Venezuela drastically cuts down nationalization compensation to Exxon
Caracas agrees to pay less than one third of $908 million awarded to US oil giant by arbitration ruling • World Bank tribunal has yet to decide on case
CARACAS (Reuters) – Venezuela’s state-owned PDVSA (Petroleos de Venezuela SA) said on Monday it will pay Exxon Mobil Corp. $255 million in compensation for nationalized assets – less than a third of what the US oil giant said it was awarded by an arbitration panel.
The South American OPEC member’s state oil company issued a defiant statement saying it was deducting debts owed by Exxon, including PDVSA’S repurchase of bonds linked to the nationalized project.
That cut down the panel’s award of $908 million, PDVSA said, adding it would make the payment within 60 days. The first figure represents less than ten percent of Exxon’s initial claims.
Paying only $255 million would leave Exxon with only a fraction of the more-than-$10 billion it had originally sought in compensation. It would be a major victory for Venezuelan President Hugo Chavez, one that could give oil-producing nations more power in nationalization disputes with global energy companies.
But Exxon still may come away with a larger payment because it is pursuing a separate case against Venezuela through the World Bank’s arbitration tribunal. Both cases deal with the 2007 nationalization of the Cerro Negro project in the vast Orinoco heavy crude belt, one of the world’s biggest crude reserves.
This week’s ruling was made by a tribunal of the Paris-based International Chamber of Commerce (ICC), which calls itself the world’s leading institution for resolving international business disputes.
The $908-million ruling is less than the $1 billion Venezuela offered in compensation in September.
“The decision [by the ICC panel] shows PDVSA was right in believing Exxon Mobil’s demands were completely exaggerated and sets the payment at a lower amount than what was claimed,” PDVSA said in its statement on Monday, calling Exxon’s original claims “completely exaggerated and lacking any logic.”
An Exxon spokesman did not immediately respond to an email asking for reaction to PDVSA’S comments. Venezuela also faces more than a dozen pending claims from companies like Conocophillips resulting from a wave of state takeovers.
“They must be elated that they got off so cheap. It’s certainly a happy new year for Venezuela,” said Russ Dallen, the head bond trader at investment bank Caracas Capital Markets.
“But what gives Exxon hope is that it’s only the first of two arbitration proceedings.”
In addition to the ICC claim, Exxon filed for arbitration with the World Bank’s International Center for Settlement of Investment Disputes (ICSID) over the same issue. An Exxon spokesman said that case was scheduled to be argued next month, and that the date for any verdict was not yet known.
Prices for Venezuela’s widely traded bonds are likely to react positively to the news given some expectations that the award could have been higher, Dallen said. Venezuela’s sovereign debt and PDVSA’S bonds may get a lift on Monday.
A limited payout in the claim will help the socialist Chavez continue to boost state spending on public assistance and housing for the poor in the run-up to his October re-election bid, which is seen as the toughest of his 13 years in power.
The dispute between Exxon and Chavez became symbolic of the conflict between countries seeking more revenue from the booming oil industry and companies insisting on respect for investments and compensation for state takeovers.
The ICC decision appears to award Exxon a sum close to the $750 million it said it invested in the project – the amount Venezuela initially said Exxon deserves following the takeover.
But Exxon insists it should also be compensated for the increased value of the project, which at its outset in the early 1990s was considered risky because of low oil prices and uncertainty about the relatively untested operations to turn tar-like Orinoco oil into valuable light crude.
“Exxon took a risk when they went in. I’m sure they were expecting more than just making their money back,” said Dallen, adding that it will be hard to reach a definitive conclusion about what the decision means until more details are released.
The Exxon spokesman told Reuters the company was still reviewing the more-than-400-page ruling.
In 2007, Venezuela bought back $630 million in bonds issued to finance the Cerro Negro project, which Dallen said may have figured into the calculation of the award.
Local analyst Asdrubal Oliveros of Ecoanalitica estimated the value of Exxon assets in Venezuela at around $4.5 billion.
Conocophillips was an investor in two of the four Orinoco upgrader projects. Exxon and Conoco, who had in total asked for as much as $40 billion in compensation, both left the country after the nationalizations.
Venezuelan Energy Minister Rafael Ramirez has said the country does not expect to pay more than $2.5 billion for the combined total of the claims by the two companies. PDVSA said in a debt prospectus it had set aside $1.5 billion in provision for litigation as of the first half of 2011.
Venezuela‘s outstanding arbitration claims include disputes with Swiss cement-maker Holcim and Canadian miner Gold Reserve Inc., which could force it to make large payouts.
Chavez’s steady push to boost control over the country’s oil industry started in 2004 and was followed by similar efforts in oil-producing countries ranging from Ecuador to Kazakhstan.
Critics say his nationalization drive has slowed foreign investment that could help lift Venezuela’s crude production, which has been stagnant for years, and left fewer companies interested in its oil fields.
Relations between Exxon and Venezuela were particularly acrimonious. In 2008, Exxon won an injunction against PDVSA to freeze up to $12 billion of its assets, a ruling that was quickly overturned but triggered furious criticism from Chavez.
Oil companies have remained eager to invest in the Orinoco belt, which is considered one of the world’s largest crude reserves, with the US’S Chevron and Spain’s Repsol signing investment deals in 2010 for new multibillion-dollar projects there.