12 SPECIAL REPORT
INTERNATIONAL ARBITRATION 1/3LY
VENEZUELA STRUGGLES TO PERFORM The need for market liberalisation is evident across Latin America, including Venezuela where oil exports account for almost 100 per cent of government revenue, with the sector dominated by state-owned behemoth Petróleos de Venezuela (PDVSA). But years of economic crisis, underinvestment and poor policy-making have left Venezuela’s energy industry in tatters. Those foreign oil companies that entered the fray – many during the leadership of the late, charismatic president Hugo Chavez – have found their projects bogged down by regulation and poor domestic performance with PDVSA having a 50 per cent operating stake in all oil developments. Chevron, Total, Russia’s Rosneft, Statoil of Norway and Chinese firm CNPC all have joint ventures with PDVSA in Venezuela’s challenging Orinoco heavy oil belt. The foreign partners have long sought operational control over the ventures, which are deteriorating from a lack of maintenance. Investors are also concerned that Caracas can’t fulfil its financial commitment to the projects. Oil service companies such as Schlumberger, Halliburton and Baker Hughes have effectively withdrawn from Venezuela in recent months following a build-up of unpaid invoices. Annual inflation is now running at some 500 per cent and GDP plunged by 20 per cent in the second quarter of 2016.
Venezuela’s problems are emblematic of the volatile environment in Latin America where markets can thrive and then rapidly deteriorate. As a fully-fledged developing region it presents obvious risks to foreign investors, but many continue to be enticed by the potential rewards. As the region works through the collapse in commodity prices, corruption scandals and currency volatility, and with many nations looking to liberalise their economies and encourage foreign investment, there are reasons to be positive.
KEY LEGAL CONSIDERATIONS • L ower commodity prices are increasing pressure on margins, raising the potential for disputes, both with domestic governments and other industry participants. • H igher numbers of claims are likely as lower commodity prices result in more bankruptcies. Claims over renegotiation or early termination of contracts and non-payment are on the rise. • T he present business climate is increasing the focus on contracts and contractual terms. Companies and governments are under pressure to negotiate the best possible terms. • G overnments in less stable regimes may fail to honour, or may seek to renegotiate, contracts, especially in the event of a change of government. • A number of national governments have demonstrated a propensity for excessive intervention and even expropriation in certain markets. • L egislation in some emerging jurisdictions may be outdated and not fit for contemporary use. National courts may be under-resourced and decisions not effectively reported. • F oreign investors should seek neutral venues to resolve potential disputes as national courts may not have the same degree of impartiality as exists in other parts of the world. Some countries’ laws allow for substantive judicial review of arbitral decisions and fail to draw distinctions between domestic and international arbitration.
I BELIEVE THAT FOREIGN DIRECT INVESTMENT AND INTERNATIONAL LENDING WILL BE UNLOCKED IN RELATION TO BOTH ARGENTINA AND BRAZIL FOLLOWING PROMISES BY BOTH NEW REGIMES TO IMPLEMENT DRASTIC STRUCTURAL AND POLICY CHANGES.
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