To say Houston’s Harvest Natural Resources (ticker: HNR) has been frustrated by the government of Venezuela is an understatement. On Jan. 15, Harvest submitted a request for international arbitration against the sovereign nation.
After years of fruitless negotiations with Venezuela for owed oil production revenue and past dividend payments, and more recently for apparently squashing the sale of Harvest’s interest in Petrodelta, its Venezuelan operating affiliate, for the second time, the company took the only path left open to protecting its investment in the OPEC nation. After years of getting nowhere with normal business to business communications, Harvest decided to take Harvest’s case to the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) in Washington, D.C.
“Over the past decade, the Venezuelan Government has violated Harvest’s rights as an investor by systematically thwarting the development of Harvest’s investment in Venezuela as well as the company’s ability to sell its interests there,” Harvest President and CEO James Edmiston said in a company press release issued Jan. 16.
“Harvest’s two attempts to sell its remaining interests in Venezuela, both of which were fully vetted with the appropriate authorities prior to undertaking either transaction, ended in the imposition of wholly unreasonable and extra-contractual conditions on the sale by Venezuela authorities, directly leading to the failure of both transactions.”
“This is not the outcome of our 22 years in Venezuela that we envisioned or desired,” Edmiston said in the press release, “but it’s the only means left to Harvest to protect our investment.”
Despite the necessary public airing of grievances that accompanied the filing for arbitration, Harvest seemed to offer Venezuela an olive branch when he said, “As always, we remain receptive to an urgent solution, reached in good faith dialogue between the parties.”
James Edmiston is no stranger to international petroleum deals with foreign governments or country-to-country management of oil and gas operations. His past positions include vice president and general manager of Conoco Russia and president of Dubai Petroleum Company, a ConocoPhillips affiliate company in the United Arab Emirates. Edmiston spent 22 years with ConocoPhillips. He joined Harvest as chief operating officer in 2004 and has served as its president and CEO since 2005.
Edmiston hosted a conference call today to carefully explain the ramifications of the company’s decision to pursue international arbitration in a final attempt to resolve the outstanding issues between Harvest and the nation credited with the world’s largest proved oil reserves at 298.3 billion barrels, or 17.7% of the world’s total (source: BP Statistical Review 2014). By comparison, the next largest holder of proved oil reserves is estimated to be Saudi Arabia with 265.9 billion barrels, or 15.8% of the world’s total, according to EIA stats.
Harvest to Venezuela: The Window is Closing
“We are clear that pursuing arbitration will require the company to make strategic shifts that soon become irreversible,” Edmiston told the collected audience via phone and simultaneous webcast.
“So, I want to communicate clearly and I hope that Venezuela will understand that there remains a very short window of opportunity to urgently set things right before both parties march down the arbitration path. “To that point, I don’t want to use this call to ‘vent’ about how Harvest has been treated in Venezuela nor do I think it serves our purpose at this stage.”
List of Grievances
On Jan. 15, in a Form 8k that Harvest filed with the United States Securities and Exchange Commission, Harvest’s Vice President and General Counsel Keith L. Head outlined the reasons that the company is seeking arbitration against the nation of Venezuela:
- “[T]he Company believes that the Venezuelan government has violated the Company’s rights as an investor by systematically thwarting the development of the Company’s investment in Venezuela, as well as the Company’s ability to sell its interests there. The Request for Arbitration sets forth numerous claims, including:
- the failure of the Venezuelan government to approve the Company’s negotiated sale of its 51% interest in Petrodelta to Petroandina on any reasonable grounds in 2013-2014, resulting in the termination of the Petroandina Purchase Agreement (see “Background” above);
- the failure of the Venezuelan government to approve the Company’s previously negotiated sale of its interest in Petrodelta to PT Pertamina (Persero) on any reasonable grounds in 2012-2013, resulting in the termination of a purchase agreement entered into between HNR Energia and PT Pertamina (Persero);
- the failure of the Venezuelan government to allow Petrodelta to pay approved and declared dividends for 2009;
- the failure of the Venezuelan government to allow Petrodelta to approve and declare dividends since 2010, in violation of Petrodelta’s bylaws and despite Petrodelta’s positive financial results between 2010 and 2013;
- the denial of Petrodelta’s right to fully explore the reserves within its designated areas;
- the failure of the Venezuelan government to pay Petrodelta for all hydrocarbons sales since Petrodelta’s incorporation, recording them instead as an ongoing balance in the accounts of Petroleos de Venezuela S.A. (“PDVSA”), the Venezuelan government-owned oil company that controls Venezuela’s 60% interest in Petrodelta, and as a result disregarding Petrodelta’s managerial and financial autonomy;
- the failure of the Venezuelan government to pay Petrodelta in US dollars for the hydrocarbons sold to PDVSA, as required under the mixed company contract;
- interference with Petrodelta’s operations, including PDVSA’s insistence that PDVSA and its affiliates act as a supplier of materials and equipment and provider of services to Petrodelta;
- interference with Petrodelta’s financial management, including the use of low Bolivares/US dollars exchange rates to the detriment of the Company and to the benefit of the Venezuelan government, PDVSA and its affiliates;
- the forced migration of the Company’s investment in Venezuela from an operating services agreement to a mixed company structure in 2007.”
“We believe that in the arbitration Harvest’s investment will receive fair treatment and any award in favor of the Company will ultimately be enforceable against the Venezuelan Government,” Edmiston said during today’s call.
Arbitration Timeline
Describing the timeline for the arbitration process as ‘merely estimates’, Edmiston said that a specific timeline is difficult to project “but under a best case scenario, we could be looking at a hearing of the merits in late 2016 with a decision from the panel in mid to late 2017. As those of you who have followed the arbitration proceedings involving Conoco and Exxon-Mobil know, the process can, however, be lengthy.”
A Brief History of Venezuela’s March to Oil Nationalization
Reuters reported on the 2012 re-election of Hugo Chavez and his propensity to nationalize private industry in Venezuela. Below are the main oil-related nationalizations under Chavez, according to the 2012 Reuters report:
- “In 2007, Chavez’s government took a majority stake in four oil projects in the vast Orinoco heavy crude belt worth an estimated $30 billion in total. Exxon Mobil Corp and ConocoPhillips quit the country as a result and filed arbitration claims. Late last year, an arbitration panel ordered Venezuela to pay Exxon $908 million, though a larger case is still ongoing in 2012. France’s Total SA and Norway’s StatoilHydro ASA received about $1 billion in compensation after reducing their holdings. Britain’s BP Plc and America’s Chevron Corp remained as minority partners.
- *In 2008, Chavez’s administration implemented a windfall tax of 50 percent for prices over $70 per barrel, and 60 percent on oil over $100. Oil reached $147 that year, but soon slumped.
- *In 2009, Chavez seized a major gas injection project belonging to Williams Cos Inc and a range of assets from local service companies. This year, the energy minister said the government would pay $420 million to Williams and one of its U.S. partners, Exterran Holdings, for the takeover.
- *In June 2010, the government seized 11 oil rigs from Oklahoma-based Helmerich & Payne Inc.”
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