by Steve Coll
On June 25, however, Cutt called again to declare that ExxonMobil had given up. The two sides were “billions of dollars apart,” he said.
For the second time in just over three decades, the largest private oil corporation in the world would withdraw from Venezuela, a country that might hold the world’s largest reserves, or was at least second to Saudi Arabia, where ExxonMobil also had not a single barrel of bookable reserves.21
BP, Chevron, Total, ENI of Italy, Sinopec of China, and Statoil all negotiated compromises during the weeks that followed; they accepted new terms as minority owners, subordinate to the Chavez regime. Only ConocoPhillips joined ExxonMobil in refusal and departed.
The decision marked one of the first tests of Tillerson’s willingness to endure economic losses for the sake of policy and principle. The corporation’s local government affairs team gathered and drove over to the twin P.D.V.S.A. towers in Caracas’s cluster of downtown skyscrapers. As Carlos Rodriguez took notes, Tim Cutt announced to the vice minister of energy that ExxonMobil would be pulling out of the Cerro Negro project and that it intended to file claims against Venezuela in international courts of arbitration to recover damages. It was an uncomfortable meeting that ended quickly.22
Cutt and the engineers at Cerro Negro prepared to turn over the pride of ExxonMobil’s Latin American operations to Chavez’s political cadres in April. It was a painful endeavor, not only because the local executives would be walking away from a complex they regarded as state of the art, but also because scores of ExxonMobil’s Venezuelan employees would lose their jobs in a country where unemployment stood at 9 percent.
ExxonMobil’s lawyers and accounting analysts prepared for their legal campaign that summer by doing some mind-boggling math. Hobert E. Plunkett, a University of Alabama graduate who served as an asset enhancement manager at the corporation, later explained to a federal court how he calculated the damage Chavez had caused to ExxonMobil. The Cerro Negro project had twenty-eight years to go under the terms of the 1997 contract. The contract had a clause that laid out the formula under which ExxonMobil’s damages should be figured. This was called the Threshold Cash Flow Formula. It allowed ExxonMobil to estimate how much money it would have made in Venezuela after operating expenses, royalties, and taxes if it had not been forced to relinquish ownership. Plunkett arrived at a round number: somewhat more than $11.9 billion.23
ExxonMobil did not immediately share its thinking about its damage claim with Chavez or his aides. Cutt and his Caracas colleagues concentrated on winding down operations as smoothly as possible. When they visited Orinoco after handing control to P.D.V.S.A., they saw the scores of new employees sitting around in blue jeans without apparent responsibilities, and they saw that political propaganda had replaced their ubiquitous safety notices on some of the walls, but they kept their opinions to themselves. In public, on Wall Street, and elsewhere, Rex Tillerson described the breakup dispassionately: “Our situation in Venezuela is a pure and simple contract. The contract was disregarded.”24
Cutt gathered the local staff at the movie complex near the Caracas office for a sort of farewell party—“ExxonMobil Idol,” a talent show inspired by American Idol. The corporation’s senior managers, with Cutt fronting, took the stage in hats, dark glasses, and chains, with their underwear hanging out of their pants, to perform a gangsta rap number. They chanted inside jokes into their microphones, to the roar of laughter and applause from the remaining staff.25
The show’s theme accurately reflected ExxonMobil’s mood about Hugo Chavez. The corporation’s executives would not think to call the plan they had in mind “revenge”; they forswore emotion about business and legal decisions. When their plan was revealed for the first time in a New York federal courtroom a few months later, ExxonMobil’s lawyers insisted that they had done nothing untoward or vengeful. It was a contract matter, they said, pure and simple.
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 interest rate—unless there were guarantees about repayment. The lawyers and investment bankers who organized the bond sale therefore constructed a Common Security Agreement to protect bond purchasers. This agreement established the cash waterfall, as it was termed by the participants, at the Bank of New York, headquartered in Manhattan. The waterfall was a web of restricted bank accounts through which revenue from the sale of Cerro Negro oil flowed in a prescribed manner. Receipts from oil sales went first to pay for the operations of the Orinoco project and second to pay interest to bondholders. Only then did leftover funds cascade into accounts for each of the main project partners, ExxonMobil and P.D.V.S.A.26
The Bank of New York’s role was to ensure that all of these 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 included collateral and other guarantees to assure bondholders that the Bank of New York could enforce the system’s rules.
The cash waterfall had flowed smoothly for almost a decade. Oil came out of the ground in the Orinoco basin; the upgrader lightened the oil and removed its contaminants; the oil flowed through pipelines to ships at a Caribbean port; and the ships delivered regular loads to Chalmette, Louisiana, for final refining into commercial products. When Chalmette confirmed receipt of a particular shipment, it released its payment to the Bank of New York, which in turn sent the money flowing down the waterfall accounts. The bank routed some cash back to Cerro Negro to cover operating expenses, it set some money aside to make monthly interest payments to the bondholders, and then it released the remainder—many tens of millions of dollars annually—to ExxonMobil and P.D.V.S.A.
There were still $538 million worth of bonds outstanding under the cash waterfall agreement in the spring of 2007, when Hugo Chavez abrogated the Orinoco oil agreements. Some of the bonds were due in 2009, others in 2020, and still others in 2028. The bondholders—investment banks, pension funds, mutual funds, hedge funds—became nervous when ExxonMobil signaled publicly that it might pull out of Venezuela. If the corporation no longer operated Cerro Negro, the cash waterfall system might not work so well, and at a minimum, the prices of project bonds would fall because of investor anxiety about the future. On April 27, 2007, Cerro Negro bondholders declared that because of the prospective actions of Hugo Chavez’s government, Venezuela and ExxonMobil had legally defaulted on their joint obligations as issuers of the bonds. Under the cash waterfall system, the bondholders had the right to seize collateral if this default declaration was confirmed.
ExxonMobil had already handed over control of Cerro Negro to the Chavez government, but the corporation contacted the Chavez regime and offered to work closely with it on the bond problem. ExxonMobil was still on the hook for 50 percent of the bond issue; hundreds of millions of dollars were at stake.
J. R. Massey, ExxonMobil’s vice president for operations in Canada, South America, and the United States, flew down to Caracas. Massey was a Texas A&I graduate who had worked at ExxonMobil for thirty-six years. He told his Venezuelan counterparts, as a lawyer for the Chavez regime recalled it, that “regardless of the differences which remained between the ExxonMobil companies and Venezuela” over the nationalization, “there was no reason not to cooperate in good faith to restructure the financing.”27
On June 1, ExxonMobil and P.D.V.S.A. jointly retained the Wall Street investment bank of Lazard to advise them on how to make their nervous bondholders happy. Lazard concluded that the best way to clean up the mess would be for the government of Venezuela to buy back all the outstanding bonds through a cash tender offer and then borrow money on its own by other means. Chavez’s aides at P.D.V.S.A. eventually accepted t
his advice. The Venezuelans even agreed to pay for ExxonMobil’s share of the bonds.
Lazard initiated the complex tender process by which the Cerro Negro bondholders would first be given a chance to decide whether to accept the repurchase offer. If enough did so, they would later surrender their bonds and receive cash payments from the Chavez government. All of the parties retained high-end law firms in New York and Washington to handle the paperwork.
The offer succeeded and the full bond repurchase was scheduled to “close” on December 28, 2007, in a meeting similar to the document-signing sessions familiar to the sellers and buyers of residential property. Curtis, Mallet-Prevost, Colt & Mosle, Venezuela’s New York law firm, agreed to host the closing in a conference room at its flagship office, an angular glass-walled skyscraper at 101 Park Avenue. For the lawyers and bankers involved, the year-end closing date meant they would have a disrupted holiday season, but a remunerative one, once their deal fees were distributed.
ExxonMobil and Venezuela were anxious for the deal to close, too. The cash waterfall had been stopped up through most of 2007. Money continued to flow into the Bank of New York accounts from oil sales, but until the disputes with debt holders were fully resolved, it could not go out. As the year wound on, more and more cash had accumulated in each of the stopped-up accounts of ExxonMobil and P.D.V.S.A. By December, ExxonMobil’s account held $242 million and Venezuela’s contained about $300 million. One purpose of the closing meeting at the Curtis law firm was to confirm that all the legal obligations to bondholders had at last been met so that these huge sums could be released, to be booked as corporate revenue before the year ended.
ExxonMobil’s lawyers and finance specialists knew all about the $300 million building up in Venezuela’s cash waterfall account because “one of the principal and fundamental economic objectives” of the bond repurchase, as a lawyer for Venezuela later put it, was to make sure that ExxonMobil got its own money out of the stopped-up accounts.28
On December 28, Venezuela’s lawyers at Curtis assumed that everything was in order—both sides would be rewarded with a cash windfall when the paperwork was formally completed that afternoon.
All along, as the bond repurchase neared completion, ExxonMobil had been working secretly with a corporate repo man: Steven K. Davidson, a litigator at Steptoe & Johnson, a global law firm founded in Washington, D.C. Davidson was a practitioner in arbitration and corporate asset seizures who worked from Steptoe’s Washington office on Connecticut Avenue. By 2007, he had become one of the world’s leading specialists in the art of seizing and liquidating assets on behalf of large, aggrieved companies. For Motorola, which had fallen into a dispute with a Turkish company over a $2 billion loan, Davidson had seized a yacht in Israel; private jets in Bermuda, France, and the United States; real estate in Britain, Germany, and the United States; and bank accounts in Switzerland and New York. There was a streak of ruthlessness in his work that made him a natural for ExxonMobil.
Over Christmas, Steptoe lawyers secretly prepared court documents to freeze the $300 million in Venezuela’s Bank of New York cash waterfall account. They argued in the documents that the money was needed as security against future arbitration awards that might pay off ExxonMobil’s outstanding claims against the Chavez regime.
On Thursday, December 27, the day before the closing, Steptoe lawyers contacted the federal court clerk in the Southern District of New York in Manhattan and asked for a hearing before the “emergency” judge on call. They drew Judge P. Kevin Castel. In Castel’s courtroom on Pearl Street, the Steptoe attorneys handed up a prepackaged filing of affidavits, draft orders to seize the Venezuelan funds—and also a request that Castel place the entire matter under seal immediately, keeping it secret so that neither P.D.V.S.A. nor its lawyers at Curtis would know, as they signed the bond closing documents the following day, what ExxonMobil had in mind.
“In view of the urgency of the matter and the precise timing required,” Steven Davidson wrote, he also requested that Castel designate two young female lawyers at Steptoe to serve the asset seizure papers so as to “avoid the delays that may occur if the U.S. Marshal is directed to serve the order.”
J. R. Massey told Judge Castel that P.D.V.S.A.’s “sole asset in the United States is its share of the Project Accounts in New York, sometimes referred to as the ‘cash waterfall’ (approximately $300 million).” (P.D.V.S.A. also owned CITGO gas stations and refineries in the United States indirectly, through a subsidiary, but ExxonMobil did not seek to move against these assets.) It was “highly unlikely,” Massey continued, that ExxonMobil could force Hugo Chavez’s government to make payments on any future arbitration claim “unless the cash waterfall is restrained.”29
Castel signed off on all of ExxonMobil’s requests and also agreed to keep his ruling secret. The next day, lawyers and executives from ExxonMobil joined the oblivious lawyers for P.D.V.S.A., Bank of New York, Lazard, and the bondholders in a Curtis conference room above Park Avenue. Robert Minyard, the treasurer of ExxonMobil’s upstream division, attended with ExxonMobil’s bond deal lawyers from the Los Angeles firm of Latham & Watkins. The oil corporation’s delegation gave no hint that anything was out of the ordinary.
A large bond closing is an excruciatingly detailed event, carefully sequenced and choreographed on blinking computer screens, all watched over by nervous lawyers. Hundreds of millions of dollars previously deposited by Venezuela to pay for the bonds went out by wire that morning to each bondholder who had agreed to sell; when the sellers received their money, they sent back electronic confirmation messages. In the late morning and early afternoon, the confirmations blinked through one after another. Signatures were affixed, photocopies exchanged.
At about 2:10 p.m., Minyard took physical possession of the certificates of the repurchased bond shares and left the building. The Bank of New York’s representative announced to those remaining in the conference room that it had received enough confirmations from bond sellers to declare the closing officially done. “I am prepared to release the collateral.”30
That meant the money in the cash waterfall accounts could flow again. Bank of New York immediately initiated a wire transfer sending the $242 million lying in ExxonMobil’s stopped-up account to the corporation, free and clear. ExxonMobil’s lawyers soon confirmed that the wire had gone through. They had their money.
For Venezuela’s account, the Bank of New York had a special Federal Reserve number to wire out the $300 million to the Chavez government. Before the bank’s representative could push the final button, however, a new electronic message arrived—an “Order of Attachment” signed by Judge Castel, freezing the Venezuelan funds in place. “The amount to be secured by this Order is Three Hundred Million Dollars,” the order declared. The bank’s lawyers told Venezuela’s lawyers that there was nothing they could do; the court had spoken, and the money would stay put.
Arbitration law pays well, but is not rich with emotional reward. 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 the lawyers involved would put on their résumés for years to come, as evidence of their litigating prowess.
They would have to celebrate in quiet, however. ExxonMobil did not call public attention to what it had done, it did not offer any cowboy-toned declarations, and it did not permit its outside attorneys to do so, either. The corporation’s executives did not see profit in crowing about Hugo Chavez. Dictators came and went; nationalizations came and went. They had their $300 million—the money was now frozen, awaiting final rulings in the arbitrations to come.
ExxonMobil “has come to this Court . . . with unclean hands,” Joseph Pizzurro, the lead attorney for Venezuela at Curtis, wrote in an impassioned filing to a federal judge a few weeks afterward.
In its undisclosed appearance before Judge Castel, the corporation had told
the judge that it needed a freezing order in secret because it did not wish to interfere with the orderly closing of the bond repurchase, but “it never told the Court why it did not want that transfer to be interfered with.” The reason, Pizzurro continued, “was simple”: ExxonMobil wanted to make sure its $242 million—money provided to it by the government of Venezuela, after months of cooperative negotiations—was moved out of the cash waterfall accounts before it acted to seize its partner’s money. ExxonMobil’s lawyers, as part of their cooperation with the Venezuela side over the bond deal, had even signed an agreement late in 2007 affirming that there was “no provision of law . . . order [or] injunction” that would “prohibit, conflict with or in any way prevent” the funds in the cash waterfall accounts from being released once the bond repurchase was completed.
“Obviously, if P.D.V.S.A. . . . had known that [ExxonMobil] was going to breach its obligations and representations,” Venezuela would never have gone through with the bond deal. ExxonMobil “knew this full well, which was the reason its litigation counsel sought to keep the court file under seal.” The whole charade, Pizzurro wrote, was little more than “a scheme calculated to conceal its misrepresentations, not only from P.D.V.S.A. . . . but from this Court.”31
Steven Davidson, for ExxonMobil, said he couldn’t understand why counsel for Venezuela seemed so upset. “They call it ‘unclean hands,’” Davidson told Judge Deborah Batts, who had inherited the case from Castel, at a hearing on February 13. “They say that we did something that’s somehow inappropriate with respect to the transaction that closed at the end of the year,” Davidson said. “Now, Your Honor, we would, as a matter of fact and law—we would say that’s simply incorrect. . . . There was nothing inappropriate done whatsoever with respect to that closing.”