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Quantum matters – US$2 billion oil award in Venezuela

Daniel Turner Daniel Turner

On 24 April 2018, an International Chamber of Commerce (ICC) Tribunal awarded US$2 billion to subsidiaries of ConocoPhillips in compensation for the expropriation of two investments in Venezuelan extra-heavy crude oil projects (Hamaca and Petrozuata). The award was obtained against Venezuela’s national oil and gas company, Petróleos de Venezuela S.A. (PDVSA), and two of its subsidiaries.


In November 1995 and July 1997, subsidiaries of ConocoPhillips entered into two Association Agreements (AAs) with subsidiaries of PDVSA to produce, refine and sell extra-heavy crude oil as part of the Petrozuaca and the Hamaca projects. Production started in April 2001 and October 2004 respectively.

The AAs provided for the indemnification of ConocoPhillips’ subsidiaries should the Venezuelan government implement Discriminatory Actions adversely affecting the cash flow of the projects. Between 2004 and 2007, the Venezuelan government adopted a series of measures, mostly increasing royalty rates and income tax, which culminated in May 2007 with the nationalisation of the two projects.

As well pursuing an ICSID arbitration, the subsidiaries of ConocoPhilips initiated two ICC claims under the AAs in October 2014.

Position of the parties

The Tribunal concluded that the expropriations and the increase in income tax were Discriminatory Actions under the AAs. This article considers some of the quantum aspects of the Discriminatory Action claims.

The parties agreed on a valuation at the date of the award. They disagreed on the sources of information to be used in the but-for scenario.

Claimant’s position

The Claimants claimed $7.31 billion (including interest) at 27 May 2016 (as a proxy to the date of the award).

The Claimants considered that the production volumes and costs in the but-for scenario up to the date of valuation should reflect pre-expropriation projections. The damages calculation should thus disregard the production and costs actually incurred from 2007 onward.

The Claimants used a discount rate of 15.21%, which included a risk-free rate of 2.11%, an industry risk premium of 6.22% and a country risk premium of 6.1%. They referred to reports prepared in 2000, which proposed a discount rate of 8% to 12% to value the projects. They also referred to discount rates used in other arbitration awards in comparable cases.

Respondent’s position

The Respondents used all information available at the date of valuation, including actual production volumes and actual costs. For the projections from January 2016 to the end of the AAs, the Respondents relied on production volumes projected by their experts.

The Respondents used a discount rate of 27.7%, which included a risk-free rate of 2.1%, an industry risk premium of 5.8%, a country risk premium of 17.8% and a discount for lack of marketability of 2%. To support the higher discount rate, the Respondents relied on discount rates used in other arbitrations and research reports, and on statements by Conoco’s management on the internal rates of return (IRRs) or hurdle rates expected from this or similar projects.

Approach taken by the Tribunal

The Tribunal awarded US$2 billion in damages for the Discriminatory Actions.

The Tribunal concluded that, as a general rule, damages should be calculated using actual historical data, as opposed to pre-expropriation projections, unless actual data is questionable. In light of the evidence, the Tribunal used actual production volumes and also adopted the Respondents’ production figures for the future period. Regarding the project costs, the Tribunal rejected a number of additional actual costs put forward by the Respondents for being unsubstantiated or unreliable.

Regarding the discount rate, the Tribunal first found that the application of a discount for lack of marketability to non-distressed companies was unsubstantiated.

Second, the Tribunal found that the statements relied on by the Respondents were not relevant as they referred to IRRs  or hurdle rates as opposed to discount rates. Documents relied on by the Respondents to support their discount rate appeared to either involve assets located outside Venezuela or to reflect generic country risk without consideration of the projects’ specific risk. Moreover, the discount rates referred to by the Claimants were set considerably prior to the valuation date.

The Tribunal concluded that the country risk premium could appropriately be set at 8.89% and the resulting discount rate of 18% was reasonable.


This case illustrates the methodology adopted by a Tribunal to determine the various inputs in a but-for model and the criteria they used to choose between actual historical data and pre-expropriation projections. It also illustrates the Tribunal’s reasoning when deciding on discounted cash flow inputs based on the evidence before them.

Case information

Claimant: Phillips Petroleum Company Venezuela Limited and ConocoPhillips Petrozuata B.V.

Respondent: Petróleos De Venezuela, S.A., Corpoguanipa, S.A. and PDVSA Petróleo, S.A

Case ref: 1:18-CV-03716 - VEC

Tribunal: Dr Laurent Lévy Presiding Arbitrator

Prof. Laurent Aynès, Arbitrator

Prof. Andrea Giardina, Arbitrator


1 Phillips Petroleum Company Venezuela Limited and ConocoPhillips Petrozuata B.V. v Petróleos de Venezuela, S.A., Corpoguanipa, S.A. and PDVSA Petróleo, S.A., ICC, Final Award dated 24 April 2018

For further information, please contact Daniel Turner.