Accounting for uncertainty in discounted cash flow valuation of upstream and gas investments

The discounted cash flow method of valuing upstream properties in calculating damages in international arbitration is now widely accepted. However, an essential component of that process - accounting for the risk that projected revenues would not have been received - remains poorly understood and has been at best incompletely explained in the few reported arbitral decisions to have addressed the issue at all. The result is a lack of predictability and transparency on an issue that can dramatically affect damage awards, creating actual and potential problems for parties, advocates, arbitrators and the legitimacy of the arbitral process alike. This article will address applicable economic principles in the context of the legal rules defining damages and examine the treatment of the issue in the principal arbitration decisions. This document is reproduced by kind permission of the International Bar Association, London. © International Bar Association