ExxonMobil and Venezuela Diverge on Compensation as War of Words Continues

Companies Differ over Compensation

The war of words between the United States and Venezuela is continuing in the wake of the court orders secured by ExxonMobil freezing US$12 billion in international assets held by the Venezuelan state oil company PDVSA (see Venezuela: 11 February 2008: Venezuelan President Weighs In On ExxonMobil Court Orders; Threatens Supplies to U.S.). The action was intended to prevent PDVSA from selling holdings that might otherwise be used to compensate the major for the loss of its Venezuelan projects. However, in a further sign of how far apart the two companies are from reaching a settlement over the compensation dispute, reports today indicate that ExxonMobil had valued its 41.66% stake in the Cerro Negro project at US$5 billion, while PDVSA has put a value on the assets of US$715 million.

Venezuela retaliated to the asset freeze with the suspension of commercial relations with the U.S. major, although it continues to supply oil to the Chalmette refinery. Reuters reported that the U.S. Energy Secretary Sam Bodman said yesterday that if it needed to ExxonMobil could access the strategic reserve for oil that would otherwise be supplied by Venezuela. Meanwhile, Venezuela has already received expressions of interest from companies in Europe and China for the 600,000 barrels a month that were formerly supplied to the U.S. major.

The U.S. Energy Secretary is not the only government official to have shown support for ExxonMobil over the past few days. Earlier this week, a spokesperson for the U.S. State Department Sean McCormack expressed the department's “full support” for the major's efforts to obtain “fair” compensation, but was careful to portray the dispute as a “commercial” one between Venezuela and ExxonMobil and to leave the resolution of the dispute to international courts. This approach contrasts with that of the Venezuelan government, which has been portraying the dispute as a political one between Venezuela and the United States and the asset freeze as an attack against its national sovereignty.

Outlook and Implications

The legal action taken by ExxonMobil reflects the company's more aggressive style at dealing with any changes to contract terms in the countries where it operates. It was earlier the only company to challenge a tax hike for projects in the Orinoco heavy oil belt and rejected new contracts for both conventional and heavy oil production. In contrast, companies that have adopted a more conciliatory approach to negotiations with the Venezuelan government have been able to reach amicable settlements. The two U.S. companies that saw their electricity assets nationalised last year received financial compensation and Total, BP, and StatoilHydro have all reached agreements over compensation for fields that they have exited. According to comments from the Minister of Energy and Petroleum Rafael Ramírez, an agreement with Eni over an arbitration claim it lodged over the Dación field is close and talks with ConocoPhillips are also ongoing.

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