Exxon Mobil Plays Hardball With Venezuela

by: Felix Salmon February 10, 2008 | about stocks: XOM    
Felix Salmon

Felix Salmon

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Did you have any idea that the bonds of PDVSA, the Venezuelan state oil company, are trading at just 65.7 cents on the dollar? I didn't, but they are now, partly because of an injunction that Exxon Mobil (XOM) has managed to get in three international courts, freezing as much as $12 billion of PDVSA's assets.

The size of the asset freeze seems enormous, relative to the size of the dispute between the two oil companies:

Exxon Mobil's 41.7 percent stake in a heavy oil project in Venezuela's Orinoco Belt region had a net-book value of about $750 million, according to a September filing with the U.S. Securities and Exchange Commission.

I have a copy of one of the injunctions, but it's no help at all in terms of working out how the $12 billion figure was arrived at. I have a feeling it's just an enormous number calculated to be bigger than the sum total of assets which PDVSA has offshore, forcing PDVSA into an arbitration process and preventing the company from simply refusing to follow through on whatever the arbitrator decides.

Still, these kind of hardball tactics are eyebrow-raising in the world of oil companies, given that Exxon Mobil has every incentive to want to have access to many international waters over the long term. Other oil-rich countries might well be following these proceedings very closely, and wondering whether they really need to be doing business with such a litigious firm.

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This article has 9 comments:

  •  
    Feb 10 11:05 AM
    Felix: The reason that PDVSA's bonds trade so much below par is that they were sold to local investors at the official rate of exchange and they turned around and sold them at discount to foreign investors, effectively "buying" foreign currency at a rate between the official one and the parallel one. In this manner the Government issued the bonds at a lower coupon than if it issued them directly abroad, saving some money and only with the discount did yields go to the Venezuelan yield curve (or slightly above). Here is my take on the whole affair:

    blogs.salon.com/000133...

    blogs.salon.com/000133...
    Reply | Link to Comment
  •  
    Feb 10 12:05 PM
    didn't chavez change the rules of the agreement with xom after xom invested millions in refineries there?
    Reply | Link to Comment
  •  
    Feb 10 02:14 PM
    They were heavy crude upgraders, like Suncor in Canada. The Government tried to force ExxonMobil to be a minority or else (BP was also involved). They refused and the Government took over the project and offered a small compensation in the form of oil in the future. Exxon went to the international arbitration specified in the original contracts.
    Reply | Link to Comment
  •  
    Feb 10 04:33 PM
    Utter poppycock. Would you not consider litigation if you had had your contract rights unilaterally abrogated?
    Reply | Link to Comment
  •  
    Feb 10 08:59 PM
    They went to arbitration but asked for an injunction on assets, just in case PDVSA sells all its assets in theUS (mostly CITGO)
    Reply | Link to Comment
  •  
    Feb 11 08:18 AM
    Good for XOM! If more of the majors acted like Exxon in their dealings with these oil rich countries who bring them in to develop their assets, using the firms vast tecnology and cash and then try to change the terms and screw them out of assets, maybe this mess wouldn't exist. If Exxon doesn't get ful price for it's assets, Bush should nationalize Citgo and see how Hugo likes that.
    Reply | Link to Comment
  •  
    Feb 11 03:42 PM
    Hugo is a Cocaine Crazy, stealing $400 million todate. As Thief in Chief I feel for that country. He changed the contract more than 3 times in five years, and the last one was the line in the sand.
    Reply | Link to Comment
  •  
    Feb 12 10:02 PM
    True, all these rich oil countries will now look more favorably on smaller oil companies that are less intimidating and easier to control, that's where BIG oil will lose out in the long run. Good will takes time to materialize into cash, but it does, eventually. I'd still rather invest in the big ones as they are better equipped to play in the big leagues and thereby less risky in the case of another 'Chavez' surfacing somewhere else...
    Reply | Link to Comment
  •  
    Feb 24 02:59 PM
    Incredibly naive article. I am quite happy to see XOM not roll over and accept Hugo's blatant nationalization- if that is not justification for a freeze of assets I don't know what is. What goes around comes around. Don't forget, many of the companies that entered Venezuela did so when prices were horrendous in the late 90's so do they not deserve now to make a decent profit. Of course Venezuela's production is now dropping due both to the nationalization of assets and the mass exodus of educated oil field workers to more stable countries where there services are better apprciated.
    Reply | Link to Comment
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