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.

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

  1. CharlesC Says:

    As to PDVSA -look at this:
    First, Chavez entertained Humala of Peru and announced on Sunday that PetroPeru
    will be investing in Faja del Orinoco -hand in hand with Humala.
    CHavez lied and exploited the news in front of the world.
    On Monday- in Lima,Peru -a clarification.”No Peterperu will not be investing with PDVSA in Faja de el Orinoco- they don’t have the money -and don’t know when in the future they might (-however they will encourage private investment”)
    On Tuesday- Humala back in Peru -says-the 2 agreements signed were
    a. PDVSA will invest in Peteroperu -southern project IN PERU to develop oil production for export – this is all for Peru.
    [Where will PDVSA get the money- borrowed from China?]
    b. Humala announced that Chavez assured that Peruvians living and working in
    “irregular status” in Venezuela -WILL GET id cards and be allowed to stay…
    some 90,000 + peruvians in Venezuela.

    Funny how – the real news -just doesn’t get clearly presented in Venezuela
    in a timely fashion. No one seems to care if they get it right or not..
    Again, this is an example of Chavez lying.
    And, this is an example of PDVSA being committed (by Chavez) to do something
    that will not benefit Venezuela.
    Also, this is an example of Chavez using everything to further his political (ALBA)
    How did Peru get a piece of Faja de el Orinoco anyway??

    • moctavio Says:

      It goes back to the post above: There is no Government, just Hugo making announcements. Hugo offered a piece of the Faja to Humala, just being a good buddy.

  2. glenn Says:

    It ain’t over until the fat lady sings and her name starts with exxonmobil……

    High dollar lawyers, experience (inlcuding retained staff), and world sentiment against totalitarian thieves will all play a part in the final outcome and in general the result for the “new” PDVSA will be “you cannot get something for nothing, in spite of your contract interpretations. It ain’t over.

  3. moctavio Says:

    I dont think it will happen in 2012 and I predict a similar number above, it will depend on what the arbitrators use.

  4. Dr. Faustus Says:

    Whilst bringing this topic to a close,….it should be further noted that Barclay’s Capital is predicting that PDVSA will have to pay 2.7 billion as a result of the precedent set by the ICC on Sunday. That’s a lot of money no matter how you spin it. The year 2012 is shaping up to be a very expensive year for arbitration cases against PDVSA.


    • Noel Maurer Says:

      Barclay’s seems to be getting things oddly wrong. The ICC decision revolved around the 1998 association agreement. It sets no precedent for ConocoPhillips.

  5. Dani Says:

    I don’t understand your new score, Miguel. If Exxon knew there was a cap in their claim due to their contract. Why not settle off-court, given that PDVSA was willing to negotiate? They would probably have gotten a better deal and would have saved the cost of a trial.

    Either the cap was not as straightforward as you are interpreting it, or Exxon made a miscalculation, or there is more information that we do not have.

    As for the PDVSA legal team (past and present) they all deserve our praises.

    • moctavio Says:

      ExxonMobil likely knew what it could get at the ICC, but there is the ICSID still, why would you settle ahead of that? PDVSA was offering US$ 1 billion, they got US$ 907 million, they could get more from ICSID.

  6. paramo Says:

    moctavio, it has been very interesting the changes on the score and the discussion on this Blog during the week. I have been enjoying all the post and comments and I think we are getting close to a more reliable conclusion. Prof. Maurer’s post was excellent pointing out the right direction of analysis.

    I think the current Venezuelan authorities always criticized that the “Old” PDVSA used these “stabilization clauses” in the AAs. A few years ago, Bernard Mommer declared (during one of the few interviews that he gave in Venezuela): “What you cannot do is bring a lawsuit against PDVSA because the State did this or that. The State responds on its own.” (The interview is available in English on the Pdvsa website)

    In the believe of the Venezuelan Government these clauses are against the interest of the State, and you know what? They can be! Because they can limit, for example, the right to legislate on taxes, which is considered a sovereign right of State. So, in the view of the current authorities they think that PDVSA should have paid US$0 for any Government change on the legislation.That is the reason why the Mixed Company contract model excluded these provisions and also, international commercial arbitration in the contract.

    I think it is essay in politics to criticize the past when you have a barrel over $100 and without considering that the AAs were negotiated with significant low prices. However, I must say that capping at that time at $25 or 27$ was like using the scenario of the 90-91 Gulf War! Maybe a little advantageous for the foreign investor don’t you think? But the country was asking for investment so, these were part of the incentives. That happened then and it is happening now with different provisions but incentives have been approved in recent years again, for the development of the Orinoco belt.

    That is the never-ending dilemma with long-term contracts of 25 to 40 years, as the Physics Nobel Prize Prof. Niels Bohr used to say “Prediction is very difficult, especially about the future.”

    • moctavio Says:

      Well, it is still hard to get a copy of the contract and the decision in order to give an educated opinion, we were guessing book value, because it looked like book value.

      People forget that Venezuela wanted these investments badly. It was mostly financed with bonds and loans from abroad and the coupons were high. But it was well structured. In fact, having the debt issued by the projects was a good model, that I think will have to be repeated in the future as the only way to increase oil production.

      They argue what they want in the end. But in the Chinese loans, the international arbitration clause is included and at the Sigapore Arbitration Court, that how cynical they can be about these issues.

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