Compass Lexecon expert Dr. Manuel A. Abdala was retained by Phillips Petroleum Company Venezuela Limited and ConocoPhillips Petrozuata B.V. (“Claimants”), two large-scale producers of heavy crude oil and related products, as quantum expert in an ICC arbitration against Petróleos de Venezuela, S.A., Corpoguanipa, S.A., and PDVSA Petróleo S.A. (“Respondents” or “PDVSA”). The dispute arose from claims related to certain discriminatory actions by Venezuela for which PDVSA, as a joint partner to ConocoPhillips, had provided partial protection and guarantees. An ICC Tribunal declared that the increase in income taxes and the 2007 expropriation were discriminatory actions under the association agreements between the parties, and found PDVSA liable for $2 billion as of May 2016.
The Tribunal used Dr. Abdala’s valuation model to compute compensation, which required economic interpretation on the contractual provisions related to the compensation clauses of the association agreements. The Tribunal sided with Dr. Abdala’s main recommendations on the discount rate, in particular, rejecting the three main propositions advanced by opposing experts: First, it ruled that the discount rate should not include an illiquidity discount, since the assets were not in distress and Claimants were not under compulsion to divest. Second, based on Dr. Abdala’s evidence, it ruled that the status of Venezuela’s sovereign debt (given its near-default situation) had no place in the calculation of a country risk premium. Finally, the Tribunal shared Dr. Abdala’s opinion on the fact that neither historic average returns in the oil industry nor the expected IRR could be used as discount rates, which instead had to be based on the cost of capital. The Tribunal ended up rejecting PDVSA’s experts proposed 27.7% discount rate and adopted a flat rate equivalent to an 18% cost of equity, close to Dr. Abdala’s recommendation of 15.2%.
Pablo López Zadicoff led the team supporting Dr. Abdala and was assisted by Carla Chavich, Mark Sheiness, Rob Mulcahy, Nick Sardi, Nicholas Dayton and Andrés Barrera. Compass Lexecon worked with Brian D. King and Elliot Friedman of Freshfields Bruckhaus Deringer LLP and Constantine Partasides QC, Jan Paulsson, and Luke Sobota of Three Crowns LLP.