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VenEconomy: PDVSA's parade continues

 

 

At the close of 2011, an arbitration court of the International Chamber of Commerce (ICC) announced that it had ordered PDVSA to pay ExxonMobil $907.6 million in compensation for the illegal expropriation, in 2007, of 41.67% of the shares in the Cerro Negro Crude Upgrader. The net amount payable, after deducting $160.7 million that ExxonMobil owes PDVSA, would be $746.9 million.

While it would seem that PDVSA did not come off too badly in the dispute brought before the ICC, this was not because it was in the right, but because of clauses that the “old” PDVSA included in the contract with Mobil Oil Company in 1996, according to which any future indemnity would be paid based on a reference price that would not be greater than $27 ($ value in 1996) per oil barrel, adjusted for inflation.  

Based on that, the ICC's arbitration court calculated the project's cash flow up until 2035 (the year in which the contract would have ended) at a reference price of $37.50/bbl (2007 price) and not at $100, which gave the figure of $907.6 million in compensation. In other words, PDVSA is paying exactly what ExxonMobil is entitled to under the contract.

It is worth mentioning that this arbitration case was for breach of contract. Still pending is a second arbitration case filed before the World Bank's International Centre for Settlement of Investment Disputes (ICSID) for violations of the Investment Treaty between Venezuela and Holland (headquarters of the subsidiary company that holds Mobil's shares).

Reactions from the government have been confusing. On the one hand, it said that the ruling came from the ICSID, not the ICC -and Chávez even threatened to withdraw from the ICSID-; and on the other, it stated that it would only recognize indemnity of $225 million.

Later it clarified that it was prepared to pay $560 million (= the $255 million already mentioned plus the $305 million that have been frozen in one of PDVSA's accounts in New York since the start of the case).

Moreover, it would seem that PDVSA is refusing to recognize the remaining $187 million, claiming that ExxonMobil would have to pay $191 million corresponding to an alleged assessed share of the repurchase, in 2008 and 2009, of Cerro Negro bonds.

There are no grounds for this claim, as the purchase of the bonds was made after the expropriation took place and, in any case, it did not affect the net worth of Cerro Negro. It should also be remembered that the purchase of PDVSA and Cerro Negro bonds was made to avoid the obligation to submit reports to the US Securities and Exchange Commission.

The fact that there are still more than 20 disputes awaiting settlement before arbitration courts is quite another kettle of fish. And more important than any arbitration rulings that might be handed down is that each of these cases serves as a reminder to potential investors that, in Venezuela, contracts are not respected, which is why they do not risk investing their money here


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VenEconomy has been a Venezuela's leading specialized publisher on financial, political and economic data since 1982. VenEconomy's Points of View on the issues of the day, as seen by VenEconomy during the last week. Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was originally published by Veneconomy , on Dec. 11, 2012. Petroleumworld reprint this article in the interest of our readers.


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Petroleumworld News 01/11/2011

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