Caracas, February 12, 2007 (venezuelanalysis.com) – Venezuela's state oil firm PDVSA issued a statement today, in which it said that it was freezing all its business dealings with ExxonMobil, in retaliation for the company's hostile actions in the dispute over compensation for a recently nationalized oil joint venture.
This move comes shortly after PDVSA instructed its traders yesterday to deposit oil receipts with UBS bank in Switzerland in a move to protect its assets. These decisions came days after Exxon announced it had won a series of temporary court orders in Britain, the Netherlands, and the Dutch Antilles, freezing up to $12 billion in PDVSA assets.
As part of a drive to recuperate oil sovereignty in May last year, the Venezuelan government required six major oil companies to hand over equity stakes of 60% or more in four important joint-venture exploration projects in the Orinoco oil belt. U.S.-based Chevron Corp., France's Total, Britain's BP PLC, and Norway's Statoil negotiated deals with Venezuela to remain on as minority partners. However ExxonMobil, along with U.S.-based ConocoPhillips, rejected the terms and its 41.7 percent stake in the Cerro Negro project was subsequently nationalized with an offer for compensation.
ExxonMobil then rejected Venezuela's offer for compenstation and sought arbitration in the International Centre for Settlement of Investment Disputes, (ICSID – a World Bank tribunal), in September.
ConocoPhillips, which has also filed for arbitration, said it remains in "amicable" talks with PDVSA.
As the $12 billion in frozen PDVSA assets far exceeds Exxon's $750 million investment in the project at the time it was nationalized, the move by the U.S oil company appears as an agressive legal tactic to pressure the Venezuelan goverment to agree to it's terms.
Venezuela's Energy Minister, Rafael Ramirez, argued that by soliciting the separate court orders ExxonMobil has violated the pre-existing arbitration proceedings in the ICSID, and said that PDVSA is evaluating the possibility of suing the U.S. oil company for damages resulting from it's legal action, which, among other things, caused Venezuela's dollar denominated bonds to experience their sharpest drop in six months.
Ramírez added that the legal actions of ExxonMobil were clearly linked the the U.S. government's policy towards Venezuela, which, President Hugo Chavez said on Sunday, involves a strategy of social and economic destabilisation to oust his government.
The Federal Court in NewYork will hold a hearing on Wednesday over an earlier injunction, solicited by Exxon in January, which froze $300 million of PDVSA funds in a U.S bank account. Exxon claims the court injunctions are necessary to secure compensation if it wins the arbitration case.
However, Patrick Esteruelas, of the Eurasia Group in New York said for the injunctions to be upheld Exxon would "probably have to prove that PDVSA has no intention of compensating them."
In contrast, PDVSA has consistently indicated it would negotiate compensation "at a fair price" and is likely to argue on Wednesday that the injunctions are unnecessary because it has paid out partners in previous disputes – in January, PDVSA agreed to pay compensation of close to $1 billion to Total and Statoil, for the partial nationalization of their holdings.
If PDVSA wins its appeal on Wednesday it could potentially help to overturn the British and Dutch court rulings scheduled for later this month.
President Chavez threatened to cut off supplies to the U.S. if PDVSA's assets remained frozen, causing oil prices to spike at almost $95 a barrel on Monday. However, many analysts haved argued the Venezuelan economy is too dependent on income from U.S. oil sales to cut off supplies.
Roger Tissot, an energy consultant based in Canada pointed out that a 2002-03 shutdown by managers at PDVSA, the state oil company, practically cut off oil exports to the United States. While "U.S. consumers saw gas prices rise a few cents for a time, the strike nearly caused the collapse of Venezuela's economy," he said.
Venezuela supplies about 10 percent of U.S. oil imports, accounting for 65 percent of Venezuela's income from oil exports, which in turn account for almost 90 percent of total exports. PDVSA is the key source of funds for the government's social projects that provide free education and healthcare for the poor.
Conversely, in a statement released today, Robbie Diamond, President of the Securing America's Future Energy (SAFE) lobby group, said Chavez's threat emphasizes "the precarious nature of our energy security."
"With global spare oil production capacity as narrow as it is, any threat by a major supplier has the potential for causing immediate and significant fluctuations in the price of oil worldwide, with tremendous economic implications for the United States," he added.
Others have pointed out that while the U.S. could source oil from other countries, PDVSA is particularly reliant on its U.S. refining subsidiary, Houston's Citgo Petroleum Corp., to process the country's heavy crude, which is more difficult and expensive to process than lighter crudes.
However, Ramirez assured that Venezuela is ready to cut supplies immediately if necessary and is working with China to construct three oil refineries capable of processing 800,000 barrels of Venezuelan heavy crude per day.