ExxonMobil Decision A Win For Venezuela

October 12, 2014

Finally the arbitration panel of the World Bank, the ICSID ruled on the compensation for ExxonMobil over the nationalization by the Venezuelan Government of its Cerro Negro and La Ceiba projects, in a 138 page decision published this week. That there would be compensation there was no doubt by now, the only question was how large it would be and whether the panel would say anything about the relationship between its award and that of the International Chamber of Commerce in New york, where ExxonMobil was awarded US$907 million in 2012, which was covered in detail in this blog.

As expected, both sides claimed victory. The same way that both side fought with extremes during the case, Venezuela saying it had to give little to ExxonMobil in compensation and ExxonMobil asking for absurd amounts that people somehow took seriously in Venezuela. This has led many to believe that Venezuelan won huge, because in the end it will “only” have to pay a total of US$ 1,943 in compensation for ExxonMobil’s 41% stake in the Cerro Negro project. Exxon claimed victory and Venezuela said it was satisfied with the decision and that it would pay after November this “manageable” amount.

But the truth is that the number are not that far away from what analysts believed would happen and they are very far from what either side wanted. In fact, while most estimates were around US$ 10 billion for both ExxonMobil and ConocoPhillips (which is 2.5 times bigger than Cerro Negro), there were estimates as low as US$ 5.6 Billion.

But let’s look at the facts of the case prior to this week:

i) ExxonMobil was asking for US$ 14.5 billion in compensation (page 52 of decision), arguing that if it had not been expropriated, the 120,000 barrels per day (bpd) produced could have been expanded to 344,000 bpd by 2014. While this was feasible, the original project had a target of 120,000 bpd, there was never any authorization to expand it and it was clear none would not be given by the Bolivarian Government. This is typical over reach when you sue, you include everything asking for the moon, hoping the final award will be what you want. Dismissing this absurd request cut ExxonMobil’s claim by a factor of 2.4 to US$ 6 billion.

ii) On the opposite side, Venezuela was only offering US$ 353 million (page 57), based on a price cap set forth in the association agreement, from which the country would subtract US$ 238 million from the repurchasing of the Cerro Negro bonds by PDVSA.  The tribunal dismissed the price cap argument based on the laws that created the association, as well as subtracting the payment of the bonds. .

But let us also look at statements made by Venezuela on the case, which were purely grandstanding: “Venezuela considers the ExxonMobil case closed” said in 2012 Rafael Ramirez, the same one that claimed this week the decision was “just”. Or “the book value is less than US$ 750 million” said Ramirez on a different occasion and that is what would be fair to pay. But the best contrast may be what Hugo Chávez said in 2012 “From now on I tell you: Venezuela will not recognize any decision by that Ciadi (Spanish acronym for ICSID)”, which he said after Venezuela “won” the ICC case.

So, given this. Did anyone score a victory this week?

Let’s look at this week’s numbers and facts:

The ruling: The arbitration panel ruled in favor of ExxonMobil, deciding that it had no jurisdiction over tax increases to the participants of the project, but it did have jurisdiction over the remaining claims, including the imposition of an extraction tax, production limitations imposed by the Venezuelan Government and the actual expropriation of the projects.

No jurisdiction over tax increases means that there would be no compensation for that part. Subtract that from the US$ 6 billion requested.

The Compensation: The final award given to ExxonMobil and its affiliates is: a) US$ 9.0 million for the forced production cuts in 2006 and 2007, b) US$ 1.411 billion for the investment in the Cerro Negro Project c) US$ 179.3 million for the expropriation of the La Ceiba project. This amounts to a total of US$ 1.599 billion dollars plus 3.25% interest since the date of expropriation (June 27th. 2007) to the date on which payment is made. From this amount, the arbitration panel ordered the subtraction of the US$ 907 million awarded by the International Court of Arbitration (ICC) in December 2011, which has been paid in full.

If PDVSA pays this in November, as it has announced, I calculated the interest to be US$ 345.2 million, where I separated the interest due in the original US$ 907 million of the ICC decision, paid in early 2012 and the interest on the remainder US$ 1.1 billion since June 27th. 2007. This gives a total of US$ 1.943 billion for the award, minus the US$ 907, which would give a total bill due of US$ 1.036 billion, assuming PDVSA pays in November.

The award for La Ceiba is easier to judge. ExxonMobil asked for US$ 179.3 million. It was awarded exactly US$ 179.3 million for its half of the project. (The other half was owned by a Canadian company which accepted US$ 75 million in negotiated compensation). A small victory for ExxonMobil.

Obviously the award is on the low end of things, which is the reason that I consider this to be a slight win for Venezuela. But the actual reason the award is on the low end of things is quite ironic: Venezuela argued that country risk (it’s own!) was high and the discount rate used in the calculation of the payment should be near 20%. In the end, the panel used 18% versus ExxonMobil’s proposed 8.5% which made a roughly US$ 1.5 billion difference in the compensation.

This is what Venezuela argued:

“The Respondent (Venezuela) contends that the CAPM methodology is of little relevance in determining the value of an international oil project because it does not take into consideration the country risk. According to the Respondent, Prof. Myers has relied on a single, inappropriate method, whereas Respondent’s experts have used four separate methods, ICAPM and country risk survey (“market acquisition approach”), and backward- and forward-looking data (“make-whole approach”). These four methods resulted in discount rates “within a relatively narrow range”, which the Respondent’s experts averaged, yielding a discount rate of 19.8%”

Thus, the same Government that is always complaining that the markets demand such a country premium when it sells it bonds, turns around and cheers for the high country risk they have created by their mismanagement of the economy. .

Oh! The pretty revolution!

So, technically, ExxonMobil got less because the revolution has made the country so risky. Strange, but not only true, but also correct from a technical point of view. But I don’t believe analysts were using such a high rate in their calculations.

If ConocoPhillips was 2.5 times larger, then you can expect this decision to establish some precedents and that case will be 2.5 times larger, plus a bit more because that panel already ruled Venezuela negotiated in “bad faith” with ConocoPhillips. I don’t know how much that will cost, but say it takes it from 2.5 times to 3 times and ConocoPhillips will be awarded with interest around US$ 6 billion. This gives a total of US$ 8 billion for both cases, below the “average” expected by markets of US$ 10 billion between the two projects.

Yes, it is low, but ISCID awards have always been on the low side, this is after all, the second highest award ever after the Occidental Petroleum-Ecuador case. In fact, two weeks ago, the ICSID awarded Canadian company Gold Reserves US$ 730 million in its arbitration case against Venezuela in an award that surprised many by its large size. The company started asking for US$ 5 billion, was cut down to US$ 2 billion and was awarded US$ 730 million after investing some US$ 300 million in the Las Brisas gold project. Venezuela has not said what it thinks of this award, whether it will pay it or not.

Yeap, a slight win for Venezuela. But I get the feeling the real winners are the lawyers on both sides.

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41 Responses to “ExxonMobil Decision A Win For Venezuela”

  1. Shrillary Clinton Says:

    hey……I just filled up at Costco at $2.84 a gallon. cheapest in years….. ha ! to bad for the clowns that voted for Chavez and the bus driver …..and the russians still want to be paid for all that crappy useless military hardware they sent you…you can’t eat or wipe your butt with those AK-47s

    http://www.worldpoliticsreview.com/articles/14250/falling-oil-prices-push-venezuela-maduro-closer-to-the-edge

  2. Dr. Faustus Says:

    Is this for real? The mouth-dribbling loon from Miraflores has just declared that “oil prices will bounce back.” Can anyone be this stupid?…
    http://www.reuters.com/article/2014/10/15/venezuela-oil-idUSL2N0SA3I720141015

    • Ira Says:

      Can someone educate me?

      How are natural gas prices and oil prices connected? I understand that for certain purposes, like heating and transportation, infrastructure and machinery can be adjusted to use one or the other.

      But aren’t they still two different things?

      I ask because can you put it past Putin to do something horrific to bring up natural gas prices, and how does that immediately, as well as gradually, bring up oil prices?

      • Dr. Faustus Says:

        Interesting point. It’s all basically supply and demand. Oil inventories around the world are very high right now due to the increasing production of shale oil here in the US. Vladimir Putin does indeed want oil prices to go up. How can he do that? A terrorist act aimed at dramatically cutting production in Saudi Arabia. One well-placed explosive device at any of the Saudi pumping stations/refineries along the Persian Gulf would do it. The consequence would likely be 200+ dollars per barrel for 5 years or more. One.

      • m_astera Says:

        Faustus-

        That is the most irrational thing I have seen you post on this site. Makes me question your reasoning ability. Qatar wants to pipe gas to Europe, that is what the Syrian deal is all about. If you don’t get that, I don’t think you have good information.

        • Dr. Faustus Says:

          Actually, I think I did overstate the point. Sorry. The real point is that oil fields and refineries are extremely vulnerable, especially those in Saudi Arabia. Also, your point about the Qatar’s wanting to ‘pipe gas’ to Europe is not quite accurate. They want to freeze the gas, liquified natural gas (LNG), and send it to Europe via tanker, to Rotterdam most likely.

      • Boludo Tejano Says:

        How are natural gas prices and oil prices connected?

        As the honcho at an oil and gas appraisal firm put it to me, gas is priced at a domestic or continental rate, [US], whereas oil is priced at an international rate. IOW, there is plenty of gas production in the US, which brings the price of gas down. There is relatively less oil production in the US, which brings the international market into focus.

        Currently, gas is much cheaper per BTU/Kilocalorie than oil is.

  3. Roger Says:

    In a country where people rely on imports just to survive, to argue, internal or external default is mote. Venezuelans are screwed either way. Venezuela is now on the Oil for food Program (cash and carry) and the chance of increasing domestic production is nil. What can they do? Send out the students to harvest the yuca crop like Castro did with sugar cane? Even Castro would say ” its not the 60’s comrades” Chavez had his chance and blew it. So he and his cronies stole and destroyed the means of production so that they could control the people. Even without the corruption, Venezulans can’t live on oil money alone. That’s the message the government and the people need to get.

  4. JC Garantón Says:

    I enjoyed the article, particularly the approach, as I understood expectations were somehow overblown.

    One feature which I think deserves additional attention (both as per the ICC award and the ICSID panel award) when identifying the burden for the RBV is that payment of the compensation amounts is to be made net of taxes (i.e. the RBV is to bear any tax associated with the payment). As the awards mostly deal with loss of profits, plus interest, the real cost for the RBV of paying the same (at least under a formal budget) should be increased in 50% (the corporate tax rate in place).

    Such a result would not necessarily have been achieved through a negotiated settlement.

  5. Ira Says:

    What happened at the urgent OPEC meeting called for by VZ? Wasn’t that supposed to be yesterday (Monday?)

    I haven’t seen any news on it.

    • Roy Says:

      I heard that the Kuwaiti Oil Minister was quoted as saying, “What meeting? I haven’t heard about any such request from Venezuela.” Which means that Venezuela’s request is being ignored by the other members of OPEC.

      • Ira Says:

        Thanks for the info! I had no idea.

        The media covered Mierduro’s request like it was a real thing.

        Hah…

        “Mierduro.” I just came up with that. I’ll NEVER grow up!

  6. Ralph Says:

    Nah.
    The chavismo was forced to pay, got its arm twisted in the end.
    The only way the regime could call this a “win” would be if they managed to get away with stealing and not paying a cent for it.
    Any amount they pay is a crushing defeat to their idiotic definition of sovereignty.
    On the other hand, it’s yet another loss for Venezuela in the string of calamities brought by the involution.

  7. Glenn Says:

    And not helping the country at all

    ” the economic basket case of Venezuela”

    http://finance.yahoo.com/news/cheaper-saudi-oil-pressure-rivals-220100111.html

  8. Vanita Says:

    Excellent post. I absolutely love this website. Keep it up!

  9. Alberto Says:

    I would like to hear of lawyers payments. How much have Venezuela paid in those 7 years? Are they been reflected in PDVSA annual reports?


  10. The panel´s use of an 18 % discount rate is unsound (Venezuelan bonds historically pay less than 18 %). I have been in the periphery of similar cases in the past, and the upper bound was always set at the country´s historical risked bond rate (the reasoning being that one would rather invest in bonds rather in an investment).

    Another point that should be point out is that neither PDVSA nor ExxonMobil, nor any oil company I´m aware of uses 20 % discount factor. The highest value I have seen is 15 %.

    • moctavio Says:

      Right now they do, but yes, historically is on the high end of things. The amazing thing is that they bought Venezuela’s argument. To me, 18-20% is historically where you have to buy and sell at 12-13% ytm. Yes, I think there is a trade right now.


    • Question: ExxonMobil and PDVSA had taken a loan for the Cerro Negro investments. I think that loan was for 60 % of their CAPEX. If PDVSA paid the loan prior to the JV formation they used to replace the old Cerro Negro venture, then we can consider EMs remaining exposure to be 40 % of 42 %, roughly 16%.

      I realize this isn’t a standard valuation practice, but those loans are also taken as risk hedges. So we can look at it as if the full Cerro Negro was worth about $10 billion. Given that the alternative was to join a JV without international arbitration then exxon Mobil did fine.

      In other words the alternative was to spend money on lawyers and pick up $1 billion or stick around and get nothing. I assume everybody realizes the foreign JV owners don’t get dividends? Those joint ventures are a scam.

  11. Dr. Faustus Says:

    Russia’s advice to Maduro on Exxon, ….don’t pay!

    “If Nicolas Maduro, President of Venezuela, decides to pay ExxonMobil $1.6bn in compensation for the nationalization of an oil project that will be almost a business deal with the devil, and Venezuela will only lose.

    Who does not remember the late Venezuelan President Hugo Chavez calling George W Bush “the devil” in front of the United Nations in September 2006? Or, how he told former British Prime Minister Tony Blair “Go straight to hell, Mr. Blair”? These moments gave us a glimpse of what Venezuela was trying to do, that they meant business with the “Evil Empire.” But eighteen months after Chavez’s death, his heirs appear to be playing games with the devil.”

    http://rt.com/op-edge/195548-venezuela-usa-economic-nationalization-oil/

    • moctavio Says:

      That article is very poor on the facts, people should do a little research when they write. Bunch of ideology without understanding the facts.

    • captainccs Says:

      Why Russia? The article is by an “activist” in Germany, “Mark Bergfeld is a writer and activist based in Cologne, Germany and London, UK. He tweets @mdbergfeld” Looks like another misguided Marxist.

      • Dr. Faustus Says:

        Yes, that’s true. But Bergfeld is a Russian propagandist writing for the very pro-Putin web page “RT.” He represents the Russian party line on many subjects. Why they, the Germans, allow this ‘West-hating’ Russian to live in the lovely city of Cologne is beyond me.

  12. captainccs Says:

    It’s always the lawyers and the money changers who make out.

  13. Dr. Faustus Says:

    Question: What are the benefits to Venezuela by making the decision NOT to default in October. Six billion dollars are being handed-out to the hated capitalists on Wall Street. Hard currency. Real money. For what? Are they really expecting NEW lines of credit from powerful investment bankers in the future as a result? THESE guys are gonna lend more money to these half-baked imbeciles? Really? Does any of this makes sense?

  14. Island Canuck Says:

    Any award against Venezuela these days is a disaster for the government.
    They are virtually broke.

    It’s been reported that imports at the port of La Guaira have fallen from 1500 containers a day to 100.
    Importaciones en La Guaira pasaron de 1.500 a 100 contenedores diarios
    http://bancaynegocios.com/camara-de-comercio-importaciones-en-la-guaira-se-redujeron-a-100-contenedores-diarios/

    It sure sounds like it’s going to be a flaca Christmas.

    • Ira Says:

      Sung to the tune of “Feliz Navidad”:

      “Fla-CA Navidad..

      “Fla-CAAA Navidad…!”

    • Dean A Nash Says:

      If the report is true, this is a disaster for Chavizmo. Lots of people in that supply chain depend on their ‘gifts’ as a regular part of their income. When it starts hitting home like this, you might finally have a chance for some real change. Fair warning, the change will be from bad/very bad to much worse.

  15. Glenn Says:

    I don’t think it’s over until Venezuela pays up the dollars it does not have. Only then can we understand the winners losers.

  16. metodex Says:

    The reds win again. It’s like god is on their side (i do not believe in god,just a saying).

    I’m used to this.What’s next? Nobel for Maduro?

  17. TV Says:

    It’s a slight win for Chavizmo, not necessarily Venezuela as a whole. 😦

    • Ronaldo Says:

      If Exxon was still in Venezuela, would petroleum production have increased significantly?
      If yes, then keeping Exxon in Venezuela may have prevented the deep deep recession Venezuela is currently facing.

      Venezuela is a big loser.

      • moctavio Says:

        Not really, the project was limited at 120,000 bpd. But, if the Government had not nationalized the projects, the money could have been used to add production.

  18. Manuela Says:

    Everybody knew that Exxon had to be compensated, the question was by how much. I heard that in order to avoid going to trial, Venezuela had offered much more than the total compensation amount they finally got. Add to that seven years of legal battles. IMHO, a waste of time, money and resources on both sides.

  19. m_astera Says:

    Is this why there is no beer or motor oil?


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