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.

40 Responses to “ExxonMobil Versus PDVSA: Arbitration and Numbers”

  1. Remi Lehmann Says:

    The investment protection treaty was not renewed by the Venezuelan government, probably because of the “Dutch route” mentioned in this article. Of course the treaty is still valid for all pre-2008 investments. And if I’m not mistaken they will be protected for ten more years.

    • theob62 Says:

      dear Remi,
      might you possibly be able to tell me the names of the four Dutch companies PDVSA bought during the first half of this year? my email is contact@inmassociates.com – i understand the PDVSA had bought minority/majority stakes in these firms. hope you can help or suggests ways to find out. best wishes Theo Baal

  2. moctavio Says:

    That is correct, you are granfathered and i think it is fifteen, I may be wrong.

  3. sapitosetty Says:

    Thanks for the linky, and for sorting all this out. Funny how Some Dude on the Internet so often ends up doing clearer reporting than the big newswires. Very useful reporting you did there. That “market value” part is pretty interesting.

    • moctavio Says:

      Well, curiosity killed this cat, even if he did not get the hoola hoop for Christmas :-)

      Well, in the Cemex case, the wires are still reporting the US$ 600 million number….


  4. […] The Devil posts a bunch of very useful and interesting stuff. Go take the party over there, I’m tired and have work tomorrow. Like this:LikeBe the first to like this post. […]

  5. paramo Says:

    “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.”

    This statement is not very accurate. I am quite sure that there is no “book value” method involved in the calculation of this compensation. I think the ICC dispute ruled that PDVSA has a contractual duty to compensate ExxonMobil for adverse material impact caused by government’s discriminatory measures over the contract. This comes from a clause approved in the AA contracts during the Third Round of the Oil Opening. The amounts of compensation are the result of cash flow estimations during a period of time, most probably from 2007 until 2011. So, there is no book value of assets involved in this case.

    • moctavio Says:

      No, cash flow compensation would have been closer to US$ 3 billion, the fact that is close to book value is simply empirical, ExxonMobil’s book value was estimated at US$ 750 million, with which interest would come to around 900 million, but I have yet to get my hands on the decision.

      • paramo Says:

        Yes, I also read the US$3 billion amount for cash flow compensation, but that also depends of how many years of cash flow the arbitrators decided to compensate. I think the book value method is more related to cases dealing with the value of an investment or assets, so, closer to an expropriation claim like the ICSID case. As far as I know, the ICC claim was about indemnification clause, so the method of calculation should be different.


    • Seems like a fair argument, but I’m not sure how one would know this without seeing the decision. ICC prides itself on not making its decisions public. Do you have a copy? And if so would you mind sharing?

      • moctavio Says:

        Nope, have been trying to get one…ICC is about the contract, as far as I understand.

      • paramo Says:

        One factor that maybe useful to identify the method of compensation is the nature of the claim. The ICSID claim is based on the violation of a Bilateral Investment Treaty by the State, in particular, the expropriation clause of the BIT, we know that since has been published in the Decision of Jurisdiction. ICC claim was based on the enforcement of a contractual duty, that was Media said, and more specific, in my opinion, it was about PDVSA’s duty to compensate over government’s discriminatory measures. For different nature of claims there are different methods to calculate the amount of compensation. A source to observe that is the ICSID decision on jurisdiction for this case, it says that “both parties agreed that there was no risk of double recovery”, this means that the nature of the claims are different in nature and so, there is no risk to compensate over the same dispute.


  6. So much for speculation, excellent report !


  7. “Additionally PDVSA says ExxonMobil owed Venezuela US$ 191 million from the repurchasing of the Cerro Negro bonds, which is not clear what it means.”

    PDVSA in late 2007 bought back $630 million worth of Cerro Negro project finance bonds that were issued at the start of the project, or probably prior to the construction phase. If that were split between the three partners it would mean PDVSA paid about $265 million worth of outstanding financing that Exxon Mobil owed as a 42 percent partner. How that later got whittled down to $191 million I do not know, possibly some amortization or some such.

    I haven’t gotten around to blogging about this over at lungsoftheearth.blogspot.com, I’m trying to figure out if I have anything relevant left to say after quality posts like this one and Setty’s.

  8. moctavio Says:

    Yes, but PDVSA decided to do that on its own, there was no need for it. I imagine that if you calculate the value of the company at the time of expropriation you subtract debt. Since there are no details it is all guessing, but you would think that was part of the decision, not something that PDVSA argues on its own.

    I owned those bonds, was sorry to see them go even if they were purchased at a premium, in my opinion they were always undervalued as the projects cash flow was always extraordinary.


    • But wasn’t the bond buyback triggered by the changes in ownership to the project? I can’t imagine PDVSA would have shelled out a bunch of cash if it didn’t have to. But if you owned the bonds you’d know more than me.

      • moctavio Says:

        No, the bond buyback was not required, ExxonMobil did not have control of the project. It was also a very expensive proposition, there were no buyback clauses, so it had to be done at make whole plus 30 bps for the 2009, make whole plus 50 bpf for the 2020 and the 2028’s. In fact, the 2020’s and 2028’s not everyone tendered and there are very small pieces out there. The Venezuelan Government and PDVSA, after 2003, began buying back all of its bonds so as not to have to do filings at the SEC.

  9. Dr. Faustus Says:

    Gosh, this is really good stuff. Many thanks for the effort!

    This quote,

    “…..at market value for the investments….”

    could indeed make the ICSID settlement much larger. Provided, of course, that the English translation from the Spanish was accurate. (Just joking)


  10. At last, a Devil’s good game, it also been commented in Petroleumworld.

  11. firepigette Says:

    Ojo:

    The arbitration ruled that there definitely was a breach of contract by Chavez.That is the main point and not the amount awarded.

    Changing contracts with others at will is how Chavez runs his government and what he is constantly doing to the Venezuelan people themselves.

    As long as we don’t understand that this moral issue is at the bottom of improving Venezuela or not, everything else is secondary.

    • Maria Says:

      “The arbitration ruled that there definitely was a breach of contract by Chavez.That is the main point and not the amount awarded.”

      And that is exactly the type of precedent that Exxon was determined to establish. The money awarded is a bonus.

    • Syd Says:

      sigh. this is NOT a moral issue. It’s a point of contract law. Period. And I agree with Maria on the setting of precedent.

  12. Dr. Faustus Says:

    According to El Universal….

    Exxon-Mobil responded to the ICC decision by putting out this quote from a corporate e-mail….

    …that what “PDVSA has to pay (ICC case) only represents recovery on a ‘limited liability’ and recalled that a “larger” ICSID case is ongoing in another court.”

    It is clear that Exxon-Mobil is looking for even greater compensations at the ICSID court. This ain’t over.

  13. Buster Hymen Says:

    personally Im hoping our next President will have the balls to end all oil purchases from Venz so your whole country can rot to hell ….you people better start learning chinese fast….

    • Kun Says:

      Venezuela sell the oil in USA using CITGO, the goverment of EEUU has nothing to do there, if you want EEUU stop buying oil from Venezuela, then you will have to make that a lot of Americans stop buying gasoline.

  14. Dani Says:

    Buster, Chavez may have screamed a lot, but in the end, Venezuela has been a very reliable oil supply. Even when he went to the UN with the “the devil’s was here” speech, Venezuela kept sending oil. And yes, the US has kept buying it.

    So look at the facts and not the noise.

    Firepigette: I have not read the original contract, but any nationalization is a form of breach of contract because it implies changing the initial rules. The initial contract was signed when oil prices were very low and the technology was considered risky. The situation has changed and now not only Venezuela but also other countries in similar positions want to renegotiate their terms. If they do not reach an agreement, they go to arbitration.

    This is not a moral issue, but a business issue. This round was won by Venezuela, who, BTW, had a superb legal team. Maybe next round will be won by Exxon, or maybe there will not be another round, if the two parties reach an agreement.

    • paramo Says:

      Dani: I agree with your post. States represented by efficient legal teams can achieve good results in international litigation, and Venezuela is not an isolated case. There are other States working with law firms doing an excellent job. So, it seems that International Arbitration is not longer that bias forum in favor of the interest of international corporations. Now States have also International Corporations (A lot of NOCs investing around) and they are having good results in international arbitration (BTW PDVSA was represented by the same law firm who dealt with the 1899 British-Venezuelan arbitration disputing the British Guyana boundary. It seems that they are giving better results now).

      Dr. Faustus, I believe that the ICC arbitration was decided over an indemnification clause included in the AA contract. Having a compensation close to $1billion, as a result of the enforcement if this clause, is not a bad result at all!!!. In fact, It could be ranked as a “high number” compared to other arbitration decisions in the oil sector dealing with the same kind of clauses. The nature of the claim is a key issue because that helps to understand what PDVSA is going to pay to Exxon as a result of the ICC decision. The ICC case was just one part of the dispute.The expropriation claim is still pending at the ICSID.

      The amount of the ICC award was disappointed to many people because the claim started too high, $12billions, and there were a lot of expectations around the Media on this case. It has turned to a bad marketing strategy for Exxon and its law firm.

      • moctavio Says:

        I understand the original contract capped liabilities, that could account for the supposedly low value. We shall see, would love to get my hands on contract and decision.

        • paramo Says:

          Yes, the original contract capped liabilities. Now, Venezuelan authorities should realize that because of that clause they are paying a lower amount of compensation, undoubtedly it could be worse without that cap. The negotiation of the AAs without this liability provision was very difficult because the oil prices during the 90s. But capping the liability was a good strategy by the former PDVSA.

  15. Francisco Toro Says:

    Thanks, Miguel, you totally own this story!

  16. firepigette Says:

    Dani.

    I am simply referring to the arbitration decision which stated that there had been a breach of contract on Venezuela’s part, not to anypne’s personal opinions. or interpretation.

    With that attitude all contracts can be broken at will.This is the same attitude as when Chavez goes to a referendum and when he does not like the results he just goes ahead and does what he wants anyway.If he does like the results he maintains the contract if not ,he breaks it.

    It is a moral issue and not a matter of opinion.

  17. firepigette Says:

    adding:

    I am referring to the implicit contract with the voters that their decision on the subject of the referendum will be respected other wise there would be no need for them to go and vote in the first place.Of course the governments intention is to take credit if the referendum goes its way and disregarded if it doesn’t .


  18. […] impressed that even arbitration lawyers and bankers are all referring people to the (excellent) Devil’s Excrement blog. It’s wonderful that a blogger can be such an authority. It’s depressing that […]


  19. […] ExxonMobil Versus PDVSA: Arbitration and Numbers, and What the ExxonMobil Versus PDVSA Decision Means For The Country’s Bonds […]

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  21. […] case Exxon is still pursuing against the Bolivarian Republic of Venezuela.) And remember how nobody could get their hands on a copy of the decision, so there was all sorts of speculation about why that amount, with me […]


  22. […] 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. […]


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