OVERVIEW OF VENEZUELA'S OIL & GAS SECTORS: TRENDS, LEGAL AND POLITICAL ENVIRONMENT

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 16C
OVERVIEW OF VENEZUELA'S OIL & GAS SECTORS: TRENDS, LEGAL AND POLITICAL ENVIRONMENT^*
Miguel I. Rivero Betancourt ^**
Hoet, Pelaez Castillo & Duque
Caracas

Miguel I. Rivero Betancourt is a partner of Venezuelan law firm Hoet Pelaez Castillo & Duque. Mr. Rivero Betancourt holds a Master Degree on Natural Resources and Environmental Law and Policy, with Specialization on Energy Law and Policy from University of Denver, Colorado, U.S.A. Rivero has particular expertise in assisting and setting up oil companies in Venezuela, including the design and preparation of all sorts of bidding and negotiation contracts of common use in the Venezuelan petroleum industry, including contract models for counseling, construction, manufacture and purchase of equipment, materials procurement of, seismic studies, etc. Since the beginning of the Oil and Gas Industry opening process in Venezuela during the early nineties, he has been directly involved in the negotiation and formation process of several agreements executed by PDVSA. He has also served many oil companies' operational areas that took part in strategic associations and operative agreements; he has participated and assisted clients in bid rounds (2005-2006 Rafael Urdaneta) for granting Gas Licenses under the Gaseous Hydrocarbon Law, as well. He provided legal assistance to companies exploiting gas under licenses granted by the Venezuelan Government. He was Professor of Antitrust Law at Universidad Metropolitana. He is currently Professor of Contract Law and Gas Upstream Activities at Universidad Monteavila, both in Caracas, Venezuela. Mr. Rivero founded and was appointed director of the Universidad Monteavila's Hydrocarbon Course - the first of its kind ever created in Venezuela - oriented to professionals, from different fields - accountants, engineers and administrators. Approximately 110 professionals from private and public sectors have enrolled in this course, giving them the opportunity to increase their oil business knowledge from the legal field perspective. Rivero is the author of several publications and articles, and has been a consequent lecturer at national and international conferences.

-I- GENERAL OVERVIEW

1.1.- Introduction.

The Venezuelan's oil and gas sectors have gone through significant legal and policy changes in the last few years under the Chavez administration. In this paper we will describe Venezuela's current legal regime applicable to investments in the oil and gas sectors and review the recent re-nationalization undertaken by the Chavez administration. This overview will provide a framework to the reader that will grant a greater understanding of the Sector's volatility and allow us to offer our thoughts on the challenges, opportunities and success factors that potential investors have to take into consideration if they seek to enter the Venezuelan oil and gas markets.

1.2. - Overview of the Oil and Gas sectors.

1.2.1. - Oil Sector:

Venezuela is one of the world's largest reserves of crude oil and oil products. It is estimated that Venezuela's reserves updated to February 2009 is approximately 122.687 Billion Barrels (Bbd).² According to Petróleos de Venezuela, S.A. (PDVSA) (Venezuela states-owned oil company) oil production is approximately 3, 15 Thousand Barrels Per Day (Tbd); however, levels of production remain a subject of debate, with considerable difference between the levels cited by the Venezuelan government and those cited by private sector observers. Those people

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affirm that the oil output is about 2.4 (Tbd).³

Venezuela has developed one of the most effective petroleum infrastructures in the world. It has a large and highly developed extractive and refining infrastructure, among the most advanced and sophisticated in the world. Venezuela's oil export revenues account for a large portion of the country's Gross Domestic Product (GDP) and for over half of the government's overall revenue.

There is also a distribution infrastructure comprising gas pipelines, distributors and petrol (gasoline) stations which ensures the secure supply of refined products throughout the country and satisfies the local market requirements while allowing for a high capacity for exporting fuels and lubricants.

Venezuela has always been regarded by its international clients as a secure supplier of crude and products, and is one of the most important providers for the United States and for the rest of Latin America, including the Caribbean Community⁴ ("CARICOM" for its Spanish acronym) relating to countries in the Caribbean. Venezuela has its own tanker fleet to cover a portion of its export sales through long-term and spot contracts.

It can be stated without reservation that Venezuela's oil potential has significant influence in the region's geo-economics. At this respect, it is important to note that the Venezuelan's Government has signed in the recent years numerous cooperation agreements, especially in the Energy Sector, with countries with which it had not regularly sustained close relationship. Countries such as Nicaragua,⁵ South Africa,⁶ Argentina,⁷ Uruguay,⁸ Portugal,⁹ Ecuador¹⁰ among others, are being

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clearly beneficiaries for the signing of such energy cooperation agreements with the Venezuela's government.

According to Venezuelan 2008-2021 Plan for Petroleum (named in Spanish "Plan Siembra Petrolera"), it is expected a overall investment of US$ 56.000 MM to reach for 2012 a output capacity of 5.8 Tbd. Under the PDVSA original strategy plan, the state assumes 70% of the capital investment and the remaining investment of 30% is left to private sector. However, some commentators believe that under the current oil price reduction and its impact over Venezuela revenues, the state would not able to assume the projected investment.

1.2.2.- Gas Sector:

Venezuela has proven natural gas reserves of more that 170,920 trillion cubic feet (Tcf),¹¹ the largest in Latin America. Annually Venezuela has been producing around 1.872 Tcf¹² of natural gas, all of which is consumed domestically. Approximately 34 per cent of the country's natural gas production is consumed by the oil industry, which either re-injects gas into oil fields or flares it. About 20 per cent of Venezuela's natural gas is used for power generation, 12 per cent in petrochemical production and the remainder by industrial or commercial customers in large cities. However, Venezuela's production does not satisfy its domestic demand, and now there is a growing natural gas deficit.

Venezuela's government is concentrating on developing its natural gas sector, including both upstream and downstream operations. In 1999, Venezuela adopted the Gaseous Hydrocarbons Law, which, through the granting of licenses and permits, allows foreign investment into virtually all sectors of the gas industry, from exploration and production to distribution and gasification plants. Venezuela's main goal is to attract investment into the exploration and development of non-associated gas fields.

Since the enactment of the Gas Law, Venezuela has, via the MENPET, granted 17 non-associated gas licenses, some for exploration and another for the development of gas reservoirs.

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Venezuela does not have a Liquefied Natural Gas (LNG) industry in place yet. However, in September 2008, the government signed agreements to create three joint venture companies to pursue LNG projects consisting of a separate liquefaction train to develop an LNG export industry through the Mariscal Sucre Project and at the Industrial Complex Gran Mariscal de Ayacucho ("CIGMA" for its Spanish acronym) both located on the Paria Peninsula and fed by the natural gas reserves located in the Orinoco river's delta continental shelf ("Plataforma Deltana") at the northern shore of the Peninsula.

The first project would source gas from the Plataforma Deltana project, with exports estimated at 4.7 million tons per year (t/y). The second train would use natural gas from the Mariscal Sucre project, also exporting an estimated 4.7 million t/y. The third train would use natural gas from the Blanquilla-Tortuga fields. According to PDVSA, the total investment in the three projects could approach $20 billion, with first exports by 2013.

With regard to pipeline transportation and distribution, a Central-Occidental Interconnection Pipeline Project (ICO) is on course, aiming to (i) connect natural gas fields in the north-eastern Falcon region to a refining complex and (ii) to connect Venezuela's western pipeline with PDVSA's eastern transport system. This pipeline is expected to have a capacity ranging between 40 and 100 Mmcf/d. The ICO also includes the addition of three new gas compression plants in order to increase transport capacity.

-II- VENEZUELAN OIL AND GAS LEGAL REGIME

2.1. -Oil Sector.

The legal regime for oil in Venezuela is framed first by the Constitution,¹³ by the Hydrocarbons Law,¹⁴ and by the mandates set forth in other laws, decrees and resolutions. The fundamental characteristic of the Hydrocarbons Law is that of unification of hydrocarbon legislation, which heretofore had been dispersed among various legal texts, thus creating serious problems for its interpretation and application, and giving rise to lack of legal certainty for the most important sector of the Venezuelan economy.

The Hydrocarbons Law specifically repeals: the 1943 Hydrocarbons Law, as modified in 1955 and 1967; the Reversion Law of 1971; the Local Market Law of 1973; the so-called Nationalization Law of 1975; and the Automotive Fuels Law of 1998; as well as any other provision in conflict with this new text.

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The organic character of the Law derives from the fact that it consolidates the rules applicable to a vast sector. It is also based on Article 302,¹⁵ of the Constitution which reserves...