World
  |
|
Exxon pursues arbitration against Venezuela over seizure of oil assets
Cerro Negro upgrader, Jose complex, Venezuela
By Polya Lesova
MarketWatch
NEW YORK
Petroleumworld.com 09 14 07ExxonMobil Corp. said it is seeking compensation for the expropriation of one of its heavy-oil projects in Venezuela, a move which, if successful, may encourage ConocoPhillips and others to follow suit.
After failing to reach an agreement with Venezuelan authorities over the amount of compensation for the Cerro Negro heavy oil project in the Orinoco River basin, Exxon (XOM:exxon mobil corp filed a request for arbitration with the International Centre for Settlement of Investment Disputes on Sept. 6, the oil giant said in a filing with the Securities and Exchange Commission late Wednesday.
" If you look at Exxon's decision, it is really driven by their belief that over the long run, the regulatory environment and fiscal terms in Venezuela can only get worse, not better," said Alex Gorbansky, managing director of the Frontier Strategy Group.
" So, arbitration gives them essentially the best possible expected outcome on their investment."
" Exxon has historically taken a more hard-nosed approach," he said.
Chavez's nationalization drive
As part of his drive to nationalize key industries, Venezuelan President Hugo Chavez decreed earlier this year that six foreign oil companies make state-run oil firm Petroleos de Venezuela SA (PDVSA) a majority partner in four Orinoco River basin heavy oil projects.
Four of the companies -- Chevron Corp. (CVX:chevron corp), Britain's BP Plc (BP:bp plc) , France's Total SA (TOT:total ) and Norwegian state oil company Statoil ASA (STO:statoil asa ) -- accepted revised terms of their Orinoco production licenses, while Exxon and ConocoPhillips (COP:conocophillips ) refused to bow to what they saw as unfair edicts from the Chavez government.
" Although ConocoPhillips said it is still in talks with the Venezuelan government, we expect the company will follow Exxon's lead due to PDVSA's reluctance to pay fair market value compensation in cash," said Patrick Esteruelas, analyst at the Eurasia Group, in a research note.
ConocoPhillips held a 50.1% stake in the Petrozuata heavy oil project and a 40% share in the Hamaca project, for a combined net book value of $4.5 billion and an estimated market value of around $7 billion, Esteruelas said.
Venezuela, a founding member of the Organization of Petroleum Exporting Countries, was the world's eighth-largest oil exporter in 2005. Chavez, a vocal critic of the U.S., has moved to nationalize assets in several important industries such as electricity, oil and mining, spooking many western investors. He has consolidated his power over the country, controlling Congress, the judiciary and the army.
" If you are a western investor, particularly from America, Venezuela is probably off limits," Gorbansky said. "Europeans have a little more leeway. If you are a Russian company or a Chinese company, you have more opportunities."
The profile of foreign investors in Venezuela is changing from American and European to those from emerging economies, he said.
Exxon to pursue arbitration
In late June, the Venezuelan government expropriated Exxon's 41.67% interest in the Cerro Negro project, the oil giant said in the SEC filing. Exxon also said that the net impact of the dispute on its consolidated financial results can't be reasonably estimated, but the company doesn't expect the resolution to have a "material effect" on its operations or financial condition.
At the time the assets were expropriated, Exxon's remaining net book investment in Cerro Negro producing assets was about $750 million, the company said. The estimated market value of the project exceeded $2 billion, according to the Eurasia Group.
Exxon Mobil's market capitalization stood at $486 billion at the close of trade on Wednesday.
" What Exxon is really trying to do here is take a firm stand and also send a signal to other governments that it is prepared to go to arbitration and is not just going to bend over to a new set of terms," Gorbansky said. "What happens in Venezuela reverberates in other parts of the world and other industries."
It can take from 30 days to six months for the International Centre for Settlement of Investment Disputes (ICSID) to acknowledge jurisdiction over an arbitration request. ICSID is an autonomous international organization that has close links with the World Bank. All of ICSID's members are also members of the bank.
Hearings typically run between three and four years, said Esteruelas from the Eurasia Group.
If the case is successful and Venezuela refuses to comply, Exxon and ConocoPhillips could resort to the courts of any of the ICSID's 143 signatory countries to enforce payment and seize state assets held abroad, Esteruelas said. Venezuela's most vulnerable assets would be those owned by CITGO, PDVSA's subsidiary in the United States, he said.
" Exxon believes that they cannot win in an environment in which there's essentially no respect for the law," Gorbansky said. "If you look at their track record, you can argue that that's fundamentally a very good practice."
Polya Lesova is a MarketWatch reporter based in New York.
MarketWatch 13 09 07Copyright© 2007 MarketWatch. All rights reserved.
Your
feedback is important to us!
We invite all our readers to share with us
their views and comments about this article.
Write to editor@petroleumworld.com
Any
question or suggestions, please write to:
editor@petroleumworld.com
Best
Viewed with IE
5.01+
Windows
NT 4.0, '95, '98 and ME +/ 800x600 pixels