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ConocoPhillips wins arbitration against state-owned Petroleos de Venezuela

May 14th, 2018 6:31 pm | By admin | Posted In Business News

After a long battle, ConocoPhillips was benefited in an arbitration that gave this corporation the right to take Petroleos de Venezuela’s assets for an amount of $2.04 billion. PDVSA is a state-owned oil corporation based in Venezuela that provides for most of the government’s budget through oil exports. This arbitrage means a relevant victory for the rule of law and a significant loss for the Venezuelan government, which is already in financial trouble as a result of inefficient economic policies and a substantial deterioration of its oil industry.


The story started in the ‘90s when the Venezuelan government granted concessions to several oil corporations with the purpose of exploiting heavy oil reserves, partnering with PDVSA. The process was named the “oil opening” and was part of radical policies taken by late President Carlos Andrés Pérez in 1992 to increase oil production and drive economic growth. Curiously, President Pérez nationalized the oil industry 20 years before in his first presidential period. Convinced of the need for different economic policies, he initiated an aggressive strategy to open and modernize the country in the ‘90s.


The world’s biggest players entered in the Venezuelan oil scene and massive investments were made. Everybody seemed happy—huge, heavy oil reserves would be finally exploited with numerous benefits for the Venezuelan economy and the oil multinationals would be participating in world-class crude projects, so they were favored too.


However, the story drastically changed after the victory of late Hugo Chavez, who was President of Venezuela from 1999 to 2012. President Chavez took power with a nationalist speech, so he acted fiercely against foreign companies. In 2007, Chavez decided to nationalize the joint ventures in which PDVSA had private partners. He believed strongly in government control over most of the industries.


ConocoPhillips was strongly affected by the government’s decision since it had investments in two large projects, La Hamaca and Petrozuata.  According to ConocoPhillips, the nationalization was an “unlawful and uncompensated expropriation of ConocoPhillips’ investments.”


ConocoPhillips took advantage of international arbitration clauses governed by the rules of the International Chamber of Commerce (ICC) and were awaiting a decision until April 2018, when the organization favored the US-based company. ConocoPhillips was planning to take PDVSA’s assets located in the Caribbean but PDVSA announced its willingness to pay the debt a few days ago.


Nevertheless, this win is just one of several attempts to receive the entire compensation. According to ConocoPhillips, the company expects to receive more than $20 billion. And this is not the only corporation foreseeing rewards from PDVSA. ExxonMobil also sued PDVSA because of the nationalization process that took place in 2007.


The ICC decision means terrible news for an oil company that is already in bankruptcy. Although the “oil opening” planned to achieve a production of 6 million barrels per day, PDVSA is currently producing less than 2 million. The oil income has been steadily declining during the past years as politics invaded the oil industry and distorted profitability. Given the political and economic circumstances in Venezuela, if PDVSA runs out of money, the Venezuelan government will run out of money too.


PDVSA already shows signals of a very weak financial situation. A Chinese company and a Canadian firm have sued PDVSA because of defaults related to suppliers. ConocoPhillips’ conquest is likely to drive more legal actions from numerous companies affected by PDVSA’s poor and negligent management.


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