Venezuela to comply with USD1.6-bil. ICSID award over 2007 expropriation but largest arbitration case still pending

A decision by the Washington-based investment arbitration centre, the International Centre for Settlement of Investment Disputes (ICSID), sentenced Venezuela to pay USD1.6 billion in compensation to ExxonMobil on 9 October for the expropriation of the Cerro Negro and La Ceiba projects in the Orinoco Oil Belt plus 3.25% interest counted from the date of expropriation (27 June 2007). Of the total, USD1.411 billion corresponds to the expropriation of the Cerro Negro project, USD179.3 million for the expropriation of the La Ceiba project, and more than USD9 million is compensation for the reduction in production and exports

ExxonMobil filed the claim against Venezuela at ICSID in September 2007 and originally requested USD10 billion in compensation. David Eglinton, a spokesperson for ExxonMobil, was quoted on 9 October saying that the ICSID decision "confirms that the Venezuelan government failed to provide fair compensation for expropriated assets". However, the ICSID award denied claims by ExxonMobil that Venezuela's seizure had been an unlawful expropriation. Meanwhile, Venezuelan minister of foreign affairs Rafael Ramirez – who until September had served as minister of oil and head of national oil company PDVSA – referred to the award as "successful" and indicative that the US company's demands for compensation had been "exaggerated". Eulogio del Pino, the new president of PDVSA, said the award was a "victory" for Venezuela and was broadcast on state-owned television celebrating with pro-government PDVSA workers. PDVSA put aside just over USD1 billion for pending litigation in 2013. A significant amount of the USD907 million paid by Venezuela to ExxonMobil as a result of a separate arbitration at the Paris-based International Chamber of Commerce (ICC) in January 2012 will be deducted from the USD1.6-billion award.   

The award follows another recent ICSID decision against Venezuela in which it was ordered to pay USD740.3 million to Canadian mining company Goldcorp after the South American country revoked its permit to build the Las Brisas gold and copper project. The latest ICSID decision also comes just after the government has paid USD1.5 billion on its global 2014 sovereign bond and interest payments for PDVSA's 2017, 2027, and 2037 bonds, and is preparing to pay USD4 billion from PDVSA 2014 bonds by the end of October. The recognition and enforcement mechanisms of ICSID are much more effective than the 1958 New York Convention at facilitating the seizure of assets. This is due to the fact that an award rendered under the ICSID Convention has to be taken as "if it were a final judgment of a court" by all states party to the convention, and limits the grounds for annulment.

Outlook and implications

The ExxonMobil case had been one of the largest cases in terms of compensation against Venezuela. The ICSID award had been expected to be larger, which is the main reason Venezuela sees it as a victory. It is clear now that Venezuela is unlikely to seek annulment of the ICSID award and will in turn seek to comply with it. Delays in payment due to the sustained deterioration of the country's economy are more likely than non-payment. Venezuela's international reserves have fallen 33.33% since 2 January 2013 from USD29.7 billion to USD19.8 billion, according to central bank statistics. Venezuela is likely to start negotiations with ExxonMobil (and with Goldcorp separately) in the following days but will try to gain some time. It is still not clear if, given Venezuela's severe shortage of foreign currency and declining reserves, the government will opt to pay compensation from the approximately USD1 billion that PDVSA put aside in 2013 or if it will offer to pay partially in sovereign and PDVSA bonds. At a time when the government is preparing for the pivotal 2015 September parliamentary elections, in which President Nicolás Maduro's leadership will be tested, the government is likely to increase public spending and will need cash to boost the ruling United Socialist Party of Venezuela's (Partido Socialista Unido de Venezuela: PSUV) prospects. A refinery at Chalmette, in the US state of Louisiana, which is owned half and half by Venezuela and ExxonMobil – and which the latter operates – can also potentially be included in the negotiation. A decision not to pay promptly can potentially increase non-payment risks, affect the credibility of Venezuela's claim of being willing to honour its international commitments, and limit external sources of funding in the future. A highly unlikely decision not to pay will potentially increase the costs of borrowing, create more difficulty for Venezuela's minority partners to look for funding to develop the Orinoco Oil Belt, and in the long term increase Venezuelan dependence on Chinese funding.

Another key issue to highlight is that despite Venezuela's withdrawal from the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (also known as the ICSID Convention) on 25 July 2012, this does not affect the government's liability with regards of the ExxonMobil case or the 27 other pending cases there, including the soon-to-be-released ConocoPhillips one. This is because Venezuela’s withdrawal from the ICSID Convention does not have retroactive effect.

Venezuela still faces the largest pending case in terms of expropriation for the seizure of ConocoPhillips' Petrozuata and Hamaca heavy crude oil projects and the offshore Corocoro development project in 2007, which is expected in the coming months. ConocoPhillips' international arbitration claim against Venezuela is for USD30 billion, the largest of the 27 cases it faces at ICSID. IHS expects compensation in this case will be significantly higher than the ExxonMobil case due to the scale of the projects and because a preliminary decision by an ICSID tribunal on 3 September 2013 stated that Venezuela "had breached its obligation to negotiate in good faith" for compensation for taking the ConocoPhillips assets. Following that preliminary decision, ConocoPhillips issued a statement claiming the ICSID ruling stated that "Venezuela unlawfully expropriated…significant oil investments in the Petrozuata and Hamaca heavy crude oil projects and the offshore Corocoro development project." The declaration of unlawful expropriation will be key in the eventual ConocoPhillips ICSID award in terms of compensation and, in particular, in determining lost profits and other damages. The US company issued a statement on 10 October claiming that it has filed a parallel arbitration process, now under the rules of the International Chamber of Commerce (ICC), against PDVSA for contractual compensation related to the Petrozuata and Hamaca projects.