The butterfly effect

Stolen goods

Stolen goods

On October 22, 1991, something momentuous took place in Venezuela.

You probably don’t remember hearing about it in the news. Heck, maybe it didn’t even make the news (there was barely any Internet back then, so there is no link I can give you).

On that day, in the middle of the drunken boom times of the second Carlos Andrés Pérez presidency, when Venezuela was a completely different country … our government signed a treaty with the Netherlands. That treaty, a little piece of paper that people rarely pay attention to, may have profound effects on the future of our oil policy.

As you probably know, ConocoPhillips was partnering with PDVSA in several oil projects in the Orinoco tar belt. ConocoPhillips was the majority stakeholder and, in effect, was the one in charge of most of the investments.

Then, in 2007, Hugo Chávez decided to do away with all that. All partners, said the comandante, had to switch over to a new regime whereby PDVSA would be majority owner … or else. ConocoPhillips was never given enough time to consider its options, and it was not compensated fairly, so it sued PDVSA in the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). A few days ago, I took to reading the ICSID ruling.

As you probably know, the tribunal ruled two-to-one in favor of ConocoPhillips. Two of the judges – one from New Zealand, the other from Quebec – ruled for ConocoPhillips, while the other one, an Egyptian presumably named by Venezuela (each party gets one judge, and the tribunal decides the third one) ruled for chavismo.

What is the basis of their ruling?

Remarkably, the sole basis is the Treaty with the Netherlands.

ConocoPhillips’s argument was twofold. The first was that, according to Venezuelan law (i.e., a foreign investment decree issued by the Constituent Assembly in 1999) ConocoPhillips should be compensated, and if it is not, it can go to the ICSID to settle the dispute.

The ICSID Panel decided that Venezuela’s 1999 law did not provide adequate protection because it only gives the ICSID jursidiction to enforce the law as long as Venezuela wants it. Since Venezuela clearly loves the ICSID as much as my cat loves a shower, then the law is simply a bunch of good wishes. Sure, the local law may say that foreign investors are protected by international courts and what not, but in reality foreign investors are at the mercy of local judges.

And we know how good they are.

If that had been the entirety of Conoco’s case, they would have been fried.

The second argument has to do with the obscure treaty I was discussing. The treaty with the Netherlands – covering Venezuelan investments in the Netherlands and vice versa – is much friendlier to foreign investment. It clearly says that when any party feels like they have been unfairly damaged in the other country without receiving adequate compensation, it can go to the ICSID unilaterally.

In other words, the treaty is the only legal protection a company like ConocoPhillips had in Venezuela. The problem, though, is that ConocoPhillips is an American company, not a Dutch one.

It turns out that in the years prior to nationalization, ConocoPhillips took measures to prepare for this. It began transferring its shares in the Venezuela ventures to Dutch subsidiaries, and in effect this meant the treaty covered ConocoPhillips’s investments in Venezuela, including those made prior to the change in ownership structure.

This put Venezuela in a bind, and I am amazed PDVSA let this slip under the radar. After all, if they were planning on nationalizing, they should have seen the problems the switch to Dutch subsidiaries was going to cause.

As it turns out, PDVSA’s legal team includes Beatrice Sansó, Rafael Ramírez’s wife, and Hildegard Rondón de Sansó, her mother. When a major oil company is run like a family business, there is no accountability, mistakes are made, and Venezuelan taxpayers pay the price.

The final piece of evidence that sealed PDVSA’s fate in the ruling is the incompetence of a man named Bernard Mommer.

Mommer was (is?) PDVSA’s VP. As such, he was in charge of negotiating with foreign companies when nationalization was announced.

The treaty clearly stipulates that negotiations must be done in good faith, and if an adequate proposal was on the table, the ICSID should not interfere.

What the evidence shows is that Mommer simply was not negotiating in good faith. Letters went unanswered. Proposals were left hanging. Heck, the joint venture’s assets were seized even before a mutually agreed deadline for a final agreement had arrived. Mommer’s heavy-handed tactics, his  chutzpah, his hubris could cost Venezuelan taxpayers billions of dollars.

Within the terms of the treaty, and because PDVSA clearly did not compensate ConocoPhillips in the spirit that the treaty stipulates, ConocoPhillips won the case.

What’s next for this legal saga? People more knowledgeable than me say that PDVSA could lose billions. If damages are awarded, PDVSA assets anywhere in the world could be vulnerable. While he was alive, Chávez said PDVSA would not comply with the ruling. It is not clear if Maduro has that option. Venezuela has apparently trashed the treaty with the Netherlands, so it’s unlikely to affect future disputes.

Still, the consequences of this ruling for Venezuela could be enormous, and all because of a simple treaty, signed 22 years ago. Makes you wonder if the cliché about the butterfly wings and the storm … is actually true.

Note: My apologies to all the international legal scholars and attorneys out there for the mistakes I have made in my story. I am narrating the sentence as I understand it – as a layman. Feel free to correct me in the comments section if I have made a mistake, and I will update my post.

57 thoughts on “The butterfly effect

  1. Another great piece Francisco , Kudos !!, read the arbitration award and talked to a lawyer friend who has been following the case to try and understand what it means with the following conclusions :
    1. the subject of whether the investment law by itself allowed a foreign investor to sue the govt before icsid was a very controversial one among Venezuelan lawyers , the mayority view being that it did allow such lawsuits . the arbitrators have clearly held that the law in itself is not enough, you need to have a treaty that provides for the Icsid forum or an express contract provision that allows it .
    2. The arbitrators also rejected Conocos claims that the US parent company could claim damages consisting of the loss of certain US tax advantages even though it itself was not sited in Holland . Additionally it rejected its dutch affiliates claim that it should be compensated for Venezuelan tax increases ocurring after the Joint Venture was set up .
    3. The big unexpected win for Conoco was that contrary to what the Treaty provided it would be allowed to request compensation for the market value of the expropiated shares not as of the date the expropiation ocurred but as of the date of the award , several years later, which has the practical effect of increasing considerably the amount of compensation payable to Conoco because the increase in the price of oil allows for a bigger valuation of the market value of the expropiated assets.
    4. The reason why the arbitrators decided to have the market valuation done as of a date different from that provided for in the treaty represents a kind of punishment for the bad faith attributed to the Govt reps in negotiating the compensation payable to Conoco . Absent such bad faith the arbitrators would have applied the treaty and allowed a compensation based on the market value of the assets at the time of the expropiation .
    The Netherlands protection treaty was part of a series of treaties signed by Venezuela in line with its intent of attracting as much foreign invesment as possible . The Chavez govt in fact has signed more of them . Now remains a very important phase of the arbitration proceeding : determining the exact amount of the compensation which the govt must pay , the consensus view is that the amount is bound to be high , at least several thousand of millions of US$.


    • Erm, it’s not Fco’s write up but Juan Nagel’s whose careful explanations are well appreciated by this reader. Congratulations, Juan. Crystal clarity on a tangled issue, beautiful writing.


    • Although Conoco is an American Company, my guess is that the treaty was signed by a dutch affiliate for tax “planning” reasons (the famous Dutch sandwich). multinational corporations operate under Dutch affiliates.


    • Possibly Citgo’s assets in the US including seven refineries on the Gulf coast specifically set up to process Venezuela’s brand of extra heavy crude. I believe that the US assets are worth around $15bn but am pulling this figure from memory so may be wrong.


        • Some will suggest that the BRoV will use a Kirchner Defense… a.) ICSID annulment proceedings plus b.) a “public policy” claim. They will likely seek Argentine advice…

          See here:

          The PP claim has been well enumerated in relation to international commercial arbitration by the Committee on International Commercial Arbitration of the International Law Association. The ‘Final Report on Public Policy as a Bar to Enforcement of International Arbitral Awards from 2002’ cites the decision of Parsons and Whittmore US Court of Appeals 1974 where enforcement of an award should be denied ‘…only where enforcement would violate the forum state’s most basic notions of morality and justice.’


        • Not mortgaged, CITGO’s bonds are guaranteed by the refineries, the enterprise value continues to be positive.


  2. I am glad you have written of this matter. It is an important one.

    About to make a substantive comment (one hopes), but first (if Canucklehead hasn’t already got to you) the judge, Yves Fortier is not from Quebec. For ICSID’s purposes the judge is from a nation-state, Canada. Quebec is a nation within Canada. It is the sort of thing one might expect a Montrealer to appreciate! From 1988 to 1992, Fortier was Canada’s Ambassador and Permanent Representative to the UN. From 1989 until 1990, he was also Canada’s representative to the UN Security Council and in October 1989 was the President of the Security Council.


  3. While CONOCO was awarded in that case, and judicially Venezuela is obliged to pay such compensation, you must remember that even though you win a case against the venezuelan state, you cannot execute judicially (ejecutar judicialmente) the patrimony of the venezuelan state. This meaning that, even if you win a case against the venezuelan state, the state will pay you whenever it feels like it (if it ever does).


    • I think ICSID rulings apply in all member countries, but I’ll let the lawyers clear that up.

      BTW, Conoco was awarded? I thought the damages phase was ongoing.


      • The Icsid ruling is enforceable outside Venezuela , Once the compensation amount is decided any govt assets outside the country may be seized to indemnify Conoco for the suffered loss . that includes money in bank accounts , tankers , airplanes , refineries , oil shipments in transit , imported goods which property have passed to govt , pending invoices for the sale of goods etc .
        Juan your query over whether this is the award is actually a very acute one . One might assumme that this is the award on the merits but there is still pending the award on the damages so that there is room for discussion over whether this is the final award . If the award on damages is the decisive one then the calculation of the damages is affected because they would have to be calculated as of this latter date .


        • Probably the award on damages wont be up until a couple of years. Considering the current situation on the country, I guess that for the Maduro government that’s an eternity and this arbitration is well below in their priority list.


      • Yes,
        Precisely what was a game changer about ICSID is that the awards made under ICSID arbitrations can be enforced as a Court Decision in any country party to the Convention, meaning the freezing of any assets that the Venezuela Government might have in many countries (i.e. Citgo). Thus, even if they don’t want to pay the will have to.
        In fact, many developing countries signed these Bilateral Investment Treaties (BIT) without quite knowing the consequences (Argentina)


  4. Venezuela has perhaps 37 claims registered at ICSID and over 25 bilateral invest treaties in force. Two of those named ICSID as the only venue available to investors for arbitration. The other BITs provided for ICSID, arbitration under UNCITRAL Arbitration Rules and ICSID’s Additional Facility Rules. This means that even after withdrawal from ICSID investors could not be stopped (from the countries covered under these BITs) from making claims outside its domestic courts in Venezuela.


  5. There is some regional support for Venezuela’s highly antagonistic position that: “… condemned the imperialistic and neo-colonialist intention that … prolong[s] the model of political, economic and military domination on our continent and to maintain, thus, an historical relation of oppression and dependency… (See Fundamental Principles of the Peoples´ Trade Treaty VII Summit, Cochabamba, Bolivia, Oct 17, 2009 ). Presumably, this was in reference to ICSID.

    Presidential Decree No. 5200 served to expropriate all foreign investor controlled oil projects in Venezuela’s Orinoco Belt. It also stipulated that Venezuelan law would govern all disagreements in the “migration” of IOCs’ current investments” to the creation of new mixed companies controlled by Venezuela. It also made plain that “Venezuela’s courts had jurisdiction over the disputes” per the Constitution of Venezuela even though Venezuela was a Member State of ICSID. In June 2012, Venezuela eventuated its ALBA commitment to formally denounce ICSID. Its then President stated at the time that: ‘We have to get out of that ICSID and I tell you: We will not recognize any ICSID decisions’.

    Certainly, Venezuela’s official claims, in addition to those made unofficially by Bolivia and Ecuador, that the bias at ICSID had resulted in ICSID arbitrations ‘… rul[ing] 232 times in favor of transnational interests out of the 234 cases filed throughout its history’ appeared to be either a fabrication or a gross misprint. Those interested in assessing the strength of the basis for the claim of bias, might consider a highly readable quantitative assessment by Professor Susan Franck, ‘The ICSID Effect? Considering Potential Variations in Arbitration Awards’ (2011) 51(4) Virginia Journal of International Law. She used used pre-2007 ICSID archival data. It answers the question whether ICSID arbitration awards were substantially different from arbitration awards rendered in other forums. The conclusion was that there was no reliable statistical relationship between ICSID arbitrations and either amounts claimed or ultimate outcomes. Diplomatically, a conclusion of bias (held by ICSID as an institution or by its arbitrators) based on pre-2007 information could not be made.


  6. You know what makes me uneasy about all this? The hundreds of hidden treaties Hugo Chávez has signed with Belarus, Iran, etc…

    After all, what’s good for the goose may turn out to be good for the gander a few years down the road.


    • Juan : There hundreds of ways of skinning a cat , the regime just chose the one which was sure to bring about the worst consequences , most of the new joint venture agreements exclude the submission of disputes to any jurisdiction other than Venezuelan courts , the door on icsid arbitrations although still open for many current ventures is fast closing to new ones .


  7. Creo que actualmente Mommer es representante de Venezuela ante la OPEP.

    Curiously, Venezuela signs agreements with China with arbitration at the Singapore Arbitration Council, or something like that.


  8. Ehhhhhh

    And you got to realize that now????

    That was a big time news back then, when Conoco sued PDVSA like two or three years ago.


  9. As ah Alternate History buff, I protest the title of this post.

    This is not a “butterfly effect”!

    This is a foreseeable, traceable consequence of a concrete action in the specific area affected.

    A butterfly effect is the unpredictable consequence of an action through the alteration of trivial circumstances. Suppose in 1991 CAP had bad temper from indigestion one day, and turned down a budget increase for some agency, The agency didn’t hire an obscure then-young man, who instead went to study overseas. There he met a girl who was a Red, and converted to rojo-rojito socialism. He is now a leading chavista, and personally made some appalling policy decision.

    That would be a butterfly effect.


  10. Great article Juan!

    It’s not “all because of a simple treaty signed 22 years ago”, it’s because of the irresponsible actions taken by Chavez, Mommer, and others involved, just 6 years ago.


    • I ve heard on the grapevine that the clincher for the arbitrators on the bad faith issue was a speech given by Ramirez before the National Asembly boastfully stating that Conoco would not get a cent more than the book value of their assets ( evidently much less than their market value ) . High profile officials too often forget that what gets them applause in a friendly political milieu can legally get them into a lot of trouble.!!


  11. Bernard Mommer was never vice president of PDVSA but Vice Minister of Energy and Petroleum. He is reported to have six nationalities. He is a mercenary who has done much harm to the Venezuelan Petroleum Industry, including the killing of Orimulsion as an alternative to coal.
    One of the lawyers commenting this note remarks that Venezuela will pay when it wants, if ever. I thought the legal action was against PDVSA. Does the company as such also has this kind of immunity? If so, no wonder everybody is starting to abandon ship: PETRONAS, Lukeoil, Petrobras.


    • Thank you for that aclaratoria, Gustavo, and the legal observation. Bolivarian socialism is nothing more than pillos at the trough with no concept of consequences, nor of a healthy future — for the nation, outside the palaver.


    • Don Gustavo : there are two kinds of lawsuits arising from the expropiations , lawsuits against the Republic under the Icsid and Investment Protection Treaties and against Pdvsa under the ICC rules as per the Joint Venture Agreements (where they included a clause making Pdvsa responsible for any expropiation measure ) , They are really two separate forums under different rules altough their consequences can merge. The Conoco arbitration decision is an Icsid decision affecting the Republic ( including Pdvsa as a govt owned entity) . It is fully enforceable against any asset of the Republic ( or of Pdvsa) practically anywhere in the world. (after compensation damages have been set by the arbitrators) . For a short period Mommer did work for Pdvsa but he resigned over differences over the way Giusti was structuring the Apertura Projects . He always opposed Orimulsion because it offended him that a product obtained from bitumen might be sold as a non oil product . He is the rigid dogmatic academic teutonic type. After Chavez took power he used his fight with Giusti to sell himself as a revolutionary . Actually he was close to Caldera and to some of his Ministers. Orimulsion had to die because it came inside the Opec quota and after the 2002 strike Venezuelan couldnt raise enough production to meet the quota which humiliated Chavez.


    • Thanks to Gustavo for bringing up that Mommer helped with he demise of the Orimulsion. I remember reading back in the 90´s that PDVSA had convinced a power utility in Florida to switch to Orimulsion (an invention from Venezuelan Engineers and scientist from Intevep, I believe) , and I remeber that tests and tryouts were made. I suggest that a post be made about this “gentleman” to have him desenmascarado (take his mask away…) …


      • Pdvsa made a big push for developing a market for orimulsion in the 90’s , the Chinese were crazy about its possibilities, They had the same kind of bitumen Venezuela used to produce orimulsion and had tried coming up with the formula but failed . They even entered into a joint venture with Pdvsa to produce it , this was in the early Chavez years . Not sure Orimulsion today offers the same advantages to Venezuela than it did back then. Market conditions and prices have changed a lot . It was never meant to be anything but a marginal operation for Pdvsa , the big profts where in other prospects..


  12. I thank Juan for his fine work in summarizing this important decision, which I might not have read, but for his reference and exposition.

    One additional point:

    I read arbitration awards almost daily in my work. I find it surprising that the Venezuelan nominee, who registers a dissent on the crucial findings against Venezuela, nonetheless writes no opinion. In cases like this, a dissent without an associated opinion is of no persuasive value.

    It is well-recognized that a well-reasoned dissent can be transmitted laterally among arbitration bodies, since there is no overall hierarchy, and because jurisdiction depends upon consent. It’s persuasive value depends on its reasoning, not on its minority status. Failing to write a full legally-supported dissent telegraphs to legal observers that your dissent was pro forma, expected from your nominator, but unsupportable in law.

    Very odd in such an important case, I think.


  13. Concur with the observation @House.

    Also,the utility of an intermittently proposed Bolivarian Alliance for Our America (ALBA) + (UNASUR) regional arbitration centre, most recently set out in the Declaration of the 1st Ministerial Meeting of the Latin American States Affected by Transnational Interests on April 22, 2013 in Guayaquil, Ecuador is questionable. Early indications from the limited information available are that the focus of the UNASUR regional arbitration centre would be to defer to the supremacy of State courts and at all times favour the ‘policy interests’ of elected governments.

    Preliminary drafts of the proposal allow only a limited assessment of the quality of accountability mechanisms and institutional independence of the new entity. This may be deduced however from the expression of political support for all Latin American States currently in dispute with investors. This statement of solidarity may signal an established presumption that States are always correct in investor-state disputes. And its coherence is somewhat unclear as it is being founded to establish a revolutionary and alternative model of arbitration outside of current norms.

    A couple of specific things:

    It is suggested in its Proposed Article 2 that arbitration is to be constrained by any exceptions stated by any Member States and the new Centre will defer at all times to any matters deemed by a Member Sate to be within its ‘public policy’ jurisdiction. This constraint is widened to include any matter pertaining to the internal laws of a Member State as determined by the Member State.

    Proposed Article 3 stipulates that a precondition for any arbitration is the exhaustion of any and all domestic court remedies. As several Latin American court systems have tended to be deemed problematic this may prove an unattractive requirement as it may signal the potential for considerable administrative delay and other issues.

    Given the recent ICSID decision on “good faith” proposed Article 4 is worth noting. It requires “best efforts” negotiation. Negotiations will be deemed concluded after six months from the date of filing a claim for arbitration unless the parties notify the arbitration centre of continuing negotiations. This appears eminently reasonable and flexible unless the other party has no intention of good faith negotiation or if the power differential between the parties is significant and therefore constitutes a disadvantage to one of the parties. Additionally, the complexity of the dispute may not permit such a rapid negotiation of differences.


  14. You imply family businesses are run wrong because they are family. This is wrong and an insult to well run family businesses like mine. You should have said instead “When a major oil company is run like a Venezuelan family business..”


    • Point well taken. However, and I will say this in my defense, is it not true that, on average, accountability in family businesses is lower than in regular businesses? On account of the personal relationships between the partners and what not.


      • Well, it doesn’t really matter so much in a small to middle size company, does it?
        And remember, Herr Nagel: Germany’s backbone is made up of small to middle-sized companies, many of them run by a family and that family almost always BUILT the company.
        Here we see a different kind of fish: a couple of blokes that get into a company for political-mafiosi reasons and who used their connections to introduce family members to said companies. Also: when we talk about PDVSA we talk about a behemoth.


      • Even that statement you make JC is hard to quantify.

        It may “seem” logical, but I know many family run businesses, including my own, where an effort is made to NOT have lower accountability standards than in non-family businesses precisely because of that perception.

        This has at times led to even an overzealous application of accountability………

        Without any hard and fast numbers, making that second statement of yours is really more of a “sounds about right” evaluation.

        I think, not using hard and fast numbers, that it is more precise to say that the “accountability” factor is inversly proportional to the size of the business.

        Polar, for example, vs. Bodega Er Coyote Cojo, SRL.


        • I think Juan needs atonement. At the very least he should work a month on a apprenticeship in a German, Swiss, Japanese or Venezuelan family business culminating in his involvement in a penance procession wearing a yellow capirote.


    • While it’s true a product made in Venezuela doesn’t carry the charm and prestige of another one made in Germany or Japan, for instance, I think making a stereotype out of it is just belittling and self-deprecating. Ronería Santa Teresa, Farmatodo, Chocolates Franceschi, just to name a few, are beyond the shadow of a doubt successful Venezuelan family businesses, like Federico’s probably is.

      What Federico should’ve said is that family businesses, like all business models, have their downsides and two of them are possible inadequacies and increased difficulty to make hard decisions. Those themselves are solely good reasons for not applying the family business model to an oil company, especially a large one like PDVSA. It has nothing to do with nationalities.


  15. “Makes you wonder if the cliché about the butterfly wings and the storm … is actually true.”

    The Butterfly Effect concept is not up for discussion. No one rationally doubts the existence of systems so sensitive to their initial states being true. These are systems so complex that one today cannot predict which of many and widely ranging outcomes will result from a single tiny tweak. The weather is one such system. The point was illustrated by pointing out that a single tiny tweak anywhere in the world, such as a butterfly flapping or not flapping its wings, could be a sufficient change to the initial state of the system to make the difference between there being or not being a hurricane, sometime in the future, somewhere else in the world.

    As to the signing the Norway agreement, it reminds me more of the endgame importance of seemingly random stone placements at the beginning of a game of GO, than anything related to the Butterfly Effect.


  16. As far as I’ve heard Mommer was sacked, as in “lo botaron p’al coño”, from PDVSA when it was run by, erm, you know, professionals.


  17. Actually he resigned , he had friends inside Pdvsa , he was friends for instance with Ramon Espinaza the head economist.of the Company . He had good academic credentials . He wanted the Apertura to copy Gnral Medinas 1945 opening of new areas to concessions. Giusti didnt agree, For instance he thought the areas offered were too large , the problem is that at the time gnral Medina opened Lake Maracaibo for bids much of the areas had been explored so bidders knew that to find , that was not the case of the areas on offer in Giustis time which were largely unexplored so the risk of finding nothing were high and companies would balk at participating in the bid if the size of the prospects did not offer better chances of finding a big sized reservoir. He was righteously dogmatic and couldnt suffer being contradicted , it hurt his pride that they wouldnt follow his advise so he quit !! Because he is a very rancorous man he then used all influences at his disposal ( including his personal access to President Caldera) to try and have the process stopped but failed. Come Chavez his notorious opposition to Apertura and friendship with Ali Rodriguez helped him launch a new career as a ‘Revolutionary’ Oil Expert. He wasnt particularly familiar with oil trading realities , he was a ‘Political Economist’ but he matched up with a couple of savy Mexicans who provided the expertise to allow him to raise himself to the position of great power he now enjoys . Because his mexican friends knew people in the Mexican offices of the US Law Firm of Curtis Mallet , this firm became the legal work horse for the implementation and defense of the regimes highly controversial Oil policies . ( aided of course by former supreme cout magistrate Dra Sanzo., mother in law of Minister Ramirez) . Funny how this regime, which presumes of its radical nationalism gave foreigners all the power to determine the prices and strategies for developing Venezuelas oil industry .


    • Gracias, Bill Bass, por esta información. Pero es una tragedia que menos de un 0,001% de los venezolanos va a enterarse de ello…a menos que quieras echar el cuento en cristiano, eso es. :-)


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