PDVSA wins very big against Exxon in arbitration, to pay book value

Venezuelan state oil company PDVSA has been ordered to pay $750 million to ExxonMobil in a four-year-old case before the International Court of Arbitration, Bloomberg reports.

This is a shockingly low amount of money, since PDVSA says the claim was for $6.5 to $7 billion — down from an initialy demand for $12 billion. Venezuela had offered somewhere around $1 billion to settle the case, and now gets off with an even lower award. This means that Venezuela is going to pay only book value to Exxon Mobil. (The NY Times and some other outlets are saying the decision was for a bit more than $900 million, but Bloomberg says that amount was reduced. We shall see.)

This vindicates of Venezuela’s point throughout the proceedings that it should pay no more than book value for expropriated projects. It also serves as a warning for companies that want to take depreciation write-downs on foreign assets. Sure, it’s an easy way to get out of some taxes, but is it really worth it if you end up getting screwed on expropriation?

There remains another case by ExxonMobil against the Bolivarian Republic of Venezuela, and that case has yet to be decided. It could be where the big bucks end up. Exxon and its shareholders must be hoping so. And ConocoPhillips and its shareholders, too, since ConocoPhillips’s claims against Venezuela started at $30.3 billion, and ConocoPhillips’s book values were less than $3 billion.

Also: Devil’s Excrement apparently didn’t spend the day hula-hooping on the beach, and instead was hard at work on the blog. Here’s his take.

A bit of background info after the jump.

Here is what we know publicly about the Exxon claim against Venezuela at the International Court of Arbitration, from a PDVSA bond filing from a few months ago:

On January 27, 2008, a subsidiary of ExxonMobil, Mobil Cerro Negro Ltd. (“Mobil Cerro Negro”) filed an arbitration request before the International Court of Arbitration of the International Chamber of Commerce against PDVSA and PDVSA Cerro Negro, S.A. (“PDVSA Cerro Negro”), claiming an entitlement to indemnity from PDVSA Cerro Negro under the association agreement relating to the Cerro Negro Project (the “Cerro Negro Association Agreement”) and from PDVSA under the terms of a guaranty granted by PDVSA of PDVSA Cerro Negro’s obligations under the Cerro Negro Association Agreement. In December 2007, Mobil Cerro Negro had obtained from the United States District Court for the Southern District 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 completed. 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 proceedings 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$6.5 billion to US$7 billion, plus interest and costs. The claim in the arbitration is for indemnification under Article XV of the Cerro Negro 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 Cerro Negro 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 that the Cerro Negro Association Agreement was extinguished by operation of law and that in any event no indemnity would be owed under the terms of the Cerro Negro Association Agreement for various reasons.