Photo: Steve Coll
We’re reading Private Empire: ExxonMobil and American Power
by Steve Colls and learning a lot about one of the world’s most powerful corporations.ExxonMobil is so powerful, in fact, that it hoodwinked Venezuelan President Hugo Chavez by pulling off one of the largest asset seizures ever attempted by an American oil company.
It all started in 1997 when Exxon signed a contract with Venezuela’s state-run oil giant P.D.V.S.A. to extract and process heavy oil from a part of the Orinoco River Basin called Cerro Negro.
From Private Empire:
The banking and legal system known as the cash waterfall was designed to control the flow of money generated by the sale of Cerro Negro crude oil. ExxonMobil and P.D.V.S.A. issued $600 million worth of bonds to international investors to finance construction of the massive upgrader complex in the Orinoco basin. Given the long record of political instability in Venezuela, nobody was likely to buy these bonds—at least not at an affordable rate—unless there were guarantees about repayment. The lawyers and investment bankers who organised the bond sale therefore constructed a Common Security Agreement to protect bond purchasers. This agreement established the cash waterfall … a web of restricted bank accounts through which revenue from the sale of Cerro Negro oil flowed in a prescribed manner.
The terms stipulated that receipts from oil sales would go first to pay for operations, second to pay interest to bondholders and then to the accounts of ExxonMobil and P.D.V.S.A. while the Bank of New York in Manhattan ensured that all “legal obligations were met before either ExxonMobil or P.D.V.S.A. took out the money that reached the bottom of the cash waterfall.”
The agreement ran smoothly for a decade until Chavez attempted to reassert control over Venezuela’s oil by nationalizing the project at a time when there was still $536 million worth of bonds outstanding.
Cerro Negro bondholders became nervous and declared on April 27, 2007, that Venezuela and ExxonMobil had legally defaulted on their joint obligations as issuer of the bonds, giving bondholders the right to seize collateral if the default declaration was confirmed and forcing ExxonMobil and P.D.V.S.A. jointly retained Wall Street investment bank Lazard to buy back the outstanding bonds through a cash tender offer (and then borrow money on their own another way).
The cash waterfall was plugged for most of 2007 while the details of the bond repurchase were worked out, and by the end of the year ExxonMobil’s Bank of New York account held $242 million while Venezuela’s contained about $300 million.
ExxonMobil had also hired Steven K. Davidson of the law firm Steptoe & Johnson to secretly prepare court documents to freeze the $300 million in Venezuela’s account, arguing that “the money was needed as security against future arbitration awards that might pay off ExxonMobil’s outstanding claims against the Chavez regime.”
On December 27, the day before the bond repurchase was to be completed, Davidson asked a federal court clerk in Manhattan for a hearing before the “emergency” judge on call, handed the judge the documents and requested that the entire matter be put under seal immediately.
The next day, after the parties involved finished excruciating process of the large bond closing and the cash waterfall began to flow again, ExxonMobil received their $242 million while all Venezuela received was an “Order of Attachment” signed by the judge that froze its funds in place.
From Private Empire:
The [Bank of New York’s] lawyers told Venezuela’s lawyers that there was nothing they could do; the court had spoken, and the money would stay put.
… For the Steptoe attorneys the late-December Friday-afternoon seizure of $300 million belonging to Hugo Chavez’s government was like hitting a walk-off home run in the bottom of the ninth before a full house at Yankee Stadium. It was the sort of thing that the lawyers involved would put on their resumes for years to come, as evidence of their litigating prowess.