PROBLEM 1 – NEW COSTS BURDENS ON THE NIGHTINGALE OIL FIELDS

2022 ICMC Mediation Problem 1 by: Nguyen Trung Nam

GENERAL INFORMATION

The Block 15.20 (Nightingale) is situated in the municipality of Qibing, in the country of Danan. Danan
has a large population of 200 million people, which has massive demand for energy. The country is
generously endowed with oil & gas resources, though crude oil & natural gas availability spread out
offshore the long coast of the country. The country has around 60 oil & gas blocks offshore, providing
around 50% of the country’s energy needs.

The Block 15.20 was commercialised and brought into commercial operation in 1990 by the
colaboration between the national oil company, Petrodanan and a Danubian operator, Petropolis under
a Production Sharing Contract (the “PSC”) which provided for the establishment of a Joint Operating
Company (the JOC). The JOC had usually reached production of between 1-1.2 million barrels of crude
oil per anum. Over the last 10 years, the JOC has dropped production gradually and it was reported by
a consulting firm that by 2025 the costs of production will exceed its commercial value and the wells
will have to be abandoned at that point. An exploration plan was in place since 2019 to explore the
opportunities to develop further wells in the area of Nightingale northeast, but no commercial result has
been published.

In the same year of 2020, Danan passed its new Tax Law and Petroleum Law (the “new Laws”). The
new Petroleum Law requires that all oil & gas operators to establish an oil & gas field abandonment
plan and contribute up to 2% of the total annual revenue to the State’s wells abandonment fund. The
new Tax Law, on the other hand, imposed a new tax rule that all personal income tax exemption for oil
& gas related activities should now be removed.

The dispute arose between Petrodanan and Petropolis, since Petropolis believed that the Block 15.20 is
protected by the Stability Clause of the and its operation should not be subject to the new Laws.
Petrodanan (“PDN”, the Owner), on the other hand, is a 100% state-owned company, wish to implement
the new Laws in 2021, and in particular, to start contributing to the State’s wells abandonment fund and
paying PIT for its personnel working for Block 15.20. In the implementation of these new Laws, it is
calculated that the JOC will have to contribute about USD 12 million each year of production until the
end of the field life, and additional PIT payment to the government of Danan around USD 5
million/year.

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The Petropolis Group (‘‘PG’’, the Contractor) is an internationally oil & gas operating company with
headquarters in Danubia and 300 branches in 32 countries. They won the bid for exploration and
production of the Block 15.20 (Nightingale) and became the operator of the oil field since 1987. Under
the PSC, PG is responsible for all the day-to-day operation of the Block 15.20, but all major decision
must be made by the Management Committee (“MC”), which comprises of 2 delegates from PDN and
2 delegates from PG. Disputes are to be settled by negotiation at the MC level, then the parties’
management board level, and if not successful then either parties may bring the dispute to arbitration to
be settled in Danubian International Arbitration Center (DIAC) in accordance with Danubian
International Arbitration Rules.

Between May - September 2020, the MC had several meetings to discuss the way forward to mitigate
the losses as a result of the implementation of the new Laws, but no agreement had been reached, and
relations became difficult. Further meetings were held in 2021 between the top-leaders of PDN and PG
but without success.

In the meantime, the JOC received requests by the Tax Department to declare and pay PIT accrued in
2021. To protect its right, PG initiated an arbitration against PND in May 2022 and PND has initially
rejected the jurisdiction of DIAC and filed an early dismissal application to DIAC.

Some provisions of the contract upon which the parties have relied in the course of negotiations:
Clause 18: STABILIZATION

18.1 The Parties base their relations hereunder on the principles of mutual goodwill, good faith and
mutual benefit with respect to the investment guarantees and other rights accorded to investors
in accordance with the Danan laws.

18.2 Petrodanan shall take all steps necessary to ensure that each of [members of the PSC] shall enjoy,
during the term of this Contract, all tax benefits and obligations as stipulated in this PSC.

18.3 If after the Effective Date, any existing law(s) and regulation(s) of Danan are amended or
annulled, or new law(s) and regulation(s) are enacted in Danan, or there is application or
interpretation of changes of regulations of a law, or a licence is cancelled or the conditions
therefore are revised thereby adversely affecting the tax benefits and obligations of the
CONTRACTOR as stipulated in this PSC; then upon a notice from the CONTRACTOR, the
Parties shall consult with each other and make changes to this Contract as are necessary both to
maintain the CONTRACTOR’s rights, benefits and interests hereunder, including
CONTRACTOR’s share of Profit Oil or Profit Gas, as at the Effective Date and to ensure that
any revenues or incomes or profits, including any one or more of the foregoing of
CONTRACTOR, derived or to be derived under this Contract, shall not in any way be diminished

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 in comparison to that which was originally contemplated, as a result of such changes of laws or
annulment thereof or as a result of such changes or cancellation of approvals or licenses.

Clause 15: ARBITRATION

15.1 The Parties shall endeavor to settle, through negotiations, differences and disputes related to or
arising under this Contract. This includes negotiations at the first level of MC special meetings,
and if such differences and/or disputes still exist, then the MC will submit the same to the parties’
representatives for further meetings at the parties’ representatives level.

15.2 Except with respect to disputes referred to an Expert as provided in Article 15.3 below, in the
event such differences or disputes cannot be settled through negotiations by the Parties within
ninety (90) Days of any Party’s issuance of notice of a dispute, such differences or disputes shall
be decided by an arbitration tribunal. The Parties on either side of the dispute shall each appoint
an arbitrator and the two arbitrators so appointed shall appoint a third arbitrator by the mutual
agreement who shall act as chairman of the tribunal. In the event the two Party-appointed
arbitrators cannot agree to the appointment of a third arbitrator within thirty (30) Days of the
appointment of the second of the appointed arbitrators, then the chairman of the tribunal shall be
appointed by the Danubian International Arbitration Center. The arbitration shall be processed in
English in accordance with the DIAC Arbitration Rules (as may be agreed by the Parties). The
place of arbitration shall be in Alexandra, Danubia. Any award of the arbitrators shall be final
and binding upon Parties.

When PG commenced arbitration based on the respective arbitration clause of the Contract, PDN
offered to suspend the proceedings and first try mediation under the Vietnam Mediation Centre (VMC)
Rules administered by the VMC. PG agreed. The mediation will be attended by PDN’s President,
accompanied by its external counsel (as Requesting Party), and PG’s new President and its in-house
counsel (as Responding Party). The representatives have unlimited authority to reach a settlement.

Both Danubia and Danan are parties to and have ratified the Singapore Mediation Convention, with
Danubia’s 8.1 (b) reservation: it shall apply the Convention only to the extent that the parties to the
settlement agreement have agreed to the application of the Convention.

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