Posts Tagged ‘arbitration panel’

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.

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What the ExxonMobil Versus PDVSA Decision Means For The Country’s Bonds

January 4, 2012

We now have a decision from the International Chamber of Commerce (ICC) arbitration panel. No matter who won or lost, and I am close to ready to review my conclusion to now call it at least a tie, but I just need more info at this time.

The question is: What does the decision mean for Venezuelan/PDVSA bonds?

Well, I think it is very bullish.

It’s simple:

With the decision, I do not expect another one in 2012. While the ICSID could decide before the Venezuelan Presidential election in the Exxon case, I think it is unlikely, and if it does, it will be so close to that event, as to be essentially immaterial. (There will be a hearing in 1Q12 at ICSID) ICC could rule on ConocoPhillips, which is larger in scope, but given how it ruled in the ExxonMobil case, it would likely be also good news.

Thus, there does not appear to be any possible surprises from arbitration on the way to the election, which was one of the biggest uncertainties on the bonds for 2012. Oil could go down, but it could go up too if Iran gets tricky. Thus, based on internal politics, there will be two, maybe three scenarios:

1) Chavez’s health is fine, he leads the polls, get out of the bonds, it will not be received well by those betting on political change.

2) Chavez’ health is not fine, it deteriorates, bonds soar.

3) The opposition does well in the primaries, leads the polls, bonds soar.

But it is unlikely that there will be surprises in the middle, no decisions to screw up your strategy, to use a fairly technical term. Given 1) you get out by mid year, you may lose a little, not much. Given 2) and 3) collect the coupon and enjoy the ride. No ride, nice coupon.   If there is a ride, it will likely your best investment all year. Just like 2011 if you were in the right Venny bonds. (Mostly PDVSA’s)

It’s Venezuelan bond investment at its simplest: Enjoy the carry trade, bet on the upside!

ExxonMobil Versus PDVSA: Arbitration and Numbers

January 2, 2012

By now, people seem a little confused by the victory by Venezuela and PDVSA at the International Chamber of Commerce (ICC) over ExxonMobil.

First, there is a numbers confusion, the first headline (Bloomberg’s) was “PDVSA has to pay US$ 750 million to Exxon”, the second (Exxon’s) was “PDVSA will have to pay US$ 907 million” and now we have a third one (PDVSA’s) saying “PDVSA will pay Exxon US$ 255 million”

As noted by Setty, this is just spinning. Exxon wants to show the largest number, PDVSA wants the smallest and Bloomberg reported the net amount awarded by the arbitration panel after a claim by PDVSA against ExxxonMobil in the amount of US$ 160.6 million for debts ExxonMobil had against PDVSA.

So, these are the true numbers:

In the arbitration case for breach of contract at the ICC, the case was decided against PDVSA in the amount of US$ 907.6 million dollars, which is about the smallest number ExxonMobil could have expected to get, as it represents book value for its 41.7% in the Cerro Negro partnership. Thus, this is a victory for Venezuela, because the amount awarded is small.

From the US$ 907.6 million, you have to subtract the US$ 160.6 million in liabilities ExxonMobil had in Venezuela.

Additionally, ExxonMobil had a New York Court seize US$ 305 million from a PDVSA account, which will now be turned over to ExxonMobil.

Thus, the net amount of cash that PDVSA will have to pay is (US$ 907.6 million-160.6 million-UDS$ 305 million)= US$ 442 million. Additionally PDVSA says ExxonMobil owed Venezuela US$ 191 million from the repurchasing of the Cerro Negro bonds, which is not clear what it means. Those bonds were repurchased by PDVSA in a decision in which ExxonMobil did not participate.

Thus, PDVSA will have to pay less cash, but the award against it was indeed US$ 907.6 million. How much it really has to actually pay or take out of its pocket is a completely different matter.

However, the case is not over. ExxonMobil went to arbitration in two courts: The ICC and the Worlds Bank’s International Center for the Settlement of Investment Disputes (ICSID).

How can this be? How can two parallel cases coexist on the same case? This is the second confusing point.

Well, after calling a good friend who knows his arbitration stuff like nobody I know, it turns out this is perfectly normal.

You see, in the the 90’s when ExxonMobil decided to participate in the Cerro Negro project, it signed a contract with PDVSA and Venezuela (Which was approved by the National assembly). At the ICC, this contract is what was being disputed: the breach of contract by PDVSA or Venezuela when it expropriated the partnership or changed its conditions unilaterally. What is awarded in this court is what the arbitration panel interprets the two sides had agreed upon in that contract.

However, separately, ExxonMobil owned its 41.7% stake in Cerro Negro via a Netherlands-based subsidiary and it so happens that Venezuela and The Netherlands have a treaty to promote and protect mutual investments. This treaty has specific clauses to protect investors from both countries. It is the violations of this treaty that the World Bank’s ICSID arbitration panel is judging upon (A decision is not imminent, there will be a hearing in 1Q12), Thus, the award by the ICSID will be determined by what that treaty says and the violations that may have occurred. This could be larger in scope, as it could include additional compensations and indemnifications.

Thus, at the ICSID the panel may give (or not) ExxonMobil awards to compensate violations such as not being paid before the expropriation, modifying contracts unilaterally, not being treated fair and equitably, discriminating foreign investors from local investors, not guaranteeing payments and many others.

As an example, the treaty specifically states (my free translation from Spanish):

“The parts will not take any measure to expropriate or nationalize investments made by nationals of the other country, nor will take measures which have the equivalent effect of nationalization or expropriation, unless the public interest is invoked and subject to due process, without discrimination and with prior compensation, at market value for the investments and with payment without delay at commercial interest rates.”

Clearly many of these conditions were violated in this case and the ICSID will have to decide on what compensation to award ExxonMobil, beyond what it was established between the parts in the original contract. The wording of the treaty is clearly much different than what may have been contained in the contract (Which I have not seen). In fact, the original contract was not even signed by a Netherlands company, ExxonMobil later transferred ownership to a Netherlands company to enjoy the protection of the treaty.

Thus, it may happen that the ICC awards something and the ICSID does not, or vice versa or both award amounts that are different because they are based on different legal concepts.In the two cases that Venezuela has lost at the ICSID, the award has been roughly book value in any case, but the amounts involved were much smaller.

Thus, the ICSID could give ExxonMobil a bigger award, or not. But for now, score it as: PDVSA 1 ExxonMobil 0.