Exxon ‘Loses’ Venezuela Nationalisation Case

Hugo Chavez must be smiling.

In the latest showdown between western oil companies and Venezuela’s populist president, Exxon Mobil is widely seen as the loser, after the Paris-based International Chamber of Commerce (ICC) ruled that the world’s biggest oil company would not be entitled to most of the damages it demanded after its fields were nationalised.

“The ICC only awarded Exxon ten per cent of what they wanted,” Chavez said recently. “You can make your own conclusions.”

Petroleos de Venezuela (PDVSA), the state oil company, said on January 2 it would pay Exxon Mobile $255m, after accounting for money frozen in a New York bank account and outstanding debts.

“Exxon has been granted the value of its [initial] investment, but not the value of the project today,” Chris Nelder, an independent energy analyst, told Al Jazeera. The company had demanded as much as $12bn, citing potential lost future profits and other concerns, after the nationalisation of its Venezuelan heavy oil assets in the Orinoco belt in 2007.

“This is a victory against a corporation that tried to abuse Venezuelan law,” said Eva Golinger, a lawyer and author ofThe Chavez Code: Cracking US Intervention in Venezuela. “The Venezuelan government had originally offered $1bn for the nationalisation and now they end up only having to pay $255m.”

After four years of arbitration at the ICC, Exxon still has another case pending against Venezuela at the World Bank-affiliated International Centre for Settlement and Investment Disputes.

‘Sending a signal’

“Traditionally, Exxon is very litigious,” Steve LeVine, professor of energy security at Georgetown University, told Al Jazeera. “This whole exercise is about Exxon sending a signal around the world to anyone who would attempt to mess with their contracts.”

After refusing to obey Venezuela’s new petroleum laws in 2007, under which foreign companies would have to become minority partners with PDVSA, Exxon and ConocoPhillips, another US firm, pulled out of the country entirely.

Exxon spokesman Patrick McGinn told the Associated Press that the arbitration award “represents recovery on a limited, contractual liability of PDVSA”. 

Talk of foreign companies cancelling Venezuelan oil projects abounds in some business circles. But aside from Exxon and ConocoPhillips, western multinationals have stayed, perhaps because the stakes of leaving are so high.

“ChevronTexaco is still there. European oil companies are there from Italy and France; the Russians, Chinese, Indians and Brazilians are there,” Golinger told Al Jazeera. “Foreign companies shouldn’t try to use their political and economic power to undermine local laws.”

Biggest deposits ‘ever assessed’

Venezuela’s Orinoco belt, containing an estimated 513bn barrels of technically recoverable heavy oil, is “the largest accumulation ever assessed” by the US Geological Survey. Until recently, the oil was not counted in reserve figures, because it was too expensive to extract. New technologies, rising oil prices and dwindling conventional reserves have changed the game.  

“The Orinoco is incredible – it is the largest volume of oil on the planet,” Professor Levine said. “The cost of producing it is huge, but the volume is bigger than Saudi Arabia’s.”

Unlike Saudi’s proven reserves of 260bn barrels of light sweet crude, heavy oil in the Orinoco is expensive, difficult to refine and environmentally harmful to extract. This type of oil is either mined, or separated from earth by injecting steam deep into the ground in a process called insitu. Most experts believe that Venezuela does not have the technology to profitably extract and refine this heavy crude alone. Extracting heavy oil from tar sands deposits causes up to three times more greenhouse gas emmissions than conventional crude, while polluting huge amounts of water. Environmentalists believe these despoits should be left in the ground, as fears of global warming intensify. 

Despite this recent victory, PDVSA is facing some trouble. Under Chavez, the energy giant has undertaken ambitious social spending, running subsidised food distribution programmes and international aid projects as if it were a state unto itself.

Critics say oil companies should not be delivering government services. And the money used for “Bolivarian” projects means the corporation has less to invest in developing new reserves; production has dropped from about 3.3m barrels per day in 1998 to about 2.25m in 2011, The Economist reported.

After subsidised gasoline for locals and cheap oil sent to Venezuelan allies – such as Cuba – is figured into the mix, the firm only exports about 1.25m barrels per day at regular market prices.

“Chavez did bring in social programmes to reduce inequality,” Amy Jaffe, director of energy research at Rice University’s Baker Institute, told Al Jazeera. “But he did so in a way that damaged the future of the oil industry in Venezuela. Is it really in people’s interest to have production cut in half or worse? 

“Is it better to have 60 per cent of a lot or 100 per cent of a little? Sometimes people get so hell-bent on the ideology of getting 100 per cent that they lose the baby with the bathwater.”

Under Chavez, PDVSA may not be a perfect model for corporate governance. Chavez’s vocal critics, however, tend to compare current problems at PDVSA with a barometer such as Norway’s Statoil, rather than PDVSA in the pre-Chavez era.

“Prior to the Chavez administration, there were governments in place getting kick-backs from these [international oil] agreements; they didn’t care if companies obeyed the law,” Golinger, a vocal supporter of Chavez, said. Corruption, and the selective enforcing of local laws, has also been a major problem for Chavez’s government, according to critics and former government officials. 

Poverty reduction

Like many of its South American neighbours, Venezuela has drastically reduced poverty in the past decade; the Bolivarian Republic’s poverty rate fell from 48.6 per cent in 2002 to 27.8 per cent in 2010, according to the UN Commission for Latin America’s 2011 report. Inequality also declined sharply. This progress is linked to tough negotiations with foreign oil companies, so the state can have more resources to invest in local communities, Chavez’s supporters contend.

Away from the medical clinics funded by oil wealth in poor Venezuelan neighbourhoods, or the stores selling subsidised food, the Exxon case symbolises something larger happening on international energy markets.

“The big picture is that the vast majority of the world’s remaining [conventional] oil resources are not accessible to the western oil majors,” Nelder, the independent analyst, said. “The easy to access oil, the stuff in the western hemisphere, has been declining. Those with the resources try to drive the hardest bargain possible.”

Other analysts aren’t so sure. Concerns over peak oil – the idea that demand will rapidly outstrip supply in the near future – may seem to have been exaggerated, they contend, especially as new, unconventional sources come onto the market. 

“Instead of staying in Venezuela, Exxon invested in shale gas in the US and the Canadian oil sands,” Jaffe said. “People are now making a fortune drilling in the US. There will be one million barrels a day coming from North Dakota, Ohio is going to have oil. If we [the world] really were running out of oil, people might have to kiss the ring in Venezuela. That is not the reality we are facing.” 

But with prices rising from around $12 a barrel in 1998 to $100 today, markets view oil scarcity as a growing reality, which helps Venezuelan exporters demand more from companies, even with new supplies coming online. 

“Oil is sort of like cocaine,” Levine said. “Supply creates demand.” If the professor is correct, then international consumers are going to be demanding crude from massive Orinoco reserves for generations to come. In this context, driving a hard bargain doesn’t sound like such a bad idea.