Discount Cash Flow Valuation of Upstream Oil and Gas Investments
Accounting for Uncertainty in Discounted Cash Flow Valuation of Upstream Oil and Gas Investments∗ by William H. Knull, III, Scott T. Jones, Timothy J. Tyler & Richard D. Deutsch∗∗
Valuing future income streams from the production of oil and gas is a welldeveloped discipline within the industry and among sophisticated investors. Valuations drive companies’ investment decisions and market transactions every day. In the context of resolving disputes, especially international ones, arbitral tribunals are frequently called on to perform a similar exercise: to determine a lump-sum damages award to compensate for the loss of an income-producing asset. Both the arbitrators’ decision and the
industry’s evaluation entail converting projected future net revenues of an incomegenerating property to present value. However, the details of how to make that
conversion remain arcane to the legal non-specialist who nonetheless must advocate or adjudicate a claim based on such calculations. Recent scholarship has made progress in illuminating the doctrines governing the award of compensation in international commercial and treaty-based arbitrations.1 Many
Based upon a paper originally published in the Journal of Energy and Natural Resources Law, Vol. 25, No 3, August 2007.
∗∗
∗
William H. Knull, III, Mayer Brown LLP. Mr. Knull is co-chair of the International Arbitration Group of Mayer Brown LLP. Scott T. Jones, Senior Managing Director, Lexecon, an FTI Company. Dr. Jones is also head of the energy practice for FTI Consulting Inc. Mr. Tyler is counsel and Mr. Deutsch is an associate in the International Arbitration Group of Mayer Brown LLP.
E.g., T.W. Wälde & B. Sabahi, Compensation, Damages and Valuation in International Investment Law, TRANSNAT’L DISP. MGMT. (forthcoming); Irmgard Marboe, Compensation and Damages in International Law – The Limits of “Fair Market Value”, 7 J. WORLD INV. & TRADE 723 (2006); John Y. Gotanda, Recovering Lost Profits in International Disputes, 36
Valuing future income streams from the production of oil and gas is a welldeveloped discipline within the industry and among sophisticated investors. Valuations drive companies’ investment decisions and market transactions every day. In the context of resolving disputes, especially international ones, arbitral tribunals are frequently called on to perform a similar exercise: to determine a lump-sum damages award to compensate for the loss of an income-producing asset. Both the arbitrators’ decision and the
industry’s evaluation entail converting projected future net revenues of an incomegenerating property to present value. However, the details of how to make that
conversion remain arcane to the legal non-specialist who nonetheless must advocate or adjudicate a claim based on such calculations. Recent scholarship has made progress in illuminating the doctrines governing the award of compensation in international commercial and treaty-based arbitrations.1 Many
Based upon a paper originally published in the Journal of Energy and Natural Resources Law, Vol. 25, No 3, August 2007.
∗∗
∗
William H. Knull, III, Mayer Brown LLP. Mr. Knull is co-chair of the International Arbitration Group of Mayer Brown LLP. Scott T. Jones, Senior Managing Director, Lexecon, an FTI Company. Dr. Jones is also head of the energy practice for FTI Consulting Inc. Mr. Tyler is counsel and Mr. Deutsch is an associate in the International Arbitration Group of Mayer Brown LLP.
E.g., T.W. Wälde & B. Sabahi, Compensation, Damages and Valuation in International Investment Law, TRANSNAT’L DISP. MGMT. (forthcoming); Irmgard Marboe, Compensation and Damages in International Law – The Limits of “Fair Market Value”, 7 J. WORLD INV. & TRADE 723 (2006); John Y. Gotanda, Recovering Lost Profits in International Disputes, 36