Exxon Wins $1.6 Billion Settlement for Venezuela Seizure

Exxon Mobil Corp. was awarded a $1.6 billion judgment by an international arbitration panel for assets seized by Venezuela’s government in 2007, a fraction of what the crude producer had sought.

The World Bank’s International Centre for Settlement of Investment Disputes, or ICSID, awarded the sum to Irving, Texas-based Exxon as compensation for investments in the Cerro Negro project and other losses, according to a ruling on the center’s website today. The world’s most valuable oil company had originally sought as much as $14.7 billion for assets nationalized after it refused to accept terms of a partnership with state-owned Petroleos de Venezuela SA.

“Our goal with the arbitration was to seek compensation for the fair market value of assets that were expropriated,” Exxon said in an e-mailed statement. “Exxon Mobil’s affiliate engaged in extensive discussions with PDVSA and government officials but was unable to reach agreement on fair compensation.”

President Hugo Chavez’s handpicked successor, Nicolas Maduro, is paying the price of his late mentor’s socialist revolution just as slumping oil prices and a dollar shortage fan investor concern the country may default on debt. The Exxon settlement may remove legal obstacles to his planned sale of PDVSA’s U.S. unit Citgo Petroleum Corp., according to Bloomberg Intelligence analysts Gurpal Dosanjh and Vincent G. Piazza.

“The potential for a higher award, more than Venezuela could afford to pay, may have deterred potential suitors for Citgo, which is ultimately owned by Venezuela, amid fears of lawsuits against the nation’s foreign assets,” Dosanjh and Piazza wrote today.

Award Reduction

The amount to be paid to Exxon under today’s ruling should be reduced after adjustments for payments Venezuela made in 2012 under a previous settlement at the International Chamber of Commerce, or ICC, Venezuela Foreign Minister Rafael Ramirez said on state television.

The payment will be reduced to about $1 billion and will not be a problem for PDVSA, according to a financial official at the company, who asked not to be named because of internal policy. Venezuela will pay its bonds due this month, he said.

“In the event of favorable award, the claimants are willing to make the required reimbursements to PDVSA,” ICSID said in the ruling. “Double recovery will thus be avoided.”

Chavez, who died last year after struggling with cancer, began to expropriate assets in Venezuela’s energy, mining and telecommunications industries in 2005, claiming their strategic role in the country’s development and sovereignty.

2007 Ultimatum

Energy companies were given until late-2007 to accept proposed contract and compensation terms from Chavez’s government or risk having their assets seized. •

Exxon and ConocoPhillips, the third-most valuable U.S. crude producer after Exxon and Chevron Corp., were the largest American energy companies to reject Venezuela’s terms.

In 2011, the ICC ordered PDVSA to pay Exxon $907.6 million, minus a $161 million counterclaim by PDVSA, for the seizure of a 41.67 percent stake in the Cerro Negro heavy-oil project in the Orinoco Belt, the same one that triggered the claim at the ICSID. The cases differ because the ICC handles contract disputes while the ICSID hears disputes based on investment treaties between countries.

PDVSA said in 2012 that it had settled the ICC ruling with a cash payment of $255 million.

Seized Projects

Exxon’s assets in Venezuela, which included 425 million barrels of proved reserves net to the company, had a remaining net book value of $750 million, according to the company’s filings to the U.S. Securities and Exchange Commission.

Shares of Exxon declined 3 percent to close at $91.82 in New York today.

The ICSID award includes $1.4 billion for expropriation of the Cerro Negro project, $179.3 million for expropriation of the smaller La Ceiba project and $9 million in compensation for production and export curtailments, ICSID said. It will incur compound interest of 3.25 percent dating back to June 2007.

In a similar complaint, the ICSID ruled Sept. 23 that Venezuela must pay $740 million to Spokane, Washington-based Gold Reserve Inc. for taking its Brisas gold and copper project in 2008. Gold Reserve said on July 23 that it was seeking $2.1 billion for the nationalization.

About 28 cases filed by mining and oil companies remain unresolved at the ICSID, including those filed by Phillips 66 and Highbury International AVV.

Not Over

The government will likely try to use legal challenges to delay compensation and to negotiate settlements with claimants, Risa Grais-Targow, an analyst in Washington at political consultancy Eurasia Group, said in an e-mailed research note to clients today. Should claimants refuse this offer, the government would likely struggle to pay significant cash awards, potentially resulting in asset seizures

“Venezuela will just want to subtract the $908 million from the $1.4 billion Cerro Negro portion, pay it and get out of there, and Exxon is unlikely to be satisfied with that math,” Russell Dallen, Miami-based managing partner at Caracas Capital Markets, said in an e-mail. “While I predict that Venezuela will move to annul the Gold Reserve case by February, it is possible that Exxon may move to annul this case and keep fighting.”

The South American country must honor ICSID rulings to avoid default of sovereign bonds, according to Joe Kogan, an analyst at the Bank of Nova Scotia.

Bond Decline

Venezuela’s benchmark dollar bonds due 2027 extended losses after the ruling, falling 0.8 cent on the dollar to close at 65.6 cents today in New York. The yield on the bonds rose 20 basis points to 15.5 percent.

Venezuela said yesterday that it paid bonds due in 2014 totaling $1.5 billion. PDVSA has $3 billion of dollar bonds that mature on October 28.

“While Venezuela has been willing to compensate claimants in the past, the government is clearly working with limited liquidity and already faces tough policy trade-offs between servicing its liabilities and importing basic goods to satisfy its base,” Grais-Targow said.

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