ExxonMobil had decided to seek international arbitration with PDVSA last year, after Hugo Chavez, the Venezuelan president, nationalised a heavy oil project in the Orinoco river basin.
The company subsequently secured court orders in London, New York, the Netherlands and the Netherlands Antilles to freeze $12bn of PDVSA's international assets, saying it needed to ensure it would get paid for the lost project and lost future revenue.
'No suggestion of fraud'
But the British judge, Paul Walker, ruled that such freezing orders are rare and occur in cases where there is "usually compelling evidence of serious international fraud".
"In the present case, there is no suggestion whatever of fraud on the part of [Petroleos de Venezuela or PDVSA]," Walker said in a summary of conclusions released by the court.
During proceedings, Walker also signalled that he agreed with PDVSA's argument that the case did not fall under British jurisdiction, since PDVSA is not a British company and has no assets, businesses or bank accounts there.
Alan Jeffers, an ExxonMobil spokesman, said the company had no plans to appeal the ruling because the judge based his decision on jurisdictional issues.
"The important thing, from our perspective, is the court did not question the merits of our underlying claim," he said.
The oil company did not question Venezuela's right to expropriate oil projects, Jeffers said, but Venezuela's state oil company PDVSA had signed a contract with ExxonMobil in the 1990s that specifically said the Venezuelan company would compensate ExxonMobil for such moves.
"We have a contractual commitment from PDVSA to compensate us in the event of that, and we're seeking that PDVSA honour the terms of that agreement,'' Jeffers said.
ExxonMobil has confirmed it plans to proceed with two arbitration cases seeking billions of dollars in compensation from Venezuela.
Joseph Profaizer, an international arbitration expert at the law firm Paul Hastings, told Dow Jones the legal tussle between Venezuela and ExxonMobil was likely to be a prolonged one.
"In the short term, the fight is over the assets and cash frozen, but the long-term fight is about the arbitration process," he said.
Rafael Ramirez, the Venezuelan oil minister, said his company was now considering suing the largest US oil company by market value.
"ExxonMobil is going to have to answer now for the damage that has been caused to our company, to our country," he told state television.
ExxonMobil has been "very arrogant" while other companies including Chevron, Total SA, BP and StatoilHydro ASA had negotiated deals to continue as minority partners in the nationalised projects, Ramirez said.
Samuel Moncada, Venezuela's ambassador to Britain, said the London court ruling was a victory for Venezuela.
"This was a defeat of the tactics of judicial terrorism used by ExxonMobil," he said.
"This is the beginning of the end of the harassment campaign Exxon instigated against Venezuela. We are planning to fight all of the way," he told reporters.
Last month, Venezuela asked ExxonMobil to resume talks on the nationalisation dispute, sponsored by the World Bank.
It also asked the US oil company to abandon legal cases in New York and London.