By Pietro D. Pitts and Nathan Crooks
CARACAS – Venezuela’s creditworthiness is improving faster than other junk-rated developing nations on signs President Nicolas Maduro is prepared to negotiate compensation for oil assets seized by his predecessor and avert embargoes on the nation’s U.S. refineries.
Yields on Venezuela’s dollar-denominated bonds have fallen an average 0.61 percentage point in the four days after the World Bank’s International Centre for Settlement of Investment Disputes ruled then-President Hugo Chavez’s seizure of ConocoPhillips’ projects in May 2007 was illegal. That’s more than three times the drop in borrowing costs for speculative-grade debt tracked by JPMorgan Chase & Co.
While Oil Minister Rafael Ramirez vowed to defend Venezuela’s interests in the case, neither he nor Maduro ruled out compensating the Houston-based producer. The response contrasts with Chavez’s pledge on January 2012 to disregard any arbitration rulings on the expropriations, which prompted yields to jump 1.6 percentage point in the next three months.
“The relief was the breathing room of not having any final judgment on the amount they owe for one to two years and also the fact that Ramirez seems willing to work to negotiate a solution,” Siobhan Morden, head of Latin American strategy at Jefferies, said in a telephone interview. “The immediate reaction was not to defy the courts and say we will never pay.”‘Good Faith’
In its Sept. 3 ruling, the Washington-based ICSID said the South American nation “breached its obligation to negotiate in good faith” for compensating ConocoPhillips for the Hamaca and Petrozuata projects in the Orinoco heavy-oil belt as well as the Corocoro offshore project.
When late President Chavez forced foreign companies to cede majority stakes in oil projects six years ago, the Houston-based producer rejected the terms and took its claims to courts. The ICSID ruled the amount should be based on the value of ConocoPhillips assets at the time of the award instead of at the time of the expropriation, which Venezuela is seeking.
Minister Ramirez said on Sept. 4 that ConocoPhillips had been seeking as much as $30 billion. He said parts of the ICSID ruling favored Venezuela, referring to three dismissed claims.
“The tribunal’s rejection of these claims may make compensation for ConocoPhillips lower than it otherwise would have been,” Michael Nolan, a partner in the Washington office of Milbank, Tweed, Hadley & McCloy LLP, said by telephone.‘Some Incentive’
The case probably will take another one to two years to reach the damages phase and another year or two if Venezuela seeks annulment, said Carolyn B. Lamm, a partner at White & Case LLP in Washington.
While an eventual award could reach $4 billion to $7 billion, the most likely scenario could involve a settlement that includes cash, bonds, refining assets or new interest in the Orinoco belt, JPMorgan wrote in a Sept. 4 note to clients.
“There’s some incentive for the two sides to come together to some type of settlement where you figure out a way for Venezuela to pay what it’s able to,” Benjamin Ramsey, a JPMorgan analyst, said in a Sept. 9 telephone interview. “If you end up going down a path where you don’t reach a settlement, then the company should worry about when and whether it would ever get paid.”
JPMorgan raised its recommendation for Venezuelan debt to overweight from marketweight on June 28 after a selloff in May, Ramsey said.PDVSA Refineries
ConocoPhillips can’t speculate on the final award and the next stage of the process will be determined by the tribunal, Davy Kong, a company spokeswoman, said by telephone.
“We have not been approached by the Venezuela government since issuing the Sept. 3 news release,” she said.
A spokesperson for Venezuela’s Information Ministry, who asked not to be named citing ministerial policy, and a press official at state-owned Petroleos de Venezuela SA, who isn’t an authorized spokesperson, both declined to comment.
PDVSA, as the state company is known, owns three refineries along the U.S. Gulf Coast and another in northeast U.S., through Houston-based unit Citgo Petroleum Corp. It also owns the Hovensa refinery in the U.S. Virgin Islands.
Once damages are awarded, the ICSID treaty can enforce payments in third-party countries that are signatories of a World Bank convention, Nolan said. The U.S. suspended last year Argentina’s participation in a trade program because of its refusal to pay $300 million of ICSID awards to U.S. firms Azurix Corp. and Blue Ridge Investments LLC.
“For that reason and to the extent Venezuela has assets in third countries, ConocoPhillips would be in a position to rely upon the convention to attach those assets abroad,” he said. “That is a significant enforcement mechanism.”Average Yield
Venezuela’s average yield fell to 12.31 percent on Sept. 9 from 12.92 percent Sept. 4 while JPMorgan’s high-yield index declined to 9.51 percent from 9.69 percent. The country’s crude basket is at the highest levels since February, averaging $107.03 a barrel last week. Barclays Plc calculates that for every additional dollar increase in the oil price, Venezuela receives $800 million a year.
Chavez, who died after a two-year battle with cancer, also nationalized steelmakers and a mine owned by Toronto-based Crystallex International Corp. during his 14-year rule.
While the late president made payments in cases awarded by the International Chamber of Commerce, or ICC, he said in January 2012 that any ICSID ruling would contravene Venezuela’s constitution. Maduro, Chavez’s hand-picked successor, has vowed to continue his mentor’s so-called Bolivarian revolution.
“It is unlikely that there will be a final ruling until 2015, at the earliest, unless the two sides resort to negotiating a settlement before that,” Russ Dallen, an international lawyer who is head of Venezuela investment bank Caracas Capital Markets, said in a Sept. 9 note, referring to the ConocoPhillips case. “This may happen after a compensation amount is decided by the ICSID.” Bloomberg