Understanding Venezuela’s defense against ExxonMobil & ConocoPhillips

Sometime soon, the World Bank-linked ICSID tribunal will announce its awards in the arbitration cases brought by ExxonMobil (XOM) and ConocoPhillips (COP) against Venezuela for 2007 expropriations. What’s six years between friends?

Juan Carlos Boué writes an 84-page (plus notes) publicly available article in English explaining these huge arbitration cases, and why the outcome may not be as favourable (with a u) to XOM and COP as is widely assumed in the USA.

[The XOM and COP decision to leave Venezuela] has been presented as the calamitous culmination of a process whereby, through a mixture of bullying and unilateral measures, the Chávez administration sought to impose extortionate new terms on oil exploration and production activities in Venezuela, which rode roughshod over the vested rights of investors. Chávez’s actions, so this story goes, not only led to suspension of the transfer of managerial know-how and technology from which Venezuela had benefited so handsomely throughout the 1993-2006 period (and without which the gigantic resources of the Orinoco Oil Belt would not have been developed) but, ultimately, paved the way for the involuntary exodus of foreign oil companies from the country and the expropriation without compensation of their assets. That being the case, so this version goes, the aggrieved companies involved were left with no alternative but to initiate legal proceedings against a rogue government and its state oil
company and affiliates.

The picture presented in the paragraph above is drawn in strokes so broad and crude that it reduces the conduct and outcomes of Venezuelan oil policy from 1999 onwards to the level of a mere caricature. Nevertheless, the broadcast and print media have had no qualms about echoing and amplifying it, while a number of OECD governments – most especially, that of the USA – have seemed equally at ease to use it as a premise for taking foreign policy decisions with regard to Venezuela. That such credence should be vouchsafed to unproven allegations raised in the context of acrimonious litigation is hardly unprecedented in the annals of US foreign relations. Unfortunately, as on many a previous occasion, this facile stance contributes nothing towards understanding the real issues underlying, and arising from, a state’s exercise of its sovereign powers to the apparent detriment of the rights (real or alleged) of foreign investors.

If you’re an international law junkie, and I know many of you are, you can read the whole thing here.

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One thought on “Understanding Venezuela’s defense against ExxonMobil & ConocoPhillips

  1. Gustavo Coronel

    Decree-Law 5.200, promulgated by the late President Hugo Chávez on February 26, 2007, required that the strategic Associations formed in the early 2000’s between PDVSA and multinational, private, oil companies to develop the Orinoco region heavy oil deposits be transformed into mixed companies in which PDVSA affiliates were to have a minimum 60 per cent shareholding.
    This decree led to ExxonMobil and ConocoPhillips to abandon the country and initiating four arbitration procedures against PDVSA, two of which have already been decided and the largest two, before the Center for Arbitration of the World Bank, still remain to be resolved. There are rumors about the decision being imminent. In connection with these remaining arbitrations Mr. Juan Carlos Boué, now at Cambridge, England, has written a 100 page analysis of the arbitration, which is highly favorable to PDVSA, see http://www.latin-american.cam.ac.uk/library/WP2Boue1.pdf. I tried to read it but I could not make it. Too long and complicated for my limited legal knowledge. But two things came to my mind:
    1. The final outcome of this arbitration, whatever it is, will be bad for Venezuela. The price that has already been paid for the tensions built around these cases is the almost complete stagnation of activities in the Orinoco region for the last six or more years. The reason is that the momentum the oil companies had acquired, with the upgrading plants in operation and production plans already in force, all of this came to a halt due to the manner the government imposed a change in the contracts. After this conflict not one new plant has been built and production has not increased in any significant way.
    The truth is that Hugo Chavez never had the best of bedside manners when dealing with private multinationals. His insolent attitude was in the best of form when he gave his 2007 ultimatum to the oil companies in the Orinoco region to transform, on the double, their strategic associations into PDVSA’s controlled joint companies. The results of this move are now clear: today the Orinoco region oil development is essentially in the hands of mostly incompetent foreign companies and PDVSA is demanding that they finance the whole operation because the Venezuelan oil company does not have the means to invest the 60 percent share they imposed in the new contracts. The Chavez government never learnt that changes to a contract can be made without conflict only if the two partners sit in a civilized manner to talk about them.
    2. Juan Carlos Boué, the author of the analysis, is not an impartial observer in this litigation. As he himself has said: “From 2005 to the end of 2009, I was special advisor to the Venezuelan Minister of Energy and Petroleum, and sat on the boards of most of the Petróleos de Venezuela (PDVSA) refining ventures abroad: Ruhr Oel Gmbh., AB Nynäs, Citgo Petroleum, Chalmette Refining, Hovensa and Merey-Sweeny LLC. In addition, I led PDVSA’s portfolio management effort to divest some of its overseas refining and storage assets (Lyondell-Citgo Refining Company, Citgo Asphalt Refining Company, Bahamas Oil Refining Corporation), and structured and negotiated the supply contracts for the divested refineries”. Today he is an active consultant and I would assume that his paper was commissioned by PDVSA. Nothing wrong with that except that, if such is the case, its claim to impartiality would be diminished.

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