ICSID says Venezuela owes Exxon $1.6 billion


That’s what Bloomberg’s Nathan Crooks is reporting.

Exxon was suing Venezuela for compensation stemming from Hugo Chávez’s forced nationalization of its assets. We’ll see how the market interprets this ruling.

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    • In a country without trifles such as aspirin, 1.6 bn is quite a bit of money. And this not the only thievery case venezuela will lose.

      Prepare to say goodbye to whatever shit we have bolted to the ground overseas.

  1. Drifting lower after the ruling… Benchmark Venezuela 2027 lost more than 1% after the news was posted on Bloomberg. Given that risk assets and commodities are mostly bearish today (Dow almost 2% down; WTI crude around -2,50%), it’s hard to pin up the drop just on the announcement.

  2. I recall that in one article I read, the expected award was between $800MM and $1.2B, and that anything below $1B in this case would be considered a win for Venezuela. One would have expected that original claim would include everything up to and including the kitchen sink. I expect that “The Street” will call this one a win for Exxon.

    In addition, the wording of the judgement includes the provision that Venezuela must pay 3.25% annually compounded interest on the judgement amount from 27 June 2007. This calculates out to a current amount due of over $2 billion at a moment when the government seems to be struggling to come up with the cash to pay off their bond obligations.

    So, this is more bad news for Chavismo.

  3. For clarification: A friend of mine said that since there was already a decision by ICSID in France awarding Exxonmobile 900 million, technically Venezuela has to pay 700 million and not really 1.6 b. Is this true?

    • Yep. In its initital enforcement filings, ExxonMobil is asking for the whole $1.6 billion, but if it gets it then Exxon will be legally obligated to refund $900 million to PDVSA.

    • Great question. Short version: creditors go after CITGO and all of PDVSA’s accounts receivable. In extremis, it would become illegal to pay for Venezuelan oil. (I’m not sure how this would shake out with the pre-paid sales to China, but it would effectively kibosh the American market.) Around the same time, Venezuela would be cut off from borrowing from any multilateral institutions. (The Obama administration got Argentina to cough up its ICSID judgments by exercising this tool.) The markets, meanwhile, would treat it like a sovereign default — which it would be — with all the standard consequences. In fact, in theory any new issuances of foreign debt could be attached to pay the outstanding ICSID judgment.

      In would be unpleasant.

  4. Prophets of apocalypses keep getting it wrong time after time. Can I have my 12.5% coupon now pls? Thanks.

    Zapatero a sus zapatos.

  5. it should be taken into account the ICC award settled in February 2012 (US$ 908 million gross of debt) that is being established that Exxon is willing to make the required reimbursement to PDVSA to avoid double recovery for the nationalization of the assets. Thus, the total amount that remains to be settled should be much lower than the USD1.6bn mentioned.

    This does not translate automatically into the Venezuelan government honoring immediately the payment associated to the award as it could appeal the decision and delay payment.

    The Venezuelan government could also start negotiations with Exxon and other companies in order to reduce the amount and/or agree on an adequate payment schedule.

  6. At the heart of the matter is the discount rate used to calculate future cash flows, which has always been a contentious subject for both academicians and practitioners. The decision, which everyone can read here (https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC4952_En&caseId=C256), is mired in convoluted and largely boring international law and procedural minutiae. However, in just three pages of the 138-page decision, items 360 to 368 starting on page 119, one of the most important value drivers used to set the compensation amount is exposed for everyone’s scrutiny; the discount rate. ExxonMobil’s main consultant, MIT professor Stewart C. Myers (http://www.brattle.com/experts/stewart-c-myers), argued on behalf of Exxon that the discount rate should be based on CAPM (Capital Asset Pricing Model) and calculated it at 8.7% in 2007 (does anybody know the yield on PDVSA bonds back in June 2007..?). On the other hand, Venezuela argued that CAPM should not be used because it does not take into account the country risk, and rather proposed to use the average of four methods, arriving at 19.8% (Paris-based ICC set its award using an 18% discount rate, coincidence?). ICSID settled for 18%. Now, I am highly sympathetic towards Exxon and MIT professors and despise the Venezuelan regime, but who would really think (and argue in front of the whole world) that the proper opportunity cost of capital used to value a project in Venezuela should be 8.7%…? I quickly calculated the difference in Net Present Value using 8.7% and 18% discount rates (the cash flows are presented in the last page, Annex 1) and it amounts to $1.23 billion, which translates to approximately $1.39 billion after interest. Regrettably for Exxon and for us hoping for a change in Venezuela, the Venezuelan government saved at least $1.4 billion by being a rogue and lawless regime, and thus having a high country risk and discount rate……I would like the investment bankers and Venezuelan economists opine.

    • Yes, they stiffed Exxon out of 1.4 billion by having the court accept the higher discount rate. But, …but, they stiffed most of the major airlines of the world out of 4 billion dollars just by being thieves and con artists. “We’re not paying you guys, …period.” Where Exxon’s margins are traditionally very high (after all we’re talking about the oil industry here), the airline industry has razor thin margins and spotty profitability. The airlines are the ones who REALLY got screwed here……

    • I’ve worked on these cases as an advisor, usually on the government side. Venetexan is spot on; the MIT argument was just hoping for a mulligan. The idea is to approximate what an investor would pay for the assets on the open market. There is no way that they would value those fields at a multiple of 11½ times earnings unless they expected phenomenal output growth … which they did not. For comparison, Exxon traded at around 11 when Venezuela expropriated the project.

      One way to think of it is that the tribunal valued the project as slightly riskier than Anadarko Petroleum, which sounds about right.

      That said, it is true that part of that discount rate is country risk, and so the government benefitted from being a risky government. But the system isn’t design to punish expropriation; rather, it’s designed to come as close as possible to the market price of the assets.

  7. I do find it somewhat amusing that while the application of Dutch law allowed Hugo Carvajal to be released after arrest in Aruba, it was a Dutch BIT that was enforced in the ICSID ruling in Exxon’s favor. Win some, lose some.

    Think the government, at this point, would trade El Pollo for $1.3 billion?

    • It’s crazy to see what happened yesterday as a ruling “in favor of Exxon”.

      The Venezuelan government knew all along that there’d be something to pay for the 2005-06 expropriations, and gambled that they could get a more favourable settlement out of ICSID than out of a direct negotiation with ExxonMobil. Yesterday, that gamble paid off big time.

      • Precisely, Francisco.
        Also, there is the Exxon legal reputation. In the oil sector they have a reputation for being pit bulls, and will spend lots of money to get anything they feel they’ve been cheated out of. It would make no sense to rely on negotiating directly with Exxon. It should be noted that, just as Hugo Chavez’ made inflammatory statements to the press against Exxon, they did the same the other way with their claims of what they were owed under the existing contracts (written during the apertura).. Anyway, there’s a reason there are independent arbitration tribunals.

        • Tom, I don’t follow why the ruling is not in favor of Exxon. Exxon’s valuation claims were spurious; it got pretty damn close to what everyone predicted … including myself, and I’ve got no special powers here. Venezuela certainly didn’t win — after all, a real win would have meant succeeding with the argument that the cap on the oil price used for valuation contained in the association agreement with PDVSA also applied to the Bolivarian Republic as a sovereign entity. Unlike the Exxon arguments that Pitiyanqui references, that was not a specious argument.

          So I’m a little confused, since I think we’re in agreement, but the first line of your comment implies differently.

      • I agree and disagree. There was always a risk for Exxon that they would receive nothing at all if the ICSID ruled against them, regardless of how low that probability was, and given that they received nothing in compensation, any substantial reimbursement some years later is better than nothing at all. When I say that the ruling was in Exxon’s favor, its because they got something back.

        It is a bit like catching someone cheating at poker after he takes all your money. Sure, you can bitch and moan about it, but even with witnesses, there’s no guarantee you are getting your money back because the judge could always toss out the old argument, “You knew it was a risky proposition in the first place.”

        I have to admire the balls of Exxon though, arguing for sovereign risk allowances on the interest to be paid when discounting said interest in the CAPM equation (with VeneTexan’s great comment above, Exxon calculated all other risk factors such as inflation/currency, commodity, and equity risk as 2.35%), wanting an additional award to offset potential taxes when such taxes were super-jurisdictional or calculated into the award, throwing out production numbers which every indication showed they had no intention of actually developing demanding non-US interest rates on a dollar denominated award. Exxon literally threw everything they could at the wall to see what they could get to stick. The fact that they walked away with what they did was not necessarily in their favor from what they wanted, but, realistically, they were reaching in several instances at best. Que bolas, Exxon.

        The real losers are the Venezuelan people of course and not the government, since they Maduro & Co. will pass the pain on to the people. Another billion and a half the country can ill afford. Can we agree on that?


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