Exxon Strikes Back At Venezuela

By Jason Simpkins
Associate Editor

Exxon Mobil Corp. (XOM) has obtained a court order to freeze $12 billion in assets from Petroleos de Venezuela as compensation for nationalization projects.

It is the boldest retaliation yet by an international oil major against the trend of governments usurping control over natural resources as energy and commodity prices have soared.

"The freezing order prohibits [Petroleos de Venezuela] from disposing of its assets worldwide up to a value of $12 billion," Margaret Ross, a spokeswoman for Exxon Mobil said in a prepared statement.

Last summer, Venezuela forced six oil majors to hand over equity stakes of 60% or more to Petroleos de Venezuela. However, Exxon Mobil and Conoco Phillips (COP) opted to walk away from their contracts rather than accept a minority role. Exxon was forced to relinquish control of its Cerro Negro affiliate as well as its joint venture to develop the La Ceiba oil field.

Exxon and Conoco say they invested more than $3.5 billion in their Venezuelan oil ventures. They have filed arbitration requests with the International Center for Settlement of Investment Disputes, but it could take years before the dispute is resolved.

"What Exxon did makes perfect sense," James Williams, head of London-based oil consultancy firm WTRG, told BusinessWeek. "They want to make sure that there is something they can get."

It's bad timing for Petroleos de Venezuela, which is struggling to finance its debt. The company took on $13.1 billion in new debt last year, El Univesal reported. Its overall debt now stands at $16 billion.

While Petroleos de Venezuela has been the beneficiary of higher oil prices and Hugo Chavez's nationalization projects, the company's wallet has also been tapped by the government, which is struggling to finance social development programs.

In 2006, Petroleos de Venezuela spent $13.3 billion on state-run social programs, up from $6.9 billion in 2005 and more than double the amount the company invested in oil and natural gas projects.

Now, Petroleos de Venezuela is struggling to raise money for a $77 billion investment program to more than double Venezuela's oil output. Oil production has dropped 25% since Chavez took office in 1999.

Petroleos de Venezuela bonds posted their biggest-ever intraday drop on Friday. The yield on its 5.25% bond due in April 2017, jumped 90 basis points (0.9%) to 11.63% at 10 a.m. according to Bloomberg News.

The asset freeze will make it "virtually impossible" for Petroleos de Venezuela to borrow money in international markets, Boris Segura, a Latin America economist at Morgan Stanley, told Bloomberg.

Venezuelan Energy and Oil Minister Rafael Ramirez said that Petroleos de Venezuela was preparing its defense and would fight the ruling.

"This is pure judicial terrorism," Ramirez told reporters in Caracas. "If they think that with this they will get us to backtrack on our nationalization policies, well, gentlemen from Exxon Mobil, you are dead wrong again."

Ramirez dismissed the compensation demands of the world's largest oil company as "ridiculous" and accused it of violating arbitration proceedings.

Venezuela is just one of many emerging nations seeking to extort more money and power from foreign oil majors developing national assets.

Last year, Royal Dutch Shell (RDS.A, RDS.B) was pressured into selling 50% plus one of its shares of the Sakhalin-2 oil and gas project to Russia's state-owned energy giant, OAO Gazprom.

Most recently Eni S.p.A (E), the Italian oil company, ceded its control over operations at the Kashagan oil field in Kazakhstan, one of the world's largest undeveloped reserves to Kazakhstan's state oil company, KazMunayGaz.

Related Articles and Links:

• Bloomberg:
  Venezuela to Fight Exxon's $12 Billion Asset Freeze

• BusinessWeek:
  Big Oil's Victory in Venezuela

• Money Morning:
  The New Cold War: How Russia Has Turned Its Energy Exports Into Weapons of Diplomacy

• Money Morning:
  Kazakhstan Squeezes the Last Drop Out of Eni

• Money Morning:
  Where Should We Invade to Bring Down Oil Prices?