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.

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20 thoughts on “PDVSA wins very big against Exxon in arbitration, to pay book value

    1. sapitosetty Post author

      We’ll have to wait and see, but for that amount of money I think most any oil company could just pay cash. If I had to bet on it, I’d guess that PDVSA will give them some oil, which is how they have paid some debts to multinational oil companies in the past.

  1. Kepler

    Do you think the judge suddenly has 250 million dollars worth in jalea de mango? I mean: judges do take decisions based on something else than a random generator. Or was the defence lawyer one of those Venezuelan girls that make you say “damn, why do I have a girlfriend already?”

  2. sapitosetty Post author

    Exxon got to choose one arbitrator, plus it had to agree on one and it had the opportunity to demand the disqualification of the third. So, no.

    I think you are joking about the other part, but I don’t care. That’s a fucked up thing to say. There are a lot of good lookng lawyers in the world, but in my experience, looks have no positive or negative correlation with competence. Venezuela essentially won the case. Accept that.

    1. Kepler

      Oh, boy, you don’t know some lawyers from the Universidad de Carabobo, born in Valencia.

      Seriously: my jokes have a much profound meaning than any political correctness would let you see (cough, cough).
      What I am ultimately asking is simply: why did the judge take this decision?
      Where is the reasoning?
      It’s quite a remarkable difference and at the end Venezuela got more than it demanded.
      Honestly, I am not taking sides on this issue. It’s Venezuelans’ money, not Chávez’s anyway.

      ” $750 million award is equivalent to 32 percent of PDSVA’s 2010 net income”.
      Wao. So little! Do you have an idea what it was in 2004?

      1. sapitosetty Post author

        Net income is all but irrelevant to a state company. What matter are total contribution to the state, which peaked in 2008 at $38 billion before falling to $13.7 billion last year; and reinvestment in future productivity, which has been stagnant. Reuters & Bloomberg talk about net income because they are accustomed to publicly traded companies.

        1. Kepler

          Thanks.

          This all sounds like the Korean conflict or the UK-EU one:

          Korean according to BBC: “Two Koreans at a turning point”
          El Universal: “Seúl responderá con firmeza a amenaza de Corea del Norte”
          Spiegel about Cameron in Brussels a month ago:
          “Auf Wiedersehen, England!”
          The Sun (no, I never read it, I just checked out the titles for this one):
          “Up Eurs: Euro crisis: Britain stands alone after PM David Cameron’s historic veto”

  3. Editor Petroleumworld

    Sorry, it seems we are not reading the same news story.
    “ExxonMobil wins $900M to PDVSA on arbitration case in Venezuela”

    Is very clear that Venezuela lost the arbitartion case : ExxonMobil vs PDVSA on the nationalization Exxon’s assest in Venezuela.

    The sum awarded is of not relevance for the general busines comunity, the botton line is that the ruling confirmed that PDVSA does have a contractual liability to Exxon Mobil and Chavez can not get away without paying for whatever he nationalized.

    Happy New Year !

  4. westslope

    Nobody is winning big here. And let’s not lose sight of the big losers here: el pueblo.

    E Petroleumworld: Would appreciate it if you would kindly explain why the sum awarded is not important to the business community. There is much more going on here than just the sum awarded but doesn’t the sum still matter? I would expect an inverse relationship between the relative size of the sum awarded and perceived risk even if everybody assumes in advance that arbitration hearings rarely award full compensation at fair market value.

    In some respects Exxon Mobil just punished Venezuela by reminding the world in a salient fashion that Venezuelan government confiscates businesses. Economic property rights are not secure.

    Cost of capital and expertise will remain high.

  5. Editor Petroleumworld

    Ups…, typos corrected!

    Sorry, it seems we are not reading the same news story.
    “ExxonMobil wins $900M to PDVSA on arbitration case in Venezuela”

    Is very clear that Venezuela lost the arbitration case: ExxonMobil vs. PDVSA on the nationalization Exxon’s assets in Venezuela.

    The sum awarded is of not relevance for the general business community, the button line is that the ruling confirmed that PDVSA does have a contractual liability to Exxon Mobil and Chavez can not get away without paying for whatever he nationalized.

    Happy New Year!

  6. Editor Petroleumworld

    We do not all the facts of this case, there are various cases in arbitration courts on Exxon’s assets in Venezuela with different amounts of compensation demanded, inclusive in Exxon’s Cerro Negro Company. So, exactly we do not know which case was the one settle, let’s be patience and see how much Exxon’s end up collecting from all the other cases. The point is Venezuela is to pay up; it is not getting away with a freebee!

  7. Noel Maurer

    Hi, Setty! Been a while; I’ve been busy.

    Anyway, I know people involved in the case. The fight wasn’t about book value versus NPV: on that, the rules are clear — NPV is the only acceptable standard. Rather, the fight was about whether Exxon would be compensated at current oil prices or the prices that prevailed when it initiated the project. In line with other arbitrations, Exxon got the latter.

    While arbitrations do not legally need to follow precedents (neither at ICSID nor elsewhere) most of the decisions that I’ve seen generally use prices prevailing when the project began unless the company can make a credible case that it only invested on the basis of an anticipated price rise.

    Venezuela still won, of course — my only point is that the victory isn’t quite as surprising as it seems. I’ve still been trying to get my hands on that Barclay’s calculation of $3.8 billion. Would you happen to have it? I’d love to know how they came up with that number.

    1. moctavio

      This is what Barclays says:

      Estimating lost cash flow to the expropriated operators leads to a different result from a
      liability perspective. Taking into account Petrozuata’s production of 104mbpd (half of which
      was Conoco’s) and Hamaca’s 120mbpd (of which Conoco’s share was 48mbpd) and
      applying the average margin over the four-year average price for the Venezuelan basket
      (net of royalties) results in roughly $6.3bn of lost EBITDA for Conoco. The same exercise for
      Exxon results in lost EBITDA of $2.9bn.

        1. Noel Maurer

          Actually, thinking about it, that’s a strange calculation. Arbitrations generally assume that enterprise have to pay interest, taxes, and depreciation … and it seems bizarre to use the average margin for all Venezuelan oil and apply them to the Orinoco fields.

          If you have a copy, I would be extremely grateful!

    2. sapitosetty Post author

      Fascinating. I missed that part about the the date of the oil prices.

      I am curious how this squares with what Miguel says about the companies arguing that this was an “empresa en marcha,” and that under Venezuelan law it would therefore be valued differently.

    1. sapitosetty Post author

      The fight isn’t about oil, it’s about an oil extraction project. And if you’re going to get all nationalistic on us, please take it to Hugo Chavez, who is the one who changed Venezuelan policy to now allow companies to book Venezuelan reserves as their own.

  8. stevieb

    Just sayin … given the US/UK history you can hardly blame him for being difficult – even if he’s taking it a bit far.

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