Mobil Cerro Negro, LTD. v. Petróleos de Venezuela S.A. ET AL., ICC CASE NO. 15415/JRF

Date of the Award:

23 December 2011

The Parties:

Mobil Cerro Negro, Ltd. (Claimant), Petróleos de Venezuela, S.A and PDVSA Cerro Negro, S.A. (Respondents)


Hydrocarbon Production

Members of the Tribunal:

Karl-Heinz Böckstiegel (Chair), Henri C. Alvarez, and Jacques Salès


This dispute arose out of a joint venture between the Claimant, Mobil Cerro Negro (“Mobil”), and one of the Respondents, PDVSA Cerro Negro, to exploit heavy oil resources located in the Orinoco Belt in Venezuela. The joint venture had been set up as part of the apertura petrolera, a Venezuelan Government campaign to attract foreign investments in the 1990s. This policy came to an abrupt end when President Chávez moved to reassert control over the oil industry to capture a larger share of the petroleum rent. In April 2007, the Venezuelan Government seized the project’s assets without offering any form of compensation.

Mobil took the claim to arbitration, seeking indemnification under the terms of its joint venture agreement with PDVSA Cerro Negro, as well as under Petróleos de Venezuela’s parent guarantee (PDVSA Cerro Negro and Petróleos de Venezuela are hereinafter referred to collectively as “PDVSA”). The contracts required PDVSA to indemnify Mobil against the effects of any expropriation, seizure of assets, or discriminatory measure imposed by the Venezuelan Government causing a “Materially Adverse Impact” on Mobil’s cash flows from the project.

The Tribunal found in favor of Mobil, determining that PDVSA owed damages as determined below.

Damages Claim:

As a preliminary matter, it should be emphasized that Mobil’s claim arose out of a contractually agreed indemnity provision and did not constitute a claim for expropriation under international law. Venezuela’s expropriation of the Cerro Negro project became relevant under the contract only because it was one of the conditions that triggered PDVSA’s obligation to indemnify Mobil. From a quantum standpoint, Mobil obtained damages based on the indemnification formula attached to the joint-venture agreement, not on the standard of compensation for the expropriation of its investment under international law.

A threshold issue concerned the term of the indemnification period. Mobil argued that the Tribunal had jurisdiction to award damages covering the entire contractual term (up to 2035). PDVSA, in turn, held the view that the Tribunal had jurisdiction to award damages covering Mobil’s prejudice only for the year 2007 — when the expropriation took place — but not thereafter because the expropriation had made it impossible to apply the indemnity formulas to the years 2008 through 2035.

Noting that the parties had indisputably negotiated the joint venture agreement keeping in mind the nationalization of the Venezuelan oil industry in 1975 and that the government’s aim was to attract international oil companies back to the country, the Tribunal concluded that the parties clearly intended to provide indemnification when expropriation, partial or complete, had occurred. A good-faith interpretation of the joint-venture agreement thus required applying the indemnity provision to the entire period.

Absent the parties’ agreement on the issue, the joint-venture agreement required the Tribunal to determine whether measures having a materially adverse impact on Mobil had occurred. The Tribunal held that such measures had effectively occurred, triggering PDVSA’s obligation to help Mobil obtain compensation or to provide indemnification. In doing so, the Tribunal rejected PDVSA’s argument that the joint-venture agreement’s indemnity formula could not apply when the agreement had been terminated.

In addition to determining whether measures having a materially adverse impact had occurred and awarding damages, the joint-venture agreement also required the Tribunal to recommend amendments to that agreement that would restore Mobil to its contractual situation “but for” the harmful measures. However, the termination of the joint-venture agreement effectively meant that the Tribunal could not recommend amendments to the agreement.

Calculation of Indemnification:

The joint-venture agreement provided for a set of complex formulas based on crude oil prices and actual cash flow to calculate the indemnity on a year-by-year basis. The agreement then provided for limitations to the calculated indemnity. The Tribunal considered the opportunity of awarding general damages instead but ultimately decided to apply the formula and limitation provisions.

PDVSA argued that compensation for the years beyond 2007 could not be calculated because there were no actual cash flows after 2007. The Tribunal adopted the view that while this made it difficult to apply the formulas, it did not make it impossible. The Tribunal went on to use the 2007 budget to calculate the future indemnity, considering it would constitute the most accurate reflection of the parties’ intent and expectations for the project’s future production.

In the absence of provisions in the joint-venture agreement or the parties’ agreement, the Tribunal had to determine what discount rate should apply to calculate Mobil’s indemnity for the remainder of the agreement (2008-2035).

The Tribunal underlined the differences between valuing future cash flows under an indemnity formula, and valuing the potential cash flows from the project, noting that there may be fewer risks to indemnity cash flows than to project cash flows. The discount rate, however, should not “add back the very risks that the indemnity protects against.” The Tribunal further noted that the discount rate should reflect the risks to the indemnity cash flows, historical rates of return to ExxonMobil and other oil companies’ shareholders, and WAAC or hurdle rates that such companies set for their investments.

The Tribunal was persuaded that the 18% rate proposed by PDVSA appropriately reflected the risks related to the indemnity cash flow analysis, whereas the “risk free” rate proposed by Mobil could not be accepted. This 18% discount rate is largely responsible for the dramatic difference between the amounts claimed and awarded.

Pursuant to this analysis, the Tribunal set the indemnity for 2007 at US$12.681 million, taking into account the limitations on liability contained in the joint-venture agreement. For the remaining life of the agreement (2008-2035), the Tribunal awarded an indemnity of US$894.9 million.

Additional Claims:

The Tribunal rejected Mobil’s request for declarations that PDVSA had breached contractual obligations, and also rejected PDVSA’s counterclaims for (i) compensation for the prior attachment of its assets in New York, and (ii) project financing.

But the Tribunal did accept PDVSA’s counterclaim in the amount of US$6,073,622, which represented the value of 1.3 million barrels of oil delivered to Mobil after 26 June 2007, and which the parties agreed did not belong to Mobil. The value of that oil was offset against the amount awarded to Mobil.


The Tribunal rejected Mobil’s claim for pre-award interest because it held that the debt upon which interest was to be calculated was not, and would not become, certain, liquidated, and due until the time of the Award.

As to post-award interest, Mobil suggested a rate of 9% but did not indicate whether this was a matter of loi de police. The Tribunal considered that in any event it should not be bound by loi de police, in that international arbitration practice is generally to award a market rate or a reasonable commercial rate under similar circumstances. The Tribunal thus awarded compound interest at the New York Prime Rate calculated from the date of the Award until the date of payment in full.

Costs, Enforcement, and Taxation:

The Tribunal observed that the case was of exceptional volume and complexity and that while Mobil had prevailed on liability, it had lost in substantial part on the quantum it sought. Similarly, while PDVSA had failed on jurisdiction and liability, it had prevailed to a large extent on quantum. Considering the exceptional magnitude and complexity of the case and the respective strengths and weaknesses of the parties’ cases, the Tribunal held that each party should bear its own costs and that the costs of the arbitration should be equally shared.

The Tribunal further mentioned that while it had no competence to rule on enforcement, the assets that Mobil had attached in New York valued at approximately US$315 million, plus accrued interest, should be used by Mobil to partially satisfy the amount of the Award.

Finally, in order to prevent unjust enrichment, ensure that Mobil would not be subject to double taxation, and comply with the framework of the joint-venture agreement, the Tribunal directed PDVSA to pay the amount of taxes deducted and retained in connection with the indemnity calculation and to indemnify Mobil against any attempt by the Venezuelan Government to impose liability on Mobil in connection with those taxes.

El Paso Energy International Company v. Argentine Republic1

Date of Award:

31 October 2011

The Parties:

El Paso Energy International Company (Claimant), Argentine Republic (Respondent)

Sector Involved:

Energy (electricity and hydrocarbons)

Applicable Treaty:

US - Argentina Bilateral Investment Treaty (“BIT”)

Members of the Tribunal:

Lucius Caflisch (President), Piero Bernardini, and Brigitte Stern


El Paso is an international energy company that invested in the Argentine companies CAPSA, an oil producer, and CAPEX, an electric power generator (collectively, the “Companies”). El Paso alleged that from December 2001 onward, Argentina took measures that breached undertakings it had assumed when the investments were made, which rendered the investments largely worthless and prevented the Companies from functioning independently. In June 2003, El Paso sold its shares in the Companies, citing Argentina’s ongoing measures and the dim prospects for a return to a stable investment environment.

El Paso subsequently initiated ICSID arbitration, alleging that the measures violated several provisions of the US - Argentina BIT. The Tribunal ultimately found Argentina liable for breach of the fair and equitable treatment standard under Article II(2)(a) of the BIT and rejected Argentina’s defenses under Article XI of the BIT and customary international law. The damages were determined as set forth below with the help of an independent expert appointed by the Tribunal.

Calculation of Damages


Before assessing the amount of damages due to El Paso for Argentina’s breach of the fair and equitable treatment standard, the Tribunal considered the element of causation, which had been raised by the parties.

El Paso’s Position:

Argentina had argued that El Paso’s losses were due to macroeconomic conditions (i.e., that El Paso had “bought high” in 1997 and “sold low” in 2003), and therefore it should not be allowed to recover damages for the “business risk” inherent in such a divestiture. El Paso protested that this assertion was misplaced for two principal reasons. First, its claim was solely for the loss of value due to the government’s measures in violation of El Paso’s legal and contractual rights, which would have occurred whether El Paso sold or not. Second, the discounted cash flow (“DCF”) analysis of El Paso’s expert had removed any effect of macroeconomic conditions, such that damages comprised only effects resulting directly from the government’s measures.

Argentina’s Position:

Argentina stated that for a causal connection to exist, the government’s measures had to be the proximate cause of the loss. El Paso did not deny this characterization. Argentina went on to say that, as determined by international tribunals, damages must be the natural and normal result of the act, as well as a reasonably foreseeable consequence of the act, or the intention of the perpetrator. Argentina contended that El Paso had not proved the causality link but rather confirmed causing the losses through its own acts (i.e., its decision to sell its assets during the financial crisis in Argentina).

Tribunal’s Analysis

The Tribunal started its analysis by affirming that it shared the view of other tribunals that the test of causation was whether there was a sufficient link between the treaty violation and the alleged damage. The Tribunal held that the test was satisfied here.

The Tribunal went on to say that it could not be denied that general economic conditions were taken into account by El Paso when it decided to sell. Nonetheless, contrary to what Argentina asserted, the Tribunal held that “there is no contribution by the Claimant to a loss it suffered due to its own conduct, in the absence of a willful or negligent action by Claimant.” The Tribunal had already concluded, in its analysis on liability, that the measures were the prevailing cause of El Paso’s decision to sell. Additionally, the Tribunal was satisfied that El Paso’s DCF analysis included only the effects of the government’s measures; this had been confirmed by the Tribunal’s appointed damages expert.


El Paso claimed for the loss in value of its Argentine assets as a result of the government’s measures. El Paso’s experts estimated the compensation owed using two valuation methodologies: the DCF method and “transactions” method. The former sought to measure damages as the difference between the value of El Paso’s stakes in the Companies with and without the measures, while the latter sought to measure damages as the difference between the hypothetical “but for” sale price of El Paso’s stakes in the Companies in the absence of the measures, as compared to the sale proceeds that El Paso actually obtained from its divestiture in 2003. The Tribunal chose the DCF.  

The Tribunal first observed that the BIT did not articulate a standard to evaluate damages where there had been a breach of the fair and equitable treatment standard. In such a scenario, the appropriate standard of compensation was that found in the Factory at Chorzów case (i.e., that reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation that would, in all probability, have existed if that act had not been committed). The Tribunal referred to other cases involving Argentina where treaty breaches other than expropriation had been found and in which tribunals had held that “damage should compensate for the difference in the ‘fair market value’ of the investment resulting from the breach of the BIT.” The Tribunal adopted this approach as well.

As a result, the Tribunal compared the “actual” and “but for” values of El Paso’s stakes in the Companies, which represented the fair market value of each Company with and without the effect of Argentina’s measures. As to the valuation date, the Tribunal, in keeping with the reasoning of the Chorzów Factory case, concluded that it should take account of events up to the moment when compensation was paid.

The Tribunal had to address several additional issues before it could decide on the amount due to El Paso, to wit:

The WAAC: The Parties’ experts had arrived at “widely divergent” discount rates. Both rates were criticized by the independent expert appointed by the Tribunal, who calculated discount rates of 15.45% for electricity and 15.43% for hydrocarbons.

Debt Discount: The Parties also had opposite views on whether a discount should be applied to the debt value of the Companies. El Paso argued that no discount should apply because the book value of the debt would remain the same before and after the measures. Conversely, Argentina argued that a discount fully attributable to the macroeconomic crisis should be adopted. The Tribunal’s expert agreed with Argentina that a discount rate should be applied to the debt, but he disagreed on the attribution of the discount. He proposed two different discount rates for the actual and but-for scenarios — the former reflecting the negative and continuing impact of the measures and the macroeconomic crisis, and the latter reflecting the macroeconomic crisis only.

Withholding Tax: The Tribunal had previously concluded that it had no jurisdiction over El Paso’s claim for withholding taxes, as this claim fell within Article XII(2) of the BIT’s exclusion (with a limited exception that the Tribunal found not applicable) of tax measures from the purview of the Treaty.

Oil Prices: The Tribunal concluded that the valuation standard it adopted would allow it to consider information that became known after the date of the first measures in 2001, and so it relied on a valuation that included oil prices as of the date of El Paso’s sale of the Companies in 2003.

Benefits to El Paso from Pesification: The Tribunal was satisfied that any benefits to El Paso due to pesification (e.g., pesification of local obligations) had been fairly considered in the expert reports.

Value Collected by El Paso for the Sale of the Argentine Companies: This value was not deducted to determine the damages amount beacuse the DCF damages calculation assumed that El Paso had kept its shareholding in the Companies.

In the end, the Tribunal calculated El Paso’s total damages to be US$43.03 million, exclusive of interest.


El Paso had asked for interest to be awarded at the LIBOR rate plus 2% compounded quarterly. Argentina objected and argued that simple interest should be awarded. The Tribunal was persuaded that El Paso’s proposal was reasonable. It also concurred with the holding in the series of available cases against Argentina that compound interest reflects economic reality and accordingly ordered that interest be compounded semi-annually. Finally, the Tribunal determined that interest would run from January 1, 2002, which was the date to which the amount of compensation was discounted in the Expert’s Report, until the full payment of the amount due.


The Tribunal noted that it had broad discretion in awarding costs and that some arbitral decisions had followed the principle “loser pays,” while others had ordered each party to pay its own costs. In this case, the Tribunal observed that while El Paso had been successful on jurisdiction, it had been only partially successful on the merits and quantum. As such, it found it had good reasons to order the Parties to pay their own costs and legal expenses and bear equally the costs and expenses of the Tribunal and ICSID.