Identifier
Created
Classification
Origin
08CARACAS168
2008-02-11 20:31:00
CONFIDENTIAL//NOFORN
Embassy Caracas
Cable title:  

EXXONMOBIL MOVES TO FREEZE PDVSA'S WORLDWIDE ASSETS

Tags:  EPET ENRG EINV ECON VE 
pdf how-to read a cable
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ZNY CCCCC ZZH
R 112031Z FEB 08
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 0575
INFO RUEHHH/OPEC COLLECTIVE
RUEHAC/AMEMBASSY ASUNCION 0917
RUEHBO/AMEMBASSY BOGOTA 7675
RUEHBR/AMEMBASSY BRASILIA 6031
RUEHBU/AMEMBASSY BUENOS AIRES 1722
RUEHLP/AMEMBASSY LA PAZ 2671
RUEHPE/AMEMBASSY LIMA 0947
RUEHSP/AMEMBASSY PORT OF SPAIN 3535
RUEHQT/AMEMBASSY QUITO 2760
RUEHSG/AMEMBASSY SANTIAGO 4037
RUEHDG/AMEMBASSY SANTO DOMINGO 0538
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHAAA/WHITEHOUSE WASHDC
RHEBAAA/DEPT OF ENERGY
RUCNDT/USMISSION USUN NEW YORK 0961
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RHEHNSC/NSC WASHDC
C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 000168 

SIPDIS

SENSITIVE
SIPDIS

ENERGY FOR CDAY AND ALOCKWOOD
NSC FOR JCARDENAS AND JSHRIER

E.O. 12958: DECL: 10/02/2017
TAGS: EPET ENRG EINV ECON VE
SUBJECT: EXXONMOBIL MOVES TO FREEZE PDVSA'S WORLDWIDE ASSETS

REF: A. 2007 CARACAS 967


B. 2007 CARACAS 426

C. 2007 CARACAS 1281

D. 2007 CARACAS 2346

Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D)

C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 000168

SIPDIS

SENSITIVE
SIPDIS

ENERGY FOR CDAY AND ALOCKWOOD
NSC FOR JCARDENAS AND JSHRIER

E.O. 12958: DECL: 10/02/2017
TAGS: EPET ENRG EINV ECON VE
SUBJECT: EXXONMOBIL MOVES TO FREEZE PDVSA'S WORLDWIDE ASSETS

REF: A. 2007 CARACAS 967


B. 2007 CARACAS 426

C. 2007 CARACAS 1281

D. 2007 CARACAS 2346

Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D)


1. (C) SUMMARY: The Venezuelan press reported on February 6-7
the attachment of a bank account in New York and an English
court's freezing of USD 12 billion in PDVSA assets worldwide.
Initial press reports in Venezuela were exaggerated in both
tone and content. ExxonMobil (XM) filed a request for
arbitration against the BRV with the International Centre for
Settlement of Investment Disputes (ICSID) in September 2006
followed by an arbitration claim for breach of contract
against PDVSA and PDVSA affiliate PDVSA CN with the
International Chamber of Commerce (ICC) on January 25. Both
proceedings arise from the BRV's expropriation of XM's assets
in Venezuela, primarily its equity stake in the Cerro Negro
strategic association. On December 27, 2007 XM filed a
complaint for order of attachment with a federal district
court to block PDVSA from withdrawing funds from escrow
accounts. (PDVSA was able to withdraw the funds following
its pay off of Cerro Negro bondholders.) It is not clear
what effect XM's actions will have on Cerro Negro supply
contract negotiations for shipments to refineries where XM
holds equity stakes. President Chavez threatened once again
to cut off oil shipments to the U.S. if XM and the U.S.
continued to pursue an "economic war" against Venezuela.
XM's actions should not have an effect on PDVSA operations.
END SUMMARY

--------------
XM PLAYS HARDBALL
--------------

2. (C) The Ambassador met briefly on February 8 with XM
International Government Relations Advisor-Americas Milton
Chaves to discuss XM's recent actions to attach PDVSA's
worldwide assets. Chaves began the conversation by stating
that XM filed a request for arbitration against the BRV in
September 2007 with ICSID for claims arising from the
nationalization of the Cerro Negro strategic association. XM

then filed an arbitration claim with the ICC on January 25
against PDVSA and PDVSA affiliate PDVSA CN for breach of
contract.


3. (C) In conjunction with the ICC filing, a British court
granted XM a freezing injunction that states PDVSA cannot
remove from England or Wales any of its assets up to the
value of USD 12 billion. In addition, it cannot dispose of
any assets up to the value of USD 12 billion in any part of
the world. Following the granting of the injunction, courts
in the Netherlands and Netherlands Antilles attached PDVSA
assets based on the UK injunction.

--------------
XM-PDVSA ARBITRATION TIMELINE
--------------

4. (U) Based on court documents supplied by oil analysts and
conversations with contacts, the following is a detailed time
line of XM and PDVSA's arbitration.


5. (SBU) September 26, 2006 XM files an arbitration claim
against the Venezuelan government with ICSID. The original
claim is based on the BRV's unilateral decision to raise
royalty and income tax rates on Cerro Negro. The claims
eventually expand to include five elements: 1) direct
expropriation of XM's interests in Cerro Negro without
compensation; 2) imposition of an extraction tax that
allegedly violated an agreement for a low level of royalties;

CARACAS 00000168 002 OF 004


3) refusal to allow expansion of Cerro Negro under previously
agreed terms; 4) income tax increases in violation of a
previous agreement; and 5) imposition of production and
export curtailments in violation of a previous agreement.


6. (SBU) May 1, 2007 PDVSA assumes operational control of the
strategic associations (Reftel A). PDVSA bases its actions
on a nationalization decree that President Chavez issues on
February 26, 2007 (Reftel B).


7. (SBU) June 22-27, 2007 XM affiliate Mobil CN sends a
series of letters to PDVSA and PDVSA CN stating they have
violated the terms of the Cerro Negro strategic association
contract. On June 26, the BRV signs agreements with the
remaining international oil companies converting the heavy
oil strategic associations into PDVSA-controlled joint
ventures. Both XM and ConocoPhillips exit Venezuela (Reftel
C).


8. (SBU) December 27, 2007 XM files a complaint for order of
attachment with the U.S. District Court in the Southern
District of New York. As a result of PDVSA's decision to pay
off Cerro Negro bondholders, funds being held in escrow
accounts to protect bondholders will be available for
withdrawal. PDVSA CN's share of the funds is approximately
USD 300 million. The court grants a freeze on PDVSA CN's
share of the funds.


9. (SBU) January 24, 2007 The High Court of Justice in
England grants a freezing injunction against PDVSA that
covers USD 12 billion worth of assets worldwide. The
injunction applies to PDVSA's assets "whether or not they are
in its own name and whether they are solely or jointly
owned". The term asset was defined to cover "any asset which
(PDVSA) has the power, directly or indirectly, to dispose of
or deal with as if it were its own". The order does not
prohibit PDVSA from carrying out its "ordinary and proper
course of business". The order also required PDVSA to
provide XM with a list of all of its assets worldwide that
exceed USD 5 million in value within five working days of
service of the injunction. The English court will hold a
further hearing on the injunction on February 22, 2008.

--------------
ADDITIONAL COMPLICATION: SUPPLY CONTRACTS
--------------

10. (C) As reported in Reftel A, the Cerro Negro strategic
association had six supply contracts with the Chalmette
Refinery in Louisiana. Chalmette is a joint venture between
XM and PDVSA. XM officials told Petroleum Attache (Petatt)
in 2007 that some of the contracts were scheduled to expire
in January 2008. BP Venezuela president Joe Perez told
Petatt on January 23 that XM and Petromonagas (the joint
venture that replaced Cerro Negro) were in discussions on
renewing the contracts. He stated BP was confident that the
parties would reach an agreement quickly since it was in both
their interests to do so. BP holds a 16.67% stake in Cerro
Negro/Petromonagas. XM officials have stated in the past
that PDVSA would lose three to five dollars per barrel if it
was forced to sell Petromonagas' production on the open
market (Reftel A). (COMMENT: Although three to five dollars
per barrel may not seem like a great deal of money due to the
current high level of oil prices, we believe it would have a
significant impact on PDVSA. Given PDVSA's precarious cash
flow (Reftel D),it cannot afford to give up revenue. END
COMMENT)

--------------
BRV REACTION: TEPID AT FIRST, THEN BOMBASTIC
--------------

CARACAS 00000168 003 OF 004



11. (C) Somewhat surprisingly, the BRV's initial reaction to
media reports on February 6 and 7 announcing the English and
New York courts' actions were tepid. XM's Chaves told the
Ambassador that XM was surprised that the BRV had not reacted
more forcefully. He also stated XM had been surprised at the
amount of information, particularly false information, that
appeared in the media and Internet.


12. (C) Energy Minister and PDVSA president Rafael Ramirez
repeatedly stated in press conferences and a nationally
televised address that XM's actions would not have an impact
on PDVSA's operations. He also stressed neither the English
nor New York court had rendered a final decision on the
underlying claims in the dispute. Ramirez also claimed that
the BRV was close to reaching a settlement with
ConocoPhillips on compensation for its expropriated assets.
Finally, Ramirez repeatedly stressed that PDVSA does not have
USD 12 billion in assets in either the United Kingdom or the
Netherlands. Local analysts have interpreted this final
statement as evidence that PDVSA does not believe the English
court's injunction applies to its global assets.


13. (C) President Chavez in his weekly Alo Presidente address
on February 10 lashed out at XM. He claimed the attempt to
freeze PDVSA assets was part of a conspiracy to destabilize
Venezuela and said XM would never again "rob" Venezuela. He
stated "the bandits of XM are imperialist bandits, white
collar thieves, corrupters of governments, overthrowers of
governments, they supported the invasion of Iraq and the
bombardment and they continue supporting genocide in Iraq".
He said if XM continued to pursue economic warfare against
Venezuela, Venezuela would "suspend the supply of petroleum
to the United States". (COMMENT: President Chavez' threat to
cut off oil supplies to the United States is nothing new. He
has repeatedly made it in the past. END COMMENT).

--------------
WHAT DOES THIS MEAN IN THE REAL WORLD?
--------------

14. (C) Although XM's recent actions in New York, England,
the Netherlands and the Netherland Antilles certainly
increases the pressure on the BRV to pursue compensation
negotiations, it will probably have little effect in the
"operational" real world. (Press reports of the freeze had a
significant impact on the valuation of PDVSA bonds.) As
noted in paragraph 9, the English injunction in no way limits
PDVSA's ability to carry out normal operations. At most, it
will serve as an impediment for the sale of assets and the
use of proceeds from major asset sales in a limited number of
secondary jurisdictions.


15. (C) XM's attorneys admitted as much in their filings
with the English court. The attorneys began by arguing that
PDVSA could easily transfer funds out of its bank accounts in
England and Wales and restructure trading interests to move
them beyond XM's reach absent the freeze. They also argued
that it is clear that PDVSA was trying to divest itself of
overseas refining interests and that the key drivers in its
decisions were "where the refinery is located and when the
refined product is sold to a foreign oil company".


16. (C) However, the attorneys then admitted that the
majority of PDVSA's assets appear to be located in Venezuela.
They also stated it would be "challenging to obtain
pre-judgment relief" against Citgo's asset in the United
States "as a matter of U.S. law". The filings state that
absent pre-judgment relief there is a "strong likelihood"
that PDVSA's U.S. assets will be dissipated. The filing then
acknowledges "PDVSA's assets outside of Venezuela and the
U.S. appear to be of modest value, compared to the value of

CARACAS 00000168 004 OF 004


the assets held in Venezuela and the U.S.".


DUDDY