Exxon lost against PDVSA, but it's still playing against Venezuela


So the blogging on this PDVSA vs. ExxonMobil case has gotten mighty interesting over on Devil’s Excrement. This is a really major story, and props to Miguel, he’s really put on a good show over there. I won’t go over the same material here – I’ll just add a little clarification for readers, since there’s still a lot of confusion:

There were really two separate arbitration proceedings surrounding Venezuela’s takeover of the Cerro Negro project from ExxonMobil in 2007. The first was a commercial dispute pitting ExxonMobil vs. PDVSA (not Venezuela) for breach of contract at the International Chamber of Commerce (ICC) in New York. PDVSA unambiguously won that fight.

The second dispute is between ExxonMobil and the Venezuelan State (not PDVSA) over its violation of the 2007 Bilateral Investment Treaty between Venezuela and the Netherlands – which is relevant because ExxonMobil owned its stake in CerroNegro through a Dutch subsidiary. That process, at the World Bank’s International Center for the Settlment of Investment Disputes (ICSID) arbitration panel, is ongoing, and may not be settled for many months or years to come. Any outcome to that dispute is imaginable, very much including ExxonMobil being compensated for Cerro Negro with, if you can believe this, a minority stake in another Faja project!

The details are strictly for the specialists, but the outline is clear enough now: on New Year’s Day, PDVSA won a battle, but the outcome of the war is very much still in play.

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  1. PDVSA-you say won the battle.
    PDVSA has been rode hard into the point of bankruptcy and overextended beyond repair
    by Chavez. Winning this is not enough to take them out of danger.
    Mr. Toro, Exxon is, was and wishes to be one of the best friends (if not THE best)
    Venezuela has ever had or ever will have.
    Which one of the “Faja del Orinoco” doled out by Chavez-do you think will even come close. Name one?

  2. “if you can believe this, a minority stake in another Faja project!”-Most definitely.
    This is the future. These companies will be back and working for some other country
    in Faja del Orinoco- and Mr. Toro- I promise you- most of the oil will end up being sold
    to US .Chavez is just putting a layer of “bs” between himself and US market and making
    it more expensive and more risk shared by others since PDVSA cannot afford and
    neither can Venezuela…

  3. Where’s Juan?MIA? Hope all is well.He is the economist.
    I believe and have believed for a long time-PDVSA is doomed.Sure it will try to hang on until
    after the election.As I mentioned elsewhere-if Chavez wins PDVSA will be finished off
    and replaced by some insane-named something -probably co-ran by Chinese and Cubans..
    If opposition wins and Chavez goes -PDVSA fails and the new goverment will have to try and
    clean up the mess by pouring billions into it (too big to fail?)..that is why I don’t understand
    people advocating buying bonds they issue-re Diablo..

    • Actually, on the issue of oil, I defer to the experts. Miguel is doing a pretty good job of clearing the air on this. But thanks!

      Here’s a question: what powers to enforce a sentence does the World Bank court have? As Josef Stalin would say, “how many Divisions does the World Bank army have?”

  4. CharlesC: PDVSA can easily hang on until well after the elections with current oil prices, after all the average price for the Venezuelan oil basket was 39.5% higher in 2011 than in 2010. The Government is stressing the company’s finances and clearly the rate of increase of debt is simply unsustainable, but PDVSA has no bond maturing in 2012 and fairly small maturities in 2013, its interest payments are also manageable. Things become tricky in 2014, but if there is political change and seriousness, I don’t see a problem in meeting obligations. PDVSA has to pay US$ 1.77 billion in interest per year, that is peanuts for a company of its size. Anyone that suggests that PDVSA will go broke with these levels of oil prices any time, has not looked at the numbers. Even if PDVSA loses both arbitration cases and has to pay US$ 12-13 billion, there will be no problem until 2014. If a new Government comes in, I am sure a plan could be implemented to heal the company, without the crazy step of having to reestructure PDVSA’s debt.

    • PDVSA-can (and could)do it’s job. What PDVSA cannot do is the endless list of things
      Chavez demands of it.
      Do you or do you not agree- “It’s just too risky to do business with Chavez?”
      And, those foreign governments who have a piece of the Faja del Orinoco-either don’t have the money, dont have the equipment resources, are in no hurry to start investing in Venezuela. How much wihh they produce in the next 2-3 years? I just don’t see the “pot of gold” at the
      end of Chavez’s rainbow…
      Talk is not reality.

      • Fine, but PDVSA will continue paying its bonds, which is the whole point of my recommendation. They yield 15% per year, no chance of not paying this year or the next, that’s 30% in yield right there in two years. Add the possibility of political change, which would drive investors wild into Venezuelan assets, and you are talking about another 15% upside in the price of the bonds. That’s 45% in two years!

        That is all I am saying. That this is not sustainable long term? I agree. That PDVSA should not be doing all it does. I agree. That the Faja is not being developed. I agree.

        But you seem to assume Chavez stays. Even The Economist says publicly he may have an untreatable sarcoma:


        I showed some numbers of what happens if you stop sending free oil to Cuba, Petrocaribe and tell the Chinese you will slow down payment on the illegal loans. We are talking tens of billions. And PDVSA only has to pay US$ 1.77 billion a year in interest.

        There is no pot of gold, it’s a bond, you dont fall in love with it or marry it, you buy it as long as it looks good collect interest, the day it looks bad, or it has gone up too much in price you sell it. And move on. At 15% PDVSA is worth the risk. At 10%, I pass and buy Electricidad de Portugal bonds. That simple.

        • You are telling the truth, I know. Sorry for being disagreeable-I am tempted
          to buy the bonds.
          Everytime I invest something bad happens-ex. with natural gas…
          however I lost my shirt several times with businesses and properties, too…
          So many cases of people losing so much in Venezuela, too.
          I feel like I have been counseled by an “economic therapist”.
          As for Chavez leaving- I wish, hope, pray, but, even if he loses (and he will in a fair election)
          I cannot see him leaving….


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