ExxonMobil Awarded US$ 750 million For Cerro Negro Nationalization by Venezuela

January 1, 2012

Well, it is early in the year, but Bloomberg last night reported that the International Chamber of Commerce awarded ExxonMobil “only” US$ 750 million in its arbitration case against PDVSA over the nationalization of its assets in February 2007. This ruling is very favorable for Venezuela, as essentially seems to recognize only book value for the expropriated properties. Exxon had been seeking compensation not only for the expropriated property, but also for the loss in cash flow from the operation of the project. ExxonMobil owned 41% of Cerro Negro, which produced on average some 95,000 barrels of heavy crude per day. The multinational company confirmed the news according to the Wall Street Journal.

ExxonMobil had been asking for US$ 7 billion of which about US$ 747 million were tangible assets. According to Bloomberg the award was for US$ 907.6 million, which was reduced to US$ 750 after a counter claim by PDVSA. But in the end the number looks exactly like book value.

ExxonMobil had also been seeking compensation at the World Bank’s ICSID Court, I am not clear how the two overlap or what judgement in one implies for the other.

If arbitration in the oil projects determines that there will be compensation only for the assets of the projects expropriated, then the total liability to ExxonMobil and ConocoPhillips should be of the order of US$ 3.5 billion, rather than the more than US$ 20 billion being sought by the two companies. Estimates put the loss of cash flow from operations around US$ 9 billion, so that a decision including book value and cash flow would have been expected to be (rough numbers) US$ 12.5 billion.

But if the World Bank’s ICISD decides in a similar manner, the Venezuelan Government would have scored a very important victory in its arbitration fights, which would impact the nineteen arbitration cases at the ICISD against Venezuela.

This should be positive for Venezuelan bonds early in 2012

15 Responses to “ExxonMobil Awarded US$ 750 million For Cerro Negro Nationalization by Venezuela”

  1. Roger Says:

    I would guess that this amount would not even cover the R&D and the proprietary technology involved in bringing Heavy Crude to market. We can also assume that the Russians, Chinese and others allowed to enter into the venture have reverse engineered the technology for pennies on the dollar.

  2. Bill S. Says:

    The nuns must have taught me incorrectly. I thought when you took something belonging to someone else, it was theft. Maybe governments are exempt from morality. No doubt Chavez will say contracts, and equipment, all belong to the ‘people’ so stealing it, or paying far below fair market value, is OK. Did the Saudis do that?

  3. Dr. Faustus Says:

    ooops. Sorry for double post.

  4. Dr. Faustus Says:

    Oh my, that’s an interesting point. I had not considered that. Your argument would be that Exxon made the investment in the Cerro Negro project based on the fact that ‘Venezuelan law’ would back them up were they to run into any financial/political difficulties. Therefore they could demand higher compensation at ICSID, and not just hope for a book value settlement. Thanks for that very interesting analysis. I enjoyed reading your point here.

  5. moctavio Says:

    Not really. Most awards at the ICSID have been for around book value. The problem is that Venezuelan law says that you have to compensate as an ongoing concern.

    • Dr. Faustus Says:

      Oh my, that’s an interesting point. So, Exxon made their investment in Venezuela at Cerro Negro with the knowledge that ‘Venezuelan law’ allowed for compensation based on an entity being an ‘ongoing concern.’ Their risk in the Cerro Negro venture was therefore reduced. They expected that ‘Venezuelan law’ would be upheld at the World Bank, thus allowing for a much larger compensation were the investment to disintegrate. Thanks for that excellent analysis! I had not considered that point.

  6. Dr. Faustus Says:

    “But if the World Bank’s ICISD decides in a similar manner, the Venezuelan Government would have scored a very important victory in its arbitration fights, which would impact the nineteen arbitration cases at the ICISD against Venezuela.”

    But,….but, a precedent has been set. How can ICSID be any different? All of the other arbitration cases will now be forced to follow the ‘book value’ rule. A very strange turn of events. It may be that the treaty laws governing the World Bank will now have to be changed. A company’s liability (and insurance) would be much too great for even the largest corporations, Exxon-Mobil for example, to partake in investments in unstable portions of the world. The Board of Directors of most major corporations could not, and would not, allow such investments under these new ‘book value’ rules.

  7. island canuck Says:

    This is totally OT however I couldn’t let it go by.

    Mexico with a population of 113+ million announced that in 2011 there were 11,890 murders in their country.

    Venezuela with a population of 29- million had 19,000 murders.

    No other comment necessary.

    • Roy Says:

      No comment really needed, but to guild the lily, that is 6.2 times the per capita murder rate of a country that is embroiled in a brutal and bloody drug war.

  8. Mike Says:

    that should be “pyrrhic”…

    • CharlesC Says:

      Faja del Orinoco map is one of the most stupid things I have ever seen.
      Actually, the opposition should publish this map so everyone can see
      how insane it is and what an idiot Chavez is.

  9. Mike Says:

    A phyrric victory causing a red light for the technologically capable big players to invest in Venezuela, or does anybody belive that the Vietnamese Oil Co has the technology to efficiently extract oil from the faja?

  10. […] Also: Devil’s Excrement apparently didn’t spend the day hula-hooping on the beach, and instead was hard at work on the blog. Here’s his take. […]

  11. moctavio Says:

    It would be bad for companies all over. Invite them, let them invest, build the company and then nationalize paying only book value. I think companies will start building different arbitration clauses being more specific about it.

    Take ExxonMobil, as an example, its price book value is 2.7, but if you wanted to but it out right, you would have to pay a premium of 40%, that makes it about 3.7 times book, which would have been US$ 2.8 billion in the Cerro Negro case.

  12. bobthebuilder Says:

    A green light for more expropriations?

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