PDVSA-Exxon arbitration in home stretch

The following is all from a preliminary version of the new PDVSA bond offering circular. I am quoting it at length and highlighting in bold the parts that strike me as newsworthy. This is much easier than writing my own article, and in times like these (lots of paid work, not much time to kiss my girlfriend), lazy works for me. Your quick guide: below the jump is news on Exxon Mobil and ConocoPhillips, plus a little note on PDVSA’s provisions.

Mobil Cerro Negro Ltd. On January 25, 2008, Mobil Cerro Negro Ltd. (subsidiary of ExxonMobil) filed an arbitration request before the International Court of Arbitration of the International Chamber of Commerce against PDVSA and PDVSA Cerro Negro, S.A., claiming indemnity under the Cerro Negro Association Agreement (the “Association Agreement”) as well as failure to comply with the terms of a guaranty granted by PDVSA of PDVSA Cerro Negro’s obligations under the Association Agreement. In December 2007, Mobil Cerro Negro had obtained from the Southern District Court of New York an attachment order on funds of PDVSA Cerro Negro, deposited in accounts held in the Bank of New York Mellon. Pursuant to that order, approximately US$300 million of PDVSA Cerro Negro funds remain attached until the arbitration procedure is terminated. Additionally, on January 24, 2008, Mobil Cerro Negro obtained ex parte a worldwide freezing order from the High Court of Justice in London, restricting PDVSA from disposing of certain assets and ordering it to maintain, on a global basis, assets having an aggregate value of at least US$12 billion. However, the High Court of Justice vacated the order on March 18, 2008, upon PDVSA’s application. Ex parte attachment orders were also obtained by Mobil Cerro Negro in The Netherlands, attaching the shares of a subsidiary, and The Netherlands Antilles and Aruba, which have not interfered with PDVSA’s ordinary course of business.

Although the provisional measures proceeding in the national courts were based on an alleged indemnity claim of US$12 billion, Mobil Cerro Negro has reduced its claim in the arbitration to approximately US$7 billion, plus interest. The claim in the arbitration is for indemnification under Article XV of the Association Agreement, which provided that PDVSA Cerro Negro would indemnify Mobil Cerro Negro, subject to certain limitations, for
certain governmental actions defined as “Discriminatory Measures” having a Material Adverse Impact on Mobil Cerro Negro as defined in the Association Agreement. Mobil Cerro Negro claims that various royalty, tax and production cutback measures starting in 2004, as well as the migration process of 2007 which required all associations operating outside of the legal framework established by the Organic Hydrocarbons Law to migrate to the mixed company structure under that law, constituted “Discriminatory Measures” as defined in the Association Agreement, triggering the indemnity obligation of PDVSA Cerro Negro and PDVSA’s guaranty. PDVSA Cerro Negro and PDVSA have raised several defenses to the indemnity claim, including the arguments that the Association Agreement was extinguished by operation of law and that in any event no indemnity would be owed under the terms of the Agreement for various reasons.
The hearing on all issues in the arbitration concluded on September 24, 2010. The parties are in the process of preparing post-hearing memorials to be filed on October 25, 2010, with replies on November 8, 2010. It is expected that a decision will be rendered in 2011.

You get all that? Exxon claim down to $7 billion, decision coming in next 14 months.

On to ConocoPhillips:

ConocoPhillips Petrozuata
On December 30, 2009, ConocoPhillips Petrozuata BV filed a request for arbitration before the International Court of Arbitration of the International Chamber of Commerce in New York, against us under a guaranty of the obligations of our subsidiary Maraven, S.A relating to the Petrozuata Project. ConocoPhillips Petrozuata claims that the subsidiary breached certain of its obligations in respect of certain production cutbacks ordered by the government of Venezuela. The arbitral court was formed in July 2010, and it is expected that the reference terms will be adopted shortly. As of the date of this offering circular, no specific amounts have been claimed by ConocoPhillips Petrozuata BV in said arbitration.

Phillips Petroleum Company
On December 30, 2009, Phillips Petroleum Company Limited filed a request for arbitration before the International Court of Arbitration of the International Chamber of Commerce in New York, against us under a guaranty of the obligations of our subsidiary Corpoguanipa S.A. relating to the Hamaca Project. Phillips Petroleum Company Limited claims that the subsidiary breached certain of its obligations in respect of certain production cutbacks ordered by the government of Venezuela. The arbitral court was formed in July 2010, and it is expected that the reference terms will be adopted shortly. As of the date of this offering circular, no specific amounts have been claimed by Phillips Petroleum Company Limited in said arbitration.

ConocoPhillips Petroleum
On August 16, 2010, ConocoPhillips Petroleum Company Limited filed a request for arbitration against us and PDVSA Petróleo in connection with a Crude Oil Supply Agreement (COSA) between ConocoPhillips and PDVSA Petróleo and the COSA guarantee granted by us relating to such supply agreement. This arbitration proceeding relates to the determination of certain adjustments to the crude oil purchase price pursuant to the adjustment formula set forth in the COSA. The arbitral court is still in the process of formation. As of the date of this offering circular, no specific amounts have been claimed by ConocoPhillips Petroleum Company Limited in said arbitration.

That’s right, there’s nothing bolded there — it’s a bunch of dull decoy distraction. The real action in the ConocoPhillips case is not against PDVSA but against the sovereign, the Bolivarian Republic of Venezuela, where the amount at issue has indeed been declared and is ginormous.

There is a lot of new language about arbitration:

We may incur losses arising from our pending arbitrations and litigation.
We are currently a party to certain arbitrations and numerous legal proceedings relating to civil, administrative, environmental, labor and tax claims filed against us. These claims involve substantial amounts of money and other remedies. Several individual disputes account for a significant part of the total amount of claims against us. While we believe that we have provisioned such risks appropriately based on the opinions and advice of our external legal advisors and in accordance with applicable accounting rules, in the event that claims involving a material amount and for which we have no provisions were to be decided against us, or in the event that the losses estimated turn out to be significantly higher than the provisions made, the aggregate cost of unfavorable decisions could have a material adverse effect on our financial condition and results of operations.

Venezuela recognizes the execution of foreign judgments and arbitration awards, subject to certain conditions provided for in Venezuelan laws.
Foreign judgments and arbitration awards rendered against PDVSA can only be enforced against its assets located in Venezuela upon compliance with the effectiveness requirements set forth in the Venezuelan Law of Private International Law, the Commercial Arbitration Law and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Notwithstanding these requirements, given that we are a state-owned company which owns assets that serve the public interest, in accordance with the provisions of the Organic Law of the National Attorney’s Office, the execution of a foreign judgment or arbitration award must be stayed for a period of 45 business days during which Venezuela may take actions in order to prevent the interruption of the public services that we provide in Venezuela.

Recall that I called out PDVSA for not even mentioning the ConocoPhillips arbitration in its last audited earnings statement, and for not mentioning its rather slim $2.1 billion in provisions for lawsuits. But this new document is oriented toward bond investors, who are a bit more litigious. So now PDVSA is covering its ass and saying straight-up the obvious fact that an arbitration loss is going to hurt.

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