PDVSA in London courts to defend Venezuelan oil sovereignty in Exxon dispute

Venezuelan state oil company Petróleos de Venezuela (PDVSA) initiated court proceedings today in London to overturn the freezing of $12 billion of its assets, which the U.S.-based Exxon Mobil Corporation won in British courts on February 7th.

Venezuelan state oil company Petróleos de Venezuela (PDVSA)
initiated court proceedings today in London where it will seek to overturn the
freezing of $12 billion of its assets, which the U.S.-based Exxon Mobil
Corporation achieved in British courts on February 7th.

The hearing is expected to last 3 days and is part of a
compensation dispute over the nationalization of what used to be Exxon's 41.6%
stake in a Venezuelan Orinoco River belt oil project called Cerro Negro.

PDVSA is expected to argue that it intends to compensate
Exxon fully, as it has already honored $1.8 billion in indemnifications to
other companies whose stakes in the Orinoco River belt were nationalized.

PDVSA will present evidence from records that the value of
Exxon's stake was $750 million when it was nationalized, and the highest amount
Exxon ever solicited during negotiations was $5 billion, which PDVSA claims
should be the ceiling for an assets freeze, if any assets remain frozen at all.
Exxon's claim to $12 billion is based on the company's calculations of
projected earnings had the Cerro Negro project been fully realized.

Venezuela's Energy and Petroleum Minister and PDVSA
President Rafael Ramírez said the maximum amount PDVSA can justifiably offer to
Exxon is around $1 billion, and it is willing to cede its 50% stake in the
Louisiana-based Chalmette refinery, which it co-owns with Exxon, if necessary
as part of the deal.

Last week, Ramírez made a public appeal to Exxon to return
to established arbitration proceedings that were underway in the International
Centre for the Settlement of Investment Disputes (ICSID) before Exxon averted
them by pursuing the assets freeze, which Ramírez labeled an act of "judicial

Ramírez also railed against having to submit to international
courts at all, proclaiming that "in our legal tradition of petroleum policy,
never was arbitration contemplated for resolving themes related to sovereign
decisions in any court and much less in courts outside of the national

In a speech to the Venezuelan National Assembly, Ramírez
criticized the previous government which had "handed over" the country`s
sovereignty when it signed the original deal with Mobil (which had not merged
with Exxon yet) in 1997.

On top of that, Exxon's move to freeze PDVSA assets after
the case had already been submitted to ICSID arbitration is "invalid" because
it "lacks legal basis" in ICSID conventions, according to Mario Isea, a
representative in the National Assembly, and former PDVSA manager Gustavo Gabaldón
in an interview with Panorama newspaper Monday.

Isea and Gabaldón also pointed out that submission to
international arbitration runs counter to Article 151 of the current Venezuelan
constitution, which states that "contracts of public interest…that are not
resolved amicably by the contracting parties, will be decided by the competent
courts of the Republic, in conformity with its laws, without any motive or
cause giving origin to foreign demands."

Venezuelan Ambassador to the United States, Bernardo Álvarez
Herrera, suggests that the core issue in the dispute is whether the
commercialization of natural resources will promote the healthy growth of
developing nations or mainly benefit stockholders in international companies.

Herrera, the former Vice Minister of Gas and Petroleum and
Director of Hydrocarbons in the Energy and Mining Ministry, recounted in an
interview with the Mexican newspaper La Jornada this week that in the years
following the nationalization oil and the creation of PDVSA in 1976, the Venezuelan
state received 70% of oil dollars and foreign companies provided services but
did not receive land concessions.

However, administrations in the 1980s and 90s granted
autonomy to PDVSA, which became more powerful than the state, and new types of
profit sharing agreements were innovated which permitted concessions, while the
state's share of oil income lowered to 40%, Herrera explained.

"What Chávez did was return to the notion that petroleum is
a strategic natural resource and not just another raw material [to be exploited
and managed by the highest bidding corporation,]" Herrera asserted.

Exxon intends to establish a "legal precedent" to use
against governments that assert public control over natural resources,
according to Patrick Esteruelas, a risk analyst with Eurasia Group in New York
who was interviewed this week by Bloomberg news.

Meanwhile, the price of oil rose to a record $101.43 per
barrel during yesterday's New York trading sessions, and closed at $100.88 per
barrel, a price increase that Minister Ramírez attributes partially to
speculations about the outcome of the Exxon-PDVSA dispute.

PDVSA's total assets are now valued at $109 billion, while
those of Exxon, the most profitable company in the world in 2007, stand at $290

Amidst soaring oil prices, PDVSA has sold $2.8 billion of
its foreign assets that are not in frozen accounts, and deposited $1.3 billion
of this money into the National Development Fund (FONDEN), which sustains
Venezuela's extensive social programs.

Opposition parties criticize the government for using
increased oil income to extend credit on favorable conditions to some 15
neighboring countries in the Caribbean and South America, including Cuba,
Nicaragua, and Argentina, through hydrocarbon-based economic accords such as
"PetroCaribe". The policies, which involve two-year grace periods, 2% annual
interest, and 15-20 year payment plans, have increased the amount that foreign
countries owe to Venezuela by 48% since 2006, to just over $1 billion.

Meanwhile, Argentine President Cristina de Kirchner publicly
advocated Venezuela´s full admission to the South American economic integration
project MERCOSUR because "we need Venezuela in the Latin American energy
equation… in order to sustain this growth which surely will have beneficial
effects on all of our peoples." President Kirchner declared that inviting
Venezuela into the deal is "pure rationality with respect to energy
operations." The ratification of Venezuela in MERCOSUR lacks only the
congressional approval of Brazil and Paraguay.