Monthly Archives: October 2014

Couldn’t happen to a nicer guy

Chile detained Cristian Labbé, the former mayor of the Providencia borough, for allegedly conspiring to kidnap and kill people during the military dictatorship led by General Agusto Pinochet. Labbé was Pinochet’s bodyguard and allegedly served at Tejas Verdes, a major torture and execution center. After the dictatorship, the diverse, but majority upper-middle-class, voters of the Providencia borough repeatedly elected Labbé to be their mayor.

11152010141As mayor, he was known for maintaining the symbols of the dictatorship. He resisted to the end the proposed renaming of September 11 Avenue, one of the main streets through the borough. The dictatorship named the street for the date of the coup that brought Pinochet to power. Locals frequently corrected the street signs to say things like “Mal Día” or “Terrible” instead of 11 Septiembre.

But beyond the symbolic, Labbé also persisted in committing acts that should be considered human rights violations. When students — many as young as 14 — nonviolently occupied high schools across the country to demand educational reform, Providencia was the only place I heard about where police fired tear gas into the buildings to evict them. The use of gas in enclosed spaces continued even when elementary school children were present. Labbé unilaterally closed down schools and tried to expel any students who didn’t live in the borough, despite a supposed national policy allowing students to attend any schools they pleased. In short, he supported the use of extrajudicial punishments, including the brutal corporal punishment of tear gas, against children. When questioned, he scoffed at constituents.

His bullying attitude and a gradual shift in the demographics of Providencia (hardcore dictatorship supporters moving further uptown or just dying off) brought him an electoral defeat in 2012. He was so bitter at the loss that he stopped going to work during his lame duck period. The first meeting of the city council under the new mayor turned into a jubilation by the new regime, who promptly returned September 11 Avenue to its old title, New Providencia.

I don’t know what he did at Tejas Verdes, if anything. It’s now up to the courts to figure it out. In any case, this is another example of Chile showing the more “developed” world how to deal with rights violators.

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Venezuela owes more $$ to Exxon (UPDATED)

In a surprise to no one*, a tribunal at the World Court’s International Centre for the Settlement of Investment Disputes decided that Venezuela was liable for expropriating ExxonMobil’s Cerro Negro heavy oil project and some other assets in 2007. The decision in English is here and in Spanish is here.

The money section is at the end:

, The Tribunal unanimously decides as follows:
(a) the Tribunal has no jurisdiction over the claim arising out of the increase in the
income tax rate for the participants to the Cerro Negro Project;
(b) the Tribunal has jurisdiction over the remaining claims, i.e.:
a. the claim arising out of the imposition of the extraction tax on the Cerro
Negro Project;
b. the claim arising out of the production and export curtailments imposed
on the Cerro Negro Project in 2006 and 2007; and
c. the claim arising out of the expropriation of the Claimants’ investments
in the Cerro Negro and La Ceiba Projects;
(c) the Respondent shall pay to the Claimants the sum of US$ 9,042,482 (nine
million, forty two thousand, four hundred and eighty two United States
dollars) in compensation for the production and export curtailments imposed
on the Cerro Negro project in 2006 and 2007;
(d) the Respondent shall pay to the Claimants the sum of US$ 1,411.7 million
(one thousand, four hundred and eleven million, seven hundred thousand
United States dollars) in compensation for the expropriation of their
investments in the Cerro Negro Project;
(e) the Tribunal takes note in both cases of the Claimants’ representation that, in
the event of favourable award, the Claimants are willing to make the required
reimbursements to PDVSA. Double recovery will thus be avoided;
(f) the Respondent shall pay to the Claimants the sum of US$ 179.3 million (one
hundred seventy nine million, three hundred thousand United States dollars)
in compensation for the expropriation of their investments in the La Ceiba
Project;
(g) these sums shall be paid to the Claimants net of any Venezuelan tax;
(h) these sums shall be increased by annual compound interest on their amount at
the rate of 3.25% from 27 June 2007
up to the date when payment of this
sums has been made in full;
(i) each Party shall bear its own costs and counsel fees
(j) the Parties shall equally share the fees and expenses of the Tribunal and the
costs of the ICSID Secretariat; and
(k) all other claims are rejected.

So, $1.6 billion plus 3.25% compounding interest, which according to my calculator, works out to a nice round $2 billion as of now, growing by another $65 million this year assuming Venezuela delays payment as long as it can.

*Note, the amount may be a surprise to some. I thought the award would be bigger, but it’s within the range that analysts have given for years. In any case, it’s almost 10% of Venezuela’s foreign exchange reserves, so it’s a lot by the Bolivarian Republic’s standards.

MAJOR UPDATE: No, it’s not $2 billion. It’s much less. Law prof and friend of the blog Julian Cardenas writes to point out paragraph 374:

Effectively, the total compensation payable to the Claimants is the amount specified
in paragraph 374 above, less the amount already received by the Claimants under
the ICC Award for the same damage. Double recovery will thus be avoided

And the referenced paragraph 374 says

As a consequence, the compensation to be paid by the Respondent for the
expropriation of the Cerro Negro Project remains in the amount of US$ 1,411.7
million (see para 368 above).

The ICC Award was $908 million. So I think this means the current value of the judgment is more like $1.1 billion. If that $908 million deduction also cuts into the interest owed, the award is less than $1 billion! That would indeed be a surprise, given how ExxonMobil originally demanded $15 billion and even (for a short time) got a Mareva injunction against Venezuelan state assets up to $12 billion. I don’t know how these things work, and additional writing on this will probably be for paying clients. But now you know!

ALSO: ExxonMobil writes with the following rather comment. I’ll just print it verbatim, it’s short:

The decision confirms that the Venezuelan government failed to provide fair compensation for expropriated assets.
Our goal with the arbitration was to seek compensation for the fair market value of assets that were expropriated by the Venezuelan government in June 2007. ExxonMobil recognizes the sovereignty of all nations and, while clearly not a desirable outcome, accepts Venezuela’s legal right to expropriate the assets of our affiliates subject to compensation at fair market value. ExxonMobil’s affiliate engaged in extensive discussions with PDVSA and government officials but was unable to reach agreement on fair compensation.

An edifying video

You could go to Harvard and take classes from Francisco Monaldi. You could hire Eurasia Group’s Daniel Kerner for big bucks. And you could wait months for a meeting with Chevron’s Ali Moshiri. Or you can go to YouTube and watch them speak with remarkable candor about the big picture of oil and gas in Argentina and Venezuela. For free, while you brush your teeth.

As usual, humans are failing. This master class by three of the top names in the industry has, count ’em, 206 views.

Here are a few notes. I took more, but they’re for me. You need to go watch this one for yourself. Continue reading

Alfa’s financial investment ($PRE.to, ALFAA.mx)

ALFA, a big Mexican conglomerate, said in May it had bought 31,437,700 shares of Pacific Rubiales Energy Corp. (PRE.to), or 10% of the company. It disclosed after buying some shares for $18.43, which at the time was a low price for PRE.

Then, in August, Alfa announced it had bought 9 million shares of PRE.to at $21 a share, bringing its total holding to 17%.

We don’t know exactly how much Alfa spent on its PRE.to shares, but we know from Canadian regulatory filings that from May 20 to August 20, Alfa paid an average $21.03 per share, or $489 million.

At that point, things were looking good. Those 53,657,900 shares closed that day at $21.65 apiece, for a total value of C$1,162 million.

Price action since then:

Screen Shot 2014-10-06 at 2.36.47 PM

At the current price of $17.88, that decline works out to a paper loss of $200 million on Alfa’s shares since that Aug. 20 press release. (From $1,162 million to $961 million. Feel free to check my math, I failed basic arithmetic.)

I’m no expert in trading patterns, but I have a theory here.

One of these things is more than $6 billion worth of not like the other

Screen Shot 2014-10-03 at 2.29.39 PM

As of December 31, 2013, PDVSA, Venezuela’s state oil company, faced $2.12 billion in “other legal claims” in addition to the previously completed arbitration cases brought by Gulmar/Kaplan, ConocoPhillips Petrozuata, and Mobil Cerro Negro.  That according to the company’s audited financial statements published in June. (Click for original)

Screen Shot 2014-10-03 at 2.35.58 PM

As of December 31, 2013, PDVSA, Venezuela’s state oil company, faced $8.47 billion in “claims and legal actions” in addition to the arbitration cases brought by nationalized Lake Maracaibo service companies, Tidewater Inc., Simco Consortium, Exterran Holdings, Helmerich & Payne, and the aforementioned Gulmar/Kaplan. That is according to the Bolivarian Republic’s audited financial statements published in June. (Click for original)

But hey, what’s well over $6 billion in potential claims?

PS: I know, on Twitter I implied that this was a $6 billion fraud. That might be a bit harsh, as I think fraud requires an intent to deceive. It’s also possible that the people doing these numbers just don’t know what they are doing.