I. Introduction
Nationalization keeps multinational corporations and investors up at night. Simply put, nationalization is an exercise of sovereignty where a country seizes private property, resources, or other investments on its soil. The country usually decides whether to pay compensation to former owners after seizure. The recent nationalization of oil projects by Venezuela begs the question: what recourse do corporations like Exxon-Mobil ("Exxon") have if their investments are nationalized?
II. Background
The dispute between Exxon and Venezuela began with six firms – Exxon, Chevron, Statoil, Conoco Phillips, Total and BP – investing along with Venezuela in an oil project in the Orinoco river basin. [1] The deal took place under a period called the "Petroleum Opening," when the 1990’s-era Venezuelan government attempted to maximize the benefits of transnational corporate investment in PDVSA while minimizing public responsibility. [2] After the Chavez government took power, the Venezuelan legislature raised tax rates for international oil companies operating inside the state from 16.67 percent to 33.3 percent. [3]
Venezuela later nationalized the Cerro Negro and La Ceiba oil projects, and agreed on a mutually agreeable compensation price with other multi-national oil corporations. Exxon, however, did not agree to the amount PDVSA offered, and instead took the case to international arbitration pursuant to its contractual rights. Exxon filed with the International Center for Settlement of Investment Disputes (ICSID), the World Bank's arbitration court in New York. As of the publishing date of this article, the arbitration has not yet commenced. [4]
III. Analysis
Generally, corporations have three options to combat losses from nationalization of resources by foreign governments: (1) arbitrate, (2) sue in U.S. or other courts, or (3) turn to the political processes of the countries involved. Each of these options has its own problems.
1. International Arbitration
Corporations should always include international arbitration and nationalization indemnity clauses in their foreign contracts. In the Venezuela dispute, Venezuela’s national oil company, Petroleos de Venezuela SA ("PDVSA") contracted with Mobil Corp. (now Exxon) and other international corporations to form a joint venture to explore Venezuela’s Orinoco heavy-oil belt. [5] Exxon claims based on a contract that PDVSA agreed to indemnify Exxon if PDVSA expropriated Exxon’s interests. [6] Because the contracts are not public, it is not known if this term is enforceable or specific.
There are generally two downsides to international arbitration: it is slow, and it can be less effective when the dispute is between countries that do not have a bilateral investment treaty. For instance, U.S. – based Occidental Petroleum Corp. filed its claim with ICSID against Ecuador last year for Ecuador’s nationalization and expropriation of assets, and the case is still pending as of publication of this article. [7] Also, the fact that Venezuela and the U.S. do not have a bilateral investment treaty removes another possible external limit on Venezuela’s expropriations. [8]
2. Sue in U.S. or Other Courts
There are serious limitations for corporations that look for recourse in U.S. courts. In the Venezuela – Exxon dispute, Exxon asked U.S. and international courts in preliminary motions to freeze PDVSA’s assets while the international arbitration process pends. Exxon might wish to speed up negotiations, harm PDVSA’s value, or assure investors that assets will not be completely lost. As of the date of this publication, Exxon has only been partially successful in its requests to U.S. courts to freeze PDVSA’s assets. It received a far larger temporary asset freeze from international courts.
The main limitation on lawsuits in U.S. courts is the Act of State Doctrine. This cousin of the political question doctrine advises judges that: "Every sovereign state is bound to respect the independence of every other sovereign state, and the courts of one country will not sit in judgment on the acts of the government of another, done within its own territory." [9]
The major act of state case was Banco Nacional de Cuba v. Sabbatino, where the Supreme Court upheld the Act of State doctrine and barred claims against Cuba for its nationalization of sugar plantations. [10] In response to the Sabbatino case, Congress enacted the Hickenlooper amendment to attempt to force courts to adjudicate cases of expropriation. Courts have subsequently taken the teeth out of this amendment, preferring not to rule on cases involving actions of foreign sovereigns. [11] Because U.S. courts are unlikely to get involved, one commentator said, “the battle for compensation may be an uphill one.” [12]
3. Turn to the Political Processes of the Countries Involved
Finally, corporations can use their lobbying abilities to influence the political processes of the countries involved in the dispute to broker a better deal. Most major nationalization disputes will include a component encouraging government involvement. For example, the Venezuela – Exxon dispute begs government involvement because it involves natural resources, energy, and a large dollar amount.
The political process, however, is not a panacea. In the dispute, the Venezuelan government is unlikely to bargain. Venezuela claims that Exxon threatens the very sovereignty of the country. It has a strong point, considering that PDVSA accounts for 90% of Venezuela's foreign exchange and half of its federal tax revenue. [13]
Venezuela may also be content to inflame the issue because crude prices and profits tend to rise during economic disturbances. This creates a reverse incentive for Venezuela to prolong any good-faith dispute.
IV. Conclusion
In nationalization, the state holds all the cards. Corporations have recourse, but it is slow and difficult to collect. In high-profile cases like the Exxon-Venezuela dispute, a corporation may use all available options concurrently, and still may not receive a settlement it deems successful.
[1] Claudia Assis, Legal recourse against Venezuelan nationalization a slog, MARKET WATCH, Jan. 10, 2007, available at http://www.marketwatch.com/news/story/legal-recourse-against-venezuelan-nationalization/story.aspx?guid=%7B581595BE-D9F1-4AFE-85FC-8B117B16EDA5%7D.
[2] James Suggett, Exxon Is Demanding Ten Times its Investment, Says Venezuelan Oil Minister, VENEZUELA ANALYSIS, Feb. 16, 2008, available at http://www.venezuelanalysis.com/news/3164.
[3] Ecuador Cancels an Oil Deal with Occidental Petroleum, N.Y. TIMES, May 17, 2006, at B1.
[4] Exxon's wrathful tiger takes on Hugo Chávez, ECONOMIST, Feb. 14, 2008, available at http://www.economist.com/world/la/displaystory.cfm?story_id=10696005.
[5] James Lumley and Caroline Binham, U.K. Court Should Grant PDVSA Asset Freeze, Exxon Lawyer Says, BLOOMBERG, Mar. 4, 2008, available at http://www.bloomberg.com/apps/news?pid=20601086&sid=ac3kdOOTG8fs&refer=latin_america.
[6] Id.
[7] Assis, supra note 1.
[8] Id.
[9] Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 91 (1976) (citation omitted).
[10] Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 439 (1964).
[11] Hunt v. Coastal States Gas Producing Co., 583 S.W.2d 322, 325 (Tex. 1979) (limiting the Hickenlooper Amendment to only property title cases).
[12] Assis, supra note 1.
[13] Suggett, supra note 2.