Archive for February 7th, 2008

UK Court gives ExxonMobil injunction over US$12 billion in PDVSA assets

February 7, 2008

So, ExxonMobil has begun playing hardball with PDVSA over its
arbitration case with the Venezuelan Government. To remind you of the
case, PDVSA tried to force ExxonMobil to give up a majority of its
stake in the Cerro Negro joint heavy crude project. Exxn Mobil held
42.5% and BP 16% and PDVSA the rest. PDVSA and ExxonMobil did not
agree on this and the Government took the company over and they could
ot agree on compensation. The same happened with ConocoPhillips in the
case of Petrozuata.

Today the news came that ExxonMobil has asked and obtained from a UK
Court an injunction for freezing US$12 billion in assets from PDVSA
worldwide, because it fears that PDVSA will dissipate its assets when
and if the arbitration panel overseeing the case rules in ExxonMobil’s

While there seems to be a little panic in Venezuela and abroad over
this and PDVSA and Venezuelan bonds have been dropping like stones
over the news. However, one should be a little more analytical over
this and don’t rush to judgment in my own opinion. While there may be
panic, it is clear that these are simple hardball tactics on
ExxonMobil’s case, trying to force PDVSA and the Venezuelan Government
to reach a settlement n the case or pay up ahead of schedule.

To begin with, one can try to eyeball how much PDVSA owes ExxonMobil.
Based on valuations of other companies that trade in the US stock
market, like Canada’s Suncor, which have sales of fur to five times
larger than those of Cerro Negro, one could get a highwater number of
roughly US$ 8 billion for ALL of Cerro Negro. Given that Exxon Mobil
owns 42.5% of Cerro Negro, we would only be talking of US$ 3.4
billion, if things like country risk premium and the like are not take
into account. In fact, the owners of Sincor, a similar company with
larger production agreed to be taken over by the Venezuelan Government
for an amount of US$ 1.2 billion, certainly well below its fair value
(I guess state owned companies can afford that luxury)

Thus, US$ 12 billion sounds like a huge amount compared to what PDVSA
may owe Exxon, but maybe the number was calculated to stop PDVSA from
selling any of the pieces of Citgo, 100% owned by PDVSA before an
arbitration ruling can be obtained n its favor.

Of course, I am assuming that Chavez will not consider this to be war
or something like that ordering the Government not to pay or
compensate ExxonMobil, in which case the recent shortages seeing
around Caracas in foodstuffs in the recent weeks may be rememebered as
the good old days.

Thus, I see this as a hard ball tactic which will force the Government
to offer ExxonMobii an adequate amount, which it can well afford. The
alternative is that you believe Venezuela will stop paying its
external debt, exporting oil and that type of doom scenario, which I
certainly don’t believe will happen.