Experts say ConocoPhillips, Exxon Mobil could seek Venezuela’s refineries in U.S
Citgo assets may be at risk in arbitration
Experts say ConocoPhillips, Exxon Mobil could seek Venezuela’s refineries in U.S.
By KRISTEN HAYS and JOHN OTIS
Copyright 2007 Houston Chronicle
ConocoPhillips and Exxon Mobil Corp. could hold a powerful card to make Venezuelan President Hugo Chavez bet his country’s sizable American assets in the high-stakes nationalization of the Venezuelan oil industry, experts say.
The Citgo subsidiary of Venezuela’s national oil company has five refineries in the U.S. experts say could be targeted for seizure if a stalemate prompts one or both U.S. oil majors to seek recompense through international arbitration.
Neither Citgo nor its Venezuelan counterpart Petróleos de Venezuela, known as PDVSA, returned repeated messages seeking comment.
Houston-based ConocoPhillips and Irving-based Exxon Mobil walked away from the table last week instead of accepting minority interest in Orinoco River basin projects. Exxon Mobil is holding its cards close, but ConocoPhillips said last week that it is keeping open all legal options, including international arbitration.
“The government of Venezuela owns significant assets in the United States through Citgo, as well as significant resources that move through the U.S. financial system,” said Jose Valera, a partner with King & Spalding in Houston. “These are assets that could conceivably be subject to an arbitration award.”
International arbitration is expensive and can take two years, said Michael Goldberg, a partner and arbitration expert at Baker Botts in Houston.
“In every situation where you have an expropriation, the host country and the company have to decide where the line is for fair compensation,” Goldberg said.
“If the host country squeezes too hard, then they face a very substantial likelihood of an arbitration awarding full compensation. If the host country comes close to a fair resolution, then most companies would like to avoid going through the process of arbitration.”
Last week, ConocoPhillips and Exxon Mobil refused to accept new working terms of their Venezuelan operations imposed by PDVSA. The company absorbed their stakes in the Orinoco River basin projects, and ConocoPhillips and Exxon Mobil are in talks regarding compensation for what they are giving up.
Four other oil companies — Chevron Corp., Total, BP and Statoil, Norway’s state-owned oil company — signed accords allowing them to stay on as PDVSA’s minority partners.
PDVSA took majority interest in four projects, valued at about $30 billion, which had been operated by Exxon Mobil, ConocoPhillips, Chevron and Total. BP and Statoil were already minority partners.
Keeping options open
A lawyer familiar with the negotiations told the Chronicle that the companies — ConocoPhillips, Exxon Mobil, Chevron Corp., Britain’s BP, France’s Total and Norway’s state-controlled Statoil — were offered essentially the same deal. PDVSA gave them veto power over investment decisions but said they would not have the right to seek international arbitration over future disputes, the lawyer said.
The companies declined to comment on terms.
ConocoPhillips said last week that while it hopes compensation talks succeed, it has preserved all legal rights, including international arbitration. In the meantime, the company said it expects to write off $4.5 billion, or its entire interest in three Orinoco projects, in its second-quarter results.
Exxon Mobil has said only that it is in compensation talks, declining to say whether arbitration may be an option.
Earlier this year, Chavez decreed that PDVSA would take majority control of foreign-run oil projects. PDVSA took over operations May 1, and last Tuesday was the deadline for the foreign companies to agree to terms for reduced roles.
Venezuela is the world’s eighth-largest oil exporter, and the U.S. is its No. 1 market for crude.
Enrique Sira, an analyst with Cambridge Energy Research Associates, said it is still possible that Exxon Mobil and ConocoPhillips can reach a deal with PDVSA to continue their Venezuela operations. The signed agreements won’t go before Venezuela’s National Assembly for final approval until August.
The rules
But the U.S. companies’ focus is turning toward compensation, Sira said. They want it based on the market value of their operations, while the Venezuelan government has said it would pay what the companies put into the assets rather than what they would sell for.
If talks don’t produce an agreement that closes the gap, arbitration could be an option, said Dino Barajas, a partner at Paul Hastings in Washington, D.C.
The companies’ production-sharing agreements likely address arbitration, specifying when the firms are entitled to arbitration and in what venue, such as the World Bank’s International Centre for the Settlement of Investment Disputes in Washington or the International Chamber of Commerce in Paris, Barajas said.
Typically, the host country and company involved each choose an arbiter and then agree on a third for a three-member arbitration panel to hear the dispute. Once the panel hears all the arguments, it can award compensation to the complaining company.
Barajas said both sides are required to honor such awards under international agreements.
Possible ramifications
The New York Convention was designed to make arbitration awards enforceable worldwide.The International Centre for the Settlement of Investment Disputes keeps a list of countries that have agreed to honor arbitration awards. Venezuela and the United States participate in both.
If Venezuela refused to honor such an award, a U.S. judge could issue an enforcement order to seize PDVSA U.S. assets, which could include refineries, cash in bank accounts or accounts receivable.
“The moment you hear someone sniffing around, looking into your bank accounts, you can pull that out,” Barajas said. “With a hard asset, that’s just game, set, match. You know where it is. It’s not going anywhere.”
Of Citgo’s refineries, three process fuels while two process asphalt. Earlier this year NuStar Energy, a spinoff of Valero Energy Corp., put in a bid to buy the asphalt plants, but no sale has been announced.
However, companies must consider that a country may not allow them to return once they’ve launched an arbitration, said Ray Whitman, a partner with Baker Hostetler in Houston.
“They are long, drawn-out fights,” he said, “and then you have to worry about whether you ever have to do business in that country again.”
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