarantee shall be [New Israeli Shekels] thirty-five million . . . .17

43. The Leases further require, in accordance with the Petroleum Law, specific construction

requirements and production timetables, 18 detailed reporting and specific production

methods,19 and extensive security and reporting duties.20 The liability for any legal

action or harm is solely the responsibility of the Lease Holders.21 As British Petroleum

15 See, e.g., Amiram Barkat, Steinitz at odds with Tamar partners on royalties, Globes-online.com (May 30,

2010) (“The partners [in the Tamar discovery] say that the areas where the [extended three dimensional] survey [was carried out] . . . cost some $50 million”).

16 Tamar and Dalit Leases, § 6.2.

17 Id. § 28.1-3.

18 See, e.g., id. §§ 9, 10.

19 See, e.g., id. Ch. E.

20 See, e.g., id. Ch. 6.

21 See, e.g., id. Ch. 9; id. § 29.1-2:

29.1 Instructions given by virtue of authority or by law, including provisions of permits and authorizations, provisions of the Lease, provisions of any law or any other provisions, shall not imply any responsibility or liability whatsoever upon the State or any of its authorities, or any of its employees, towards the Lease Holder, its employees, contractors, consumers or any other third party, and shall not be used as a cause for legal action by any of the above against the said parties, and shall not remove from the Lease Holder the full liability under the law and according to the Lease, to construct and operate facilities in a safe and proper manner.

17

has experienced from recent events in the Gulf of Mexico, this potential liability can be

enormous and represents a risk that must be taken into account in weighing the feasibility

of investments. The Lease Holders also remain responsible through the very end of the

endeavor. The Leases require them to submit a detailed plan determining how the site

will be abandoned when drilling is complete.22

44. Finally, the Leases expressly incorporate the provision of the Petroleum Law regarding

the payment of royalties: “The Lease Holder shall pay royalties in accordance with the

provisions of the law.”23 This provision refers to Article 32 of the Petroleum Law, which

sets the royalty rate at 12.5% of production.

D. THE PETROLEUM-LAW REVIEW

45. In April 2010, as estimates for the petroleum reserves recently discovered by NEM and

its partners continued to rise, Finance Minister Yuval Steinitz created the Committee to

review the Petroleum Law with the potential for a recommended increase in the royalty

rate on production of petroleum and/or in the taxes paid by the producers thereof.24 At

least one bill has already been submitted to the Knesset to modify the Petroleum Law.25

“The committee was instructed to propose an up-to-date policy for future gas and oil

29.2 The authority of the authorization or the supervision under the law or according to the Lease, or the use of any other authority as may be given in accordance with the Lease or any law of the State or any of its authorities or employees, shall not imply to any of the aforementioned any liability whatsoever that falls to the Lease Holder, nor does it remove from or reduce this liability.

22 See, e.g., id. § 27; id. § 27.1 (“Within 30 months of the date of the start of the production period, the Lease Holder shall submit for the authorization of the Commissioner a general plan of abandonment of the production system facilities and sealing of the drilling at the time of the conclusion of the use thereof, whether during the period of possession or subsequent thereto.”).

23 Id. § 33; see id. § 34 (“The Lease Holder shall pay the fees as stated in any law.” (emphasis added)).

24 “Following the discovery of a large natural gas reserve off the Haifa coast, Minister Steinitz decided to check whether companies which received a State concession to search and produce oil and gas were paying the government enough royalties and has a [sic] created a special committee for that purpose. The companies which found natural gas currently pay the government a 12.5% tax.” Amir Ben-David, US diplomat tries to prevent gas royalties raise, Ynetnews.com (May 27, 2010), http://www.ynet.co.il/english/Ext/Comp/ArticleLayout/CdaArticlePrintPreview/1,2506,L-3893557,00.html.

25 See Sharon Wrobel, MKs want more royalties on gas finds, JPost.com (July 13, 2010), http://www.jpost.com/Business/BusinessNews/Article.aspx?id=181341.

18

discoveries, and to study the implications of the present discoveries on the Israeli

economy.”26

46. A major issue of concern for members of the Israeli government, foreign governments,

and private investors is “that finance minister Yuval Steinitz did not state clearly that the

committee would refrain from discussing retroactively increasing royalties on current

leases and natural gas discoveries, including Tamar.”27 Reportedly:

This stance is opposed to the view expressed in the past by Minister of National Infrastructures Dr. Uzi Landau and Prime Minister Benjamin Netanyahu’s bureau. It is also inconsistent with official Ministry of Finance statements and views expressed by senior ministry officials, to the effect that royalties policy should not be changed for areas where seismic tests have been carried out and large amounts of money have been invested.28

47. This concern was echoed by Acting U.S. Ambassador Sievers, who wrote to the Israeli

Finance Minister that a decision to retroactively increase royalty rates and/or taxes may

“undermine confidence in the stability of Israeli fiscal policy and create[] barriers to

international investment.”29 A spokesperson for the Lease Holders likewise observed: “It

is unacceptable that with the news of the latest test results which suggest significant

potential for new discoveries, a committee should discuss the option of retroactively

changing the rules of the game and creating uncertainty and instability among all the

investors, primarily the foreign investors.”30

26 Zvi Zrahiya & Avi Bar-Eli, State wants higher royalties on gas, oil, Haaretz (April 14, 2010),

http://www.haaretz.com/print-edition/business/state-wants-higher-royalties-on-gas-oil-1.284235.

27 Israel Considers Upping Oil & Gas Royalties, Oil in Israel (May 21, 2010), http://www.oilinisrael.net/oil-in-israel-news/oil-in-israel-christian-world-news/israel-royalties.

28 Amiram Barkat, Steinitz at odds with Tamar partners on royalties, Globes-online (May 30, 2010), http://www.globes.co.il/serveen/globes/docview.asp?did=1000563029.

29 Letter from U.S. Ambassador, Marc Sievers to Minister of Finance of the State of Israel, Yuval Steinitz dated April 21, 2010; see also Amir Ben-David, US diplomat tries to prevent gas royalties raise, Ynetnews.com (May 27, 2010), http://www.ynet.co.il/english/Ext/Comp/ArticleLayout/ CdaArticlePrintPreview/1,2506,L-3893557,00.html.

30 Roni Sofer, Steinitz: Natural gas profits belong to people, Ynetnews.com (July 6, 2010), http://www.ynet.co.il/english/articles/0,7340,L-3899626,00.html.

19

IV. THE FCN TREATY

A. HISTORICAL PERSPECTIVES

48. The FCN Treaty is part of an extensive series of bilateral investment treaties signed and

ratified by nations following World War II. The purpose of these treaties is to encourage

and protect foreign investment by creating mutually favorable conditions for investments

by nationals of each State Party in the territory of the other. In addition, the FCN Treaty

was signed in the context of specific historical, political, and economic concerns.

1. The American Perspective

49. The U.S. signed the FCN Treaty with Israel as part of a program developed after World

War II, which carried forward one of its oldest diplomatic activities reaching back to the

Revolutionary War.31 From 1778 onward, with varying degrees of intensity from era to

era, the U.S. has used commercial treaties to “promote trade relations and to protect

shipping and the citizen and his interests abroad, according to legal principles,”32 to

strengthen friendly relations between nations, and to address special diplomatic interests

in the country’s formative years.

50. By the 1930s, however, the U.S. had become firmly established as a leading international

creditor and a major exporter of manufactured goods. That, together with the nation’s

intensified foreign economic interests, sparked a new series of foreign negotiations with

special emphasis on international trade. The reciprocal trade agreements program that

was subsequently developed provided a more precise and efficacious medium for

attaining trade promotion objectives, and in particular for encouraging and protecting

foreign investment. The pre-existing commercial treaties were overhauled in new

31 Herman Walker, Jr., The Post-War Commercial Treaty Program of the United States, 73 POL. SCI. Q. 57,

58 (1958); see Commercial Treaties: Hearings on Treaties of Friendship, Commerce and Navigation with Israel, Ethiopia, Italy, Denmark, Greece, Finland, Germany and Japan Before the Subcomm. on Commercial Treaties of the Senate Foreign Relations Comm., 83d CONG., 1st SESS. 6 (1953).

32 Herman Walker, Jr., The Post-War Commercial Treaty Program of the United States, 73 POL. SCI. Q. 57, 58 (1958).

20

“Friendship, Commerce and Navigation” treaties with a view towards responding to the

needs of foreign investors.33

51. According to Herman Walker, the primary architect of FCN treaties for the U.S., these

bilateral treaties “define the treatment each country owes the nationals of the other; their

rights to engage in business and other activities within the boundaries of the former; and

the respect due them, their property and their enterprises.”34 The FCN treaties “are not

political in character. . . . They are ‘commercial’ in the broadest sense of that term; and

they are above-all treaties of ‘establishment,’ concerned with the protection of persons,

natural and juridical, and of the property and interests of such persons.”35

52. FCN treaties seek to encourage and protect foreign investment by according foreign

investors two categories of rights. First, they grant to foreign investors rights based on

two “contingent standards”: (i) national treatment, which assures nondiscrimination or

no-less-favorable treatment than the citizens or companies of the host State; and (ii) MFN

treatment, which assures treatment no-less-favorable than the treatment of aliens or

companies from other States.

53. Second, FCN treaties accord foreign investors “non-contingent” (or non-relative) rights,

based on what are called “absolute” standards because their meaning is not dependent on

differential treatment.36 Non-contingent (absolute) standards are intended to protect the

rights of foreign nationals regardless of whether the host State provides the same rights to

its own or a third State’s nationals.37 FCN treaties thus include the non-contingent

guarantee that a foreign investor “shall receive not only equal protection, but also a 33 Whereas the pre-World War II treaties discussed foreign investment in one article among approximately 30,

half of the provisions in the post-World War II FCN treaties related to encouraging and protecting foreign investment. Herman Walker, Jr. Treaties for the Encouragement and Protection of Foreign Investment: Present United States Practice, 5 AM. J. COMP. L. 229 (1956).

34 Herman Walker, Jr., Modern Treaties of Friendship, Commerce and Navigation, 42 MINN. L. REV. 805, 806 (1958).

35 Id.

36 Id. p. 811

37 Wickes v. Olympic Airways, 745 F.2d 363, 366-67 (6th Cir. 1984); Herman Walker, Jr., Modern Treaties of Friendship, Commerce and Navigation, 42 MINN. L. REV. 805, 823 (1958); see also Robert Wilson, Postwar Commercial Treaties of the United States, 43 AM. J. INT’L L. 262, 264 (1949).

21

certain minimum degree of protection, as under international law, regardless of a

Government’s possible lapses with respect to its own citizens.”38

54. During the decade 1946-1956, the U.S. negotiated and signed 16 FCN treaties with

countries comprising a cross section of the world in geographical distribution, size, and

national circumstance outside the Soviet bloc. 39 In Asia, those represented include

Nationalist China, Korea, and Japan; in Africa, Ethiopia; in Latin America, Colombia,

Haiti, Nicaragua, and Uruguay; in Europe, Denmark, Germany, Greece, Ireland, Italy,

and the Netherlands; and in the Middle East, Iran and Israel.

2. The Israeli Perspective

55. From the Israeli perspective, the need for capital in the formative years of the nation was

paramount for its future economic and political success.40 From 1948 to 1953, Israel’s

population doubled, with expectations of 300% growth by 1958.41 This placed enormous

strains on the nascent economy.42 Further, the Israeli economy suffered from across-the-

board resource scarcities of petroleum, coal, iron, timber, and machines; of arable land

and adequate rainfall; of raw materials for sundry industries; of dollar exchange; and of

various kinds of consumers’ goods, such as shoes, clothing, meat, soap, paper, and

drugs.43

56. These deficiencies would have been insurmountable in the absence of adequate foreign

capital flows to begin major development:

38 Herman Walker, Jr., Treaties for the Encouragement and Protection of Foreign Investment: Present United

States Practice, 5 AM. J. COMP. L. 229, 232 (1956). Walker describes this as “rule-making in independent terms, without reference to the treatment given to others.” Herman Walker, Jr., Modern Treaties of Friendship, Commerce and Navigation, 42 MINN. L. REV. 805, 811 (1958).

39 Herman Walker, Jr., The Post-War Commercial Treaty Program of the United States, 73 POL. SCI. Q. 57 (1958).

40 Samuel M. Levin, Some Problems of the Economy of Israel, 3 AM. J. ECON. & SOC. 231, 239 (1953).

41 Id. p. 238.

42 Id.

43 Id. p. 239.

22

To Israeli economists, industrialists, and statesmen, the solution of the economic problems confronting the country can only be accomplished through the provision of an adequate supply of such capital; capital drawn from investment sources within the land and without.44

57. The need for capital led the Israeli government in 1950 to pass the Law for the

Encouragement of Capital Investments, which was specifically intended to facilitate the

influx of foreign capital. The law arranged for the movement of duty-free imports, tax

reductions and exemptions, release of foreign exchange for imports of raw materials and

machinery, a limited convertibility of profits into foreign exchange, and preferred status

for new enterprises.

58. Internationally, Israel sought to establish robust and reliable relations with the nation that

quickly became its primary investor and ally, the U.S. Starting with President Harry

Truman’s recognition of the provisional government as the de facto authority of Israel in

May 1948, the U.S. maintained a policy of “friendly and helpful cooperation” with Israel,

of which trade relations soon became an important part. Seeking to strengthen Israel and

its economy, high level officials of the Israeli and U.S. governments convened the

National Planning Conference for Israel and Jewish Rehabilitation in Washington, D.C.

on October 27, 1950. The National Planning Conference formally endorsed the

following goal: “the absorption and creative rehabilitation of large-scale immigration

and for the consolidation and development of Israel’s economy requiring

$1,500,000,000.”45 To that end, it approved a four-point program:

(a) Urging the U.S. to help Israel through grant-in-aid, loans, and other forms of

financial support;

(b) Intensification of efforts to raise gift funds;

(c) Support of a “public loan in the United States as a means of obtaining funds for

the financing of its constructive programs”; and

44 Id.

45 Id. p. 236 (internal quotations omitted).

23

(d) Stimulation of private investment in Israel.46

59. It was in the context of these goals that Israel completed the FCN Treaty with the U.S.,

establishing the MFN status for both countries’ investors and enterprises.47 As President

Truman stated in his message to the U.S. Senate seeking advice and consent, the FCN

Treaty establishes “Israel’s definite intention to encourage foreign investments.”48

B. U.S. AND ISRAEL SIGN THE TREATY

60. The U.S. and Israel signed the FCN Treaty in Washington D.C. on August 23, 1951. The

U.S. ratified the Treaty on December 18, 1953, and Israel ratified it on January 21, 1954.

The nations exchanged ratifications in Washington, D.C. on March 4, 1954, and the

Treaty entered into force one month later, on April 3, 1954. The Treaty is “self-

executing” and thus binding domestic law of its own accord in both States, without the

need for implementing legislation.49

61. As a public international law treaty between two sovereign States, the FCN Treaty must

be interpreted in accordance with Article 31 of the Vienna Convention, the interpretation

rules of which reflect customary international law.50 Article 31 of the Vienna Convention

requires that the terms of the Treaty be interpreted in accordance with their ordinary

meaning in their context and in view of the Treaty’s object and purpose—i.e., the

encouragement and protection of foreign investment.51

46 Id.

47 See id.

48 President’s Message to the Senate Transmitting The Treaty of Friendship, Commerce, and Navigation Between the United States of America and Israel, 82d CONG. REC 1 (Oct. 18, 1951).

49 See Zenith Radio Corp. v. Matsushita Electric Industrial Co., Ltd., 494 F. Supp. 1263, 1266-1267 (E.D. Pa.1980).

50 See, e.g., Aguas del Tunari S.A. v. Bolivia, ICSID Case No. ARB/02/3, Partial Award of October 21, 2005, ¶ 88; Methanex Corporation v. The United States of America, UNCITRAL, Final Award on Jurisdiction of August 3, 2005, Part IV, Chapter B, ¶ 29.

51 Vienna Convention on the Law of Treaties adopted on May 22, 1969 (the “Vienna Convention”), Art. 31.

24

V. APPLICATION OF THE FCN TREATY

A. NOBLE HAS PROTECTED INTERESTS UNDER THE FCN TREATY

62. Noble is a U.S. company, duly registered in the U.S. under the laws of the State of

Delaware. It is therefore a “company” within the meaning of Article XXII(3) of the

Treaty:

As used in the present Treaty, the term “companies” means corporations, partnerships, companies and other associations, whether or not with limited liability and whether or not for pecuniary profit. Companies constituted under the applicable laws and regulations within the territories of either Party shall be deemed companies thereof and shall have their juridical status recognized within the territories of the other Party.

63. Noble is the 100% shareholder of NEM, an entity incorporated in the Cayman Islands

and registered for doing business in Israel under the Israeli Companies Ordinance. NEM

is the direct owner of 36% of the rights in the Tamar and Dalit Leases and has ownership

rights under licenses pursuant to which other discoveries have been made. The question,

therefore, is whether the Treaty covers (and thereby protects) Noble’s interest in NEM’s

rights under the licenses and Leases.

64. Resolution of this issue depends on whether the FCN Treaty accords protection to U.S.

companies’ economic “interests” in Israel rather than merely their property “rights.” This

was the distinction drawn by the ICJ in Barcelona Traction, Light and Power Co., Ltd.

(Belgium v. Spain), where the Belgian government sought to exercise diplomatic

protection against Spain for damage sustained by a Canadian company with Belgian

shareholders. The ICJ rejected the claim on the basis that (i) Belgium may only exercise

protection of “rights” of Belgian citizens affected by Spain’s measures; and (ii) Spain’s

measures could have only affected the rights of the Canadian company, not the rights of

its Belgian shareholders. The ICJ expressly pointed out that the derivative damage

sustained by shareholders affects their interests, but not their rights:

25

Not a mere interest affected, but solely a right infringed involves responsibility, so that an act directed against and infringing only the company’s rights does not involve responsibility towards the shareholders, even if their interests are affected.52

65. It is well-settled, however, that treaties may provide protection for economic “interests”

in addition to “rights.” In ELSI (United States of America v. Italy),53 the ICJ interpreted

the U.S.-Italy FCN Treaty to allow the U.S. Government to claim damage sustained by

two U.S. shareholders of an Italian company. The ELSI tribunal thus recognized the

standing of the U.S. to sue under the FCN Treaty on the basis of an American national’s

interest (shares) in the Italian company.

66. Similarly, the FCN Treaty expressly states that it protects not only the rights of U.S.

companies in Israel, but also their “interests” in Israel. The equitable treatment standard

in Article I, for example, expressly requires Israel to accord equitable treatment to the

“interests” of U.S. companies in Israel:

Each Party shall at all times accord equitable treatment to the persons, property, enterprises and other interests of nationals and companies of the other Party. (Emphasis added).

67. With equal force, the reasonableness and non-discrimination standard in Article VI(4)

accords protection to U.S. companies’ “interests” in Israel:

Neither Party shall take unreasonable or discriminatory measures that would impair the legally acquired rights or interests within its territories of nationals and companies of the other Party in the enterprises which they have established or in the capital, skills, arts or technology which they have supplied; nor shall either Party unreasonably impede nationals and companies of the other Party from obtaining on equitable terms the capital, skills, arts and technology it needs for its economic development. (Emphasis added).

68. Thus, under the doctrine of Barcelona Traction, Noble has “interests” in the license and

lease rights of NEM within the meaning of the FCN Treaty. This conclusion is supported

52 Case Concerning The Barcelona Traction, Light and Power Co., Ltd. (Belgium v. Spain), ICJ Reports 1970,

¶ 146. The ICJ recently reaffirmed this principle in Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo), ICJ Reports 2007, ¶ 87.

53 Case Concerning Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy), ICJ Reports 1989.

26

by the plain text of the Treaty and by its purpose of encouraging and protecting foreign

investment. It is also overwhelmingly approved by modern investment jurisprudence,

which recognizes that shareholders are protected under investment treaties independent of

their subsidiaries.54 Further, the Protocol section of the Treaty expressly states that the

expropriation clause in Article VI(3) applies to “indirect and direct” interests: “The

provisions of Article VI, paragraph 3, providing for the payment of compensation shall

extend to interests held directly or indirectly by nationals and companies of either Party

in property which is taken within the territories of the other Party.” (Emphasis added).

69. Israel is thus required to accord Noble’s interests in its territories the substantive

protections under the Treaty.

B. THE SUBSTANTIVE PROVISIONS OF THE FCN TREATY

70. Like most FCN treaties, the Treaty accords nationals of the U.S. and Israel contingent

and non-contingent rights in the territory of the other Party. The four relevant non-

contingent (absolute) standards are:

(a) The equitable treatment standard in Article I;

(b) The most constant protection and security standard in Article VI(1);

(c) The expropriation standard in Article VI(3); and

(d) The reasonableness and non-discrimination standard in Article VI(4).

71. These substantive protections are identical in form and substance to many of the

protections later found in bilateral treaties “concerning the reciprocal encouragement and

protection of investment,” entered into by many States, including the U.S. and Israel, also

known as “BITs.” BITs incorporate or draw upon the language and provisions of the

54 See, e.g., Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction of

August 3, 2004, ¶¶ 135-144 (holding that indirect investments are protected in the context of a bilateral investment treaty that does not specifically cover indirect investment).

27

FCN treaties that generally preceded them.55 As Professor Vandevelde has observed,

“[t]he BITs retain the absolute standards of treatment imposed by the modern FCNs”56

and are “equivalent” to the FCN provisions.57

72. A rich body of international investment jurisprudence has developed over the past two

decades interpreting and applying these substantive protections. Because investment

treaties “demonstrate many commonalities, including their coverage of similar issues and

their use of equivalent or comparable legal concepts and vocabulary,” they have

contributed to the creation of an “international framework for investment.” 58 The

following section reviews that framework, first, with respect to the non-contingent

(absolute) standards and, second, with respect to the contingent (relative) standards.

1. The “Equitable Treatment” Standard in Article I

73. The first absolute standard in the FCN Treaty is the “equitable treatment” standard in

Article I. That provision provides:

Each Party shall at all times accord equitable treatment to the persons, property, enterprises and other interests of nationals and companies of the other Party. (Emphasis added).

55 See, e.g., Continental Casualty Co. v. Argentine Republic, ICSID Case No ARB/03/9, Award of September

5, 2008, ¶ 176 (BITs derive their purpose and import from their direct predecessor treaties, FCN treaties); Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Jurisdiction of December 8, 2003, ¶ 71 (same); Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award of July 14, 2006, ¶ 368 (same); Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2, Award of October 11, 2002, ¶ 125 (same). Indeed, in its recommendations to President Reagan to support the signing of BITs, the U.S. Department of State stated that “BITs are consistent in purpose with the network of treaties of Friendship, Commerce and Navigation (FCNs) . . . . They continue the U.S. policy of securing by agreement standards of equitable treatment and protection of U.S. citizens carrying on business abroad.” As the U.S. Department of State explained, “[o]ur [BIT] treaties, which draw upon language used in the U.S. FCN treaties . . . , are more comprehensive and far-reaching than European BITs.” See, e.g., Letter from George P. Shultz to President Ronald Reagan dated May 20, 1986, 1986 U.S.T. Lexis 151 (regarding U.S.-Grenada BIT).

56 KENNETH J. VANDEVELDE, UNITED STATES INVESTMENT TREATIES: POLICY AND PRACTICE 76 (Kluwer 1992).

57 Id. p. 77.

58 Jeswald W. Salacuse & Nicholas P. Sullivan, Do BITs Really Work?: An Evaluation of Bilateral Investment Treaties and Their Grand Bargain, 46 HARV. INT’L L.J. 67, 89 (2005).

28

74. This “equitable treatment” standard is “concordant[ ]” with the “fair and equitable

treatment” standard found in many BITs.59 As explained by Professor Vandevelde, these

two standards are “equivalent.”60

75. International investment tribunals have interpreted the equitable treatment standard

broadly—most notably in CME Czech Republic B.V. (The Netherlands) v. Czech

Republic,61 Lauder v. The Czech Republic,62 Pope & Talbot Inc. v. Canada,63 Maffezini v.

Kingdom of Spain,64 and S.D. Meyers, Inc. v. The Government of Canada.65

These cases

reflect the principle that a State’s guarantee under investment treaties, like FCNs and

BITs, is not only to protect against “egregiously unfair conduct,” but also to ensure “the

kind of hospitable climate that would insulate them from political risks or incidents of

unfair treatment.”66

76. The fair and equitable standard has been interpreted as “a basic and general standard

which is detached from the host State’s domestic law.”67 International tribunals thus

have distinguished the higher “fair and equitable” standard under BITs from the lower

“fair and equitable” standard under customary international law. For example, the

tribunal in Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v. The Republic of

59 Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2, Award of October

11, 2002, ¶ 125.


61 CME Czech Republic B.V. (The Netherlands) v. The Czech Republic, UNCITRAL, Partial Award of September 13, 2001, ¶ 611.

62 Lauder v. The Czech Republic, UNCITRAL, Final Award of September 3, 2001, ¶¶ 231-233.

63 Pope & Talbot Inc. v. The Government of Canada, UNCITRAL, Award on Merits of Phase 2 of April 10, 2001, ¶¶ 105-118.

64 Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7, Award of November 9, 2000, ¶ 83.

65 S.D. Myers, Inc. v. The Government of Canada, UNCITRAL, Partial Award of November 13, 2000, ¶¶ 258-269.

66 Pope & Talbot Inc. v. The Government of Canada, UNCITRAL, Award on Merits of Phase 2 of April 10, 2001 ¶¶ 105-118.

67 Saluka Investments BV v. The Czech Republic, UNCITRAL, Partial Award of March 17, 2006, ¶ 295 (quotation omitted).

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Estonia 68 characterized the “fair and equitable” treaty standard as an international

minimum standard, not the international minimum standard. The “fair and equitable

treatment” standard requires the Contracting States to accord to foreign investors

treatment which does not fall below a certain minimum, regardless of the lower

customary international law standard.69

77. As required by the Vienna Convention, international tribunals apply the fair and equitable

standard in view of the object and purpose of the applicable treaty—namely, to encourage

foreign investment by creating favorable conditions for investment. The standard

requires a proactive approach by the host State, thereby conferring protection not already

required without such provisions by the customary minimum standard:

[F]air and equitable treatment should be understood to be treatment in an even-handed and just manner, conducive to fostering the promotion of foreign investment. Its terms are framed as a pro-active statement—“to promote”, “to create”, “to stimulate”—rather than prescriptions for a passive behavior of the State or avoidance of prejudicial conduct to the investors.70

78. As a result, State action that violates the fair and equitable standard does not need to rise

to the level of “shocking,” “outrageous,” “egregious,” or even bad faith. Those standards

are requirements traditionally associated with the “customary minimum” standard of

treatment, rather than the “equitable treatment” standard found in Article I of the FCN

Treaty. As the tribunal in Azurix v. The Argentine Republic observed:

68 Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v. The Republic of Estonia, ICSID Case No.

ARB/99/2, Award of June 25, 2001, ¶ 367.

69 See, e.g., Enron Corp. Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award of May 22, 2007, ¶ 258; Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Award of August 20, 2007, ¶ 7.4.5.

70 MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award of May 25, 2004, ¶ 113 (emphasis added).

30

To encourage and protect investment is the purpose of the BIT. It would be incoherent with such purpose and the expectations created by such a document to consider that a party to the BIT has breached the obligation of fair and equitable treatment only when it has acted in bad faith or its conduct can be qualified as outrageous or egregious.71

79. Professor Dolzer has noted that long-term investments in the energy sector—where the

risks are often greater than in shorter-term, non-energy investments—are particularly

well-suited for protection under the fair and equitable standard. As Professor Dolzer

explained, “[s]uch long-term foreign investments . . . are not infrequent in the energy

sector. . . . The standard of fair and equitable treatment will acquire its strongest

significance in such long-term projects.”72

80. In addition to these general principles, the international tribunal in Rumeli v. Kazakhstan

observed that the equitable treatment standard includes the concrete principles of

transparency, good faith, non-arbitrariness, non-discrimination, and due process and

imposes the standard that the State must “respect the investor’s reasonable and legitimate

expectations”:

The parties rightly agree that the fair and equitable treatment standard encompasses inter alia the following concrete principles:

- The State must act in a transparent manner;

- The State is obliged to act in good faith;

- The State’s conduct cannot be arbitrary, grossly unfair, unjust, idiosyncratic, discriminatory, or lacking in due process;

- The State must respect procedural propriety and due process.

71 Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award of July 14, 2006, ¶ 372

(emphasis added); see also Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2, Award of October 11, 2002, ¶ 116 (“To the modern eye, what is unfair or inequitable need not equate with the outrageous or the egregious. In particular, a State may treat foreign investment unfairly and inequitably without necessarily acting in bad faith.”).

72 Rudolf Dolzer, Fair and Equitable Treatment: A Key Standard in Investment Treaties, 39 INT’L LAWYER 87, 104 (2005).

31

The case law also confirms that to comply with the standard, the State must respect the investor’s reasonable and legitimate expectations.73

81. In addition to a host State being required to protect an investor’s “reasonable and

legitimate expectations,” the fair and equitable treatment standard also requires the State

“to maintain a stable and predictable framework” for the investment.74 The following

sections apply these standards in the context of increased royalty rates and/or taxes to

existing oil and natural gas rights.

i. Israel’s Obligation to Treat Noble’s Investment Transparently and to

Provide Noble Due Process

82. The standard of fair and equitable treatment requires that Israel act in a transparent way

and to allow protected investors, such as Noble, to know beforehand any and all

regulations that would govern its investment. As the tribunal in Tecmed v. Mexico

observed:

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.75

83. The standard requires the Committee to give Noble prior notice and a meaningful

opportunity to be heard after the Committee has announced its specific proposal for any

changes to the royalty rates and/or taxes applicable to Noble’s interests.

73 Rumeli Telekom A.S. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID

Case No. ARB/05/16, Award of July 29, 2008, ¶ 609 (emphasis added).

74 CMS Gas Transmission Co. v. The Argentine Republic, ICSID Case No. ARB/01/8, Award of May 12, 2005 ¶ 274 (emphasis added); Duke Energy Electroquil Partners v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award of August 18, 2008, ¶ 327 (emphasis added).

75 Técnicas Medioambientales Tecmed S.A. v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award of May 29, 2003, ¶ 154 (emphasis added).

32

ii. The Treaty Requires Israel to Act Reasonably and in the Highest

Good Faith

84. The equitable treatment standard also requires that the host State act reasonably and in

the highest good faith. These standards require that the host State’s actions regarding

investors relate to a rational public policy, such as an emergency or newly-discovered

need, and not purely for monetary gain. It further requires that the host State’s actions be

appropriate in view of the overall object and purpose of the Treaty.76 Indeed, tribunals

have found that it was not reasonable for a State to change the regulatory framework

regarding the corporate structure of an investment into a private TV station,77 or for a

State to fail to engage in good faith negotiations with the investor.78

85. Here, the FCN Treaty requires that Israel’s actions be in the highest good faith and relate

to a rational public policy—and not simply be for the purpose of taking additional

revenue from U.S. investors. The calls to increase royalty rates and/or taxes applicable to

petroleum in Israel appear to have been motivated by Noble’s recent discoveries of

commercial exploitable deposits, not by some social or economic emergency or other

newly-discovered public need. Until Noble’s discoveries, Israel was content to impose

the same 12.5% royalty rate that it had imposed for the last half-century.

86. Indeed, during the exploration phase of Noble’s endeavor, Israel maintained its existing

royalty and taxation structure, which was part of the incentive for Noble to continue

investing money in the project. Yet only a few months after Noble earned the right to

and received two 30-year Leases, Israel’s Ministry of Finance announced that Israel was

revisiting its 50-year-old royalty and tax laws with respect to petroleum. These calls for

increased royalty rates and/or taxes appear to spring not from the greater economic needs

of the nation but, rather, from the desire to reap more of the reward from oil and natural

gas production in response to Noble’s discoveries. Such a proposed reallocation of risks

76 BG Group Plc. v. The Republic of Argentina, UNCITRAL, Final Award of December 24, 2007, ¶ 342.


78 Saluka Investments BV (The Netherlands) v. The Czech Republic, UNCITRAL, Partial Award of March 17, 2006, ¶ 426.

33

and rewards is not a “rational policy,” as required by the equitable treatment standard

under the Treaty.

iii. The Treaty Requires Israel to Protect Noble’s Legitimate

Expectations

87. The fair and equitable treatment standard also requires the host State to protect the

investor’s legitimate expectations. As the tribunal in Tecmed v. Mexico explained:

[The fair and equitable treatment standard], in light of the good faith principle established by international law, requires the Contracting Parties 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. 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. The investor also expects the State to use the legal instruments that govern the actions of the investor or the investment in conformity with the function usually assigned to such instruments, and not to deprive the investor of its investment without the required compensation.79

88. Professors Dolzer and Schreuer make this point with even greater particularity and

relevance, explaining that the legitimate expectations standard protects against the host

State altering the scheme of burdens, risks, and benefits that formed the investor’s

business plan and legitimate expectations when the investment was made:

The central political risk that arises for the foreign investor lies in a change of position of the host government that would alter the scheme of

79 Técnicas Medioambientales Tecmed S.A. v. The United Mexican States, ICSID Case No. ARB(AF)/00/2,

Award of May 29, 2003, ¶ 154 (emphasis added).

34

burdens, risks, and benefits, which the two sides have laid down when they negotiated the deal and which formed the basis of the investor’s business plan and the legitimate expectations embodied in this plan. Such a change of position on the part of the host country becomes more likely with every subsequent change of government in the host state during the period of investment.80

89. The tribunal in ADC v. Hungary expounded on this principle:

The Tribunal cannot accept the Respondent’s position that the actions taken by it against the Claimants were merely an exercise of its rights under international law to regulate its domestic economic and legal affairs. It is the Tribunal’s understanding of the basic international law principles that while a sovereign State possesses the inherent right to regulate its domestic affairs, the exercise of such right is not unlimited and must have its boundaries. . . .

The related point made by the Respondent that by investing in a host State, the investor assumes the “risk” associated with the State’s regulatory regime is equally unacceptable to the Tribunal. It is one thing to say that an investor shall conduct its business in compliance with the host State’s domestic laws and regulations. It is quite another to imply that the investor must also be ready to accept whatever the host State decides to do to it. In the present case, had the Claimants ever envisaged the risk of any possible depriving measures, the Tribunal believes that they took that risk with the legitimate and reasonable expectation that they would receive fair treatment and just compensation and not otherwise.81

90. Here, the FCN Treaty obliges Israel to maintain the level of royalties and taxes as Noble

legitimately expected would apply when it made its investment. Israel could argue, as

other States have unsuccessfully claimed in the cases discussed above, that it has the

sovereign power to change its laws. The Tamar and Dalit Leases provide, as one would

expect, that Noble and its partners agree to comply with all Israeli laws, including “any

amendments made thereto from time to time, and any legislation that replaces such.” But

such a provision cannot be read to permit Israel to act in a manner inconsistent with the

FCN Treaty, both because Article 27 of the Vienna Convention provides that a State

80 RUDOLF DOLZER & CHRISTOPH SCHREUER, PRINCIPLES OF INTERNATIONAL INVESTMENT LAW 4-5 (Oxford

Univ. Press 2008) (emphasis added).

81 ADC Affiliate Ltd. v. The Republic of Hungary, ICSID Case No. ARB/03/16, ICSID Case No. ARB/03/16, Award of October 2, 2006, ¶¶ 423-424 (emphasis added).

35

cannot escape its international obligations by amending its domestic law, and because it

would be unreasonable to construe this lease provision as having been intended to allow

changes in the law that materially alter a U.S. investor’s legitimate expectations.

91. Prior to making its investment, Noble took into account Israel’s legal and regulatory

regime in estimating its prospective costs and, on that basis, in determining whether

investing in Israel was worth the enormous long-term risks. Noble thus made its

investments over the years in Israel in reliance on forecasts that reflected its expectation

to pay a 12.5% royalty rate (with no increase in taxes aimed at deriving the same result as

an increased royalty). Together with its partners, Noble shouldered the full financial

burden of the investment and bore the full risk of not finding viable deposits, in addition

to the panoply of other risks associated with exploration and development of oil and

natural gas fields and the requirement of fulfilling commercial production as specified in

Section 13 of the Leases.

92. The purpose of the lease provision requiring Noble and its partners to abide by any future

amendments of Israel’s laws was to ensure compliance with regulatory changes based on

the need to protect the resources involved, the environment, and the numerous other

socially important subjects dealt with in the Petroleum Law, among others. Noble and its

partners had no legitimate expectation that such regulatory changes would never occur.

The provision is most reasonably construed, however, in order to avoid conflict with

international obligations, as not having been intended to enable Israel to retroactively

alter the fundamental terms of its economic arrangement with holders of vested

petroleum interests, and legitimate expectations related directly to the financial terms of

that arrangement.

93. The reasonable and legitimate expectations of such investors lie at the heart of the

“bargain” that Noble struck with Israel in agreeing to search for and produce

commercially exploitable deposits in Israeli-regulated, international waters. In effect,

Israel and Noble agreed upon an allocation of risk and potential reward when Israel

offered, and Noble accepted, the terms of the licenses and subsequent Leases under the

current legal and regulatory framework.

36

94. On the one hand, Israel entrusted to Noble the rights to explore for, develop, and

eventually to produce and sell oil and natural gas under licenses and subsequent Leases.

In return, Israel benefitted from the immediate influx of major investments, the economic

effects of stimulating support services to Noble and its partners, and Noble’s established

expertise. If the investments proved successful, Israel also could expect the supply of oil

or natural gas produced pursuant to the licenses and related Leases to be delivered to the

Israeli market, thus satisfying national supply needs and enhancing energy security for

the nation. Israel was also guaranteed the revenue stream established in law of a 12.5%

royalty on production, together with the applicable corporate and VAT taxes.

95. It is settled law that a State unlawfully frustrates the legitimate expectations of an

investor when it unilaterally modifies essential aspects of the bargain underlying the

investment. In CME, for example, the tribunal found that the Czech Media Council’s

interference with the contractual exclusivity of the investment’s broadcasting license

breached the fair and equitable treatment standard because it amounted to an

“evisceration of the arrangements in reliance upon with the foreign investor was induced

to invest.”82 Similarly, in Eureko, the claimant argued that it had only bought a minority

stake in a privatized state bank because of the Polish government’s commitment

subsequently to launch an IPO that would enable the claimant to acquire a controlling

stake in the bank.83 The tribunal found that, by later reneging on that commitment, the

Polish State had “consciously and overtly[] breached the basic expectations of [claimant]

that are at the basis of its investment in PZU and were enshrined in the SPA, and,

particularly, the First Addendum.”84 The tribunal held that, even though “the SPA of

itself, in terms, did not create a legal obligation for the Respondent to carry out an IPO of

some or all of the remaining shares of PZU,” in light of all the evidence “Eureko was

82 CME Czech Republic B.V. (The Netherlands) v. The Czech Republic, UNCITRAL, Partial Award of

September 13, 2001, ¶ 611.

83 Eureko B.V. v. Republic of Poland, UNCITRAL, Partial Award and Dissenting Opinion of August 19, 2005, ¶¶ 41-50, 88.

84 Id. ¶ 232.

37

fully justified, at the time that it entered into the SPA, in believing that the [State] would

honour and abide by . . . its privatization strategy.”85

96. In the present context, Noble legitimately expected that Israel would not retroactively

alter a regulatory regime that had endured for more than half-a-century. Yet only a few

months after Noble uncovered commercially exploitable deposits and received two 30-

year Leases, Israeli officials have begun threatening to unravel the long-term bargain on

which Noble had premised its investment. Having invited Noble to invest in Israel under

specific terms favorable to convince Noble Energy to proceed with its investment, a

retroactive increase in royalty rates and/or taxes for the purpose of changing those terms

would amount to a “bait and switch.”

97. In sum, a host State cannot, consistent with the “legitimate expectations” standard in the

Treaty, reallocate the risks and rewards of the investment merely because the investment

has become successful. An investor that bears all the risk of finding commercially

exploitable deposits is protected against being deliberately deprived of the benefits when

his investment leads to the very rewards contemplated by the parties. At a minimum, the

legitimate expectations standard prevents a State from setting up favorable conditions to

“draw in” an investor and then, when he makes the precise discovery for which he risked

the investment, retroactively altering the regulatory landscape to take for itself a greater-

than-expected portion of the revenues.

iv. The Treaty Requires Israel to Maintain a Stable and Predictable

Environment for Noble’s Investment

98. The protection afforded by the Treaty’s fairness standard has also been interpreted to

require more broadly that a host State maintain a stable legal and business environment

for foreign investment.86 The tribunal in Enron v. Argentina explained that “a key

85 Id. ¶ 196.

86 See, e.g., Occidental Exploration and Production Co. v. The Republic of Ecuador, LCIA, Final Award of July 1, 2004, ¶ 191; CMS Gas Transmission C. v. The Argentine Republic, ICSID Case No. ARB/01/8, Award of May 12, 2005, ¶ 274; LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/1, Award on Liability of October 3, 2006, ¶ 125; Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16, Award of September 28, 2007, ¶ 303; PSEG Global Inc., The North American Coal

38

element of fair and equitable treatment is the requirement of a ‘stable framework for the

investment’, which has been prescribed by a number of decisions.” 87 Echoing this

principle, the tribunal in MTD v. Chile held that a State “has an obligation to act

coherently and apply its policies consistently, independently of how diligent an investor

is.”88 Likewise, the tribunal in LG&E v. Argentina explained that “the fair and equitable

standard consists of the host State’s consistent and transparent behavior, free of

ambiguity that involves the obligation to grant and maintain a stable and predictable legal

framework necessary to fulfill the justified expectations of the foreign investor.”89 And

the tribunal in CMS v. Argentina ruled that “[t]here can be no doubt . . . that a stable legal

and business environment is an essential element of fair and equitable treatment.”90

99. Addressing the legality of a cancelled tax benefit for oil production under the U.S.-

Ecuador BIT, the tribunal in Occidental v. Ecuador described the “stability and

predictability” standard as follows:

The relevant question for international law in this discussion is not whether there is an obligation to refund [the tax], which is the point on which the parties have argued most intensely, but rather whether the legal and business framework meets the requirements of stability and predictability under international law. It was earlier concluded that there is not a [tax] refund obligation under international law, except in the specific case of the Andean Community law, which provides for the option of either compensation or refund, but there is certainly an obligation not to alter the legal and businesses environment in which the

Corp., and Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, Award of January 19, 2007, ¶ 254.

87 Enron Corporation Ponderosa Assets, L.P. v. The Argentine Republic, ICSID Case No. ARB/01/3, Award of May 22, 2007, ¶ 260.

88 MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award of May 25, 2004, ¶ 165.

89 LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/1, Award on Liability of October 3, 2006, ¶ 131; see id. ¶ 125.

90 CMS Gas Transmission Co. v. The Argentine Republic, ICSID Case No. ARB/01/8, Objections to Jurisdiction of July 17, 2003, ¶ 274.

39

investment is made. In this case it is the latter question that triggers a treatment that is not fair and equitable.91

100. By increasing royalty rates and/or taxes, or reducing tax benefits, applicable to Noble’s

Israeli interests, Israel would upend the stable and predictable environment in which

Noble’s decision to invest was made. For more than half-a-century, Israel has maintained

consistent royalty and taxation standards in the petroleum sector, and it willingly issued

licenses and entered into Leases with Noble according to those standards.

101. Indeed, during the exploration phase of the project, Israel maintained its existing royalty

and taxation structure to continue incentivizing Noble to invest money in the project.

Immediately after Noble’s investment became successful, however, the Ministry of

Finance announced it was revisiting its decades-old royalty and tax code with respect to

oil and natural gas production. Such a sudden ex post facto change—made because of the

potential magnitude of Noble’s discoveries—would upset the stable and predictable

framework that Israel is obligated to maintain under the Treaty and under which the

decision to invest was made.

102. This conclusion is confirmed by other cases where tribunals have applied the stable and

predictable framework standard. For example, tribunals that have considered the 2002

Argentine emergency measures (which devalued the peso, converted the tariffs of U.S.

dollar-denominated utility contracts into pesos, and revoked the right of utilities to tariff

adjustment) have consistently found that those measures violated the equitable treatment

standard because they altered the business environment under which the decision to

invest was made.92 Similarly, the tribunal in Occidental v. Ecuador found a breach of the

fair and equitable treatment standard because ‘‘the framework under which the

91 Occidental Exploration and Production Co. v. The Republic of Ecuador, LCIA, Final Award of July 1,

2004, ¶ 191 (emphasis added).

92 CMS Gas Transmission Co. v. The Argentine Republic, ICSID Case No. ARB/01/8, Objections to Jurisdiction of July 17, 2003, ¶ 275 (concluding that Argentina breached the equitable treatment standard because the emergency measures “entirely transform[ed] and alter[ed] the business and legal environment under which the investment was decided and made.”); LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/1, Award on Liability of October 3, 2006, ¶ 133 (“Having created specific expectations among investors, Argentina was bound by its obligations concerning the investment guarantees vis-à-vis public utility licensees. . . . The abrogation of these specific guarantees violates the stability and predictability underlying the standard of fair and equitable treatment.”).

40

investment was made and operates [was] changed in an important manner” by Ecuador’s

tax agency on the basis of a “manifestly wrong” assumption of what tax benefits OEPC

expected to receive under the Participation Contract.93

103. Stable and predictable royalty and taxation standards in Israel were an essential part of

the business environment in which Noble decided to make its investments and which

Israel is required to maintain. Here again, for the reasons discussed above, the fact that

the definition of the Petroleum Law in the Leases includes a commitment by Noble and

its partners to abide by Israeli law and “any amendments made thereto from time to time,

and any legislation that replaces such” does not change that conclusion. Although NEM

acknowledged that Israel may amend the Petroleum Law, it did not agree that Israel could

amend the Petroleum Law in a way that violates the FCN Treaty.

2. The “Most Constant Protection and Security” Standard in Article VI(1)

104. The second absolute standard in the FCN Treaty is the “most constant protection and

security” standard in Article VI(1), which provides:

Property of nationals and companies of either Party shall receive the most constant protection and security within the territories of the other Party. (Emphasis added).

105. This standard, which is indistinguishable from the “full protection and security”

requirement found in many BITs,94 “requires that the government protect investment

from injurious activities by the government or private persons.”95 According to the

tribunal in American Manufacturing & Trading, Inc. v. The Republic of Zaire, it is “an

obligation of vigilance, in the sense that [the host State] shall take all measures necessary


2004, ¶ 184; see id. ¶ 187.

94 Joshua Robbins, The Emergence of Positive Obligations in Bilateral Investment Treaties, 13 U. MIAMI

INT’L & COMP. L. REV. 403, 426 (2006) (stating that the FCN standard is “indistinguishable in practice” from the “full protection and security” requirement found in many BITs); KENNETH J. VANDEVELDE, UNITED STATES INVESTMENT TREATIES: POLICY AND PRACTICE 77 (Kluwer 1992) (calling these two standards “equivalent”).


41

to ensure the full enjoyment of protection and security of [the] investment and should not

be permitted to invoke its own legislation to detract from any such obligation.”96

106. This obligation of vigilance extends to both the physical and legal security of

investments. The tribunal in Siemens A.G. v. The Argentine Republic explained that “[a]s

a general matter and based on the definition of investment, which includes tangible and

intangible assets, the Tribunal considers that the obligation to provide full protection and

security is wider than ‘physical’ protection and security. It is difficult to understand how

the physical security of an intangible asset would be achieved.”97

107. Similarly, the tribunal in Azurix v. The Argentine Republic stated that “full protection and

security was understood to go beyond protection and security ensured by the police. It is

not only a matter of physical security; the stability afforded by a secure investment

environment is as important from an investor’s point of view.”98 The tribunal in National

Grid v. Argentina confirmed this point, explaining that the phrase “protection and

constant security” does not carry with it the implication that this protection is inherently

limited to protection and security of physical assets.99 Noting the “changes introduced”

by the State and “uncertainty reigning” during a period of the investment, that tribunal

held that the State breached the protection and constant security standard:

In applying this standard of protection to the facts of the instant case, the Tribunal finds that the changes introduced [by the state], and the uncertainty reigning during the two years preceding the sale of its [investment], with respect to any possible compensation on account of the impact of the Measures on Claimant’s investment, are contrary to the protection and constant security which the Respondent agreed to provide for investments under the Treaty.100

96 American Manufacturing & Trading, Inc. v. Republic of Zaire, ICSID Case No. ARB/93/1, Award of

February 21, 1997, ¶ 6.05.

97 Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Award of February 6, 2007, ¶ 303.

98 Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award of July 14, 2006, ¶ 408.

99 National Grid P.L.C. v Argentine Republic, UNCITRAL Case 1:09-cv-00248-RBW (2008), Award of November 3, 2008, ¶ 189.

100 Id. (emphasis added).

42

108. Consistent with the holdings in Siemens, Azurix, and National Grid, the tribunal in CME

Czech Republic B.V. v. Czech Republic concluded that the protection and security

standard requires the host State “to ensure that neither by amendment of its laws nor by

actions of its administrative bodies is the agreed and approved security and protection of

the foreign investor’s investment withdrawn or devalued.”101

109. Accordingly, Article VI(1) requires Israel to provide Noble’s investment with “the most

constant protection and security,” which—in the words of the CME tribunal—means that

it must ensure that “neither by amendment of its laws nor by actions of its administrative

bodies is the agreed and approved security and protection of the foreign investor’s

investment withdrawn or devalued.”102

110. Two tribunals have recognized the broad scope of this guarantee and its overlap with the

equitable treatment standard. In Vivendi v. Argentina, the tribunal determined that the

full protection and security standard “should be interpreted to apply to reach any act or

measure which deprives an investor’s investment of protection and full security,

providing . . . the act or measure also constitutes unfair and inequitable treatment. Such

actions or measures need not threaten physical possession or the legally protected terms

of operation of the investment.”103 Similarly, the tribunal in Occidental v. Ecuador held

that “treatment that is not fair and equitable automatically entails an absence of full

protection and security of the investment.”104

111. Thus, for the same reasons that retroactively applied, increased royalty rates and/or taxes,

or reduced tax benefits, would violate the equitable treatment standard, Israel would fail

to grant Noble’s investment the most constant protection and security if it so

fundamentally altered the bargain on which Noble had premised its investment.

101 CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL, Partial Award of September

13, 2001, ¶ 613.

102 Id.

103 Compañia de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Award of August 20, 2007, ¶ 7.4.15.

104 Occidental Exploration and Production Co. v. The Republic of Ecuador, LCIA, Final Award of July 1, 2004, ¶ 187.

43

3. The Expropriation Standard in Article VI(3)

112. The third relevant absolute standard in the FCN Treaty is the expropriation clause in

Article VI(3):

Property of nationals and companies of either Party shall not be taken except for public purposes, nor shall it be taken without the payment of just compensation. Such compensation shall be in an effectively realizable form and shall represent the equivalent of the property taken; and adequate provision shall have been made at or prior to the time of taking for the determination and prompt payment thereof. (Emphasis added).

113. This provision states that takings are legal under the FCN Treaty only if they satisfy three

criteria: (i) the taking is for a public purpose; (ii) the taking is compensated in amount

equivalent to the property taken, and (iii) the payment of the compensation is prompt and

adequate. If any one of these criteria is not satisfied, the taking is an unlawful

expropriation under the Treaty.

114. The expropriation standard in investment treaties has been found to encompass (i) direct

expropriation, where the host State takes legal title of the investment; and (ii) indirect or

“creeping” expropriation, where the host State achieves the same result by taxation and

regulatory measures that makes continued operation of the investment uneconomical.105

115. Indeed, it is well established that a tax can amount to an expropriation. The tribunals in

Goetz v. Republic of Burundi106 and Revere Copper and Brass Inc. v. Oversees Private

Investment Corp.107 held that taxes and/or cancellations of tax exemptions constituted an

unlawful expropriation by the host State. Moreover, the Restatement of the Law of

Foreign Relations of the United States specifically includes “taxation” as a possible

105 American Law Institute, Restatement of the Law Third, Foreign Relations of the United States, American

Law Institute Publishers, Vol. 1, 1987, § 712, Reporter’s Note 7.

106 Goetz v. Burundi, ICSID Case ARB/95/03, Award of February 10, 1999.

107 Revere Copper and Brass Inc. v. Oversees Private Investment Corp., AAA Case No. 16 10 0137 76, Award of August 24, 1978; see also Revere Copper and Brass Inc. v. Oversees Private Investment Corp., 628 F.2d 81 (D.C. Cir. 1980).

44

expropriatory action and establishes state responsibility, inter alia, for unreasonable

interference with an alien’s property.108 As the tribunal explained in Feldman v. Mexico:

The Tribunal notes that the ways in which governmental authorities may force a company out of business, or significantly reduce the economic benefits of its business, are many. In the past, confiscatory taxation, denial of access to infrastructure or necessary raw materials, imposition of unreasonable regulatory regimes, among others, have been considered to be expropriatory actions.109

116. By definition, royalties and taxes are not accompanied by the payment of compensation.

Under the test set forth in the FCN Treaty, therefore, any royalty or tax would ipso facto

satisfy that element of expropriation. For this reason, international tribunals have

adopted a different analytic framework for determining whether a tax is expropriatory

under an investment treaty, as set forth by the tribunal in EnCana v. Ecuador. Under that

test, a tax is expropriatory if it is:

(a) extraordinary;

(b) punitive in amount; or

(c) arbitrary in its incidence.110

117. The disjunctive “or” between the second and third prongs of the EnCana test indicates

that the tax is expropriatory if it meets any one of its three prongs. Few tribunals have as

yet applied this test in resolving disputes, but several cases are currently pending that

involve challenges to increased taxes and royalties on natural resources, and other

authorities provide useful guidance on the provision’s meaning.

118. Five points regarding the expropriation of investments through taxation or royalties are

clear. First, tribunals have rejected the argument that a tax or royalty is not expropriatory

108 American Law Institute, Restatement of the Law Third, Foreign Relations of the United States, American

Law Institute Publishers, Vol. 1, 1987, § 712, Reporter’s Note 5.

109 Feldman v. Meixico, ICSID Case No. ARB(AF)/99/1, Award of December 16, 2002, ¶ 103 (emphasis added).

110 EnCana Corp. v. Ecuador, LCIA Case No. UN3481, Award of February 3, 2006, ¶ 177.

45

under the Treaty because the tax or royalty is owed by the investor’s subsidiary. In

EnCana v. Ecuador, the tribunal analyzed whether Ecuador expropriated EnCana’s two

Ecuadorian subsidiaries’ right to VAT refunds, even though EnCana itself had no such

right.111 Likewise, in GAMI Investments Inc. v. Mexico, the NAFTA tribunal applied the

traditional expropriation test to shareholders’ investments and stated that “[t]he fact that a

host state does not explicitly interfere with share ownership is not decisive. The issue is

rather whether a breach of NAFTA leads with sufficient directness to loss or damage in

respect of a given investment.”112

119. Second, a tax or royalty measure is not taken in the public interest—thus satisfying the

first requirement under Article VI(3)—simply because its immediate effect is to increase

tax revenues of the State. If that alone were sufficient, taxation would always comply

with the requirement of public interest, and the first requirement would have no practical

effect when applied to tax measures.113

120. Third, international tribunals have rejected the argument that if the expropriatory actions

are done in pursuit of some laudatory goal that outweighs the harm to the investor, then it

is per se not an expropriation for which compensation is owed the investor. Such a

balancing test is an insufficient basis to conclude that no expropriation has taken place.

As the tribunal in Santa Elena S.A. v. Costa Rica ruled:

Expropriatory environmental measures—no matter how laudable and beneficial to society as a whole—are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains.114

111 EnCana Corp. v. Ecuador, LCIA Case No. UN3481, Award of February 3, 2006.

112 GAMI Investments, Inc. v. The Government of The United Mexican States, UNCITRAL, Final Award of November 15, 2004, ¶ 33.

113 EnCana Corp. v. Ecuador, LCIA Case No. UN3481, Partial Dissenting Opinion of Dr. Horacio A. Grigera Naón of December 30, 2005, ¶ 52.

114 Compañia del Desarrollo de Santa Elena, S.A. v. The Republic of Costa Rica, ICSID Case No. ARB/96/1, Final Award of February 17, 2000, ¶ 72, Azurix Corp. v. The Argentine Republic, ICSID Case No.

46

121. Fourth, a tax need not be permanent to be expropriatory. In Wena Hotels Ltd. v. The

Arab Republic of Egypt, a temporary deprivation that lasted for approximately one year

was found to be sufficient to constitute expropriation.115 The tribunal in Middle East

Cement Shipping and Handling Co. S.A. v. Egypt reached the same conclusion, holding

that a deprivation lasting for only four months was found expropriatory.116

122. Finally, tribunals have rejected the argument that the investor must “lose control” of its

investment for a tax to amount to an expropriation. None of the major international

investment cases on expropriation—EnCana v. Ecuador,117 CME Czech Republic B.V. v.

The Czech Republic,118 Pope & Talbot Inc. v. Canada,119 and Técnicas Medioambientales

Tecmed S.A. v. The United Mexican States 120 —identifies “loss of control” as a

prerequisite for a finding of unlawful expropriation. Rather, numerous tribunals have

found expropriation based on “significant interference” with parts of an investment, even

where the owner retains legal title. See, e.g., Middle East Cement Shipping and Handling

Co. S.A. v. Egypt,121 Eureko B.V. v. Poland,122 Pope & Talbot Inc. v. Canada,123 S.D.

Myers Inc. v. The Government of Canada,124 Waste Management, Inc. v. Mexico,125

ARB/01/12, Award of July 14, 2006, ¶ 309, Técnicas Medioambientales Tecmed S.A. v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award of May 29, 2003, ¶ 121 (emphasis added).

115 Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award of December 8, 2000, ¶ 99.

116 Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/99/6, Award of April 12, 2002, ¶ 107.

117 EnCana Corp. v. Republic of Ecuador, LCIA Case No. UN3481, Award of February 3, 2006.

118 CME Czech Republic B.V. (The Netherlands) v. The Czech Republic, UNCITRAL, Partial Award of September 13, 2001.

119 Pope & Talbot Inc. v. The Government of Canada, UNCITRAL, Interim Award of June 26, 2000.

120 Técnicas Medioambientales Tecmed S.A. v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award of May 29, 2003.

121 Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/99/6, Award of April 12, 2002.

122 Eureko B.V. v. Republic of Poland, UNCITRAL, Partial Award and Dissenting Opinion of August 19, 2005.

123 Pope & Talbot Inc. v. The Government of Canada, UNCITRAL, Interim Award of June 26, 2000.

124 S.D. Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award of November 13, 2000.

125 Waste Management, Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3, Award of April 30, 2004.

47

GAMI Investments Inc. v. Mexico,126 Metalclad Corp. v. The United Mexican States,127

Santa Elena S.A. v. Costa Rica128 and Tippetts, Abbett, McCarthy, Stratton v. Iran.129

123. Middle East Cement is particularly instructive. There, the tribunal found that

expropriation occurred as a result of a governmental decree prohibiting imports of

commodities by the claimant pursuant to a previously-issued license to import. The

tribunal observed that this was a form of “creeping” or “indirect” expropriation:

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 of his investment. This is the case here, and, therefore, it is the Tribunal’s view that such a taking amounted to an expropriation within the meaning of Art. 4 of the BIT and that, accordingly, Respondent is liable to pay compensation therefor.130

124. The tribunal in Metaclad v. Mexico similarly found that expropriation is not limited to

open, deliberate, and acknowledged takings of property. Instead, expropriation can be

“covert or incidental interference with the use of property which has the effect of

depriving the owner, in whole or in significant part, of the use or reasonably-to-be-

expected economic benefit of property.”131

125. Further, the tribunal in Eureko v. Poland addressed a situation in which the claimant

acquired a minority share in a Polish insurance company and a right to acquire additional

126 GAMI Investments, Inc. v. The Government of The United Mexican States, UNCITRAL, Final Award of

November 15, 2004.

127 Metalclad Corp. v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award of August 30, 2000.

128 Compañia del Desarrollo de Santa Elena, S.A. v. The Republic of Costa Rica, ICSID Case No. ARB/96/1, Final Award of February 17, 2000.

129 Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran, UNCITRAL, Award No. 141-7-2 of June 29, 1984, reprinted in 6 Iran-U.S. C.T.R. 219.

130 Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/99/6, Award of April 12, 2002, ¶ 107 (emphasis added).

131 Metalclad Corp. v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award of August 30, 2000, ¶ 103.

48

shares of that company in the future. Thereafter, Poland changed its privatization policy

and prevented the claimant from acquiring the additional shares. Although the first part

of the investment was not affected by the governmental measure, the tribunal found that

an expropriation had nonetheless occurred:

It is plain that Respondent has not deprived Eureko of its shares in PZU which it continues to hold and on which it receives dividends. . . . The Tribunal has found in an earlier section of the present Award that Eureko, under the terms of the First Addendum, acquired rights in respect of the holding of the IPO and that these rights are “assets”. Since the RoP deprived Claimant of those assets by conduct which the Tribunal has found to be inadmissible, it must follow that Eureko has a claim against the RoP under Article 5 of the Treaty.132

126. Similarly, in S.D. Myers Inc. v. Canada, the tribunal stated that “in some contexts and

circumstances, it would be appropriate to view a deprivation as amounting to an

expropriation, even if it were partial or temporary.” 133 The tribunal in Waste

Management, Inc. v. Mexico likewise reasoned:

It is open to the Tribunal to find a breach of Article 1110 in a case where certain facts are relied on to show the wholesale expropriation of an enterprise but the facts establish the expropriation of certain assets only. Accordingly the Tribunal will consider first the standard set by Article 1110, in particular for conduct tantamount to an expropriation, then whether the enterprise as a whole was subjected to conduct in breach of Article 1110, and finally whether (even if there was no wholesale expropriation of the enterprise as such) the facts establish a partial expropriation.134

132 Eureko B.V. v. Republic of Poland, UNCITRAL, Partial Award and Dissenting Opinion of August 19, 2005,

¶¶ 239-240 (emphasis added).

133 S.D. Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award of November 13, 2000, ¶ 283 (emphasis added).

134 Waste Management, Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3, Award of April 30, 2004, ¶ 141 (emphasis added).

49

127. Yet another tribunal that recognized partial expropriation was GAMI Investments Inc. v.

Mexico. Citing well-known cases such as Metalclad Corp. v. Mexico,135 Santa Elena v.

Costa Rica136 and Tippetts v. Iran,137 the tribunal in GAMI explained:

Should Pope & Talbot be understood to mean that property is taken only if it is so affected in its entirety? That question cannot be answered properly before asking: what property? The taking of 50 acres of a farm is equally expropriatory whether that is the whole farm or just a fraction. The notion must be understood as this: the affected property must be impaired to such an extent that it must be seen as “taken.” GAM’s own case would thus not have been affected in principle if only one mill had been expropriated. GAM’s property rights in that single mill would have been “taken” because GAM was formally dispossessed of those rights.138

128. International law commentators agree. In their leading commentary on ICSID

arbitration, Reed, Paulsson and Blackaby observe:

It is a well-accepted principle of public international law that expropriation may result from either (a) a direct and deliberate formal act of taking, such as an outright nationalization, or (b) from an indirect taking that substantially deprives the investor of the use or enjoyment of its investment, including deprivation of the whole or a significant part of the economic benefit of property even if the legal and beneficial title of the asset remains with the investor.139

129. Accordingly, Israel is obligated under Article VI(3) not to unlawfully expropriate Noble’s

investment through royalties and/or taxation. It is impossible to apply this standard to

Noble’s investment until the Committee reveals its specific, proposed amendments.

Nevertheless, the expropriation principles outlined above should be applied in evaluating

135 Metalclad Corp. v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award of August 30, 2000.

136 Compañia del Desarrollo de Santa Elena, S.A. v. Costa Rica, ICSID Case No. ARB/96/1, Final Award of February 17, 2000.

137 Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran, UNCITRAL, Award No. 141-7-2 of June 29, 1984, reprinted in 6 Iran-U.S. C.T.R. 219.

138 GAMI Investments, Inc. v. The Government of The United Mexican States, UNCITRAL, Final Award of November 15, 2004, ¶¶ 126, 127 (emphasis in the original).

139 LUCY REED, ET AL., GUIDE TO ICSID ARBITRATION, KLUWER LAW INTERNATIONAL 52 (Kluwer Law Int’l 2004) (emphasis added).

50

any increase in royalty rates and/or taxes, or any reduction or cancelling of tax benefits,

aimed at Noble’s interests in existing oil and natural gas rights in Israel.

4. The Reasonableness and Non-Discrimination Standard in Article VI(4).

130. The final relevant absolute standard in the FCN Treaty is the reasonableness and non-

discrimination standard in Article VI(4):

Neither Party shall take unreasonable or discriminatory measures that would impair the legally acquired rights or interests within its territories of nationals and companies of the other Party in the enterprises which they have established or in the capital, skills, arts or technology which they have supplied; nor shall either Party unreasonably impede nationals and companies of the other Party from obtaining on equitable terms the capital, skills, arts and technology it needs for its economic development. (Emphasis added).

131. This prohibition of “unreasonable or discrimination measures” corresponds to the

protection in BITs that neither State may impair an investment by “arbitrary and

discriminatory measures.”140 The concept of reasonableness requires that the host State’s

actions in relation to investors and their investments relate to a rational policy.141 It

further requires that State actions be appropriate in view of the overall object and purpose

of the Treaty.142

132. Any analysis of reasonableness is necessarily fact-dependent. Cases interpreting the

reasonableness requirement have concluded that it was unreasonable for a State to change

the regulatory framework regarding the corporate structure of an investment into a private

TV station,143 to fail to engage in good faith negotiations with the investor,144 or to leak

140 KENNETH J. VANDEVELDE, UNITED STATES INVESTMENT TREATIES: POLICY AND PRACTICE 77 (Kluwer

1992).


142 BG Group Plc. v. The Republic of Argentina, UNCITRAL, Final Award of December 24, 2007, ¶ 342.



51

sensitive information.145 Further, the tribunals in Saluka v. The Czech Republic and BG

Group v. Argentina held that the concept of reasonableness would require that the State

action be related to some “rational policy.”146

133. Reasonableness is closely related to the concept of non-arbitrariness. The tribunal in

Siemens v. Argentina held that the absence of an “adequate determining principle” by the

Government in acting is one way of determining whether the act is arbitrary and thus

violates the investment Treaty.147 As the tribunal observed in Tecmed v. Mexico, an

unreasonable act is one where it “would be recognized [as such] by any reasonable and

impartial man.”148

134. With respect to the non-discrimination standard, tribunals have held that State conduct is

discriminatory if the State treats similar cases differently without reasonable

justification.149 Because the notion of “similar cases” most often involves nationals of

the host country or of third countries, the concept of discrimination links this standard to

the non-contingent national treatment and MFN standards.

135. Moreover, international investment tribunals have held that, where government measures

have a detrimental effect on an investment while other investments in the same economic

sector benefit, a prima facie case exists that those measures illegally damage the

investment because the measures are discriminatory. In Saluka Investments BV v. The

Czech Republic, the tribunal recognized this prohibition against discrimination under

international law:

A foreign investor . . . is entitled to expect that the [host country] will not act in a way that is manifestly inconsistent, non-transparent, unreasonable

145 Id. ¶ 481.

146 Id. ¶ 460; see BG Group Plc. v. The Republic of Argentina, UNCITRAL, Final Award of December 24, 2007, ¶ 342.


148 Técnicas Medioambientales Tecmed S.A. v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award of May 29, 2003, ¶ 154 (internal quotations omitted).


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(i.e. unrelated to some rational policy), or discriminatory (i.e. based on unjustifiable distinctions).150

136. Rather, an investor has a reasonable and legitimate expectation that the host State will

behave in an even-handed, nondiscriminatory, transparent, and consistent fashion, and

will respect the principles of due process and refrain from any coercion and harassment:

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.

Finally, it transpires from arbitral practice that, according to the “fair and equitable treatment” standard, the host State must never disregard the principles of procedural propriety and due process and must grant the investor freedom from coercion or harassment by its own regulatory authorities.151

137. Occidental v. Ecuador is instructive on the issue of discrimination under international

law. In that case, Ecuadorian tax authorities abruptly changed their interpretation of

applicable tax laws and refused to grant 10% VAT refunds for oil exporters. The refusal

did not apply to all exporters (exports of other goods such as mining and seafood

products, lumber, or flowers were granted the refund), but it did apply to all exporters of

oil. Ecuador therefore argued that the measure was not discriminatory because it applied

to all companies in the oil sector.152

138. The tribunal in Occidental rejected Ecuador’s argument. It concluded that discriminatory

intent is not necessary to establish discrimination as long as the investor objectively

150 Id. ¶ 309 (emphasis added).

151 Id. ¶¶ 307-308.

152 Occidental Exploration and Production Co. v. The Republic of Ecuador, LCIA, Final Award of July 1, 2004, ¶¶ 168-172.

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receives different treatment. 153 The tribunal further held that, for the purposes of

assessing Occidental’s claim, “like situations” must be understood to include all exporters

rather than just oil exporters.154 Accordingly, the tribunal concluded that Ecuador had

unlawfully discriminated against the Claimant’s investment.

139. Here, Article VI(4) requires Israel to act reasonably with respect to Noble’s interests in

Israel and not to discriminate against them. Again, without any specific proposal from

the Committee, it is difficult to apply the reasonableness and non-discrimination

standard. Nevertheless, three of Israel’s duties under Article VI(4) can generally be

described in the context of a proposal to increase royalty rates and/or taxes applicable to

Noble’s interests in Israel.

140. First, the reasonableness standard requires Israel’s actions to be related to a rational

policy, such as a public emergency. As explained above, however, a State does not act

reasonably when it retroactively raises royalty rates and/or taxes on a foreign investor for

the purpose of taking for itself greater profits than had been established in a pre-existing

arrangement with that investor.

141. Second, the decisions above support the view that the non-discrimination standard

prohibits Israel from directly targeting Noble’s interests in oil and natural gas rights. The

Ministry of Finance has not sought to review taxes across-the-board, but instead has

targeted one industry supported by significant U.S. investment. Such special and

discriminatory treatment would require an “adequate determining principle.”155 For the

same reasons that there does not appear to be a rational policy behind the threat to

retroactively increase royalty rates and/or taxes, there does not appear to be an “adequate

determining principle” to justify it. In the absence of an adequate determining principle,

Israel would be required by the doctrine in Occidental v. Ecuador to treat the petroleum

sector in the same manner as other industrial sectors in Israel for purposes of royalty rates

and taxes.

153 Id. ¶ 184.

154 Id. ¶¶ 173-176.


54

142. Finally, the non-discrimination standard in Article VI(4) prohibits Israel from

discriminating against Noble as compared with other foreign investors. As indicated

above, the Egyptian company EMG is exempt from taxes on natural gas sales and

transportation in Israel pursuant to a Memorandum of Understanding between Israel and

Egypt. Article VI(4) prohibits Israel from discriminating against Noble as compared with

EMG and or any other foreign investor.

5. The National Treatment and MFN Standards of the FCN Treaty

143. The FCN Treaty also accords foreign investors two principal contingent standards: the

national treatment standard and the MFN standard. Both “national treatment” and “most-

favored-nation treatment” are defined in Article XXII of the Treaty:

The term “national treatment” means treatment accorded within the territories of a Party upon terms no less favorable than the treatment accorded therein, in like situations, to nationals, companies, products, vessels or other objects, as the case may be, of such Party.

The term “most-favored-nation treatment” means treatment accorded within the territories of a Party upon terms no less favorable than the treatment accorded therein, in like situations, to nationals, companies, products, vessels or other objects, as the case may be, of any third country.

144. Several provisions in the Treaty contain both the national treatment and the MFN

treatment standard. Article V(1), for example, provides national treatment and MFN

treatment with respect to access to courts and administrative tribunals in the territory of

the host State:

Nationals and companies of either Party shall be accorded national treatment and most-favored nation treatment with respect to access to the courts of justice and to administrative tribunals and agencies within the territories of the other Party, in all degrees of jurisdiction, both in pursuit and in defense of their rights. It is understood that companies of either Party not engaged in activities within the territories of the other Party shall enjoy such access therein without any requirement of registration or domestication. (Emphasis added).

145. Similarly, Article VI(5) provides national treatment and MFN treatment with respect to

matters set forth in Article VI(2) (trespassing) and Article VI(3) (expropriation):

55

Nationals and companies of either Party shall in no case be accorded, within the territories of the other Party, less than national treatment and most-favored-nation treatment with respect to the matters set forth in paragraphs 2 and 3 of the present Article. Moreover, enterprises in which nationals and companies of either Party have a controlling interest shall be accorded, within the territories of the other Party, not less than national treatment and most-favored-nation treatment in all matters relating to the taking of privately owned enterprises into public ownership and to the placing of such enterprises under public control. (Emphasis added).

146. With respect to taxation, Article XI(3) of the Treaty provides:

Nationals and companies of either Party shall in no case be subject, within the territories of the other Party, to the payment of taxes, fees or charges imposed upon or applied to income, capital, transactions, activities or any other object, or to requirements with respect to the levy and collection thereof, more burdensome than those borne by nationals, residents and companies of any third country. (Emphasis added).

147. Other provisions in the Treaty are specific to national treatment. One such provision is

Article VII, which requires the host State to provide national treatment to companies of

the other State “with respect to engaging in all types of commercial, industrial financial

and other activity for profit”:

Nationals and companies of either Party shall be accorded national treatment with respect to engaging in all types of commercial, industrial, financial and other activity for profit (business activities) within the territories of the other Party, whether directly or by agent or through the medium of any form of lawful juridical entity. Accordingly, such nationals and companies shall be permitted within such territories: (a) to establish and maintain branches, agencies, offices, factories and other establishments appropriate to the conduct of their business; (b) to organize companies under the general company laws of such other Party, and to acquire majority interests in companies of such other Party; and (c) to control and manage enterprises which they have established or acquired. Moreover, enterprises which they control, whether in the form of individual proprietorships, companies or otherwise, shall, in all that relates to the conduct of the activities thereof, be accorded treatment no less favorable than that accorded like enterprises controlled by nationals and companies of such other Party. (Emphasis added).

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148. Article XVI similarly requires the host State to provide national treatment on articles

produced by foreign investors “in all matters affecting exportation, taxation, sale,

distribution, storage and use”:

Articles produced by nationals and companies of either Party within the territories of the other Party, or by companies of the latter Party controlled by such nationals and companies, shall be accorded therein treatment no less favorable than that accorded to like articles of national origin by whatever person or company produced, in all matters affecting exportation, taxation, sale, distribution, storage and use. (Emphasis added).

149. These types of standards are intended to harmonize the benefits that the host State offers

under the “base” treaty (here, the FCN Treaty) with more favorable benefits that it may

offer its nationals or nationals of third states.156

a. National Treatment

150. In Feldman v. Mexico, the tribunal applied the national treatment standard to strike down

a Mexican tax policy regarding the exportation of tobacco products by a local Mexican

company owned by a U.S. national.157 The claimant in Feldman alleged that Mexico’s

refusal to rebate excise taxes on cigarettes exported by his trading company constituted a

breach of the national treatment standard in NAFTA. Claimant argued that, at the same

time Mexico was denying rebates based on his investment, it was providing the rebates to

similarly-situated companies owned by Mexican nationals. Finding merit in that

contention, the tribunal struck down the tax policy under the national treatment

standard.158

151. More recently, the tribunal in Occidental v. Ecuador (described above) applied the

national treatment standard to invalidate an Ecuadorian tax policy. Claimant argued that

Ecuador had failed to provide the national treatment required by the U.S.-Ecuador BIT

156 Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction of August 3,

2004, ¶ 120.

157 Feldman v. Mexico, ICSID Case No. ARB(AF)/99/1, Award of December 16, 2002.

158 Id. ¶¶ 154 et seq.

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when it refused to grant 10% VAT refunds for oil exporters, while continuing to grant

that refund to nationals involved in the exportation of flowers, mining, and seafood

products. The tribunal agreed, holding that the claimant “ha[d] received treatment less

favorable than that accorded to national companies. . . . [and therefore] the Respondent

has breached its obligations.”159

152. Accordingly, Israel is obligated under the Treaty not to raise royalty rates and/or taxes

applicable to Noble’s interests if it affords more favorable treatment to its nationals.

Under the doctrines set forth in Occidental v. Ecuador and Feldman v. Mexico, this may

be the case if, for example, Israel has failed to subject other Israeli-owned industries to

increased royalty rates and/or taxes.

b. MFN Protection

153. The MFN clauses in the FCN Treaty assure non-discrimination as compared with foreign

investors in Israel from other States. These clauses have been held to incorporate both

substantive and procedural rights from other treaties. First, MFN clauses enable investors

to invoke substantive provisions of the host State’s other investment treaties that treat

investments more favorably than the substantive provisions of the base treaty (such as

provisions on equitable treatment, most constant protection and security, expropriation,

and reasonableness or non-discrimination).

154. In MTD Chile S.A. v. Chile, for example, the tribunal applied the MFN clause in the

Malaysia-Chile BIT to incorporate the fair and equitable treatment standard, the

reasonableness standard, and the non-discrimination standards from the Croatia-Chile

BIT.160 The MFN clause thus expanded the substantive provisions under the base treaty

to make them equal to (as favorable as) the standards under the provisions of another

treaty to which the host State was a party.


2004, ¶¶ 177, 179.

160 MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award of May 25, 2004, ¶ 104.

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155. Here, Article VI(3) expressly allows Noble to avail itself to the benefits of expropriation

clauses in other investment treaties to which Israel is a party. Israel has BITs with

Bulgaria, Croatia, The Czech Republic, Estonia, France, Germany, Hungary, Korea,

Romania, Slovakia, Thailand, and Turkey. Each of these BITs contains an expropriation

clause that specifies that Israel is liable for the fair market value of the asset taken, that

the asset taken should be valued immediately before the expropriation occurred or the

impending expropriation became public knowledge (whichever is earlier),161 and that the

investor is entitled to interest until the date of payment. Thus, using the MFN provision

in the FCN Treaty, Israel is bound to accord Noble’s investment the same expropriation

protection as provided in each of those BITs.

156. Israel also undertook in Article XI(3) of the Treaty not to impose on U.S. investors

“taxes, fees or charges . . . . more burdensome than those borne by nationals, residents

and companies of any third country.” As discussed above, EMG is an Egyptian

Company that Israel has exempted from taxes on natural gas sales and transportation

pursuant to a Memorandum of Understanding between Israel and Egypt. NEM is

therefore entitled under the Treaty to the same exemption from taxes that EMG obtained.

157. Moreover, international tribunals have interpreted MFN clauses to grant procedural

rights, such as allowing parties to take advantage of dispute resolution clauses in other

investment treaties entered into by the host State. The leading case on point is Maffezini

v. Spain, where an Argentine national brought an investment claim against Spain under

the Argentina-Spain BIT. 162 The dispute resolution clause in that BIT contained a

requirement that the dispute be submitted to national courts and, only if no decision had

been rendered on the merits after 18 months, could the claim be submitted to

international arbitration. Faced with this procedural impediment to international

arbitration, the claimant in Maffezini argued that the MFN clause embraced not only

161 The asset value is determined by the market value immediately before the expropriation occurred or before

the impending expropriation became public knowledge, whichever occurred earlier, in all Israeli BITs except for the Israel-Germany BIT, which values the asset immediately before the expropriation was publicly announced.

162 Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7, Decision on Jurisdiction of January 25, 2000, ¶¶ 38 et seq.

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substantive investment rights but also dispute resolution procedures. The claimant

therefore invoked the dispute resolution clause in the Chile-Spain BIT, which provided

that the investor could pursue international arbitration after the standard six-month period

for negotiation had expired.

158. The tribunal agreed and allowed the claimant to bypass the national court requirement in

the Argentina-Spain BIT. In so doing, the tribunal explained that “[a] number of bilateral

investment treaties have provided expressly that the most favored nation treatment

extends to the provisions on settlement of disputes.” 163 According to the tribunal,

international arbitration and other dispute resolution provisions were “essential . . . to the

protection of the rights envisaged under the pertinent treaties; they are also closely linked

to the material aspects of the treatment accorded.”164 The tribunal thus held:

From the above considerations it can be concluded that if a third-party treaty contains provisions for the settlement of disputes that are more favorable to the protection of the investor’s rights and interests than those in the basic treaty, such provisions may be extended to the beneficiary of the most favored nation clause as they are fully compatible with the ejusdem generis principle.165

159. Three years later, the tribunal in Siemans A.G. v. Argentina, citing Maffezini, ruled that a

German investor could invoke against Argentina the wider dispute resolution clause

contained in the Chile-Argentina BIT.166 Several other tribunals have since taken the

same approach, including the tribunals in Gas Natural SDG, S.A. v. The Argentine

Republic,167 Suez and Interaguas v. Argentina,168 and Rosinvest v. Russia.169

163 Id. ¶ 52.

164 Id. ¶ 55.

165 Id. ¶ 56 (emphasis added).

166 Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction of August 3, 2004, ¶¶ 102-103.

167 Gas Natural SDG, S.A. v. The Argentine Republic, ICSID Case No. ARB/03/10, Decision on Jurisdiction of June 17, 2005, ¶¶ 24-30.

168 Suez and InterAguas v. The Argentine Republic, ICSID Case No. ARB/03/17, Decision on Jurisdiction of May 16, 2006, ¶¶ 60-66.

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160. The FCN Treaty does not explicitly provide MFN treatment to nationals on procedural

rights. Noble may nonetheless attempt to use the MFN clauses in the FCN Treaty to

avail itself to a dispute resolution clause from another Israeli treaty, such as the Israel-

Ethiopia BIT, which allows a direct claim against Israel before an ICSID or UNCITRAL

international tribunal, arguing on the basis of Maffezini that equality of substantive rights

implies an intention to provide procedures that are necessary to accomplish the same

level of substantive protection of investments.

VI. NOBLE’S REMEDIES IF ISRAEL BREACHES THE TREATY

161. International law governs the relief to which Noble would be entitled for any breach by

Israel of the FCN Treaty.170 Article VI(3) of the Treaty provides for the payment of “just

compensation” that is “in an effectively realizable form and shall represent the equivalent

of the property taken,” but only as one of the prerequisites that must be met by the State

for an expropriation to be lawful under Article VI(3). The Treaty does not specify,

however, the remedies to which an investor is entitled in case of an unlawful

expropriation or breaches of other protections of the Treaty. Nevertheless, it is clear that,

if a lawful expropriation requires payment of fair market value, the damages owed for an

unlawful expropriation can be no less.

162. In the absence of specific remedies in the Treaty, customary international law applies.171

The Permanent Court of International Justice stated the applicable standard almost 80

years ago, in its judgment in the Chorzow Factory case:

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, so far as possible, wipe out all the consequences of the illegal act and

169 RoslnvestCo UK Ltd. v. The Russian Federation, SCC Case No. Arb. V079/2005, Award on Jurisdiction of

October 5, 2007, ¶¶ 131-132.

170 ADC Affiliate Ltd. v. The Republic of Hungary, ICSID Case No. ARB/03/16, Award of October 2, 2006, ¶¶ 290-92.

171 Compañia de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Award of August 20, 2007, ¶¶ 8.2.3-5; ADC Affiliate Ltd. v. The Republic of Hungary, ICSID Case No. ARB/03/16, Award of October 2, 2006, ¶¶ 290-92.

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reestablish 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—such are the principles which should serve to determine the amount of compensation due for an act contrary to international law.172

163. Today, tribunals universally recognize Chorzow Factory as the definitive standard for the

proper measure of damages under international law, including the tribunals in ADC v.

Hungary, 173 Vivendi v. Argentina, 174 Siemens v. Argentina, 175 CMS v. Argentina, 176

AMCO v. Indonesia,177 S.D. Myers v. Canada,178 and Starrett Housing v. Iran.179

164. Applying this well-settled principle, the damages to which Noble would be entitled for

Israel’s breach of the FCN Treaty would be payment from Israel in an amount that would

put Noble in the same position as it would have been “but for” Israel’s breach. In this

context, that amount would be a reimbursement of all royalties and/or taxes collected

from NEM that violate the Treaty, together with any other proximate damages that result

from such unlawful royalties and/or taxes.

VII. CONCLUSION

165. The Committee will undoubtedly consider, not only the legal obligations that Israel has

undertaken in the FCN Treaty with the U.S., but also the policy considerations relevant to

Israel’s possible, retroactive increases of royalty rates and/or taxes on what Israeli law

172 Factory at Chorzow, 1928 P.C.I.J. (Sel. A) No. 17, Decision of September 13, 1928, 47 (emphasis added).

173 ADC Affiliate Ltd v. The Republic of Hungary, ICSID Case No. ARB/03/16, Award of October 2, 2006, ¶ 493.

174 Compañia de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Award of August 20, 2007 ¶¶ 8.2.4-5.


176 CMS Gas Transmission Co. v. The Republic of Argentina, ICSID Case No. ARB/01/8, Award of May 12, 2005, ¶ 400.

177 AMCO Asia Corp. and Others v. The Republic of Indonesia, Award of November 21, 1984, ¶ 267.

178 S.D. Myers, Inc. v. The Government of Canada, Partial Award of November 13, 2000, ¶ 311.

179 Starrett Housing Corp. v. The Government of the Islamic Republic of Iran, Case No. 24, Final Award of August 14, 1987, ¶ 264.

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explicitly recognizes are existing petroleum interests. Israel has succeeded in

establishing a credit rating on its government debt that is exceptionally high, even for

developed States. This has given Israel the benefits that good credit ratings provide:

access to capital at relatively low rates. This extraordinary achievement was

accomplished by protecting the expectations of lenders. The same beneficial

consequences—including economic development—have been achieved in the area of

foreign investment, by protecting the legitimate expectations of such investors. To

undermine those expectations, especially of a company such as Noble that has

accomplished so much for Israel’s security and economic well being, would be

shortsighted and in the long run detrimental to the State of Israel, its economy, and its

people.

VIII. MY DUTY TO THE COMMITTEE

166. In preparing this Opinion and Memorandum of Law, I have endeavored to be accurate

and to cover all relevant issues concerning the matters that I have been asked to address.

I have included any matters of which I am aware that might adversely affect the

conclusions that I have reached. I have made clear which of the facts stated in my

Opinion and Memorandum of Law are within my own knowledge, and which I believe to

be true, and I confirm that the opinions I have expressed represent my true and complete

professional opinion.

A-1

APPENDIX I - CURRICULUM VITAE OF ABRAHAM D. SOFAER

The Hoover Institution Stanford University

Stanford, California 94305-6010 TEL: (650) 725-3763 FAX: (650) 723-2103

E-MAIL: [email protected]

1994-Present George P. Shultz Distinguished Scholar & Senior Fellow, The Hoover Institution, Stanford University

1996-Present Professor of Law, by Courtesy, Stanford Law School

1990-1994 Partner, Hughes, Hubbard & Reed, Washington, D.C.

1985-1990 Legal Adviser, U.S. Department of State

1979-1985 United States District Judge, Southern District of New York

1969-1979 Professor of Law, Columbia University School of Law

1975-1976 Hearing Officer, N.Y. Dep’t. of Env. Consv. v. Gen. Elec. Co. (concerning discharge into Hudson River of PCBs)

1967-1969 Assistant U.S. Attorney, Southern District of New York

1966-1967 Law Clerk, Hon. William J. Brennan, Jr., Assoc. Justice, U.S. Supreme Ct.

1965-1966 Law Clerk, Hon. J. Skelly Wright, Judge, U.S. Ct. of Appeals, D.C. Cir.

1962-1965 New York University School of Law, LL.B.—Editor-in-Chief NYU Law Review; Outstanding Graduate; Root-Tilden Scholar

1959-1962 Yeshiva College, B.A., History, magna cum laude;

[Yeshiva University, Doctor of Laws, honoris causa, 1980]

1956-1959 Airman 2nd Class, U.S. Air Force (Good Conduct Medal, 1959)

Member: California Bar; District of Columbia Bar; New York Bar; U.S. Supreme Court; U.S. Court of Appeals for the D.C. Circuit; U.S. Court of Appeals for the Second Circuit; U.S. District Court, Southern District of New York; U.S. District Court, Eastern District of New York; U.S. Department of State Advisory Committee on International Law American Bar Association; American Law Institute; Association of the Bar of the City of New York; Council on Foreign Relations; American Arbitration Association.

A-2

Selected Negotiations as Legal Adviser, U.S. Dept. of State

! Settlement of dispute over Taba (Egypt/Israel)

! Claims for deaths at Ras Burga (Egypt/Israel/U.S.)

! Convention on Maritime Terrorism (multinational)

! Claims for deaths on USS Stark (Iraq/U.S.)

! Plan for the Permanent Members of the U.N. Security Council to use the International Court of Justice (China/France/U.K./U.S./U.S.S.R.)

! Iran-U.S. Claims Tribunal (Iran/U.S.)

! Extradition and Mutual Legal Assistance Treaties

! Sovereign Immunity in Soviet/U.S. Relations

! Compensation Agreement, Orlando Letelier assassination (Chile/U.S.)

Selected Public Arbitrations and Adjudications

! United States v. Iran, Case B-1, Cl.4 (Hague Tribunal)

! ELSI (Raytheon, Inc.) v. Italy (ICJ)

! In the Matter of Mazilu (ICJ) (amicus curiae)

! Iran v. United States (ICJ) (Airbus case)

! United States v. United Kingdom (PCA) (arbitration of Heathrow Airport fees)

Service in Private Arbitration Systems

! International Chamber of Commerce: Service as party-appointed arbitrator and chairman.

! American Arbitration Association; CPR Center for Dispute Resolution; arbitrations performed by ad hoc agreement. Member, College of Commercial Arbitrators.

! Many publications of books and articles.

THE LEGALITY OF INCREASES IN ROYALTY RATES AND/OR …...before the committee on fiscal policy...

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