Lagniappe

 

 

Oliver L Campbell: BITs and pieces

 

The Venezuelan Oil Minister, Rafael Ramírez, is annoyed because oil companies that are not Dutch, such as China National Petroleum Corporation and Eni Spa, can be registered in the Netherlands and so benefit from the Bilateral Investment Treaty (BIT) between the Netherlands and Venezuela. He also complains it was a legal abuse when ExxonMobil asked the Dutch courts to freeze some PDVSA assets. This arose from the former’s dispute with PDVSA about compensation for its investments that were expropriated in the Orinoco Oil Belt. The minister said Venezuela will “denounce” this course of action. In addition, he stated Venezuela will this month challenge the Netherlands’ court decision to impose a freezing order.

As regards BIT protection, the minister may have grounds for annoyance, but he should realise that a company associated with one country can be registered in another--this is particularly so in the case of subsidiaries of large companies. In fact, it is common and is often done for tax reasons and as an efficient way of routing dividends. It is similar to the situation in the USA where large companies incorporate in the State of Delaware because residency is not required and non residents obtain preferential tax treatment. PDVSA has benefited from this by incorporating its subsidiaries, PDV American and PDV Holding, in the State of Delaware.

The legal position can best be understood by quoting an extract from the BIT.

“ The Government of the Kingdom of the Netherlands, and the Government of the Republic of Venezuela (hereinafter referred to as "the Contracting Parties")

Desiring to strengthen the traditional ties of friendship between their countries, to extend and intensify the economic relations between them, particularly with respect to investments by the nationals of one Contracting Party in the territory of the other Contracting Party,

Have agreed as follows

(a) The term ‘investments’ shall comprise every kind of asset.

(b) The term ‘nationals’ shall comprise with regard to either Contracting Party:

i. natural persons having the nationality of that Contracting Party;

ii. legal persons constituted under the law of that Contracting Party;

iii. legal persons not constituted under the law of that Contracting Party but controlled, directly or indirectly, by natural persons as defined in (i) or by legal persons as defined in (ii) above.”

Nationality is only important in the case of natural persons--a company just needs to be constituted under the law of a contracting party. It should be noted that cover will also extend to any companies which the former controls.

It is interesting that Cemex, the cement company which is being nationalised by the Venezuelan government, is known as a Mexican company. However, the investments in Venezuela were made by subsidiaries registered in Spain and the Netherlands. That is why Cemex said any dispute “should be resolved under BITs that Venezuela signed with Spain and the Netherlands.” So it is not just oil companies associated with one country that are registered in another.

Apart from Cemex, two other cement companies, Lafarge of France and Holcim of Switzerland, may be wholly or partially nationalised. It should be noted Venezuela and Switzerland have signed a BIT.

Venezuela also intends to nationalise the steel company Sidor whose parent company, Ternium SA, is based in Luxembourg. The latter is controlled by the Techint Group, an Argentine-Italian conglomerate which is based in Argentina and which was founded in 1945 by Agostino Rocca. Ternium holds 60% of Sidor, the government 20% and the employees 20%.

Venezuela and Argentina have signed a BIT, which is in Spanish, but has similar conditions to the one between the Netherlands and Venezuela. In fact, most BITs have a similar format. Venezuela also has a BIT with Belgium/Luxembourg, though the latter has not yet been ratified.

Cemex and Holcim and Sidor all have recourse to a BIT and, France, through Total, is one of Venezuela’s preferred investors so that Lafarge will be well treated. Mr Rocca has influence with the Argentinean President and Mexico has commercial clout. My point is that all should be adequately compensated and that payment will not be based on book value but close to market value.

The only one that will have to fight for compensation above book value is ExxonMobil, and even they may take heart from the fact that the owners of Cemex and Sidor are being compensated on market value. It is a precedent which may help their case with the arbitrators.

It seems Venezuela and Belarus have recently signed a BIT. I have not seen the treaty, but it should include the following as part of the common format:

“Investments of nationals or companies of either Contracting Party shall not be nationalised or expropriated…except for a public purpose related to the internal needs of that Party…and against prompt, adequate and effective compensation. Such compensation shall amount to the genuine value of the investment expropriated immediately before the expropriation or before the impending expropriation became public knowledge.”

Expropriation for a public purpose is allowed, but compensation should make good the genuine value of the investment.

Since it is so prevalent that a company associated with one country may, for tax or other reasons, be registered in another and enjoy the benefits of its BITs, perhaps the oil minister should reconsider his objection to this practice. The alternative would be to withdraw from some 22 BITs already in force or pending signature. It seems highly unlikely the minister will opt for that course of action.

 

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.

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Petroleumworld News 04/25/08

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