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Editorial Commentary
Oliver L Campbell: ExxonMobil
seek more than net book value
Much has been written about the freezing order granted to ExxonMobil in its
quarrel with PDVSA. Some of it has been distorted in my opinion, and I should
like to give the reader the opportunity to decide if my assessment is valid.Firstly, I do not criticise the government's decision to increase the royalty
rate from 1 to 33 percent and the income tax rate from 34 to 50 per cent for
the operators in the Orinoco Belt. This was not a dicriminatory measure as the
higher rates were the ones already being paid by other oil companies. Also, the
circumstances had drastically changed--oil prices had increased from $10 to over
$60 a barrel--and the operators in the Orinoco Belt were making much higher
profits than originally contemplated.The government had to decide if the original contractual conditions were written
in stone, or if they should increase both the royalty and income tax rates to
reflect current conditions. The Chancellor of the Exchequor in the United
Kingdom has created a windfall tax whenever he thought the companies in the
North Sea were making excessive profits, so PDVSA was in good company when
increasing the royalty and tax burden.The government of a country has to place the interests of its citizenas above
those of foreign companies, and this may mean having to change the original
contractual conditions. Some of my colleagues disagree and uphold the concept
of the sanctity of contracts--so do I in theory but in practice that may not
always be possible.Secondly, let me touch on Resolution 1803 of the United Nations which goes back
to 1962 and establishes 'The right of peoples and nations to permanent
sovereignty over their natural wealth and resources.' The Resolution allows for
nationalization and expropiation and states 'appropriate compensation' shall be
paid. Furthermore, it states that in cases of controversy, 'upon agreement by
sovereign States and other parties concerned, settlement of the dispute should
be made through arbitration or international adjudication.'It is quite clear that under the Resolution ExxonMobil have the right to go to
international arbitration. What is more, that right was already included in the
contract with PDVSA. The Resolution does not define 'appropriate compensation'
but it certainly does not say it should be based on book value. I believe PDVSA
has a very poor case for offering only net book value and that, if the company
wishes to avoid arbitration, it will have to offer a higher figure.Let us assume the circumstances were reversed and the USA decided to nationalize
CITGO'S refineries. The net book value of the assets is probably around $2
billions but, as a going concern, they are worth some $12 billions. Would PDVSA
be happy to receive compensation of only $2 billions? Surely was is good for the
goose is good for the gander.The estimate of $1.2 billion, which appeared in the press as the compensation
payable to ExxonMobil, was based on an extrapolation of the amount paid to
Total]/Statoil. As such, it is not a good guide since these two companies
accepted a sum under net book value but, in exchange, received a sweetener in
the form of extended areas of operation.Much has been made of the fact that the bonds issued by PDVSA have lost a few
points, but that is a risk bondholders take and it does not affect PDVSA
financially. It may mean the company has to pay a higher coupon in future,
though we know investors' memories are very short. PDVSA'S credit rating has
not changed because of the freezing order, and I believe the bonds' value will
soon bounce back.There have also been some alarmist suggestions that cargos could be seized on
the high seas. But nothing physical will happen until the arbitrator decides on
the compensation payable to ExxonMobil, and the action to seize the assets will
only occur if PDVSA refuses to pay the compensation. Though possible, I should
say this was highly unlikely.The ventilation of all this unpleasantness in the international press has hurt
Venezuela's reputation. It could all have been avoided if PDVSA had seriously
negotiated with ExxonMobil from the start. But there is still time to sit round
the negotiating table and come to an agreement that avoids arbitration.Some Venezuelan commentators have questioned the propriety of freezing orders.
They were originally intended to protect a claimant from action by a defendant,
before a court case had been decided, which would put an asset outside the
jurisdiction of the court and so frustrate a judgement. The reader who wants to
know more about freezing orders should type 'Mareva Injunction' in either Google
or Yahoo search engines.Whether ExxonMobil needed a freezing order to protect its claim for compensation
is debatable, but it has made PDVSA take notice which was probably what they
wanted too achieve.
Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in
England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Petroleumworld does not necessarily share these views.Editor's Note: All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.
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Petroleumworld News 02/13/08
Copyright© 2008 Oliver L Campbell. All rights reserved.
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