Gold Reserve cases vs Venezuela tick on

Get all the background from Reuters’ story today.

For some reason they didn’t include the current legal situation. Court had declared that Venezuela lost the case on default a few weeks ago, on the basis that Gold Reserve said service of process was successful in January and Venezuela never responded. This led to all sorts of gnashing of teeth, especially by a Twitterer named Federico Alves, who has 50,000 followers who like to retweet him. He was going on and on about how this was the worst thing that had ever happened to his country. I told him to chill, that this isn’t a debt default and the case would go on. I am no expert in these things, but the experts I talk to say it will be a while yet before any assets get attached, at least from the US case.

Yesterday, the court agreed with me:

 

So now you know, watch that court in early June. Anyone want to make odds on how long the case drags on? I am starting to think Luxembourg and France are going to go faster.

The most remarkable thing about this whole arbitration situation in Venezuela is that there are now more than $3 billion in well adjudicated claims against Venezuela (Gold Reserve’s $750-odd million, Owens Illinois at around $450 million, ExxonMobil at about $2 billion, plus a bunch of smaller ones), all of them already smaller than the original claims, and it is taking a long time to seize assets. For all the worries by people like me about the possible problems of an international system in which companies can sue countries, it looks like states still have the upper hand. (As Noel Maurer likes to point out.)

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.

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

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)

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.

The mysterious winners of a $644 million arbitration against PDVSA

CORRECTION 21 October 2015:

I have learned that the billion-dollar contract referred to in this report was not just for ship rental. It was also for the provision of ship crews, divers, and geotechnical engineers, and other professionals for the full project of pipeline mapping, repair and replacement.

AND AN UPDATE: Pdvsa said in its 2014 annual report that it paid this award.

========================================

PDVSA, Venezuela’s state oil company, released financial statements last month. One of the more remarkable items in there was a $644 million loss for an arbitration award in a case that I had never heard about before — and no Venezuela expert I’ve talked to had heard about, either. This is all that PDVSA has ever disclosed about the case:

In November 2013, the award related to the arbitration request filed by Gulmar Offshore Middle East LLC and Kaplan Industry Inc. was issued against PDVSA, corresponding to early unilateral termination of contract by PDVSA. The award established a compensation of $644 million.

That is a tremendous amount of money. I wrote last week in REDD Intelligence (subscription needed to read) about what this surprise means for Venezuela’s country risk. Here, I’m going to focus instead on what we know about the companies that won this money.

I had only heard of Gulmar Offshore as one of a long list of companies with assets that Venezuela expropriated back in 2009. I had never heard of Kaplan, as it was misspelled in the initial announcement (good English analysis here) as “Kapplan.”

Gulmar was, and is, a company that leases vessels for undersea projects in the oil industry. It was later purchased by Oaktree Capital Management (more on them later). Back in 2009, I had a hard time reaching them; for this article the one phone number I found didn’t even ring and Oaktree’s lawyer didn’t respond to an e-mailed request for comment.

Kaplan is more difficult to pin down. Bloomberg said that Kaplan was a gas-cylinder manufacturer from New Jersey. Oops! That’s Kaplan Industries.

Kaplan Industry website, unchanged since 2010

No, this was Kaplan Industry. At the top of its web page, it says it’s “An engineering design firm.” Then in the text, it’s “a leading independent international development consultancy.” The confusion may have come about as the website was thrown together, almost entirely plagiarized from other sites. The home page is from Adam Smith International, some of the “About” page is from Secunda Canada, and the line “Having fun inspires creativity, which rouses fresh ideas that we take to our clients” is from Zain Public Relations. Yes, having fun inspires creativity. And nothing demonstrates creativity like “copy-paste.”

No one answered at any of the three phone numbers listed on the website. Company president Vince Hulan didn’t respond to e-mails sent to the address on the website, including one e-mail asking specific questions about the plagiarism and other concerns raised in this article. Four lawyers connected to the company and its principals also failed to return calls and e-mails.

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.

Venezuela arbitration watch: Saint-Gobain Performance Plastics

I have never heard of this “Bolivian Republic of Venezuela” defendant, but maybe they mean Bolivarian. Anyway, Saint-Gobain is the parent company of NorPro, which made proppants — little ceramic balls — at a factory in Venezuela that got nationalized on a rainy night in 2010. And now there’s a new case called “Saint-Gobain Performance Plastics Europe v. Bolivian Republic of Venezuela” and you can see it on the ICSID website if you so please. And you owe me one, cause those direct links to ICSID pages aren’t easy to come by.

Venezuela now has 21 officially pending cases at ICSID, rapidly closing in on leader Argentina, which has 25. Noel Maurer wrote the other day about Argentina and Icsid and if you care about these things you’ll like his article.

Polar vs. Venezuela — interesting news that got lost in the shuffle

Amidst the flurry of news in the middle of February — Chavez cancer, Venezuela shipping diesel to Syria, my folks coming to visit — I never even noticed this article come out. But man, it’s interesting. I had no idea that Empresas Polar had taken the Venezuelan government to international arbitration. This is at least the second case of an ostensibly Venezuelan company using a foreign shell company to get protection under international arbitration rules, rather than being stuck with the rather weak protections of Venezuela’s domestic court system.

Let the brainiacs at Reuters tell the story:

Top Venezuela firm files arbitration against Chavez government

(Reuters) – A Barbados-based holding company led by executives of Venezuelan food and beermaker Empresas Polar has filed an international arbitration claim against President Hugo Chavez’s government over its nationalization of a fertilizer project, documents show.

The move may set a precedent for Venezuelan companies seeking access to international courts to settle disputes with the socialist government that otherwise would be litigated by local judges, who critics say are controlled by Chavez.

You can read the whole thing here.