The tale of how an American company took on the state of Venezuela through a Dutch bilateral investment treaty, and won.
Earlier this month, ICSID, the World Bank’s international arbitration body, awarded Exxon Mobil $1.6 billion against the Venezuelan government over assets expropriated in 2007. Although not close to the $50 billion awarded to the former shareholders of the now-defunct Yukos Group, (article here) or the $16.6 billion the US oil giant first sought, the award is hardly a pittance. It is also a reminder that if you invest overseas a smart company will consider the protections offered by investment treaties.
The Exxon case is one of more than 20 claims against Venezuela demanding compensation for assets seized during a nationalisation spree under the leadership of the late socialist President Hugo Chavez. The state took over scores of companies to secure greater control over key economic sectors, particularly in the oil industry.
In this case, five subsidiaries of Mobil Corporation (a Dutch holding company) initiated the arbitration against the Venezuelan government for seizing their interests in the Cerro Negro and La Ceiba projects, in breach of the Netherlands-Venezuela bilateral investment treaty (BIT). These assets were initially held by Exxon Mobil’s US entities, however the restructure of Mobil Corporation in 2005-2006 saw them moved to Dutch holding companies so that they would be protected under the Netherlands-Venezuela bilateral investment treaty (there is currently no equivalent between the US and Venezuela). Venezuela argued that the move constituted an abuse of rights under the BIT and the tribunal had no power to hear the matter. The tribunal rejected this, saying that Exxon Mobil had a legitimate goal to restructure Mobil’s investments in Venezuela to gain protection under the Netherlands-Venezuela BIT.
Interestingly, in its challenge to the tobacco plain packaging legislation, Australia argues that Philip Morris took similar steps to restructure its investments in Australia so as to take advantage of the Australia-Hong Kong BIT. We assume that Australia will be hoping the tribunal takes a different approach.
Venezuela is now up for a sizeable award and another hit to its struggling economy. On the bright side, it has gotten away with an award significantly less than expected and more assets to add to its thriving oil industry. Viva La Revolucion!