Determining Compensation for Expropriation In Treaty-Based Oil & Gas Arbitrations - Chapter 06 - Leading Practitioners’ Guide to International Oil & Gas Arbitration

Author(s):

David W. Rivkin

Floriane Lavaud

Page Count:

46 pages

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Published:

August, 2015

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I. INTRODUCTION

The Occidental v. Ecuador II award1 and more recently the Yukos v.

Russia award2 leave no doubt that the largest damages awards in

treaty-based arbitration concern oil and gas disputes. In fact, four

out of the ten largest awards issued by the International Centre for

Settlement of Investment Disputes (“ICSID”) pertain to oil and gas

even though oil, gas and mining disputes only represent 25% of all

ICSID cases filed as of the end of 2013.3

The large size of these damages awards is not surprising, because

oil and gas arbitrations almost always deal with long-term contracts

involving substantial amounts of investment. Whether alleged treaty

violations occur during or before production, inevitably many years

remain in the life of the asset, which results in large claimed sums.

Given the amounts at stake, which are frequently in the billions of

dollars, even small variations in the way damages are calculated can

lead to substantial differences in the final damages award.

Because of the sheer size of claimed damages, it is incumbent

upon the investor-claimant to make the tribunal comfortable with the

amount of damages sought early on. Arbitrators are typically experts

at parsing complex issues of facts and law, but since they are

generally not mathematicians or economists, they are often much less

comfortable engaging in complex damages calculations. Tribunals

can be ill-at-ease when confronted with a very large damages claim,

the ultimate value of which must inevitably involve some measure of

estimation as to what would occur in the future. This element of

estimation, in turn, means that many of the factors in every oil and

gas damages calculation have some inherent uncertainty and offer a

range of possible values. Tribunals faced with such a circumstance

have wide discretion to choose numbers that they feel are appropriate

to factor into their analysis, and there is little room to challenge their

choices in this respect.4

In such circumstances, claimants are well-advised to present

arbitrators with as many actual figures as can be provided, rather than
rely solely on hired experts’ forecasts as to what those figures ought