Sunday, March 23, 2008

Exxon's $12 Billion Venezuela Asset Freeze Overturned

Exxon's $12 Billion Venezuela Asset Freeze Overturned

By Caroline Binham and Joe Carroll

Go To Original

Exxon Mobil Corp.'s freeze on $12 billion of Venezuelan oil assets was overturned by a U.K. court in a setback for the world's largest energy company in its dispute with President Hugo Chavez.

A London court today dissolved an injunction freezing assets belonging to Petroleos de Venezuela SA, known as PDVSA, because the dispute wasn't connected to the U.K. Exxon, which is battling in arbitration to win compensation for an oil field Chavez seized last year, said it won't appeal the ruling.

The decision means PDVSA will face less skepticism from lenders as it seeks financing for a $70 billion expansion to double crude output in the next four years, said Erich Arispe, an analyst at Fitch Inc. in New York. Asset freezes remain in place in the U.S. and two other countries, Exxon said.

``It's an early skirmish in a war of conflicting philosophies,'' said Chris Ross, a vice president at Boston- based CRA International Inc. who advised Venezuela in the 1990s on opening the country's oil sector to foreign companies. ``Venezuela's won that skirmish.''

Irving, Texas-based Exxon said the ruling wasn't on the merits of the underlying dispute. Judge Paul Walker ``concluded that the English courts shouldn't be issuing pre-judgment orders'' with reference to international arbitrations, Exxon spokesman Alan Jeffers said in a telephone interview.

Shares, Bonds Rise

Exxon rose $2.68, or 3.1 percent, to $88.47 in New York Stock Exchange composite trading.

Venezuela's benchmark 9 1/4 percent bonds maturing in 2027 rose 2 cents on the dollar, the most since Dec. 3, to 96.75 cents on the dollar, according to JPMorgan. That pushed the yield to 9.62 percent, down 24 basis points.

Courts in the U.K., the U.S., the Netherlands and the Netherlands Antilles issued orders in December and January prohibiting PDVSA from shifting or liquidating assets such as bank accounts, refineries and storage terminals. Those measures forced PDVSA to postpone a $1 billion refinery refinancing and threatened to hamper plans to tap new fields to reverse a 34 percent slide in crude output since 1999.

``The Venezuelans have an ambitious plan that involves injecting a lot of money in new projects to double production,'' Arispe, a sovereign debt analyst, said in an interview. ``If the assets had remained frozen, that could have triggered additional declines in production, which is already falling, and that would have trickled into reduced revenues to the government.''

Pressure Eased

Judge Walker's ruling also is a victory for Chavez amid food shortages and rising street crime that threaten the regime's popularity eight months before state and municipal elections, said Richard Francis, an analyst specializing in Andean region debt at Standard & Poor's in New York.

``The pressure is still on for the government to spend major amounts on social programs and such ahead of the elections in November,'' Francis said. ``This gives them some breathing room.''

Exxon must pay 380,000 pounds ($767,000) of PDVSA's legal fees within 21 days, said Gordon Pollock, a lawyer for PDVSA. He said his client would be seeking higher legal costs. The Venezuelan company also will seek, by June 18, compensation for damages suffered because of the freeze, he said.

``This campaign, this assault of lies that tried to oppress our country, that tried to freeze the assets of our companies, that tried to say our domestic industry was broken, all of that has been crushed,'' Venezuelan Energy and Oil Minister Rafael Ramirez said today on state television.

Case for Compensation

Exxon is pursuing dual claims against Venezuela through the International Chamber of Commerce in New York and the World Bank's International Centre for Settlement of Investment Disputes in Washington. If either panel awards Exxon compensation, the company may have to return to local courts to enforce the awards, said Joseph Profaizer, a lawyer at Paul, Hastings, Janofsky & Walker LLP in Washington.

``If they win such an order and Caracas doesn't agree to comply, then they go to the courts where the assets are, whether that's London, Madrid, New York, Mexico City or wherever,'' said Profaizer, who specializes in international arbitration.

Exxon lost 425 million barrels of proved reserves when Chavez last year ordered PDVSA to seize control of four heavy- oil ventures operated by foreign companies, including Exxon's Cerro Negro project. The field had a 48 percent profit-to-sales ratio, quadruple the company's global average.

Exxon won a U.S. court order Feb. 13 that extended a freeze on as much as $315 million that would have been transferred to PDVSA in a bond buyback transaction.

The dispute stems from a 1997 agreement between Mobil Corp. and PDVSA to explore for extra-heavy crude in the Orinoco oil belt. Exxon, which later acquired Mobil, claimed PDVSA agreed to indemnify Mobil if it later expropriated Mobil's interests.

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