To kick off the new year, Exxon Mobil (XOM) was awarded $908 million by an arbitration panel of the International Chamber of Commerce as compensation for assets which were nationalized by the Venezuelan government in 2007. Although $908 million seems like a lot, Exxon Mobil was asking for $10 billion, and the actual award was slightly less than Petroleos de Venezuela had offered before Exxon took the case to arbitration. The question remains if this decision will have any lasting effects on Exxon Mobil or other oil companies who were or are doing business in Venezuela.
The market seems to have anticipated the low settlement amount, and there has been no noticeable effect on the XOM share price after the announcement. Exxon Mobil currently generates revenues of $125 billion each quarter and profits of $10 billion per quarter. A larger settlement from the arbitration board would have been a positive, but the overall effect on the company's financial value is negligible.
Exxon Mobil has an additional case against Venezuela awaiting an outcome at the World Bank International Centre for Settlement of Investment Disputes. The ICSID seems to be the court of choice for making claims against Venezuela, with 20 company claims currently on the docket, including a $30 billion claim by ConocoPhillips (COP). From this arbitration venue, Mexican cement company Cemex (CX) was recently awarded $600 million in compensation for seized assets. Cemex and Swiss cement company Holcim claimed a total of $2 billion, so the awards from the ICSID seems to be closer in line with the claims.
An note on the financial condition of Petroleos de Venezeula: The company will generate about $90 billion in 2011 revenues. The company is owned by the Venezuelan government and the majority of cash flow goes to support the so-called social programs of President Chavez. As a benchmark, both XOM and COP produce operating income of about 8 percent of total revenue. Using this as a guide, one or more multibillion-dollar settlements against Petroleos would put the company and the Venezuelan government in a very tight financial position. Of course, the Venezuelan oil company spends much less on exploration than the multi-national oil companies, being content to rake off whatever cash flow the existing projects produce.
In spite of its large claims against the Venezuelan oil company, ConocoPhillips still has significant operations in the country. Chevron (CVX) is not mentioned with any claims against Venezuela, and the company maintains a working partnership with Petroleos de Venezuela, but company presentation materials make little mention of the production there and Chevron's exploration activities are focused elsewhere.
The nationalization of oil company assets by Venezuela in 2007 through 2009 has resulted in virtually no outside investment into oil production in the country. As other contributors note, the majors could continue their move toward domestic acquisitions. Petroleos is the controlling partner for all remaining oil company contracts in the country and the national oil company controls how production dividends are paid to the outside companies. Recently, Royal Dutch Shell (RDS.A) was part of a joint venture announced a plan to attempt to raise $14 billion in capital for investment to reverse declining oil production in joint venture oil fields. The problem remains whether companies investing in Venezuelan oil can expect to receive a reasonable return on their investments.
One point to remember is the large mega cap oil companies must maintain a long-term outlook and plan for future exploration. Venezuela still has one of the largest oil finds ever discovered in the Western Hemisphere. Companies like Exxon Mobil, ConocoPhillips and Chevron will do what they can to protect their assets from unfriendly governments, but will always keep in mind that governments change, and a country like Venezuela could once again become an attractive place to explore and produce crude oil.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.