Exxon Wins Freeze on Over $12B in Venezuela Assets

Exxon Mobil Corp. (XOM) has secured court orders to freeze more than $12 billion in worldwide assets of Venezuela's state-owned oil company, as it prepares to dispute the nationalization of a multi-billion dollar oil project.

The move, which sent Venezuela's sovereign bonds sliding Thursday, limits Petroleos de Venezuela's (PVZ.YY) room to maneuver as it fends off challenges from major western oil companies over President Hugo Chavez's 2007 decision to nationalize four heavy oil projects in the Orinoco Basin, one of the richest oil deposits in the world.

Exxon and ConocoPhillips (COP) opted to walk away from the contracts rather than stay on in a minority role. Both have filed arbitration proceedings with the World Bank seeking compensation and Conoco "continues to discuss an amicable resolution specific to the assets that were expropriated in Venezuela," said spokesman Bill Tanner.

ExxonMobil has so far been the most aggressive in fighting back. The Irving, Texas oil major's legal action essentially seeks to ring-fence Venezuela's overseas assets ahead of any decision by the arbitration panel.

According to documents filed in the U.S. District Court in Manhattan, Exxon secured an "order of attachment" on about $300 million in cash held by PdVSA. A hearing to confirm the order is scheduled in New York for Feb. 13. Exxon also filed documents with the New York court showing it had secured from a U.K. court a freeze on $12 billion on PdVSA's worldwide assets "whether directly or indirectly held."

In a statement, Exxon Mobil spokesperson Margaret Ross confirmed the court filings. She added that the company "has obtained attachment orders from courts in the Netherlands and Netherlands Antilles against PdVSA assets in each of these jurisdictions up to $12 billion." Exxon said the orders are subject to further review by the courts. "We will not comment further on legal proceedings, she said.

Venezuela Disputes Need For Freeze

A freeze on PdVSA's assets wouldn't directly affect their day-to-day operations, but it would prevent the Venezuelan company from selling them. If ExxonMobil steps up its litigation efforts, it may complicate PdVSA's dealings with oil traders, who may be reluctant to take possession of assets, such as crude-oil cargoes, that another company has laid claim to.

Venezuela's sovereign bonds slumped in reaction to the asset freeze. Venezuela's risk premium on JPMorgan's Emerging Markets Bond Index Global Diversified was flat at 544 basis points over Treasurys, and returns were negative 1.93%. Earlier, returns were a negative 0.37%.

"Until this gets resolved, PDVSA will naturally be unable to sell any of its assets up to $12 billion," noted Gianfranco Bertozzi, a sovereign debt analyst at Lehman Brothers. "We may see follow through from other companies seeking the same sort of court support, which could severely impair PDVSA's ability to operate."

The U.K. move includes a hold on the assets of Nynas Limited, a four-refinery complex jointly controlled by PdVSA and Finland's Neste Oil (NES1V.HE). The company controls refineries in Scotland, Belgium and Sweden.

In a Jan. 24 response disputing orders of attachment from Dec. 27 and Jan. 8, PdVSA disputed the need for a freeze. Exxon Mobil "has failed to sustain its burden of establishing that any arbitration award it obtains may be rendered ineffectual without provisional relief," it said. A PdVSA spokesman declined to comment further.

Exxon's action signals an aggressive response to the trend of resource-rich countries flexing their muscle over the large oil majors. Since oil prices began skyrocketing earlier in the decade, oil producing nations have grown bolder in their dealings with publicly traded companies active on their territories by demanding larger stakes in existing projects and raising taxes.

Venezuela will pay two European oil companies that were partners in other Orinoco heavy oil projects less than half the estimated market value of their stakes, according to a copy of the compensation agreement reviewed by Dow Jones Newswires. That agreement offers an inkling of what ExxonMobil and ConocoPhillips might expect as they carry on compensation talks with PdVSA.

James Loftis, head of the international dispute resolution practice at Vinson & Elkins, speculated that Exxon's move "is specifically targeted at preventing PdVSA from disposing U.S. oil and gas assets." Loftis isn't involved in the case.

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