Big Oil's Victory in Venezuela

ExxonMobil has won a court battle to freeze $12 billion in assets of Petroleos de Venezuela as compensation for nationalization of projects

by Peter Wilson

Venezuelan President Hugo Chávez has repeatedly seized assets of international oil companies operating in the country as part of his socialist revolution. Now, Big Oil is striking back.

ExxonMobil (XOM) said on Feb. 7 that courts in Britain and the U.S. had granted its requests to freeze more than $12 billion in assets of Venezuela's state oil company, Petroleos de Venezuela (PDVSA). ExxonMobil is seeking compensation for the nationalization of two oil projects in the country that are together worth several billion dollars.

"The freezing order prohibits PDVSA from disposing of its assets worldwide up to a value of $12 billion," ExxonMobil spokeswoman Margaret Ross said in a prepared statement. The company "has also obtained attachment orders from courts in the Netherlands and Netherlands Antilles against PDVSA assets in each of these jurisdictions up to $12 billion." All court orders are subject to appeal, she said.

Bad Timing for PDVSA

A Petroleos de Venezuela spokeswoman confirmed the company had been informed of ExxonMobil's actions, but she declined further comment. Western oil executives in Venezuela said the orders would make it difficult for PDVSA to transfer assets as pending arbitration battles heat up.

ExxonMobil and ConocoPhillips (COP) have said they invested more than $3.5 billion in their Venezuelan heavy-crude oil ventures. Both ExxonMobil and ConocoPhillips filed arbitration requests last year with the International Center for Settlement of Investment Disputes. Arbitration is still in its preliminary phases, and a final decision could be years away. "What Exxon did makes perfect sense. They want to make sure that there is something they can get," says James Williams, who heads the London (Ark.)-based WTRG oil consultancy firm. "They are trying to make sure that Chávez doesn't do an end run, that he doesn't seek to circumvent the process by selling assets."

ExxonMobil's actions couldn't have come at a worse time for PDVSA, which is struggling to raise money as part of its $77 billion investment program to more than double the country's oil production to 5.8 million barrels a day by 2012. Venezuela is hoping international oil companies will provide about a third of the funds.

Seizing Stakes from Six Oil Giants

Venezuela's move to assume majority control of the projects was the latest example of emerging oil producers placing greater demands on global oil giants, many of which struck exploration and production deals years ago when oil prices were much lower. Russia has pushed BP (BP) and Royal Dutch Shell (RDSA) to agree to less favorable terms on large projects in Siberia and the Far East.

The Orinoco Belt, a basin near the Orinoco River, is believed to hold up to 235 billion barrels of crude. Global oil companies were awarded contracts in the 1990s to take extra-heavy crude, which has the consistency of tar, and refine it to higher, more profitable blends for export. Venezuela began changing its royalty agreements with the oil companies in October, 2004. At that time, companies were paying 1% of the value of oil extracted from the ground. That was unilaterally raised to 16.67%, and then to 30%.

Last July, Venezuela forced six oil giants, including ExxonMobil and ConocoPhillips, to hand over equity stakes of 60% or more in four important ventures to PDVSA. Four of the companies, including Chevron (CVX), BP, France's Total (TOT), and Norway's Statoil (STO), agreed to the handover. The seizures included ExxonMobil's Cerro Negro affiliate and its profit-sharing venture to develop the La Ceiba oil field.