Archive for January 5th, 2012

Will the Chavez Government Thank The “Old” PDVSA For Saving The Day On The Exxon Arbitration?

January 5, 2012

I know, this Exxon/Cerro Negro stuff is getting boring, you don’t want to hear any more about this dull ExxonMobil arbitration, who won, who lost. But there are a couple of more points that it is important to make, so please bear with me. Hopefully, this is the last post on that matter.

Yesterday President Chavez said that ExxonMobil’s demands for as much as US$ 12 billion was “crazy”. Except that such a demand never took place at the International Chamber of Commerce, but at the World Bank’s ICSID arbitration Court. And that court told ExxonMobil that it could not ask for such a compensation, because its stake in Cerro Negro was not owned by a company from The Netherlands until later, and the company could not ask for compensation for what happened before then.

What we will never hear is Chavez thanking the “Old” PDVSA for a job well done. And he should, because that is exactly what happened. ExxonMobil got in the arbitration exactly what the contract called for. And it was smaller and more limited than people expected, because the lawyers and negotiators of the “Old” PDVSA did a very good job and included a cap or a limit on the oil price that could be used in any such compensation as explained very well by Noel Maurer in his blog “The Power and the Money” via the great Setty.

The key is that the decision by the arbitration panel at the ICC was based essentially on Clause XV of the Cerro Negro Association Agreement, which in 15.2 says:

“Notwithstanding the foregoing, after the first period of six (6) consecutive months during which the Price of Brent Crude Oil is in excess of the Threshold Price, Lagoven CN will not be required to compensate any Foreign Party for any Discriminatory Action(s) with respect to any Fiscal Year in which the average Price of Brent Crude Oil is in excess of the Threshold Price, and such Foreign Party received Net Cash Flow commensurate, after taking into account the effect of the Discriminatory Action(s), with a reference price for the Production produced by the Parties that bears at least a reasonable relationship, adjusted for quality and transportation differences, to the Threshold Cash Flow for such Fiscal Year.”

The key is that Threshold value which I have placed in bold letters. Above that value, there was no compensation. As Maurer explains, that value was US$ 27 in 1996 dollars and inflation adjusted became US$ 37.5 in 2007. Thus, even if oil prices were soaring above this value ExxonMobil could not ask for more.

And thus, thanks to those people of the “Old” PDVSA, all ExxonMobil received was the compensation for the economic consequences from 2007 to 2035 up that cap or threshold value for oil. According to the decision by the ICC panel, this was US$ 12.68 million for 2007 and US$ 894.9 million for 2008-2035. Period. ExxonMobil could not ask for more.

At the ICISD it will be a different matter, as the treaty between Venezuela and The Netherlands talks about “market value”, a much harder to define concept, which has no limitation. What this market value is, or how it is calculated, will depend a lot on the arbitration panel. But in arbitration circles, market value is interpreted in a fairly restrictive way and is usually considered to be something like “What a willing buyer wants to pay a willing seller” to put it in simple non-lawyerly words.

How much can that be? Hard to say. But we can take a stab at it, using the above definition and book value. This is a very approximate way, but it is a reasonable guess.

The price to book value of the shares of most major oil companies ranges from 1.5 for ConocoPhillips to 2.6 for ExxonMobil. If someone, a “willing buyer”, tried to take over any of these companies it would have to pay a premium, to turn the owners into “willing sellers”, of between 30%-50% to current stock market value. That would be as low as 1.95 x book for ConocoPhillips, as high as 3.9 x Book for ExxonMobil.

Applying this back of the envelope estimates to the Cerro Negro property which had a book value of US$ 750 million, then one should expect a range of US$ 1.46 billion to US$ 2.95 billion.There may be other damages and compensations involved fort chaing royalties and taxes, but in terms of market value the answer should be around these numbers. (For ConocoPhillips, that could be as high as US$ 10 billion, those projects were much larger)

That’s my guess.

And after learning about the origin of the arbitration from Maurer, the contract and other various sources, I am changing my score to: ExxonMobil 1, “Old” PDVSA 1, PDVSA 1.