Inter Press Service English, English (January 4, 2016)

Oil giants punish Venezuela through Dutch treaty

Venezuela doesn't want investment treaties anymore if they give investors the right to drag the country before a commercial court. "The system has been set up to break down the nation-state."
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Oliereuzen straffen Venezuela via Nederlands verdrag

This article has also been published in Spanish, Swedish, and Finnish.

All is not going well for Venezuela. While the country is torn apart by poor governance, poverty and polarisation, it is attacked from the outside by oil firms claiming tens of billions of dollars.

The method they use is called ISDS, or Investor-State Dispute Settlement. This is a mechanism by which investors can sue a state by means of arbitration, which is a kind of privatized court. Many lawyers stress the advantage that this saves you from the local judge, whom you can't trust in many countries. You can choose a judge for yourself, the opponent does the same, and the two choose a chairman. They are called arbitrators. The case is heard at a renowned institute, like the Worldbank. How could it be more fair?

Biased

But Bernard Mommer, former vice-minister for Oil in the time of Hugo Chavez, now the main witness in different claims against Venezuela, has to laugh a bit. "I won't say that Caracas is a neutral venue. But don't be so foolish to say that Washington is neutral. The whole arbitration system is biased in favour of investors."

After Argentina no country has been sued as much as Venezuela: until 2014 at least 37 cases have been filed against this Latin American state. However, the fine they can expect now exceeds all of the others. Conoco-Philips, a Texan oil company, claims 31 billion dollar, and seems to be on the winning side. According to critics, the case has everything that's wrong with the ISDS system.

Oil dispute

The dispute about oil began in 2006. Under the activist leadership of Chavez Venezuela decided to nationalise the oil sector. Also higher taxes were announced. Mommer was responsible for the negotiations with international oil firms about compensation. Most of the 41 companies in the country agreed with the buyout. Two didn't. Those were the Texan companies ConocoPhillips and Mobil (now ExxonMobil).

"When we started with the expropriation, they went for arbitration", says Mommer. "I didn't even know that this was possible. For arbitration two parties need to consent, don't they? How could they sue a state?" But Mommer discovered that Venezuela signed Bilateral Investment Treaties (BITs) in 1991, among others with the Netherlands. Those treaties give all investors from the given country an offer to arbitration if they feel treated unfairly by the host state.

Dutch sandwich

Conoco-Phillips and Mobil quickly moved their Venezuelan holdings to the Netherlands in 2006. That gave them the opportunity to claim, as Dutch investors, that the unexpected policy change violated their BIT rights. Together, they demanded 42 billion dollar.

"This is called the Dutch sandwich", says George Kahale III, a top lawyer from New York, who defends Venezuela in different cases. "You put a Dutch holding in the middle of your company chain and you can call yourself Dutch."

By the way, it is not allowed to do this if the dispute already started. ExxonMobil and Conoco said that their move was made independently of the dispute. However, a remarkable message has been found among the Wikileaks cables. In this a representative of Conoco told someone from the American embassy that they "already" moved to the Netherlands to "safeguard their arbitration rights".

Unlawful

The cases are still dragging on. ExxonMobil has no luck. The three arbitrators have judged that the expropriation was lawful. ExxonMobil gets a compensation, but not much more than what they were offered earlier, around one billion dollar.

But the Conoco case evolves differently. Two of the three arbitrators find the expropriation unlawful. This means that Venezuela has to compensate the firm, not on the basis of the low oil price in 2006, but on the basis of the much higher price at the time of the claim. This will amount to tens of billions of dollars.

This is insane, says Kahale. "The fact is that four out of six arbitrators found that the expropriation was perfectly lawful. And yet Venezuela can expect a mega award."

Unfair

Talking about fairness: among the Wikileaks cables another juicy anecdote has been found. In a cable from 2008 the Conoco representative tells the American ambassador that the negotiations go well and that Venezuela makes use of reasonable principles. This is in contradiction to what Conoco was claiming in public. Yet the arbitrators – at least, two of the three – now say that they can't change their conclusion anymore and now have to proceed to the next phase, about the damages.

"In other words", says Mommer, "the investor can lie. We can't sue them anyway. They alone can sue us. This shows why Western countries have invented this system. It has been set up to break down the nation-state."

Disaster

ISDS is structurally flawed, says Kahale. "Who are the judges? They are investment lawyers. Their commercial background shines through in their decisions. Every judge of course always brings his own views to his job. But in arbitration these people are deciding no longer private commercial disputes, but megacases of international significance, with sometimes vital importance for individual states, involving billions of dollars, with very little training in international law."

Too many comflicts of interest arise. "You will never see a supreme court judge, acting as a counsel in an other case. But many arbitrators also act as a counsel. It's very hard to preside over the legality of something one day, and advocate the same issue the other day. It is natural that I'm holding back in one or the other, depending on which case is more important to me. There are very few checks and balances. Too many mistakes are made."

Venezuela is fed up with ISDS claims. Soon after the claims were filed, they pulled the plug, not only from the ICSID convention (which acknowledges the Worldbank as arbitration court) but also from a number of BITs. The Dutch BIT was the first to be terminated, a few years. Unfortunately for Venezuela, this treaty contains a clause giving investors the right to arbitration until 2023.

Don't challenge us

Arbitration can be an elegant method for solving a dispute. But is has developed into an instrument for multinational companies to pressurize states.

"These oil firms were offered a brilliant compensation", says Juan Carlos Boue, a Venezolan researcher at the Oxford Institute of Energy. "But when the oil price rose, they decided to leave the country with as much money as possible." For ExxonMobil, a giant with a revenue of 400 billion dollar, twice as big as the gdp of Venezuela, there is more at stake. "They have unlimited resources. They want to let the world know what happens if you challenge them."

And the arbitrators? "Some of them are on the boards of multinatinal companies. They just don't want the countries to get away with it. They have an extreme dislike towards countries like Venezuela."

ExxonMobil and Conoco-Phillips refrained from any comment.

This article is part of a research by De Groene Amsterdammer, Oneworld and Inter Press Service, supported by the European Journalism Centre (made possible by the Gates Foundation). See www.aboutisds.org.

Oil giants punish Venezuela through Dutch treaty

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