Venezuela Rejects U.S. Ruling on Alleged PDVSA Expropriation of Assets from CIA-linked Firm

“OPIC’s decision was based on prevailing politics in Washington, D.C.” said Ali Rodriguez Araque, president of Venezuela’s state oil firm PDVSA Credit: Venpres

Caracas, July 15 (Venezuelanalysis.com).- Venezuelan government officials reacted to a decision by a U.S. government agency which ruled that the Venezuelan state oil company PDVSA had “expropriated” assets belonging to Science Applications International Corporation (SAIC), a firm based in San Diego.

On Monday, the United States Overseas Private Investment Corporation (OPIC), a U.S. government agency established to oversee the political risks of U.S. investments in foreign countries, issued a ruling accepting SAIC’s allegations of PDVSA’s “expropriation” of its assets and awarded the firm compensation from the U.S. government for a not yet determined amount of dollars.

SAIC has strong ties to the Pentagon, the Central Intelligence Agency (CIA) and National Security Agency (NSA), as many former defense and intelligence officials serve in its board of directors, and much of its yearly three billion dollars earnings come from defense and intelligence contracts with the U.S. government.

Venezuela is the world’s fifth-largest oil exporter and its state owned company PDVSA provides about 14% of U.S. oil imports.

In 1996, before Venezuelan President Hugo Chavez took office, under PDVSA’s slow path towards privatization led by company president Luis Giusti, SAIC and PDVSA formed a joint venture called Informatica, Negocios y Tecnologia S.A. (INTESA) to manage the oil company’s outsourced IT operations. The two companies signed a five-year contract that could be renewed upon agreement by both parties. SAIC invested $1200 (twelve hundred dollars) while PDVSA provided all financing for the venture as well as all equipment, office space, personnel and $800.

The president of Venezuela’s state oil firm PDVSA, Ali Rodriguez Araque, said Monday that the Venezuelan oil company had decided not to renew the contract with SAIC after an audit by IT consulting firm Gartner Group determined that PDVSA was not benefiting from the venture. The Gartner Group recommended changes but according to Rodriguez SAIC refused to change the operating terms of the contract.

“The OPIC simply accepted SAIC’s allegations without examining the actual facts,” said Rodriguez in a press release issued today. Rodriguez said that PDVSA consulted with outside legal counsel in the United States, and with a noted U.S. academic expert in international law, both of which said that the OPIC decision “is entirely without merit”.

Rodriguez said that PDVSA has offered to pay SAIC its share of the value of the company as determined by an independent audit, but “SAIC has refused even to meet, and has consistently refused to allow any independent audit of INTESA’s books.”

“We have every reason to believe that OPIC’s decision was based on prevailing politics in Washington, D.C., and the desire to satisfy a politically powerful U.S. company, rather than on the facts.” Rodriguez said. The U.S. government is a strong critic of Venezuelan President Hugo Chavez. U.S. officials welcomed a coup d’ etat against the Venezuelan leader in 2002, and are believed to have provided assistance for the coup. The U.S. has continued efforts to oust Chavez by providing millions of dollars to Venezuelan opposition groups through the National Endowment for Democracy, according to recently declassified documents.

“I personally find it astonishing that a government agency such as OPIC would pay out millions of U.S. taxpayer dollars based purely on the self-serving allegations of the company making a claim and in the absence of any certified financial information,” Rodriguez said.

PDVSA submitted the dispute to arbitration before the International Chamber of Commerce. “This independent adjudicative body will allow for a proper and unbiased review of all facts in this matter and we are confident of the outcome,” Rodriguez said.

For Venezuelan Ambassador to the US, Bernardo Alvarez “there are no real legal arguments to justify the OPIC ruling.”

Venezuelan Ambassador to the US, Bernardo Alvarez said OPIC gave up to political pressures to influence the outcome of a purely commercial dispute. “There have been no expropriation here, and there are no real legal arguments to justify the [OPIC] ruling,” Alvarez said.

Possible political reasons

Although PDVSA argues that the main reason to discontinue the partnership with SAIC was based on the fact that the venture was not economically beneficial to PDVSA, OPIC said that the election of Hugo Chavez as President of Venezuela in 1998 “had almost immediate consequences for INTESA.”

Shortly after taking office, Chavez ordered to halt the privatization process in PDVSA, which according to him was being done slowly through increased outsourcing of its operations, and joint ventures with little benefits for Venezuela but that allegedly benefited economically the company’s former executives who later rebelled against the Venezuelan government.

PDVSA and Venezuelan government experts have evidence that INTESA personnel participated in sabotage operations against PDVSA during the lock-out and strike organized from Dec 2002 until Feb 2003 by foes of President Chavez to force his ouster after a coup d’ etat failed in April 2002. The stealing of software, passwords, and remote control electronic disruption of production, refinery and storage operations, were crucial in the sabotage campaign against the oil company, which brought 14 billion dollars in losses and a historic 28% quarterly GDP drop of Venezuela’s economy at the beginning of 2003. PDVSA fired an estimated 18.000 employees, mostly from managerial position, for failing to show up for work for months and for damages to the company’s patrimony. It took months for PDVSA to restore production and refining operations, and its IT infrastructure sustained long term damage whose consequences may still persist until today.

Venezuelan government officials believe SAIC was using INTESA for espionage purposes in Venezuela due to its strong ties to the Pentagon, the CIA and the NSA. Its current and past board of directors include former NSA president Bobby Inman, former Defense Secretary Melvin Laird, former head of the research and development division of the Pentagon Donald Hicks, ex-Secretary of Defense William Perry, ex-CIA Director John Deutsch, and ex-CIA director Robert Gates. William B. Black Jr. served at Assistant Vice President at SAIC for three years after retiring from the NSA in 1997. Black later returned to the NSA as deputy director in 2000.

Pro-Chavez political commentators argue that the willingness of former PDVSA executive to hand over the company’s financial, commercial data, and technical information to SAIC through INTESA, shows their lack of patriotism and their desire to privatize the company.

Venezuelan officials have expressed concerns about the possible motives and consequences of the OPIC ruling. “We think they may be something big here. Accusing Venezuela of expropriating U.S. assets is a serious matter,” said a government official. “This may be the beginning of a new type of attack on Chavez. They [the US government] and the [Venezuelan] opposition know we are leading the polls by a wide margin, and they will need new ammunition to throw against Chavez after he wins the referendum,” said the official who asked not to be named.

Chavez has described the upcoming recall referendum on his rule as a battle between him and U.S. President George W. Bush.

The press release issued by PDVSA president Ali Rodriguez is reproduced below.

Statement of Ali Rodriguez Araque
President, Petroleos de Venezuela S.A. (PDVSA)
July 14, 2004

CARACAS, Venezuela.- July 14, 2004 .- The United States Overseas Private Investment Corporation (“OPIC”) formally informed us yesterday that it has decided to pay the San Diego firm Science Applications International Corporation (“SAIC”) based on SAIC’s claim that its investment in Venezuela has been expropriated.

We have every reason to believe that OPIC’s decision was based on prevailing politics in Washington, D.C., and the desire to satisfy a politically powerful U.S. company, rather than on the facts. We have consulted with outside legal counsel in the United States, as well as with a noted U.S. academic expert in the field of international law and expropriation, and both have concluded that OPIC’s determination is entirely without merit. OPIC simply accepted the allegations of SAIC without examining the actual facts.

The facts are straightforward:

• In 1996, PDVSA made the decision to outsource its information technology services. It entered into a joint venture with SAIC, and together they created a Venezuelan joint venture company called “INTESA” to provide outsourced information-technology services to PDVSA.
  
• SAIC – through an offshore subsidiary called “SAIC Bermuda” – invested $1,200 in the venture, while PDVSA provided all financing for the venture as well as all equipment, office space, personnel and $800. The venture was governed by a five-year contract that could be renewed upon agreement of both parties. The contract gave SAIC both management and board control of INTESA.
  
• Under the contract, PDVSA paid INTESA all costs for services provided, plus a mark up of approximately 10 percent. PDVSA paid each month in advance.
  
• SAIC profited handsomely from the venture, earning more than $40 million in dividends on its investment of twelve hundred dollars, and an additional $53 million in subcontract fees.
  
• By contrast, the venture was not economically beneficial to PDVSA. A July 2000 report by PDVSA’s internal auditor raised questions about the cost-plus outsourcing agreement. Guaicapuro Lameda, who was then President of PDVSA, created an internal committee to evaluate that agreement and recommend changes. PDVSA hired the Gartner Group, an internationally recognized IT consulting firm, to examine and assess the agreement. Both the internal committee and Gartner recommended that PDVSA not renew the agreement unless its terms were changed significantly.
  
• After a series of attempts to renegotiate the working arrangement, and after SAIC refused to change the operating terms, PDVSA informed SAIC that it would not renew the agreement after it expired.

OPIC concluded that the decision not to renew the agreement “effectively ended the viability of the joint venture.” It apparently decided that PDVSA made that decision at the direction of the government and for political reasons. That is simply untrue. PDVSA made that decision purely for commercial reasons based on its own internal studies and the advice of an expert outside consultant.

PDVSA has consistently tried to meet with SAIC to work out an orderly dissolution of INTESA in conformity with the terms of the joint venture contract. PDVSA has made clear in all these efforts that it would pay SAIC its share of the value of the company as determined by an independent audit, in accordance with the contract.

SAIC has refused even to meet. It has also consistently refused to allow any independent audit of INTESA’s books. Such an audit is particularly important because INTESA’s own auditors had refused to certify the accuracy of its financial statements. PDVSA, of course, cannot make a payment based on guess work and unaudited financial statements.

Rather than work out an orderly dissolution with PDVSA in accordance with the contract, SAIC sought political support in Washington from various agencies and members of Congress and filed a claim with OPIC alleging that PDVSA and the Government of Venezuela have “expropriated” its investment in INTESA. Neither the Government of Venezuela nor PDVSA was notified of SAIC’s filing or has ever been allowed even to see SAIC’s claim.

OPIC has tried to pressure PDVSA to pay SAIC in order to make this dispute go away and to avoid any controversy that might occur as a result of an OPIC determination. But we simply cannot be subjected to such blackmail. PDVSA has a public trust and it cannot pay money that is not lawfully due.

I personally find it astonishing that a government agency such as OPIC would pay out millions of U.S. taxpayer dollars based purely on the self-serving allegations of the company making a claim and in the absence of any certified financial information.

The OPIC process, in which only one party is able to present its case, is not an appropriate venue for resolving these types of commercial disputes. On April 28, PDVSA notified SAIC of its intent to submit this dispute to arbitration before the International Chamber of Commerce in accordance with the specific terms of their joint venture contract. This is the proper forum for the resolution of disputes between the parties. This independent adjudicative body will allow for a proper and unbiased review of all facts in this matter. We are confident of the outcome.

The wide array of companies that continue to invest in the oil business in Venezuela – with more than $25 billion of direct investment to date – is testament to our commitment to the highest standards of commercial and legal propriety. Now, as always, PDVSA is deeply committed to its international business partners and to upholding the laws and regulations that bind us together.