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Oliver L Campbell : Arbitration
proceedings still ongoing


I refer to a report by EFE entitled "PDVSA set aside nearly $1.5 billion for arbitration with Exxon and Conoco." The report fails to mention some salient facts. It also includes an unfortunate translation of the comment made in Spanish by the Oil Minister that "those mechanisms are so perverse that if you don't show up they execute you." Happily, if the PDVSA representative does not show up for the hearing before the Arbitration Tribunal, he or she is not executed! What happens is that, as in most judicial proceedings, if you don't attend to present your case then judgement will be given against you. However, PDVSA has employed a firm of US lawyers and also sends its own lawyers to all the proceedings so It is difficult to see where there is any perversity.

The oil Minister boasts about scoring victories over ExxonMobil, but the fact is the battles were lost through two bad mistakes by the latter's lawyers. First, Mobil's lawyers were at fault for not ensuring the company was covered by a Bilateral Investment Treaty (BIT). This did not take place till 2006 when a holding company was formed in The Netherlands. It is not surprising the Tribunal ruled that the claims related to increased royalty and income tax prior to establishment of the BIT should be excluded. Mobil then reduced its claim from $12 billion to $7 billion.

Second, in March 2008 ExxonMobil went to a British court seeking a freezing order--originally called a Mareva Injunction--against $12 billion of assets belonging to PDVSA.. It is not surprisingly Judge Walker threw this out saying freezing orders are upheld "where there is compelling evidence of serious international fraud" and that there was "no suggestion whatever of fraud by PDVSA."

You win some and you lose some. PDVSA argued the Tribunal had no jurisdiction to hear the case, and that the protection of a BIT applies only to the company that is registered in the country with which Venezuela has the BIT and not to its subsidiaries. The Oil Minister forgot to mention PDVSA lost on both counts.

The EFE article implies the $1.5 billion covers only the ExxonMobil and ConocoPhillips arbitration claims. In fact, it includes Tidewater, Exterran, Helmerich and Payne and other cases submitted to arbitration. This provision is patently insufficient and I am surprised the external auditors, associates of KPMG, did not insist on a higher provision being made. Accountants are normally prudent, and I should have expected a provision of about $10 billion composed as follows:

Provision for Arbitration Claims

ConocoPhillips

$5 billion

ExxonMobil

$4 billion

Tidewater, Exterran, Helmerich and Payne and others

 

$1 billion

Total

$10 billion

Compensation awarded under arbitration is a lottery, so the above figures are not estimates but a prudent provision for possible awards--they could end up higher, of course. The $1.5 billion is based on net book value which is what the government offered to pay. However, the BIT between The Netherlands and Venezuela, under Article 6, includes the standard conditions, "Neither Contracting Party shall take any measures to expropriate or nationalise investments of nationals of the other Contracting Party....unless the measures are taken against just compensation. Such compensation shall represent the market value of the investments affected immediately before the measures were taken." Thus it is clear that compensation should be based on market value rather than net book value. The Tribunal will determine what this market value is and give its reason.

05.08.11


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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 08/05/2011

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