The year-end decision in an arbitration case between ExxonMobil and Venezuela has revealed how widespread is the public ignorance about what is going on in several multi-billion-dollar cases that could have major effects on both the people of Venezuela and XOM shareholders.
The short of it is this: Those who know don’t speak. Those who speak don’t know. That’s how Venezuela works, and that’s why reporting on that country is more interesting and frustrating than reporting on, say, Chile.
All we can hope to do is occasionally find a more or less reliable info leak from those who know and then have the ability to sort wheat from chaff in the leak, a uniquely difficult task. That and the much easier task of ignoring the great mass of blowhards who don’t know what they are talking about (present company included).
Here are a few basic things you need to know about both this case and the other, still ongoing arbitration at ICSID.
- Both were triggered when Venezuela decided to convert the Cerro Negro oil extraction project into a majority-PDVSA joint venture. Everyone agrees that the act constituted an expropriation.
- The concluded case put ExxonMobil up against PDVSA. The ongoing case has the company opposing the Bolivarian Republic of Venezuela.
- Like all legal cases, these are not free-wheeling wide open lovers’ arguments. They are governed by rules, and the judges (or in this case, arbitration panel) have limited room for judgment. They must comply with the letter of whatever contract or treaty created the right to arbitration. In the case of the ICA case, they were governed by the Cerro Negro Association Agreement. In the case of the ICSID case, they are governed by the Venezuela-Holland Bilateral Investment Treaty. You will notice that the latter has a hyperlink because it is a public document. The former has no hyperlink. I don’t have a copy of this document. If you have one, feel free to send it my way, confidentiality guaranteed. My guess is you don’t have one. And I can tell, by reading recent analyses, that almost none of the supposed experts out there have a copy, either. Anyone with a copy could write a most enlightening description of why exactly the ICA came to its decision, but I imagine that people who have such a document are busy attending to their clients, students, or cufflinks purchases.
- Based on my un-lawyerly reading of the BIT, it seems that the big issue in the ICSID case will be how to interpret this clause: “Such compensation shall represent the market value of the investments affected immediately before the measures were taken or the impending measures became public knowledge…” So: What defines “market value?” It could be that such a term is in some way limited by the value decided at the ICA. Is market value based on NPV? Comparables? Future cash flow? Through what period? Also, which “measures” are being referred to here? The market value just before the first act that Exxon claimed to have been expropriatory — year-end 2004 — was probably much lower than the market value at May 1 2007. Or will someone claim that the measures became public knowledge when Pres. Chavez first started talking about a takeover, in January 2006? These dates will make a difference.
- In the end, both PDVSA and ExxonMobil have been relatively professional about this whole thing. There haven’t been any really egregious leaks of confidential information. I’m impressed that even arbitration lawyers and bankers are all referring people to the (excellent) Devil’s Excrement blog. It’s wonderful that a blogger can be such an authority. It’s depressing that supposed authorities are so benighted.
Both PDV and Exxon have repeatedly insisted that this is a commercial conflict and it will all work out. While others (starting with Chavez but also plenty of his opponents) have tried to turn this all into an epic struggle of good and evil, it’s really just an arcane legal dispute in which all the rules of the game were set up long before Hugo Chavez became president of Venezuela. As commenter Dani says at the Devil’s Excrement:
This is not a moral issue, but a business issue. This round was won by Venezuela, who, BTW, had a superb legal team. Maybe next round will be won by Exxon, or maybe there will not be another round, if the two parties reach an agreement.
One tidbit that I find especially ironic is that credit for the recent win needs to be shared between the present and the past. That is, credit is split between PDV’s legal team and some now-anonymous oil company suits who negotiated the contract back in the 1990s. As commenter “paramo” says at the Devil’s blog (my emphasis):
the original contract capped liabilities. Now, Venezuelan authorities should realize that because of that clause they are paying a lower amount of compensation, undoubtedly it could be worse without that cap. The negotiation of the AAs without this liability provision was very difficult because the oil prices during the 90s. But capping the liability was a good strategy by the former PDVSA.
I suspect that more on this will come out soon enough. But not yet. After all: those who know don’t speak (much). Those who speak don’t know (much).
Finally: In an earlier post, I was inappropriately sneering toward people who have not only been good to this site but are also personal friends — the people at Caracas Chronicles. I want to apologize again for my clumsy writing. I meant to poke fun at what I read as Francisco Toro’s dismay about how the ICA case turned out. Instead, I ended up questioning the patriotism of that site’s writers. That was inappropriate.