Chavez move piles on legal, insurance risks for US companies

10 January 2007

Chavez Move Piles On Legal, Insurance Risks for U.S. Companies

By Peter Robison

(By Bloomberg) - Venezuelan President Hugo Chavez’s move to nationalize industries from energy to telecommunications has an added sting for U.S. companies: They stand less chance than foreign rivals of getting a fair price for their assets.

Unlike Paris-based Total SA or London-based BP Plc, Exxon Mobil Corp. and other U.S. companies aren’t protected by any bilateral investment treaty with Venezuela. The nation of 26 million, the No. 4 supplier of oil to the U.S., has reached such treaties with two dozen other countries, including the United Kingdom and France.

The bilateral treaties offer some protections in cases where assets are seized, containing provisions allowing for adequate compensation and for disputes to be taken to arbitration. A World Bank arbitration body that handles the cases says it has successfully concluded 114 of them and 108 more are pending.

“I wouldn’t be optimistic that the U.S. investors would be as fairly treated as they should be,’’ said Larry Pascal, a partner with the law firm of Haynes and Boone LLP in Dallas. “A lot of times, the constraints are the bilateral relationships. You can’t separate it from the broader bilateral U.S.-Venezuelan relationship, which is not good.’’

Chavez this week pledged to nationalize utilities, including the country’s biggest phone company, known as Cantv and controlled by New York-based Verizon Communications Inc. “Everything that was privatized will be nationalized,’’ Chavez said in a Jan. 8 televised address.

Dwindling Coverage

From 1990 to 1998, Venezuela generated $4.8 billion through the sale to investors of 40 state-owned entities, according to the U.S. State Department. Foreign investors bought stakes in telecommunications, electricity, steel, sugar refining, tourism, dairy, cement and aviation.

Insurance isn’t an option, either, for companies that may have assets seized.

Ace Ltd. and other insurers that protect companies from the seizure of their assets by governments have been cutting back coverage in Venezuela for the past five years on concern Chavez would nationalize industries, according to an insurance broker at Aon Corp.

Companies likely won’t be able to secure coverage of more than $10 million or $20 million, said Bryan Squibb, a managing director at Chicago-based Aon, the world’s second-largest broker. Most of the companies that want coverage are energy and mining firms with far greater exposures there, he said. Premiums have climbed as high as 3 percent of coverage limits.

OPEC Member

Some unidentified clients called today asking about buying coverage, and it may no longer be available, Squibb said. “The horse has somewhat bolted,’’ he said.

Chavez, who has railed against U.S. policy in Iraq and called President George W. Bush “the devil,’’ was re-elected last month with 61 percent of the vote, invigorating his plans to create a “socialism of the 21st century.’’ The nation is also flush with cash from the oil boom.

Venezuela, a founding member of OPEC, is the world’s fifth- largest oil exporter. Prices reached more than $77 a barrel on the New York Mercantile Exchange last year, more than five times the average of $14.39 in 1998.

Venezuela’s Energy and Oil Ministry said Jan. 8 that four ventures to produce heavy crude oil from a region known as the Faja may be nationalized.

That goes far beyond measures Venezuela has taken so far to raise taxes or renegotiate contracts with foreign producers.

Exxon, Chevron

The Faja in eastern Venezuela, near the Orinoco River, has attracted $17 billion in investment by foreign oil companies, more than any other part of the country. About 600,000 barrels a day are produced from its tar-like deposits, which are easy to find and expensive to extract.

The companies that have investments in the Faja include four of the world’s five biggest publicly traded energy companies: Irving, Texas-based Exxon Mobil; BP; Chevron Corp. of San Ramon, California; and Total. ConocoPhillips, based in Houston, has invested the most in the region. Statoil ASA, based in Stavanger, Norway, also has a stake.

The U.S. companies may be at greater risk because of the lack of a bilateral investment treaty with Venezuela, said R. Doak Bishop, a lawyer with Atlanta-based King & Spalding.

The treaties generally guarantee a stable legal and business environment, provide for equal treatment of foreign and domestic investors and require compensation for expropriated assets. Without one, the companies have little choice but to take whatever offer Chavez gives them.

`Incredibly Frustrating’

“It’s an incredibly frustrating situation for investors and one in which, practically speaking, they will have little recourse,’’ said Ileana Blanco, a partner with Bracewell & Giuliani, a law firm in Houston.

Venezuela has bilateral treaties with more than two dozen other countries, including the U.K., Canada, France, Germany and the Netherlands, according to the United Nations conference on Trade and Development.

New York-based Verizon has a 28.5 percent stake in Cantv, whose shares tumbled 20 percent yesterday. Arlington, Virginia- based AES Corp. paid about $1.7 billion for control of the country’s biggest electricity distributor in 2000.

source: Bloomberg