The butterfly effect

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.