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Investment Dispute between ExxonMobil and Venezuela

By Oliver L Campbell

The International Centre for Settlement of Investment Disputes has established it has jurisdiction to decide on the dispute between Mobil Corporation and others v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/07/27) with regard to the latter's expropriation of Mobil's assets in the Orinoco Oil Belt.

The request for arbitration was filed on 10 October 2007 and the tribunal's "Decision on Jurisdiction" was made on 10 June 2010. The proceeding took 32 months, but it is hoped the final decision on the award will not take as long. The Tribunal's shock decision was that Venezuela's Investment Law does not assure international arbitration when virtually everybody, including the co-author of the law, thought it did.

There has been certain conjecture as to whether Venezuela will accept the award the tribunal makes, but at no time has Venezuela intimated it would not. The country has signed 28 Bilateral Investment Treaties (BITs) where international arbitration is envisaged. Let us look at three possible bases for the award:

1) Net book value of assets when expropriated . This has been offered by PDVSA and rejected by Mobil. Under Article 6 of the relevant "Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Republic of Venezuela" it is clearly stated that, where expropriation has taken place in the public interest, "just compensation" shall be paid and this is defined as "the market value of the investment" when expropriation took place, plus interest till the time of payment. Thus it is clear that net book value is not an acceptable option, even though companies accepted it as the price for continuing to operate in the Orinoco Oil Belt. .

2) Replacement cost of assets when expropriated . This would apply to Mobil's share in the joint venture of the wells drilled, the crude upgrader and other facilities. It is thought this could come to between $4 and $5 billion.

3) Replacement cost plus foregone profits. This would be as in 2) plus compensation for lost profits during the remainder of the 30-year contract.

Replacement cost in 2) is reasonably simple to calculate and there are many firms with the expertise which could be contracted to do it. However, calculation of foregone profits in 3) is fraught with difficulty, and I am not sure to what extent "just compensation" allows for it. In economic terms, you could say it is the discounted value of the foregone, future profits to the present day. But these profits depend on future oil demand, future oil prices and future capital and operating costs. The interest rate for discounting cash flows over such a long period is also a questionable element.

However, it seems Mobil is seeking compensation in excess of the replacement cost and a figure of $10 billion has been mentioned. But this is well below the figure that would result from including all discounted future profits ("lucro cesante" in Spanish) so, in that light, Mobil's claim does not look inflated even though the Oil Minister believes it is.

The arbitration process contemplates five grounds for the annulment of an award, though this very seldom takes place. The ground must be argued before a separate ad hoc committee and the most common one is that "the Tribunal has manifestly exceeded its powers." However, annulment does not cover preliminary decisions as to jurisdiction, so Venezuela has to abide with the Tribunal's decision that it does have jurisdiction in its dispute with Mobil.

Once the Tribunal has made a decision, "there is no resort to domestic courts against an ICSID award" and enforcement can take place. It is interesting that, in a US court, enforcement of an award was denied in a case where the amount awarded was considered to be based on "guesswork." This means any award made under 3) above should be carefully justified and explained.

Once enforcement can proceed, you would expect all was cut and dried but, as in all legal processes, there are loopholes and execution, i.e. the action to convert specific assets into cash, is not always successful. This is particularly so where the losing party claims sovereign immunity regarding the assets to be realised. It appears the assets should be ones used for commercial purposes and not those regarded as sovereign property e.g. funds belonging to a state which are held in a bank account. Claims of sovereign immunity and the distinction between enforcement and execution are two aspects which can cause potential problems for the party trying to make good his award.

I am no expert on arbitration and have no idea to what extent Venezuela can use sovereign immunity to thwart the execution of an award by Mobil. Neither do I know the basis for determining an award where what has been expropriated is a business i.e. assets which produce an income stream for their owner. May I ask any lawyer with expertise on international arbitration who reads this paper to elucidate both these aspects for myself and other readers?

How Venezuela would meet any award is a matter of conjecture--the easiest way would be to pay with oil. PDVSA would not want any of CITGO'S assets to be embargoed, neither would the banks which lent CITGO $2.1 billion and have the first charge on its assets. PDVSA could sell some assets and the first that comes to mind is its investment in Ruhr Oil. PDVSA supplies virtually no oil to the German refineries so the investment can hardly be seen as strategic. Another possibility would be to sell oil forward to the Chinese for cash, though this would mortgage the future.

In brief, expropriation of Mobil's assets was a nationalistic measure supported by most Venezuelans. It is also contemplated in Resolution 1803 of the United Nations. However, the high-handed manner in which it was carried out, and the fact the dispute could not be amicably settled, has tarnished Venezuela's reputation as a country where foreign oil companies can do business.

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 07/10/10

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