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Tuesday, September 04, 2007
Perspectives

Nicaragua and Esso: What Will Happen?

Nicaragua's government will likely reach an agreement with Esso over its confiscated terminal, experts predict.
Presidents Daniel Ortega and Hugo Chavez in Nicaragua in July groundbreaking of a future Venezuelan refinery.  (Photo: Nicaraguan President's Office)

CHRONICLE SPECIAL
Latin America Advisor

The United States warned Nicaragua ...that it risked serious damage to economic relations after a Nicaraguan judge seized a fuel terminal owned by Esso Standard Oil—a subsidiary of ExxonMobil—in a tax payment dispute with the government of President Daniel Ortega. How will this dispute play out? Is promised Venezuelan investment in Nicaragua’s energy sector helping to marginalize the importance—and political influence—of US energy companies such as Esso in the Central American nation?

Mario Arana, former President of Nicaragua's Central Bank: Contrary to what has been said in the international media, confiscation of the Esso Standard Oil terminal in Nicaragua by Ortega is highly unlikely. But, this is a government overburdened with electricity shortages, which has brought blackouts in the country up to eight hours. The government, trying to solve a very practical problem of storage capacity for finished petroleum products from Venezuela, is acting in a very clumsy way, bending the law, and risks shattering the carefully crafted image of a country friendly to foreign investment. What we are seeing played out is a very old Sandinista style of negotiation. They come with a strong hand and try to intimidate you to get concessions, and then back down to a more realistic and pragmatic settlement. I believe in the end there will be a negotiated solution no matter what they call it. It must be said that Exxon could have contributed more when asked to help solve the energy crisis a while back. Unfortunately, they misread the gravity of the situation. This is not to say that the actions of the government are justified, since they had other options, which could have adhered fully to the law, but a disregard for institutionality unfortunately emerges too often in the Sandinista ruling party. I don't believe that Venezuela's investment promises will necessarily displace the influence of US energy companies. There is an interest on the part of the government in promoting foreign investment and respecting the rules of the game in general. They do not seem totally consistent all the time on this, but they are really trying to see the economy grow more dynamically, and for that they know they need foreign investment. The Sandinistas supported the implementation of CAFTA in the National Assembly. They have completed negotiations with the IMF to have a Poverty Reduction Growth Facility in place. Hopefully they will learn in due time that adherence to the rule of law is part of the game in making the economy grow, especially in a globalized world.

Mélida Hodgson, Counsel at Miller & Chevalier, a former Associate General Counsel at the office of the US Trade Representative, and was the lead US government investment lawyer in the negotiation of CAFTA: From all reports, efforts are being made to resolve this issue through negotiation. It may end up being a simple matter of bureaucratic incompetence and judicial mismanagement, as it appears that the judge may not have followed Nicaraguan legal procedures in allowing Nicaragua's General Customs Services to seize the terminal. Although Bayardo Arce, an aide to Mr. Ortega, initially appeared to politicize the dispute, Mr. Ortega himself reserved judgment and advised that the matter would be investigated. A judge is currently involved in negotiations between Esso and Petronic to resolve the issue and return the terminal to Esso. While details are confusing, it appears that the seizure was carried out by Petronic, the Nicaraguan state oil company. Esso seems to be keeping the issue of judicial mishandling out of Nicaraguan courts, perhaps in order to preserve arbitration rights under the US-Central America-Dominican Republic free trade agreement (CAFTA). Under CAFTA, bringing the matter to a Nicaraguan court may foreclose ExxonMobil's ability to later seek international arbitration. At any rate, should negotiations fail, before a dispute can proceed under CAFTA on the most likely claim of expropriation, the tax authorities (of both countries' treasury departments) would first have an opportunity to review the claim (other claims are not limited in this manner). With respect to Venezuela's influence, it would appear that for now Nicaragua still needs the ExxonMobils of the world. A curious facet to this dispute is the arrival on August 29 of a Venezuelan tanker loaded with a second shipment of promised crude oil. Some in Nicaragua appear to speculate that the terminal was seized in order to process Venezuela's gift.

Manuel Orozco, Executive Director of the Remittances and Rural Development Project at the Inter-American Dialogue: The dispute will have to arrive to a settlement in favor of ExxonMobil because the Nicaraguan government's legal grounds are weak and at best unrelated to the interest in using the plants to store Venezuelan oil. The dispute is creating an uncomfortable environment for investors wanting to work in Nicaragua and who feel that a politicized Sandinista judiciary is not one that protects their interests. Although the Nicaraguan government hopes Esso will pull out voluntarily as a practical solution to satisfy its relationship with Venezuela, that's unlikely. Instead, Esso may agree to a contract with the Nicaraguan government to store oil during a short period or manage it within its own activities. Unfortunately, the current conflict with Esso is an example of Ortega wanting to have it both ways: support the private sector while threatening them with political pressure.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

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