Investor's Business Daily
February 11, 2008
Energy: To Hugo Chavez, Venezuela is a rich country and Exxon a cruel exploiter whose projects are best expropriated. But Exxon's $12 billion injunction against him over broken contracts may just show who's bigger.
Exxon Mobil, a $440 billion company with operations across the globe, has for decades dealt with crazy, corrupt governments. It routinely does business with the likes of Chad, Russia and Angola and knows all about them. But it's never run into a partner as outrageously bad as Venezuela. That's why its unprecedented move to take Venezuela all the way to international courts over Chavez's seizure of its assets is a big blow from the private sector against a dictatorship that otherwise seems to hold all the cards.
Exxon sends the message that playing within the rule of law is a far better means to succeed, win and play with the big boys than to break contracts, steal assets and violate internationally recognized norms, as exemplified in Chavez's Venezuela.
Last year, the power-mad petrotyrant declared Exxon and Venezuela's other foreign investors "robbers" and vowed to conquer them like Simon Bolivar taking the Andes. He hurled leftist nationalistic rhetoric against these private companies whose only "crime" was to invest in and bring jobs to Venezuela.
Waving the flag, Chavez sent his military to the Venezuelan hinterlands last year, where Exxon had a 42.5% stake in one big project in Cerro Negro. He seized that along with the assets of five other oil companies and called it victory. Exxon's investment was worth at least $4 billion, but Chavez refused to pay market compensation.
Instead, he justified his breaking of contracts as sovereign decisions and told investors they'd have to be satisfied with minority partnerships run by ideologically correct Chavista "managers."
Seeing themselves as powerless and eager to limit their losses, some of the companies caved. But not Exxon. It took a hit on its balance sheet, and decided something bigger was at stake. With operations all over the world and every other tinhorn dictator watching its moves, it knew a precedent could be set and refused to appease.
In so doing, it put all petrotyrants on notice that their power extends only as far as their borders and no more. If they want to cut themselves off from the world by changing the rules, then it's off to international arbitration with them.
Today, Chavez faces a potential penalty of $12 billion if the British, Netherlands and Netherlands Antilles courts rule Exxon's way, compensate it and declare damages. Exxon even got a U.S. court to freeze $315 million in Venezuelan cash here to ensure compliance.
Exxon had only a few tools, but it used them effectively. Like a tree, Chavez hacked Exxon's actual investment down with his crude nationalization, thinking he'd won. But the roots of the investment -- the provisions for redress under which the agreement was first signed -- remained, and Exxon used them.
Though signed by Mobil Oil well before its merger with Exxon, the legal provisions gave Exxon the right to international arbitration, which is now the basis for its injunction. Venezuela can neither sell nor trash the overseas assets it possesses in any country where rule of law prevails.
This comes at a bad time for Chavez. Oil production is declining as his state oil company becomes increasingly politicized. Its earnings are being diverted from investment and maintenance to pork-barrel social programs that have nothing to do with energy.
A record sell-off in state oil company debt since news of the injunction broke has raised Venezuela's cost of borrowing at a time when it is having cash-flow problems. There are signs Chavez and his oil minister are running scared, calling the freeze "judicial terrorism."
By breaking contracts and rewriting rules as they please, they no longer have as much access to the cash and conveniences of the West because they are isolating themselves. This raises questions about the invincibility of petrotyranny.
Exxon's case reminds all that wealth doesn't come from materials alone, but from added value derived in part from the rule of law.
As oil prices remain high, this may signal that the seller's market in oil is shifting. Chavez is going to be the first to take the short end of it because Exxon is going to teach him a lesson.