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Exxon Pursuit of Venezuelan Cash ‘Not Over Yet’ After Ruling

January 03, 2012, 6:45 PM EST

(Adds S&P analyst’s comment on PDVSA debt rating in 13th paragraph.)

Jan. 3 (Bloomberg) -- Exxon Mobil Corp.’s four-year hunt for billions of dollars in nationalized Venezuelan oil profits isn’t finished after an international panel slashed the U.S. oil company’s claim by 89 percent.

Venezuela’s state-controlled oil producer, known by the acronym PDVSA, was ordered to pay Exxon $746.9 million for the 2007 seizure of oil wells, crude-processing facilities and related equipment, according to a copy of the International Chamber of Commerce’s Dec. 23 ruling obtained by Bloomberg News. The award represents 11 percent of the $7 billion sought by Exxon, the world’s largest company by market value.

Exxon, the first international energy explorer to abandon Venezuela four-and-a-half years ago when Hugo Chavez consolidated control of the nation’s oil industry, is counting on a separate arbitration case overseen by the World Bank to win billions in potential profits the company says were lost as a result of the nationalization, said Lysle Brinker, director of energy equity research at IHS Inc.

“Initially, this looks like a pretty low number because it does not fully reflect the value of the assets Exxon lost,” Brinker said yesterday in a telephone interview from Norwalk, Connecticut. “But this is not over yet.”

Exxon and the Venezuelan government are scheduled to resume arguments before the World Bank panel in February.

Cerro Negro

Exxon sought arbitration with PDVSA and the Venezuelan government in 2007, a decade after Mobil Corp. began drilling wells in the Orinoco River basin and building facilities to process the region’s thick, tar-like crude. Exxon acquired Mobil and assumed operations of the Cerro Negro venture in 1999.

PDVSA said yesterday on its website that it will pay $255 million in cash for the judgment, after accounting for about $300 million in a frozen New York bank account and $191 million in Exxon debt that the Venezuelan company will cancel. The total amount of the International Chamber of Commerce ruling was for $907.6 million, minus a $161 million counterclaim by PDVSA.

ConocoPhillips, which joined Exxon in rejecting Venezuela’s new terms in 2007, also is awaiting a ruling in its case before the World Bank panel.

During the final year of operations under Exxon’s control in 2006, the Venezuelan assets had net income of $362 million on sales of $758 million, a profit margin that was quadruple the company’s worldwide average. Exxon originally sought $12 billion in compensation for the nationalization and later lowered its demand to $7 billion.

‘Fair-Market Value’

Exxon’s $406 billion market value exceeds Venezuela’s total economic output and is larger than the gross domestic products of all but 23 of the world’s nations.

Chavez’s seizure of assets cost Exxon 425 million barrels of proved reserves at the end of 2007, which had a market value of $38 billion at the time of the nationalization, based on Bloomberg calculations. Exxon stock rose 16 percent in 2011, the largest annual increase since 2007.

The ruling by the New York-based International Chamber of Commerce probably has few implications for foreign investment in Venezuela’s energy sector, Brinker said. Although U.S. and European producers such as Chevron Corp., Total SA and Statoil ASA yielded to the 2007 seizures that made them junior partners to PDVSA, Chavez has been increasingly courting investments from Russian and Chinese energy firms, Brinker said.

Ratings Unchanged

Standard & Poor’s Ratings Services today said it won’t change its B+ rating on PDVSA as a result of the ICC judgment. Given that PDVSA held about $9 billion in cash as of June 30, “the compensation amount will not effect the company’s liquidity,” Fabiola Ortiz, an S&P analyst based in Mexico City, said today in a note to clients.

The separate proceeding before the World Bank’s International Centre for the Settlement of Investment Disputes is “larger” than the ICC case, Patrick McGinn, an Exxon spokesman, said yesterday in an e-mailed statement.

“We recognize Venezuela’s legal right to expropriate assets subject to compensation at fair-market value,” McGinn said. “This ICC arbitration award represents recovery on a limited, contractual liability of PDVSA that was provided for in the Cerro Negro project agreement. Contract sanctity and respect for the rule of law are core principles used to manage our business over the long term.”

World Bank Panel

The three-person World Bank panel was created in August 2008 and began deliberations in November 2008, according to case documents published on the ICSID’s website. The panel was occupied with jurisdictional arguments until June 2010 and disputes about document production through March 2011, the filings showed. Hearings are scheduled to resume next month, McGinn said.

The panel members are French jurist Gilbert Guillaume, University of Geneva professor Gabrielle Kaufmann-Kohler, and Egyptian lawyer Ahmed Sadek El-Kosheri, according to the ICSID’s website.

Guillaume, 81, adjudicated a century-old territorial dispute between Indonesia and Malaysia when he was president of the International Court of Justice from 2000 to 2003. He also presided over Belgium’s unsuccessful attempt to prosecute an African politician for war crimes.

Kaufmann-Kohler, a former director of Zurich-based UBS AG, was Exxon’s nominee to the panel. El-Kosheri, 79, was Venezuela’s nominee. He’s a former legal adviser to the Kuwaiti oil ministry and a partner in the Cairo law firm Kosheri, Rashed & Riad. Guillaume was assigned to the case by the ICSID.

--With assistance from Corina Pons in Caracas. Editors: Jessica Resnick-Ault, Charles Siler

To contact the reporters on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net; Nathan Crooks in Caracas at ncrooks@bloomberg.net