CARACAS -- Harvest Natural Resources, Inc. (NYSE: HNR) says it has withdrawn a World Bank arbitration suit against Venezuela under pressure from the Venezuelan government.
Harvest announced that its affiliates, HNR Finance B.V. (Harvest BV) and Harvest Vinccler S.C.A. (HVSCA), have withdrawn without prejudice a Request for Arbitration against the Government of the Bolivarian Republic of Venezuela before the International Centre for Settlement of Investment Disputes (ICSID) regarding Harvest BV's interest in Venezuela and violations by the Government of Venezuela of the Netherlands – Venezuela Bilateral Investment Treaty.
Harvest's withdrawal of the Arbitration Request was pursuant to an order issued by the Court of Chancery of the State of Delaware at the request of Petroandina Resources Corporation N.V. (Petroandina), an affiliate of Pluspetrol Resources Corporation B.V. and an indirect equity owner of Harvest BV.
Petroandina had told Harvest that it has encountered no adverse reaction or ramifications related to the filing of the Arbitration Request, but according to its request for the order, Petroandina sought the order because "Petroandina and its affiliates are suffering irreparable harm to their business relationships in Venezuela" and "Petroandina and its affiliates risk impairment of their ongoing business relationships, both in connection with the Petrodelta investment and their other existing and future relationships."
"Unfortunately, despite the fact that we continue to believe that the immediate pursuit of the claims set forth in our Arbitration Request is in the best interests of all equity owners of Harvest BV, we will be delayed from promptly pursuing these claims without going through a process established in the shareholders' agreement with Petroandina or obtaining a waiver of that process," says James A. Edmiston, President and CEO of Harvest. "Harvest remains committed to protecting the value of the Company's investment in Venezuela. As always, we remain receptive to an urgent resolution of our issues with the Government of Venezuela, reached in good faith dialogue, between all parties concerned."
Harvest submitted a Request for Arbitration against the Government of the Bolivarian Republic of Venezuela before the International Centre for Settlement of Investment Disputes (ICSID) regarding Harvest BV's interest in Venezuela and violations by the Government of Venezuela of the Netherlands - Venezuela Bilateral Investment Treaty earlier this month.
The lawsuit would have brought the amount of arbitrations against Venezuela currently before the World Bank's arbitration arm to 27.
"Over the past decade, the Venezuelan Government has violated Harvest's rights as an investor by systematically thwarting the development of Harvest's investment in Venezuela as well as the Company's ability to sell its interests there," Edmiston said at the time. "Since its initial investment in Venezuela, Harvest has acted in good faith, complied with its contractual obligations and supported the operations of both our pre-existing Operating Service Agreement and Petrodelta while attempting to resolve our disputes with the Venezuelan Government and PDVSA affiliates. To date, Harvest's efforts to resolve these disputes in a manner that would allow us to realize the value of our investment in Venezuela for the benefit of our stockholders have been unsuccessful. Harvest's two attempts to sell its remaining interests in Venezuela, both of which were fully vetted with the appropriate authorities prior to undertaking either transaction, ended in the imposition of wholly unreasonable and extra-contractual conditions on the sale by Venezuela authorities, directly leading to the failure of both transactions."
"Having exhausted all alternatives to protect Harvest's shareholders, we are now regrettably forced to exercise our right to submit this dispute to ICSID arbitration to protect the value of Harvest's investment in Venezuela. This is not the outcome of our 22 years in Venezuela that we envisioned or desired, but is the only means left to Harvest to protect our investment. As always, we remain receptive to an urgent solution, reached in good faith dialogue, between the parties. However, the recent failure of our latest sale of our interests in Venezuela requires that the Company take urgent action with respect to our Venezuelan investments, and to the Company's liquidity and strategy as a whole. In addition to exercising Harvest's rights for protection under the Treaty, Harvest will take any legal action necessary to protect the Company's investment and assets against possible actions by third parties or agents who are not directly involved with the Company's interests in Venezuela."
"The Request for Arbitration was filed because the Company believes that the Venezuelan government has violated the Company’s rights as an investor by systematically thwarting the development of the Company’s investment in Venezuela, as well as the Company’s ability to sell its interests there," Harvest said.
The Request for Arbitration set forth numerous claims, including:
- The failure of the Venezuelan government to approve the Company’s negotiated sale of its 51% interest in Petrodelta to Petroandina on any reasonable grounds in 2013-2014, resulting in the termination of the Petroandina Purchase Agreement;
- The failure of the Venezuelan government to approve the Company’s previously negotiated sale of its interest in Petrodelta to PT Pertamina (Persero) on any reasonable grounds in 2012-2013, resulting in the termination of a purchase agreement entered into between HNR Energia and PT Pertamina (Persero);
- The failure of the Venezuelan government to allow Petrodelta to pay approved and declared dividends for 2009;
- The failure of the Venezuelan government to allow Petrodelta to approve and declare dividends since 2010, in violation of Petrodelta’s bylaws and despite Petrodelta’s positive financial results between 2010 and 2013;
- The denial of Petrodelta’s right to fully explore the reserves within its designated areas;
- The failure of the Venezuelan government to pay Petrodelta for all hydrocarbons sales since Petrodelta’s incorporation, recording them instead as an ongoing balance in the accounts of Petroleos de Venezuela S.A. ("PDVSA"), the Venezuelan government-owned oil company that controls Venezuela’s 60% interest in Petrodelta, and as a result disregarding Petrodelta’s managerial and financial autonomy;
- The failure of the Venezuelan government to pay Petrodelta in US dollars for the hydrocarbons sold to PDVSA, as required under the mixed company contract;
- Interference with Petrodelta’s operations, including PDVSA’s insistence that PDVSA and its affiliates act as a supplier of materials and equipment and provider of services to Petrodelta;
- Interference with Petrodelta’s financial management, including the use of low Bolivares/US dollars exchange rates to the detriment of the Company and to the benefit of the Venezuelan government, PDVSA and its affiliates;
- The forced migration of the Company’s investment in Venezuela from an operating services agreement to a mixed company structure in 2007.
"The Share Purchase Agreement (SPA) between Petroandina Resources Corporation N.V. (Petroandina), Pluspetrol Resources Corporation B.V. (Pluspetrol), Harvest and HNR Energia B.V., a wholly-owned subsidiary of Harvest, for the purchase of Harvest’s remaining interests in Venezuela for a purchase price of $275.0 million in cash has been terminated as a result of the failure to obtain approval of the transaction from the Government of the Bolivarian Republic of Venezuela by December 31, 2014," Harvest said.
"Representatives of the Venezuelan Government and Corporacion Venezolana del Petroleo S.A. (CVP), a PDVSA affiliate who along with another PDVSA affiliate owns a 60% interest in Petrodelta, informed Harvest and Petroandina that any approval of the contemplated transaction would be conditioned on Petroandina guaranteeing (i) an unspecified bonus payment for access to Petrodelta’s reserves and (ii) $1.52 billion of financing for Petrodelta. Neither of these conditions exists as contractual obligations related to ownership in Petrodelta and ultimately Petroandina and the Venezuelan Government could not reach an agreement on those matters," Harvest said.
Harvest and Petroandina -- a subsidiary of PlusPetrol, an Argentine oil company with interests throughout South America which is also the largest oil and natural gas producer in Peru -- signed the agreement to sell HNR's 80% equity interest in Harvest-Vinccler Dutch Holding, B.V. to Petroandina in two closings for an aggregate cash purchase price of $400 million. The first closing occurred on December 16, 2013, when the Company sold a 29% equity interest to Petroandina for $125 million. The second closing under the Share Purchase Agreement, for the sale of the remaining 51% equity interest in Harvest Holding for a cash purchase price of $275 million, was subject to, among other things, approval by the Government of Venezuela and Harvest shareholders.
On May 7, 2014, Harvest’s stockholders approved the sale of the Company’s remaining interests in Venezuela to Petroandina.
As a result of the termination of the agreement, Harvest will retain its 20.4% interest in Petrodelta and Petroandina will retain its 11.6% interest in Petrodelta, which it had purchased from Harvest for $125 million in cash on December 16, 2013. Petroandina had also loaned HNR Energia $7.6 million which will become due on December 31, 2015.
“After three years of our best efforts, we are both disappointed and frustrated that the sale of our interests in Petrodelta has once again been effectively denied by the Government of Venezuela and CVP," said James A. Edmiston, President and CEO of Harvest. "As a result of this development, in the near term, Harvest will focus on strengthening its balance sheet and exploring alternatives with regard to our interests in Petrodelta and Gabon. These actions may include efforts to monetize our Dussafu asset.”
In 2012, Harvest Natural Resources, Inc., which is headquartered in Houston, Texas, signed a contract with PT Pertamina (Persero), the national oil company of Indonesia, to sell all of the Company's interests in Venezuela for $725 million in an all-cash transaction, but that transaction also fell through after the Venezuelan government failed to approve the sale.
Petrodelta was projected to produce 42,920 barrels a day in 2014 and averaged approximately 41,300 barrels a day in 2013 from its oil fields in northeastern Venezuela.
Harvest has been operating in Venezuela since 1992, when it signed a 20 year operating agreement with an affiliate of PDVSA to develop the Uracoa, Tucupita and Bombal fields. These three Orinoco belt fields were developed from 1937 through 1962 but abandoned in 1987. Harvest initially took the production up to 28,000 barrels per day and after further investment, development and exploration, to over 41,000 barrels per day. But the company has had problems getting paid for its production in Venezuela as well as repatriating dividends and has had to restate earnings over the last few years. As a result, in the final quarter of 2013, the company lost $112.7 million, or $3.02 per share, despite $100 a barrel oil.
The Harvest BV equity owners unaffiliated with the Company, including Petroandina Resources Corporation N.V. and Oil & Gas Technology Consultants (Netherlands) Cooperatie U.A. are not parties to the Request for Arbitration.
After a rash of expropriations and nationalizations by Venezuela's firebrand former President Hugo Chavez, Venezuela has 26 cases pending against it at ICSID -- the most of any nation in the world. Faced with the cases, Chavez withdrew Venezuela from ICSID jurisdiction in 2012, but pending cases and new cases brought under bilateral investment treaties and contracts continue to give ICSID jurisdiction to settle the arbitrations.
Other companies with pending ICSID arbitrations against Venezuela include mining and smelting companies Anglo American, Rusoro Mining Ltd., Crystallex International Corporation, Highbury International and Tenaris SA; food industry companies Gruma, Polar, Longreef, Vestey, and Owens-Illinois Inc.; and oil industry companies Tidewater Inc., Williams Cos. Inc., Koch Industries Inc., and ConocoPhillips.
In December, ICSID reaffirmed its $713 million award (plus legal costs and interest) rendered in favor of Gold Reserve on September 22, 2014. With interest, Gold Reserve estimates that Venezuela now owes approximately $745 million, which is increasing at a rate in excess of $1.5 million per month.
Also in December, Chilean airport operator IDC and Swiss partner Flughafen Zürich won a $34 million arbitration proceeding against Venezuela that was originally filed in June 2010 at ICSID over the expropriation of the airport concession on Margarita Island in Venezuela in 2005
In October, an ICSID arbitration panel awarded ExxonMobil $1.6 billion in its case against Venezuela for the 2007 expropriation of Exxon's investments in the Orinoco oil region. Venezuela has filed a procedure for Revision which has temporarily stayed the enforcement of the Exxon judgment.
ICSID is an autonomous international institution established in 1965 under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID or the Washington Convention) with over one hundred and forty member States. The primary purpose of ICSID is to provide facilities for conciliation and arbitration of international investment disputes.