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Towards a More Standardized Rule of Compensation?

Towards a More Standardized Rule of Compensation?

Feb-11-08 09:29 am

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ExxonMobil and Venezuela--under the leadership of Hugo Chavez--have been pushing forward greater standardization of the rule of compensation through their most recent business dispute.

With the price of oil and natural gas sustaining high levels over the past several years, oil-producing countries have asserted greater control over their resources, extracting both greater influence among global energy markets as well as the domestic political and economic realms to which resource revenues, or rents, accrue. An interesting aspect of resource wealth and ownership under international law has revolved around the rules of expropriation, nationalization, and compensation. While surely state nationalization of energy industries, and expropriation of foreign-owned assets is a not a new phenomenon, the most recent wave of nationalizations has occured within the context of a more binding homogeneous global economic system as compared to that of four decades ago. The status of expropriation under international law is considered legal if it is carried out for a "public purpose," as well as--and perhaps more importantly--"adequate" compensation is provided. The second criterion is more contentious, especially from the expropriating state's vantage point. One of the more recent cases highlighting this point is the dispute between ExxonMobil and Venezuela. As the New York Times reports today, the disagreement has entered a new phase with the most recent international ruling favoring ExxonMobil and effectively freezing a significant amount of Venezuelan state monies:

The oil giant Exxon Mobil has won court orders freezing as much as $12 billion in petroleum assets controlled by Venezuela’s government in an escalation of a dispute over efforts by President Hugo Chávez to assert greater control over the country’s oil industry.

Venezuela’s dollar-denominated bonds suffered their steepest drop in six months on Thursday on concerns that Mr. Chávez’s government could face a protracted legal battle with Exxon, preventing the government from raising cash through the sale of refineries abroad if the economy here slows after years of torrid growth.

Investors are also increasingly concerned about the financial health of the national oil company, Petróleos de Venezuela, amid reports that its debt is ballooning as its output declines.

The oil company is the largest single source of revenue for Mr. Chávez’s government, financing an array of social welfare projects and foreign aid to leftist allies.

“This is a big blow against Venezuela,” said Pietro Pitts, an oil analyst who publishes Latin Petroleum, an industry magazine based here. “It could set an important precedent for other multinationals threatened by Venezuela’s government.”

After Mr. Chávez’s move to take control of large oil ventures last year, Exxon dug in for a fight. While Chevron and other companies accepted the terms imposed by Mr. Chávez, Exxon aggressively sought to prevent Venezuela from transferring control of foreign-based oil assets to entities here ahead of arbitration proceedings.

In recent days, Exxon won a court order from the High Court of London prohibiting Petróleos de Venezuela from selling assets worldwide up to a value of $12 billion, Margaret Ross, an Exxon spokeswoman in Houston, said in a statement. Exxon won similar orders in the Netherlands and the Netherlands Antilles for assets worth up to $12 billion.

And in New York, Exxon won an order freezing $300 million of Petróleos de Venezuela’s assets. Despite a deterioration of political relations between Caracas and Washington, Venezuela remains a major trading partner with the United States, ranking as its fourth-largest supplier of imported crude oil.

There are two issues to note in this phase of the dispute. The first revolves around the political-economic question of energy imports, oil dependence, and relative posturing. While Hugo Chavez may threaten the US with cutting off oil supplies as a reaction to the current ruling, the reality is that Venezuela is more reliant upon the US as an export market for their heavy crude (about 60% of Venezuelan crude goes to the US), whereas the US is less reliant upon Venezuela as a supplier (about 10% of US oil imports comes from Venezuela). While any disruption may be hazardous to the US economy and energy markets, the reality of this "assymetric interdependence" trumps both the posturing and the rhetoric of either party in the dispute. Secondly, and perhaps more interestingly, the rule of compensation in dealing with expropriation under international law may be heading towards greater standardization, especially if this case proves to influence Venezuela into compensating ExxonMobil within an acceptable price band of "adequate" compensation. While international rules of human rights may be perceived as having a higher degree of universiality, international rules and norms of business and finance are constructed under the rubrix of specific global economic systems. The fact that the rule of compensation may be taking on a new acceptable and enforcable role under international law may point towards the consolidation, realization, and internalization of the standards of a globalized market economy with regulated and limited state action.

Posted by: Brendan P. Geary

Tags: expropriation compensation nationalization

About the editor:

Anthony Clark Arend

Professor

Commentary and analysis at the intersection of international law and politics.

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