PARTNERING WITH NATIONAL OIL COMPANIES - OIL & GAS EXPLORATION AND EXPLOITATION IN VENEZUELA MIXED COMPANIES PROTECTION OF FOREIGN INVESTORS RIGHTS

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 14B
PARTNERING WITH NATIONAL OIL COMPANIES - OIL & GAS EXPLORATION AND EXPLOITATION IN VENEZUELA MIXED COMPANIES PROTECTION OF FOREIGN INVESTORS RIGHTS
Vera de Brito de Gyarfas
Travieso Evans Arria Rengel & Paz
Caracas, Venezuela

Vera De Brito de Gyarfas is a partner of the Venezuelan law firm Travieso Evans Arria Rengel & Paz. Vera's practice is focused in energy and natural resources regulation in Venezuela and she advised foreign oil companies that participated in the opening of the Venezuelan oil industry during the 90s, namely Statoil in the SINCOR extra heavy crude project, Mobil in the Cerro Negro Project and Phillips Petroleum in the Hamaca Project, she also advised several companies in the 1^st , 2^nd and 3^rd Round of Operating Services Agreements and then represented these companies in the negotiations and migration of these contracts to mixed company structures (with a majority participation of the Venezuelan State) when the Venezuelan government changed its oil policy in 2005. She advised clients in the bidding procedure for award of gas licenses in the Plataforma Deltana and Rafael Urdaneta projects, the obtaining of the licenses and subsequent permits. Vera is currently advising clients in the Carabobo Project Bidding Procedure which is the first bidding procedure under the 2002 Organic Hydrocarbons Law and in the contracts for the construction of LNG trains. Vera is the Editor of the Venezuelan Legal and Economic Newsletter, a monthly publication of the firm alerting management of economic and legal developments of importance for companies doing business in Venezuela. She writes on a monthly basis for "Latin American Law and Business Report", a publication of WorldTrade Executive Inc. Vera is the Exclusive Columnist in Venezuela for the International Law Office on Energy and Natural Resources and is a member of the Association of International Petroleum Negotiators - AIPN.

I. Introduction

The Venezuelan government imposed a policy of State control over upstream oil and gas activities since 2002. This means that if any oil and gas company wishes to carry out upstream activities in Venezuela it must necessarily be willing to be a minority shareholder in a mixed company that will be controlled by a Sate-owned company (PDVSA/CVP). This is the law for oil upstream activities and the practice in free gas activities as will be explained later on.

As a result, it is very important for oil companies to make sure that their rights as minority shareholders will be duly protected in the contracts that they execute with the State owned company, PDVSA or CVP (Shareholders Agreements and Charter/By-laws of the Mixed Companies) and that they use vehicles that are domiciled or incorporated in countries which have Bilateral Investment Treaties and Double Taxation treaties with Venezuela.

The Venezuelan government's policy since 2005 has been to favor National Oil Companies (NOCs) that are closely supported by their countries which execute special Energy Cooperation Treaties with Venezuela that grant the NOCs the diplomatic support that is required to make sure that the projects will effectively progress. Venezuela has executed Energy Cooperation Treaties with many countries among which we can point out Brazil, Iran, Vietnam, Uruguay, India, China, Japan, Angola, Portugal, and Argentina, among others.

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II. Development of Upstream Activities - Oil

Pursuant to the Organic Hydrocarbons Law which entered into effect in January 2002, upstream activities - also called primary activities - exploration for and exploitation of oil reservoirs may be carried out directly by the State, by State-owned companies and by Mixed Companies with a State participation of more than 50% of their corporate capital. In practice the State has decided that it shall hold 60% of all mixed companies so the minority shareholders' participation has been reduced de facto to a maximum of 40%.

The process of selection of the minority partners should be carried out via a public bidding process but these rights may be directly awarded to minority partners if a special authorization is granted by the Cabinet of Ministers explaining the reasons for said direct award.

At present the Ministry of the Popular Power for Energy and Petroleum has launched a public bidding process to award the right to become Minority Partners in 3 mixed companies to be incorporated to produce and upgrade crude from the Orinoco Oil Basin under the Carabobo Project. This is the first public bidding procedure since the entry into effect of the Organic Hydrocarbons Law in 2002 and 19 companies have acquired the data package that will allow them to participate in this project.

On the other hand, direct awards...