{"id":6186,"date":"2019-04-23T06:28:36","date_gmt":"2019-04-23T11:28:36","guid":{"rendered":"https:\/\/www.iisd.org\/itn\/?p=6186"},"modified":"2024-08-09T18:29:36","modified_gmt":"2024-08-09T16:29:36","slug":"icsid-tribunal-awards-conocophillips-usd-8-7-billion-plus-interest-dispute-venezuela-gregg-coughlin","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2019\/04\/23\/icsid-tribunal-awards-conocophillips-usd-8-7-billion-plus-interest-dispute-venezuela-gregg-coughlin\/","title":{"rendered":"ICSID tribunal awards ConocoPhillips USD 8.7 billion plus interest in dispute with Venezuela"},"content":{"rendered":"

ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V., ConocoPhillips Gulf of Paria B.V. and ConocoPhillips Company v. The Bolivarian Republic of Venezuela, ICSID<\/span> Case No. ARB\/07\/30<\/h2>\n

An ICSID tribunal awarded over USD 8.7 billion plus interest to ConocoPhillips for Venezuela\u2019s unlawful expropriation of three oilfield investments made by Netherlands-based subsidiaries of U.S. corporation ConocoPhillips. The tribunal issued its award on March 8, 2019, nearly six years after its September 2013 decision on jurisdiction and the merits. The award also comes nearly one year after an ICC<\/span> tribunal awarded over USD 2 billion<\/a> in a separate contract-based claim against Venezuela related to two of the three oilfield investments implicated in this case.<\/p>\n

Background and claims<\/h3>\n

In the mid-1990s, ConocoPhillips invested in three projects\u2014the Hamaca, Petrozuata and Corocoro Projects\u2014involving the production, partial refining and marketing of extra-heavy oils from the Orinoco Oil Belt.<\/p>\n

In 2007, Venezuela attempted to restructure the projects into companies in which affiliates of Petr\u00f3leos de Venezuela, S.A. (PDVSA), Venezuela\u2019s state-owned oil company, would own 60 per cent of the shares, thereby aligning ConocoPhillips\u2019s investment with the legal and fiscal requirements applicable to all other companies with oil activities in Venezuela. ConocoPhillips rejected the terms of this restructuring deal and subsequently exited the Venezuelan market, after which PVDSA nationalized the projects.<\/p>\n

On November 2, 2007, ConocoPhillips initiated arbitration against Venezuela, claiming unlawful expropriation and a violation of the fair and equitable treatment standard contained in the Netherlands\u2013Venezuela BIT<\/span> (the BIT). ConocoPhillips sought over USD 21 billion in compensation, while Venezuela contended that the investor was entitled to only USD 515 million.<\/p>\n

In 2013, a majority of this tribunal found that Venezuela failed to negotiate in good faith<\/a> for just compensation as required by BIT Article 6(c). In 2017, the tribunal filed an interim decision in response to Venezuela\u2019s third application for the tribunal to reconsider its 2013 decision. In the 2017 interim decision, the tribunal clarified it did not find a lack of good faith on the part of Venezuela in its negotiation efforts but rather that Venezuela failed to negotiate an offer in compliance with the BIT\u2019s requirements of just compensation and market value.<\/p>\n

Choice of law \u2013 BIT compensation standard and contractual standard<\/h3>\n

Venezuela argued that ConocoPhillips should not be able to claim damages outside the limits established by the Association Agreements (AAs) for the projects\u2019 original contracts and Venezuelan law at the time of the investment because these conditions placed a limit on ConocoPhillips\u2019s expected profit and the state\u2019s expected liability under the BIT.<\/p>\n

The tribunal noted that, because the claim was initially brought under BIT Article 6, the AAs and Venezuelan law were not directly applicable. However, because the compensation for ConocoPhillips\u2019s rights and assets must include what the investors were entitled to if there had been no expropriation, the tribunal determined that compensation needed to take into account both the BIT standard and the provisions of the AAs.<\/p>\n

Venezuela carries burden to prove project costs, ConocoPhillips carries burden to prove output prices<\/h3>\n

The tribunal upheld all expected costs connected with the project. For output prices between 2007 and 2020, the tribunal accepted actual sale prices, rejecting both Venezuela\u2019s preference for lower prices and ConocoPhillips\u2019s contention that the crude would have sold at higher prices if managed by the investor during the relevant period. For post-award output, the tribunal determined that prices for future output would start at the 2020 average and increase at a flat rate for each subsequent year.<\/p>\n

Windfall Profit Tax constitutes \u201cdiscriminatory action\u201d in Petrozuata AA<\/h3>\n

The tribunal determined that the Windfall Profits Tax (WPT) implemented by Venezuela should not be included in ConocoPhillips\u2019s valuation of reasonable expected profits because the AAs clearly gave Venezuela authority to modify the tax regime in connection with increases in oil prices and any WPT exemptions would have been granted solely at Venezuela\u2019s discretion. However, the tribunal also determined that the WPT constituted a \u201cdiscriminatory action\u201d under the Petrozuata AA because it authorized Venezuela to apply exemptions unequally to enterprises within the oil industry.<\/p>\n

Discount rate overview and relevant factors<\/h3>\n

With these considerations in mind, the tribunal determined the expected profit and dividends ConocoPhillips would have received over the duration of the projects. First, the tribunal rejected Venezuela\u2019s contention that ConocoPhillips\u2019s original internal rate of return (IRR) of 20 per cent is the appropriate discount rate. Instead, it adopted ConocoPhillips\u2019s position that once the IRR, or \u201churdle rate,\u201d was passed, it is essentially irrelevant and should not be used because it is merely the minimum level of return expected by ConocoPhillips. The tribunal also determined that Venezuela\u2019s borrowing costs did not affect the discount rate analysis other than by increasing political risk because financing for oil projects is project specific and generally operates outside the general constraints of Venezuela\u2019s economy.<\/p>\n

Expropriation and taxation effect on discount rate<\/h3>\n

The tribunal noted that \u201cthe discount rate should not serve as a premium for unlawful acts committed by the host State and detrimental to the investment\u201d (para. 906). However, the tribunal also noted that expropriation with \u201cjust compensation\u201d is permitted under the BIT and thus ConocoPhillips assumed some risk of expropriation. As a result, the tribunal included in the discount rate the risk of any difference between \u201cjust compensation\u201d and full reparation for loss suffered through expropriation.<\/p>\n

17.25 per cent discount rate used by the tribunal<\/h3>\n

The tribunal ultimately used ConocoPhillips\u2019s 2006 discount rate of 13 per cent as a baseline, determining that it represented the expected risks of the projects more than any alternative presented by the disputing parties. The tribunal reduced it to 9.75 per cent to account for risk already accounted for due to reduced production and higher costs. Combining the cost of capital (risk-free rate and industry risk) with the discount rate of 9.75 per cent and the tribunal\u2019s margin of discretion resulted in a discount rate of 17.25 per cent.<\/p>\n

Interest rate<\/h3>\n

The tribunal noted that applying a risk-free rate\u2014as argued by Venezuela\u2014would allow Venezuela to retain expropriated dividends and earn higher profits, while ConocoPhillips \u201cwould have to be content with the most minimal rate available on the money market\u201d (para. 816). The tribunal instead used ConocoPhillips\u2019s cost of equity as pre-award interest reduced to reflect the tribunal\u2019s findings on higher than expected costs.<\/p>\n

In contrast, the tribunal focused on the investors\u2019 reduced opportunity to invest in the oil industry to determine the post-award interest rate. As a result, the tribunal adopted the industry risk premium of 5.5 per cent (compounded annually) for post-award interest.<\/p>\n

Total award<\/h3>\n

Ultimately, the tribunal awarded USD 8.4 billion for unlawful expropriation in violation of BIT Article 6 and USD 286 million for \u201cdiscriminatory actions\u201d taken in violation of the Petrozuata AA. The tribunal also awarded ConocoPhillips 40 per cent of its legal costs, amounting to over USD 20 million. Lastly, the tribunal declared the entire amount awarded net of taxes.<\/p>\n

Notes<\/em>: The tribunal was composed of Eduardo Zuleta (president, appointed by the chairman of the ICSID Administrative Council, Colombian national, replacing Kenneth Keith, New Zealand national, who resigned from the tribunal in 2016), Yves Fortier (claimants\u2019 appointee, Canadian national) and Andreas Bucher (respondent\u2019s appointee, Swiss national, replacing Georges Abi-Saab, Egyptian national, who resigned from the tribunal in 2015). The award is available in English at https:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw10402.pdf<\/a>.<\/p>\n

Gregg Coughlin<\/strong> is a Geneva International Fellow from University of Michigan Law and an extern with IISD<\/span>\u2019s Investment for Sustainable Development Program.<\/p>\n

TAGS: ISDS<\/span>, Expropriation, ICSID, Venezuela, Oil & Gas<\/p>\n