Phillips Petroleum Company Venezuela Limited, Conocophillips Petrozuata B.V. v. Petroleos De Venezuela, S.A., Corpoguanipa, S.A., PDVSA Petroleo, S.A

Case summary

At a glance

Parties: Phillips Petroleum Company Venezuela Limited (CPH, Bermuda) and ConocoPhillips Petrozuata B.V. (CPZ, Netherlands) v. Petróleos de Venezuela, S.A. (PDVSA), Corpoguanipa, S.A. and PDVSA Petróleo, S.A.
Case no.: ICC Case No. 20549/ASM/JPA (C-20550/ASM); enforcement: S.D.N.Y. Case No. 1:18-cv-03716
Forum and rules: ICC arbitration under the ICC Rules 2012; seat New York; hearing held in Washington, D.C.
Treaty: None. Contract claims under the Petrozuata and Hamaca Association Agreements and the PDVSA guarantees, governed by Venezuelan law
Tribunal: Dr. Laurent Lévy (President), Prof. Laurent Aynès, Prof. Andrea Giardina
Sector: Oil and gas (extra-heavy crude, Orinoco Oil Belt)
Outcome: Final Award of 24 April 2018 (unanimous, according to the US petition). The wilful breach and hecho ilícito claims were dismissed. The 2006 Income Tax Increase and the 2007 Expropriation were held to be Discriminatory Actions, and indemnity was awarded on that basis. The counterclaim was dismissed.
Amount: Claimed: USD 19.23 billion (wilful breach plus Discriminatory Action indemnity, as of 27 May 2016), or USD 7.31 billion on the Discriminatory Action claims alone. Awarded: USD 1,986,047,214.72 including pre-award interest (USD 489,334,468.87 under Petrozuata; USD 1,496,712,745.85 under Hamaca), plus simple post-award interest at LIBOR. Each side bears its own legal costs. Respondents must repay USD 215,000 of advances on costs and USD 16,200 paid towards the Italian lawyers' fund (MCLF).

The dispute

ConocoPhillips subsidiaries held 50.1% of the Petrozuata Project and an interest in the Hamaca Project. Both were extra-heavy crude oil ventures in Venezuela's Orinoco Oil Belt, set up under association agreements with PDVSA subsidiaries and guaranteed by PDVSA. Between 2004 and 2007 the Venezuelan Government took a series of measures. It abrogated the 1% royalty agreement in October 2004 (Royalty Measure). It imposed an Extraction Tax in 2006 that raised the effective royalty to 33.33%. It raised the income tax rate from 34% to 50% from 1 January 2007. Finally, it took the Projects under the 2007 Nationalization Decree, effective in mid-2007. The Claimants argued that the Respondents wilfully breached the agreements and the duty of good faith, or alternatively committed an hecho ilícito (a tort under Venezuelan law). In any event, they said, the Respondents owed indemnity under the contractual "Discriminatory Action" clauses. The Respondents conceded that the Expropriation was a Discriminatory Action. They argued that the wilful breach claims were not arbitrable and lacked causation, that the tax and royalty measures were not Discriminatory Actions, and that the Claimants had not given the required notice or exhausted local remedies. Corpoguanipa also counterclaimed for a declaration that it could exercise the Hamaca buy-out option.

Key holdings

The Royalty Measure and the Extraction Tax are not Discriminatory Actions, either alone or 'analysed globally' together with the Expropriation. The Petrozuata clause allows a cumulative assessment only on an effects basis, and these measures applied equally to State-owned oil companies. The Government's intent is irrelevant. The Tribunal reached the same conclusion under the Hamaca AA. Award, pp. 79–81
The wilful breach claims against PDVSA Petróleo, Corpoguanipa and PDVSA are dismissed in their entirety, and the hecho ilícito claim is rejected. According to the costs section, the Claimants showed that the Respondents did not perform the agreements from the date of the Expropriation, but the claim failed for lack of causation. Award, pp. 435, 439
The Income Tax Increase and the Expropriation are Discriminatory Actions under both agreements. Because notice was lacking under Section 9.07(e) of the Petrozuata AA, compensation there for the Income Tax Increase runs only from 2013. Award, pp. 425, 435, 439
Quantum used an ex post valuation as of 27 May 2016. The Tribunal largely adopted the Respondents' production, price, inflation and exchange-rate inputs. It rejected most of the Respondents' claimed post-Expropriation additional costs. It held that the Special Contribution (windfall tax), the Social Contribution and the Special Advantage Tax are not Discriminatory Actions and must be counted in the but-for scenario. Award, pp. 342–378, 425–429
Under Article 530 of the Venezuelan Commercial Code, compound interest is not available. Historical indemnities bear simple interest at 12-month LIBOR (Petrozuata) and 3-month LIBOR (Hamaca), and post-award interest is also simple. Award, pp. 379–383, 419
The discount rate is 18%, built on an unlevered cost of equity with a country risk premium of 8.89%. The Tribunal rejected the 2% discount for lack of marketability. It also held that an internal rate of return or hurdle rate is not the same as a discount rate. Award, pp. 398–413
The Respondents owe USD 489,334,468.87 (PDVSA Petróleo and PDVSA, under Petrozuata) and USD 1,496,712,745.85 (Corpoguanipa and PDVSA, under Hamaca), a total of USD 1,986,047,214.72. The award is net of Venezuelan taxes. The counterclaim is dismissed. Each party bears its own costs, and the arbitration costs are split equally. Award, Decision, pp. 439–440

Procedural history

10 October 2014Claimants file two Requests for Arbitration, one for each Association Agreement and its guarantee.
13 January 2015Respondents consent to consolidation of the two ICC proceedings.
27 March 2015Dr. Laurent Lévy is confirmed as President and the Tribunal is constituted. The co-arbitrators had been confirmed on 6 February 2015.
12 June 2015Terms of Reference are signed in New York.
28 November – 10 December 2016Evidentiary hearing at ICSID's facilities in Washington, D.C.
24 April 2018Final Award: Discriminatory Action claims partly upheld; wilful breach, hecho ilícito claim and counterclaim dismissed.
26 April 2018Claimants petition the U.S. District Court for the Southern District of New York to confirm, recognise and enforce the Award.