It looks like another piece of drama is unfolding within the oil industry, and this time in the international courts of arbitration. Not surprisingly, the bigwigs are involved, and the latest event has the potential to reshape the dynamics of the oil industry in the next decade.
PDVSA: 1, Exxon: 0
The Paris-based International Chamber of Commerce has ruled that Venezuela's state-owned oil company Petroleos de Venezuela SA, or PDVSA, pay a-far-from-satisfactory $907 million to ExxonMobil (NYSE: XOM ) . And in a bizarre twist, Venezuela has declared that it owes the Irving-based company only $255 million.
In 2007, Venezuelan President Hugo Chavez nationalized the country's oil reserves and related assets, which saw Exxon forfeiting its 41.7% interest in the Cerro Negro Project. In response, according to PDVSA's claims, Exxon had initially demanded $12 billion in compensation. Now that's exactly what has piqued my interest. $12 billion? To put things into perspective, the figure is in the region of the company's average quarterly net profits!
You don't have to search hard to figure out why the figure is so high, though. The U.S. Geological Survey estimates that Venezuela's Orinoco Belt contains 513 billion barrels of technically recoverable oil. The original-oil-in-place is estimated to be a whopping 1,300 billion barrels. Exxon lost at least 425 million barrels of oil and 219 billion cubic feet of natural gas in terms of proved reserves. But I suspect this is a very conservative figure. In fact, according to analyst estimates, at the time of nationalization, the market value of the assets stood at an eye-popping $38 billion.
Delving into the ruling, PDVSA claims that it needs to pay up only $255 million in cash in the next 60 days. Exxon's $160 million debt has already been credited by the tribunal, while a New York bank has frozen $305 million in its account. Additionally, the state-owned oil company claims that Exxon has acknowledged that it owes $191 million from the repurchasing of the Cerro Negro bonds.
The last bit of information looks a little vague. Decidedly, Exxon is not satisfied and thus intends to pursue the case with the International Center for the Settlement of Investment Disputes, or ICSID -- a panel that has the blessing of the World Bank. Exxon feels that there are more violations to take into account.
Exxon's investment in the Cerro Negro project has been through its Dutch subsidiary. The reason? The Netherlands and Venezuela have a treaty to protect each other's investors. This is where the Venezuelan government might have violated the law. Mr. Chavez's 13-year rule has been seeing cracks, and the nationalization has been aimed at winning a reelection bid by boosting public spending and housing for the poor.
Not so attractive
But will the current ruling have an effect on the oil industry at large? As of now, the answer would be no. While Venezuela has the second-largest heavy oil reserves in the world after Canada's Athabasca oil sands, there's a lot more than that. Digging out the reserves is a different ball game. PDVSA doesn't look capable of pulling off the job alone. The nationalization will only distance private players.
ConocoPhillips had rejected the expropriation in 2007, and not surprisingly is awaiting a ruling before the ICSID. Chevron has a 34% stake in the Carabobo Project 3 -- a project slated to produce 400,000 barrels per day. Italian giant Eni has a 40% stake in the Junin 5 block, with a slated initial output of 75,000 barrels per day by 2013. Beyond this, there isn't anything much to look forward to in terms of international players. Statoil and Total lost out on contracts for the Junin 2 block.
Foolish bottom line
There's nothing much to worry about. It's just that the leftist government in Venezuela will ensure that things are slowed down in terms of production. The amount of capital needed to be spent is immense. However, if you're looking for more ideas, The Motley Fool has created a new special report titled "3 Stocks for $100 Oil," which you can download today, absolutely free. In this report, Fool analysts cover three outstanding oil companies. To get instant access to the names of the three oil stocks, click here -- it's free.