17

Expert Evidence

Howard Rosen and Matthias Cazier-Darmois1

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 pro-
ducers, 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.2 Variation in
energy prices has also resulted in a large number of commercial arbitrations following the
activation of price review clauses in sales agreements.

1 Howard Rosen is a senior managing director and Matthias Cazier-Darmois is a senior director at FTI
Consulting. They would like to thank Dugald Young for his assistance in researching and writing this chapter.
2 ICSID Case Load Statistics, issue 2016-1, p. 26.

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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 dis-
pute.3 In October 2014, an ICSID tribunal awarded damages of US$1.6 billion (excluding
interest) to Exxon Mobil following a claim brought against Venezuela.4 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.5 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 uncertain-
ties 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 dis-
cussed herein.

3 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.
4 ICSID Case No. ARB/07/27, Award, p. 133.
5 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.

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Role of expert witnesses

Experts are typically appointed to assist the tribunal in making an assessment of the mon-
etary 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 fore-
casted 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 acquisi-
tion 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 loca-
tion, 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 compa-
rable 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 sur-
rounding the transactions in comparable assets) can further compound the issue.

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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 com-
pany 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 valu-
ing 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 conclu-
sion. 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 inde-
pendent assessment.
Party-appointed experts are governed by a set of rules specific to each arbitral institu-
tion. 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.6

6 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.

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This independence obligation can also be governed by self-regulated professional bod-

ies: 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.7 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

7 IBA Rules, Art. 5.2, 1 June 1999.

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experts should rely only on expectations from 2010. Experts therefore, not infrequently,
find themselves having to make predictions based only on the knowledge and expecta-
tions that prevailed at some point in the past. With arbitration proceedings sometimes aris-
ing 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 spe-
cific 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 trans-
late 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 com-
parable 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 com-
mon 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.8
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.9 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 frame-
work 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

8 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.
9 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.

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of 32 expert reports produced by 12 experts (five on the claimants’ side and seven on the
respondent’s) during proceedings.10

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 com-
mon: 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 eco-
nomic motivations of the parties, for example by calculating the financial benefits associ-
ated 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 unbal-
anced 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.11 On the demand side, past investments in fuel-efficient technologies to accom-
modate the soaring costs of fuel, and the slow growth in Western economies led to unex-
pectedly low levels of demand. Collectively, these factors contributed to an unexpected
imbalance between supply and demand with dramatic effects on prices.12

10 ICSID Case No. ARB/06/11, Award, p. 31.

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

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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.13
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.14 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.15 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.16
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 bil-
lion). 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

13 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).
14 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).
15 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.
16 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).

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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 2015.17
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.

Conclusions
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 pro-
vision 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?

17 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.

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