Amongst the recent activities of “energy nationalism” by certain governments around the world, by which ownership of large or high-profile oil and gas projects is transferred from private companies to the state by fair means or foul, there has been a consistent murmur of often sneering voices who largely approve of what is going on. These sounds usually originate from embittered natives or (largely clueless) sections of the western political left, who see development of a country’s reserves by a foreign company as tantamount to theft, and only a national company holding the monopoly of power can deliver what is fair and just to the citizens of any given country.
Russia is one such place where the government, with much support from the populace, has made giant strides to wrest control of its flagship oil and gas projects, notably the Shell-managed Sakhalin II development, away from foreigners and back to its own bosom. The method employed is usually to use the power of the state to cite dubious environmental or financial concerns which prevent the further progress of the project unless control is ceded to the state, at which point all concerns miraculously disappear. There is a general feeling amongst Russians and foreigners alike that, since the Russian government holds the monopoly of force in the country, there is little that can be done to stop the state helping itself to the ownership of foreign projects if they really want to. The foreigners (the aforementioned lefties excepted) are mostly resigned to being able to do nothing about it. Most Russians are typically apathetic towards the whole issue and most others outside personal economics and wellbeing, but there is a sizeable minority – particularly amongst the more educated, who tend to have opinions on these things – which sneers triumphantly at the plight of the foreign companies, who are now powerless to stop the Russian government renege on the deals signed by their predecessors, contracts they view as bordering on treasonous.
They’d do well to stop and think more carefully. On the face of it, it does look as though Shell had no choice but to cede ownership of their project to Gazprom, as they had no recourse to arbitration which was independent of the Russian government. But the exporting of oil and gas, upon which most of Russia’s economy depends, is an international business and therefore much of it lies beyond Russia’s control. As such, international oil and gas companies are not as completely helpless in the face of politically contrived domestic disputes as most would think. ExxonMobil is currently demonstrating rather effectively how an international oil company can remove the dispute from the domestic arena into the international, where the national government does not hold a monopoly on decision making and cannot order the use of force whenever it likes.
The row started last year when PDVSA, the Venezuelan state oil company, seized control of several foreign-owned heavy oil projects as part of President Hugo Chavez’s socialist crusade against foreign companies operating in the country. Four foreign oil companies agreed to a minority share and a compensation package, but ExxonMobil and ConocoPhillips refused to budge. Finding themselves physically booted off the project and knowing they’d get no fair hearing in a Venezuelan court, Exxon moved the dispute into the international arena where Hugo Chavez does not enjoy the monopoly of power he does back at home. They appealed to courts in the US, UK, the Netherlands, and Netherlands Antilles to freeze $12bn of PDVSA’s international assets in advance of a compensation claim by Exxon against PDVSA. The freezing of assets is designed to guarantee payment in the event Exxon’s compensation claim is successful. As Upstream Online describes:
ExxonMobil knew where to hit PDVSA hard, and hit it hard it did.
The “fair market value” of the frozen PDVSA assets are likely to be worth far more than any compensation ExxonMobil could win from eventual arbitration proceedings.
ExxonMobil’s move sparked a sell-off in the Opec nation’s debt bonds this week and prompted government officials to tell Venezuelans to remain calm.
The court rulings in several countries mean state oil company PDVSA – Chavez’s main income source – cannot sell certain assets or move some funds while the compensation case is reviewed.
Investors worry the court orders could limit its activities, make it more difficult for PDVSA to raise capital and affect its cash flow.
Wall Street economists and industry analysts have mainly focused on the effect the court orders have on Venezuela’s fixed assets such as refineries.
It was also known the court rulings froze $300 million in a US account.
But on Saturday, the extent of ExxonMobil’s attack appeared wider – targeting more of PDVSA’s cash held abroad.
A central bank director in Curacao said ExxonMobil lawyers had told banks that one of the court rulings meant they had to at least maintain the current level of money PDVSA holds in any account on the Caribbean island.
Exxon did not become the world’s most successful oil company operating in dozens of countries and in places of extreme political and environmental difficulty by being thick. On the contrary, they have years of experience successfully playing political games within and across international boundaries. Exxon is unlikely to recover everything it lost to PDVSA, but it is not the sum of compensation which is the issue here. Exxon is making a stand that international oil companies are not completely powerless to retaliate against arbitrary state action by making life more difficult abroad for the government in question. In moving the dispute into foreign waters, Exxon has found itself with a clear advantage, having experience and knowledge of the foreign courts which Hugo Chavez lacks completely. It is clear that the Venezuelan government is way out of its depth:
Oil Minister and PDVSA president Rafael Ramirez described the ExxonMobil court moves as “judicial terrorism” and PDVSA said it would no longer sell oil to the supermajor, which quit the country last year following the equity spat.
“You have a multinational, imperialist company trying to damage our flagship company,” Reuters quoted Chavez as saying at a meeting with farmers. “But this ship will keep sailing and sailing full of oil.”
“PDVSA will not sink. Venezuela will not sink. This revolution will not sink,” he said, in his first comments on the legal move by the world’s largest oil company.
This might go down well with an audience of Venezuelan farmers, but it probably isn’t going to convince a British court that Exxon is not due some hefty compensation and to rule to unfreeze the Venezuelan assets. Going to court in the west is going to require the Venezuelan government to understand how the laws and judiciaries work in the west and how they are independent of the government in charge, a task which requires a calm, sensible approach without room for fiery rhetoric. I’m not convinced an appointee of Hugo Chavez is capable of this.
It is unlikely that either PDVSA or Exxon will come out as winners of this dispute, nor will it adversely affect either company too much. But it has assuredly come as an embarrassment for the Venezuelan government, who have found themselves wrongfooted and forced to fight on unfamiliar territory where their usual rules of combat count for nothing against an opponent who is better prepared and quicker on their feet, with the whole battle being done in full public view. It is not a situation which a government used to making its own rules and controlling the media would be in a hurry to find itself in.
With Russia increasing its foreign investments, many through the state-owned energy companies Gazprom and Rosneft, I wonder if the government in the Kremlin is taking note of Exxon’s dispute with PDVSA and the position in which the Venezuelan government now finds itself. At the very least, they should be preparing to tread far more carefully over the issue of Exxon exporting gas from its Sakhalin I project than they did when they gained control of Sakhalin II at the expense of Shell.