Patrick Childress
Attorney
Sidley Austin LLP, Washington, DC
Venezuela is home to the largest proved oil reserves in the western hemisphere, but for a variety of reasons—lack of capital and technical know-how and an unstable government, to name a few—it has never harnessed the full potential of this valuable resource. In the early 1990s, the Venezuelan government hoped to accelerate development in the oil sector through the Apertura Petrolera, or "oil opening." Through this program, Venezuela invited and incentivized foreign investment to help it develop its vast petroleum resources.
The Apertura worked. Major international operators like ConocoPhillips, ExxonMobil Corp., Chevron Corp., Total SA, Statoil ASA, and BP PLC brought new technology and expertise to bear, increasing production and reserves.
Soon, however, Hugo Chavez swept into power on a message of populism and resource nationalism. The new president and his government began passing measures that hurt international operators, including but not limited to the following:
• Increasing royalty rates to be paid to the state.
• Exacting an "extraction tax" on each barrel of crude produced.
• Raising the income tax rate for heavy crude projects.
In 2007, the Chavez government passed its most extreme measure: a nationalization program that would transfer ownership of international oil projects to "mixed companies," in which the Venezuelan state would hold a majority interest.
Chevron, Total, Statoil, and BP all complied with the government's demands and negotiated terms to cede ownership rights to the state. ConocoPhillips and ExxonMobil, however, refused. Instead, these two companies sued Venezuela's government for $30 billion and $15 billion, respectively.
The basis of these claims were bilateral investment treaties—international agreements between two countries that protect foreign investors and provide for dispute resolution before a panel of independent arbitrators.
In 2014, an international arbitration tribunal ordered Venezuela to pay ExxonMobil compensation of $1.6 billion—an amount that was later reduced. ConocoPhillips is still awaiting its award of damages, but the tribunal hearing its claim has already declared that the Venezuelan government breached its international obligations.
ConocoPhillips and ExxonMobil are not alone. To date, the Venezuelan government has faced at least 13 oil and gas-related international arbitration claims from foreign companies. While it is defending these costly claims, the government is suffering from flagging domestic production as the industry flounders under state control.
