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The Guide to Energy Arbitrations - Second Edition

Expert Evidence

Disputes tend to arise more often in the energy industry than in others. In addition to the scale and complexity of the investments typically required in energy projects, another important explanatory factor is volatile energy prices that affect the returns realised on these investments.

Oil prices dropped from US$140/barrel in mid-2008 to approximately US$40/barrel in just six months. In the US, following a dramatic increase in shale gas production, natural gas prices dropped from above US$12/MMBtu in mid-2008 to just over US$3/MMBtu a year later. More recently, oil prices went from over US$100/barrel in late 2014 to less than US$50/barrel a few months later. Coal and power prices have also experienced significant fluctuations over the same time period.

Although energy agreements are typically designed to split identified risks between producers, transporters and users, significant price variations can affect the commercial balance (real or perceived) of energy agreements and lead to tensions among stake­holders (investors, lenders, states and consumers) on how profits (or losses) should be shared between them.

This is fertile ground for disputes and arbitrations: in 2015, 20 per cent of the cases filed with the International Centre for Settlement of Investment Disputes (ICSID) were in the ‘Oil, Gas and Mining’ industry and 42 per cent in the ‘Electric Power and Other Energy’ industry. The energy and extractive industry cases therefore collectively represented 61 per cent of all ICSID cases registered in 2015, far more than any other sector.[1] Variation in energy prices has also resulted in a large number of commercial arbitrations following the activation of price review clauses in sales agreements.

When disputes arise, the amounts at stake are often substantial. In 2012, an ICSID tribunal awarded US$1.8 billion in damages (excluding interest) in the Oxy v. Ecuador dispute.[2] In October 2014, an ICSID tribunal awarded damages of US$1.6 billion (excluding interest) to Exxon Mobil following a claim brought against Venezuela.[3] These awards were dwarfed by the decision of the tribunal in the arbitration between the former share­holders of Yukos and the Russian Federation where damages of US$50 billion were awarded to Yukos’s former shareholders. This award would have been US$17 billion higher, had the tribunal not determined that the claimant bore partial responsibility for the breaches.[4] The financial impact of price review arbitration decisions is also often in the billions of dollars.

In this chapter, we briefly discuss the role of expert witnesses in arbitrations and consider three specific features that can affect the nature of expert evidence in the energy industry.

Firstly, assessing damages typically requires forecasting cash flows over long periods, often in hypothetical (or counterfactual) scenarios. As there can be significant uncertainties associated with this exercise in the energy industry, parties may be inclined to rely on industry experts to provide opinions on future or counterfactual states of the world. However, at the same time, industry specialists may lack the expertise required to turn their industry knowledge into robust quantifications of damages or evaluate how the evidence of a case supports their own opinion. These skills fall more naturally under the remits of valuation or economic experts. The frequent need for a variety of expertise and the often high financial stake tend to make energy disputes more prone to multiple appointments of experts. Some of the implications of dual appointments are discussed in this article.

Secondly, more often perhaps in energy disputes than in others, expert evidence can be relevant to the merits of the case. This is because the financial circumstances of a dispute can be an aid to understanding the potential motivations behind a breach: for example, a 20-year contract may have been terminated because a notice was not issued on time, as a respondent might allege, or it may have actually been because the respondent stood to lose substantial sums if it had continued to honour its contractual obligations because of changes in the price environment since the deal was originally struck. Counsel may rely on their experts to address some of these questions.

Thirdly, the volatility of energy prices makes the date on which damages are assessed especially important. This can have a significant impact on the value of a claim, as discussed herein.

Role of expert witnesses

Experts are typically appointed to assist the tribunal in making an assessment of the monetary compensation that would put the injured party back in the economic situation in which it would have been in the absence of the wrongful actions of the respondent.

Three main valuation methods are often employed by experts to estimate the value of a claimant’s investment: income-based approaches, market-based approaches and asset-based approaches.

Income-based approaches consist of estimating the present value of future monetary benefits lost by the claimant because of the breach. Among these approaches, the most widely applied is the discounted cash flow (DCF) method. Under the DCF method, the expert estimates the company’s or project’s expected future cash flows and discounts them at a rate reflecting the risks associated with their realisation. Cash flows are sometimes forecasted under two main different scenarios, with and without the alleged breach, to measure the cash flows ‘lost’ as a result of the breach in question.

The strength of this approach lies in its theoretical and practical soundness: it is the most commonly applied methodology in the oil and gas industry for project and acquisition appraisal and other resource allocation decisions. It is also able to factor in the unique features of the company or project in question (in relation to costs, taxes, risks, etc., which can vastly differ between projects).

Conversely, the forward-looking nature of the DCF requires assumptions over future revenues and costs, such as commodity prices, which may be difficult to predict. The DCF methodology is therefore best suited in cases where future cash flows can be estimated with a reasonable degree of confidence. The application of the DCF method further requires assessing an appropriate discount rate to account for the risks associated with the realisation of the forecasted cash flows. A number of elements, such as the project’s geographic location, or its state of advancement, can affect the level of risk and warrant specific adjustments to the discount rate. For this reason, and because there is no universally agreed method to quantify a number of specific risk factors, the discount rate is often the subject of debate between experts, with potentially significant effects on the estimate of damages.

Market-based approaches consist of deriving the value of a project or company by reference to the value of other comparable projects or companies whose market value is known or can be inferred. The market value of a power plant, for example, could in theory be estimated by reference to the market value of similar power companies listed on a stock exchange or recently sold. The expert can then adjust for differences in size (by assessing ‘multiples’ of certain relevant metrics such as profits or, in the example of power plants, capacity) or timing (through indexation methodologies), to infer an estimate of the market value of the company.

The strengths of this approach are that it is relatively straightforward to understand, and that it is based on market observations, arguably less prone to subjective judgements than the DCF method. A limitation is the ability of the expert to identify sufficiently comparable companies for benchmarking. Adjusting for different features between the company being valued and the benchmarks identified (such as different extraction costs, growth prospects, locations, etc.) can be difficult and involve a degree of judgement. A lack of pertinent details regarding the benchmarks (for instance, details of the circumstances surrounding the transactions in comparable assets) can further compound the issue.

The third approach consists of valuing a company or project by reference to the value of the assets it holds. This can be achieved by considering the investments made in the company of the value its individual assets and liabilities. This approach is typically appropriate for early stage companies (when investments, operating costs and revenues are unknown or when reserves have not been delineated) or for companies that are not going concerns.

The main disadvantage of this method stems from the difficulty in identifying and valuing the market value of each asset and liability, and not considering them as an operating unit. Additionally, for profitable going concerns the amounts invested in the project may be worth less than the present value of the project’s expected profits and this approach may therefore understate the true market value of that project.

The market value of a business should in principle not depend on the method applied to measure it. All methodologies, if appropriately applied, should lead to similar conclusions on value, and applying multiple valuation methodologies will typically bolster a conclusion. Ultimately, although well-sourced and documented models can be effective and are essential in almost all energy disputes, the litmus test for any tribunal is often how well the analysis stands up against evidence the observable behaviour of the market.

Independence and transparency, two key requirements for expert witnesses

Although experts are typically appointed by parties, they are expected to perform an independent assessment.

Party-appointed experts are governed by a set of rules specific to each arbitral institution. These procedural guidelines often include instructions relevant to the use of experts. The parties also sometimes adopt standardised rules published by the International Bar Association (IBA) or by the United Nations Commission on International Trade Law (UNCITRAL) to supplement institutional rules.

Arbitral institutions do not provide uniform guidance on experts, although a few themes are universal. Broadly, arbitral institutions require that experts be independent from the parties and transparent on how they reached their conclusions (the facts they relied upon, the methodology they used, the opinions they hold, etc.).

Independence from the parties is a key requirement for party-appointed experts, who are expected to provide impartial evidence rather than a partisan testimony on behalf of their client. They commonly provide declarations of their independence in their reports to tribunals (as well as to comply with arbitration rules). This practice delineates the expert’s ethical and independence obligations, but equally reminds the expert of his or her primary duty to assist the tribunal.[5]

This independence obligation can also be governed by self-regulated professional bodies: general professional codes of conduct have been adopted for instance by the Chartered Professional Accountants Canada, the American Institute of Certified Public Accountants, the Institute of Chartered Accountants of England and Wales or Institute of Chartered Accountants of Scotland, or the CFA Institute which awards and regulates the use of the certified financial analyst designation. Although not all these bodies provide specific guidance for their members acting as expert witnesses, they all broadly address the issue of independence.

Transparency is the other key requirement for an expert witness, to allow the parties and the tribunal to understand the premises underpinning the expert’s conclusions, and the reasoning behind his or her findings.

Institutional rules governing expert evidence typically require experts to prepare reports that are relevant, sufficient and reliable, based on acceptable methodologies. The IBA Rules for instance require expert witnesses to set out the facts on which their opinions are based, and describe the method, evidence and information relied on.[6] Some rules (such as the CIArb Protocol) also recommend that an expert bring to the attention of the tribunal all matters which may adversely affect his or her professional opinion, and notify the parties if their opinion requires correction subsequent to submission of a written expert report.

The ability of the parties and tribunal to question expert witnesses during a hearing is another convention aimed at transparency. It is a pervasive feature of institutional rules. All arbitral institutions require that experts be available for cross-examination or a similar form of questioning by the tribunal and counsel.

Dual appointments are often made in relation to energy disputes

One of the most common methods used by experts to assess economic damages in energy disputes is the DCF method, which, as explained above, requires an estimation of cash flows, sometimes far into the future. However, one difficulty with applying this method is that the energy industry is prone to significant and often unexpected economic changes. The past or current performance of a project or company is not always the best guide to future performance.

Experts assessing damages in energy disputes may therefore be confronted with difficult questions: what will be the price of Brent crude oil in 2050? How will gas prices evolve in the Mediterranean basin over the next two decades? Will the gap between the natural gas hub prices and oil indexed prices expand or narrow in the future?

More complex questions can arise when the uncertainty over the future of market fundamentals is combined with the uncertainty of a counterfactual scenario, such as what profits a concession could have reasonably generated over 20 years, had the gas field been as warranted in the concession agreement.

In addition, the financial consequences of the actions complained of often need to be assessed as at the date of the breach. For example, if a gas delivery contract providing for deliveries until 2030 was terminated unlawfully in 2010, the financial consequences of the supply interruption may need to be evaluated as of 2010. In principle that means that the experts should rely only on expectations from 2010. Experts therefore, not infrequently, find themselves having to make predictions based only on the knowledge and expectations that prevailed at some point in the past. With arbitration proceedings sometimes arising years after the alleged breaches, this compounds the difficulty of the exercise that the experts must undertake.

Experts appointed in energy arbitrations therefore are often required to make forecasts amid considerable uncertainty. Quantum experts that are otherwise well placed to estimate the present value of future cash flows may not be best qualified to give an opinion on specific industry developments affecting cash flows, and industry experts may provide valuable insight when these questions arise.

At the same time, industry experts may lack the skills or experience required to translate market predictions into cash flow forecasts for use in a DCF, assess the riskiness of the claimant’s business operations to calculate an appropriate discount rate, or assess the impact of other economic factors on the market value of, say, an expropriated company. Industry experts may also be less comfortable with the forensic examination of the evidence before a tribunal to triangulate their views with business plans, forecasts or transactions in comparable companies at the time of the breach. These fall more naturally under the remits of quantum experts.

As both sets of skills are distinct and necessary, it is not infrequent for parties to appoint experts with industry knowledge and experts with valuation skills. This is a relatively common feature of energy arbitrations. In Oxy v. Ecuador, twelve experts were appointed with quantum experts relying extensively on the evidence of industry experts. Similarly in ExxonMobil v. Venezuela, the claimants alone appointed eight experts.[7]

Multiple appointments of experts have various implications for the tribunal, the parties, counsel and the experts.

Experts must work independently to arrive at their own opinions, but also in concert so that their opinions are based on the same set of facts, and can be incorporated into an overall analysis of damages. Furthermore good planning and coordination is required, especially when the appointed experts are not from the same firm and are not used to working together. Indeed the evidence of an industry expert is frequently used as an input to the work of a quantum expert.[8] Further, industry experts who have not had experience in preparing expert reports for use in international arbitration will require guidance as to the rules governing experts and the need to communicate clear, unambiguous conclusions based on the evidence in the case.

Experts may choose to produce their evidence in separate reports authored and signed by each expert or in a joint co-signed expert report. The former option can provide more clarity and accountability, while the latter is more likely to guarantee a coherent framework of analysis. Either way, the appointment of more than one expert is invariably more expensive and may lead to an inflation of the proceeding costs. In Oxy v. Ecuador, a total of 32 expert reports produced by 12 experts (five on the claimants’ side and seven on the respondent’s) during proceedings.[9]

Expert evidence can be relevant to the merits of a case

Another characteristic of energy disputes is that expert evidence may be relevant not only to the quantification of damages but also to questions pertaining to the merits of a case.

Outright expropriations or terminations of long-term contracts are not very common: respondents will allege that their decision (for example) to expropriate, discriminate or terminate was a response to some prior wrongful acts of the claimant. Allegations of infringement on environmental laws, tax evasion, late payments or non-conformity of the product with the terms of the original agreement are examples of claims typically made by respondents to justify the actions complained of by the claimant.

Understanding motives behind alleged breaches may assist the tribunal in determining the credibility of the parties’ assertions. Experts can aid understanding of the potential economic motivations of the parties, for example by calculating the financial benefits associated with the respondent’s decision to terminate a long-term contract.

Allegations of corruptions against the claimant or the respondent also sometimes arise in disputes and arbitrations proceedings. As corruption is often difficult to prove, counsel might seek to rely on expert evidence to show, for instance, that the original deal was unbalanced from the outset. In that context, experts might be instructed to consider whether in their opinion the returns on the claimant’s investments conformed to industry norms, whether the royalty rates provided in the agreement were sound, or whether the level of price agreed was commensurate with energy prices prevailing at the time of the agreement.

Naturally, imbalances and misalignments of interest can also arise because of divergent expectations from the outset, asymmetric information or differences in bargaining power at the time of the signing of the original agreement.

These considerations illustrate situations in which counsel may instruct their experts on matters not directly relevant to quantum.

Importance of timing in energy disputes

In 2014, oil prices dropped from over US$100/barrel in late 2014 to less than US$50/barrel a few months later. This sell-off was prompted by a combination of factors. On the supply side, US shale production increased significantly over the last few years, while OPEC decided not to reduce their level of output, resulting in an unexpectedly high global oil supply.[10] On the demand side, past investments in fuel-efficient technologies to accommodate the soaring costs of fuel, and the slow growth in Western economies led to unexpectedly low levels of demand. Collectively, these factors contributed to an unexpected imbalance between supply and demand with dramatic effects on prices.[11]

Forecasts of future energy prices are about as volatile as energy prices themselves. Investors considering an investment in an oilfield in July 2014 would have been unlikely to build a dramatic fall in oil prices in the following months into their forecast.[12]

Similarly an expert or a tribunal seeking to reconstruct expectations to assess damages as of that date should also in principle disregard developments subsequent to the date of breach.[13] Given the significant volatility of energy prices, a small change in the date on which damages are assessed can have a substantial impact on the quantum of the claim.

Yet, identifying the date on which damages are assessed is not always straightforward. The choice of the relevant date (whether date of breach or current date) depends on the nature of the breach as well as the applicable law.[14] Furthermore, different approaches have been adopted in similar circumstances by different tribunals, adding uncertainty as to what date it is appropriate to use. Difficulties can be further compounded where there are several breaches complained of or where the breach takes place over a long period, such as in the case of rampant expropriations.[15]

The Yukos case provides an interesting illustration of the substantial effect that the choice of the valuation date can have on quantum. In this case, the tribunal performed two assessments of Yukos former shareholders’ damages: one at the expropriation date in 2004 (US$16.5 billion) and the other at the date of the award in July 2014 (US$50 billion). On the basis that investors should benefit from favourable events increasing the value of the expropriated asset up to the date of the award (as is generally the case in unlawful expropriations), the tribunal awarded the largest of these amounts. The difference between these assessments, some US$33.5 billion, reflects the impact of the choice of the date of assessment on damages. This US$50 billion award would have been approximately US$7.6 billion lower had the decision been rendered six months later, after the fall in oil prices that occurred in late 2014 and early 2015.[16]

The relative uncertainty over the applicable valuation date in arbitration cases, coupled with high price-volatility, therefore raises two important practical challenges for experts involved in energy arbitrations.

Firstly, several assessments of losses might be required: when there is uncertainty over the actual date of the breach, counsel might instruct their experts to consider alternative plausible dates of assessment. In the case of unlawful expropriations, valuations as at the date of breach and as at the date of award may need to be performed. Secondly, in cases of unlawful expropriations or wherever a current date of valuation is deemed appropriate it is technically impossible to assess losses as at the date of an award because experts need to produce their evidence long before the award itself. Where a current date is appropriate, indexation solutions might be usefully proposed by the experts to account for changes after the production of their evidence.


Quantum experts acting in energy disputes, as in any industry, are expected to provide independent advice on a counterfactual state of the world, in which there was no breach, as well as to assess the monetary compensation that would put the claiming party back in the position in which it would have been, in the absence of the breach.

Energy projects tend to be long-term projects, and the assessment of their value heavily relies on the expected price of volatile commodities. This consequently affects the provision of expert evidence in various ways. From the outset counsel and experts should consider three general questions: what sort of expertise will be helpful to the tribunal and is more than one expert necessary? Can the expert usefully provide insight into questions that pertain to liability? And as of when should damages be assessed by the experts?


[1]    ICSID Case Load Statistics, issue 2016-1, p. 26.

[2]    ICSID Award in Occidental Petroleum Corporation, Occidental Exploration and Production Company (claimants) v. The Republic of Ecuador (respondent), dispatched to the parties on 5 October 2012, p. 326.

[3]    ICSID Case No. ARB/07/27, Award, p. 133.

[4]    The tribunal found that ‘the Claimants contributed to the extent of 25 percent to the prejudice they suffered at the hands of the Russian Federation. As a consequence, the amount of damages to be paid by Respondent to Claimants will be reduced by 25 percent to USD 50,020,867,798.’ (p. 564, paragraph 1827, PCA Final Award in Yukos International Limited v. Russian Federation). This finding was based on the reasoning that, if ‘there is a sufficient causal link between any willful or negligent act or omission of the Claimants . . . and the loss Claimants ultimately suffered’ the final award should be reduced to reflect that (Id. p. 501, paragraph 1599). This award was subsequently overturned by a court in The Hague on jurisdictional grounds. At the time of publication, the original claimants are preparing to appeal this decision.

[5]    The IBA and UNCITRAL Rules require for instance that experts affirm their independence before accepting appointment. Art. 5(2) of the IBA Rules require party-appointed experts to provide ‘a statement of his or her independence from the Parties, their legal advisors and the Arbitral Tribunal’ and to make ‘an affirmation of his or her genuine belief in the opinions expressed in the Expert Report’. Additionally, under these rules, an expert must confirm that matters discussed in the report are accurate, and within his or her area of expertise. Experts appearing before ICSID tribunals are required to ‘solemnly declare upon [their] honour and conscience that [their] statement will be in accordance with [their] sincere belief.’ IBA Rules on the Taking of Evidence in International Arbitration, adopted by a resolution of the IBA Council on 29 May 2010.

[6]    IBA Rules, Art. 5.2, 1 June 1999.

[7]    Including two quantum experts, one financial theory expert, two experts in the field of oil reserves evaluation, one expert in oil price forecasting, one expert in the management of oil and gas projects, and one expert in the field of negotiations of commercial and fiscal arrangements in energy projects.

[8]    In ExxonMobil v. Venezuela, the oil price forecast of the claimant’s oil prices expert was for instance used by the claimant’s damages expert to estimate the project’s long-term cash flows.

[9]    ICSID Case No. ARB/06/11, Award, p. 31.

[10]   Shale gas production is up 230 per cent and US crude oil production up 67 per cent since 2010. Looking Forward- Effects of $50/BBL Oil, FTI Consulting, p. 1.

[11]   Reuters, Oil price fall exacerbated by hedging, energy firms’ debt: BIS, 7 February 2015.

[12]   In early July 2014, with oil prices at around US$110/barrel, oil future contracts for delivery in 2021 traded at approximately US$100/barrel. Six months later, when oil prices were approximately US$40/barrel, 10 year contracts traded at substantially less, close to US$75/barrel).

[13]   Tribunals sometimes explicitly rely on hindsight, in particular to confirm certain key assumptions. Recently for example in the Tidewater Investment SRL v. Venezuela case, the tribunal found that although damages should be assessed as at the date of the expropriation, the tribunal was ‘not required to shut its eyes to events subsequent to the date of injury, if these shed light in more concrete terms on the value applicable at the date of injury or validate the reasonableness of a valuation made at that date’. In this case we understand that the question was relevant in deciding whether the tribunal should account for revenues associated with a prospective gas field that turned out to be dry shortly after the expropriation date. (Tidewater Investment SRL and Tidewater Caribe, C.A. v. Venezuela, ICSID Case No. ARB/10/5, paragraph 160).

[14]   A number of tribunals have decided that a claimant was entitled, in cases of an unlawful expropriation, to claim for damages as at the date (whether date of breach or current date) that maximises the claim. The rationale articulated for instance in the Yukos case is that investors should benefit from favourable events increasing the value of the expropriated asset up to the date of the award, but at the same time, because the claimants could have sold their asset at an earlier date, unfavourable developments should be disregarded.

[15]   In the Yukos case, the claimants had for example argued for a date of breach in 2007. The tribunal considered that the date of the breach was in fact in 2004, setting out the general principle that: ‘in the event of an expropriation through a series of actions, the date of the expropriation is the date on which the incriminated actions first lead to a deprivation of the investor’s property that crossed the threshold and became tantamount to an expropriation’ (Final Award of 18 July 2014 in PCA Case No. AA 226, Hulley Enterprises Limited (Cyprus) vs. Russian Federation, p. 543, paragraph 1761).

[16]   The tribunal calculated the equity value of Yukos by scaling the value at 27 November 2007 by the RTS Oil & Gas Index at the date of breach and date of award. The estimated award represents the sum of the equity value, dividends paid to that date and prejudgment interest scaled in accordance with the proportion of shares owned by the claimants (70.5 per cent) and reduced by a further 25 per cent to account for the claimant’s contributory fault. Replicating the tribunal’s approach based on the actual variation of the RTS Oil & Gas Index, we estimate that the award would have been approximately US$7.6 billion lower (15 per cent) as at 31 December 2014.

Practical insight from experts on the ground