VENEZUELA: RECENT DEVELOPMENTS IN OIL & GAS REGULATIONS AND OVERVIEW OF PRIVATE INVESTMENT IN THE HYDROCARBON SECTOR

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2013)
CHAPTER 12F
VENEZUELA: RECENT DEVELOPMENTS IN OIL & GAS REGULATIONS AND OVERVIEW OF PRIVATE INVESTMENT IN THE HYDROCARBON SECTOR
Diógenes L. Bermúdez ¹
Counsel, Hogan Lovells
Caracas

DIOGENES BERMUDEZ joined Hogan Lovells' Caracas office as Counsel in 2012, as part of the infrastructure and project finance team. He received his LL.M from Georgetown University Law Center and his JD, as well as his Ph.D. in Law, from Universidad Central de Venezuela, combining his common law training with a solid academic background in civil law and strong negotiation skills. He is author of the book LEGAL REGIME FOR GASEOUS HYDROCARBONS IN VENEZUELA and has lectured and written on various topics related to energy and arbitration. His practice encompasses a wide range of international business transactions, including all aspects of oil and gas projects, foreign investment, government contracts and corporate governance, as well as investment arbitration work. In his previous position as General Counsel and member of the Board of Directors for PETROBRAS VENEZUELA, Diogenes provided legal advice on major energy projects in Latin America and led complex negotiations with national oil companies, host governments and international partners. He has a strong background in business development activities and vast experience negotiating oil and gas contracts and granting instruments, such as public-private joint ventures, joint venture agreements, operating services agreements and gas licenses. For the last five years, Bermudez served on the board of joint venture companies (empresas mixtas) controlled by Petróleos de Venezuela S. A., in which Petrobras is a minority shareholder. Earlier in his career, Bermudez served as legal counsel for LAGOVEN S.A., an affiliate of Petróleos de Venezuela S.A., and for CANTV (Compañía Anónima Nacional Teléfonos de Venezuela). During 2012, Diogenes served as President of the Legal Directors Committee at the Venezuelan American Chamber of Commerce (VENAMCHAM). He is a member of the Association of International Petroleum Negotiators (AIPN) based in Houston and a past member of the Strategic Planning Committee of the Venezuelan Association of Hydrocarbons (AVHI). Diogenes is licensed to act as an arbitrator at the Caracas Chamber of Commerce (Venezuelan Chapter of ICC) and the CEDCA (affiliated to the American Arbitration Association). He is fluent in Spanish, English and Portuguese.

Venezuela contains one of the largest oil and natural gas reserves in the world and is one of the world's largest exporters of crude oil and the largest in the Western Hemisphere. Important projects are underway and most of the relevant oil and gas companies and service companies are engaged in projects in Venezuela.

Western Hemisphere proven oil reserves and production (2011)

[Page 12F-2]

Venezuela has consistently ranked as one of the top suppliers of oil to the U.S., exporting almost one million barrels per day, which makes Venezuela the fourth exporter of oil to the U.S., after Canada, Saudi Arabia and Mexico. In addition, the largest share of Venezuela's global downstream operations is in the United States. CITGO, a wholly owned subsidiary of PDVSA, operates three refineries with a combined capacity of 755,400 barrels per day.² Notably, Venezuela has a favorable balance of payment with respect to the U.S., importing 20,390 million dollars from the U.S. and exporting 45,115 million dollars to the U.S. The balance is favorable to Venezuela in 24,725 million dollars.³

Although the United States account for the bulk of exports, Venezuelan crude oil exports include other important destinations in the Caribbean, Asia and Europe, as part of an initiative to diversify its oil export destinations. The fastest growing destination has been China. Exports to China jumped from only 19,000 barrels of crude oil per day in 2005 to 230,000 barrels per day in 2011. According to the U.S. Energy Information Administration, in 2011 Venezuelan crude oil exports to the U.S. represented 40% of total exports, followed by the Caribbean and China.⁴

Venezuelan crude oil exports by destination (2011)

[Page 12F-3]

The current Venezuelan Organic Hydrocarbon Law (OHL) was passed more than eleven years ago, in November 2001, with only very few and specific aspects modified in 2006.⁵ The Regulations for this Law are still pending. Back in 2005, the then Ministry of Energy and Petroleum published in the Official Gazette the initiation of a public consultation process of the proposed Regulations, which was followed by a public discussion of the comments received; however, the Regulations have not been enacted yet.⁶ Because of this, the old Regulations of 1943 are still in force for anything not contrary to the current Law, which would be basically limited to certain technical and safety provisions.⁷

In general, Venezuela's legal regime is almost a dozen years old and has been actively discussed. The most recent development is related to the windfall profit tax, levied on export volumes when international oil prices are above certain thresholds. This article summarizes the recent amendment to the windfall profit tax and intends to examine the current state of affairs in the Venezuelan oil sector related to foreign investment, revisiting the legal framework for participation of private investors in future development of the country's capabilities.

1. PRIVATE INVESTMENT IN THE VENEZUELAN OIL AND GAS SECTOR

By the end of 2008, Venezuela launched the Carabobo Project Selection Round, a major bidding process for the selection of minority partners to join venture companies for the production and upgrading of extra heavy oil in the Orinoco Belt. This bidding process attracted significant participation from international oil companies. Around 19 companies purchased the data pack, paying each of them US$2 million just to gain access to the technical, economic and legal information of the Bidding Round.

In February 2010 the Venezuelan Oil Minister announced the consortia winning the bids. The first winning consortium, integrated by Chevron, Mitsubishi, Inpex and Suelopetrol, was awarded the Carabobo 3 area. The second winning consortium, integrated by Repsol, Petronas and ONGC, was awarded the Carabobo 1 area. Each one for a total crude output of 400-480 thousand barrels per day and a combined total investment around US$ 30 billion until 2016.⁸

This bidding round and other new directly awarded projects show that foreign investors are interested in participating in the development of the Orinoco Belt, one of the world's largest basins, under the legal, contractual and fiscal terms in force. Those new projects also suggest that, despite a high level of Government take, there are still opportunities for private investors in a country with vast resources and low geological risk. In fact, under the Venezuelan legislation, a foreign oil and gas company can hold equity in a local corporation that basically holds title to a "concession" and owns the crude oil extracted.

[Page 12F-4]

The Venezuelan Government has approved the "Plan Siembra Petrolera" ("Sowing the Oil Plan") 2012-2018, which sets the goal of achieving a production capacity of 5,819 MBD in 2018 and a production of 296 MBD of Natural gas liquids, with a total expected investment of 266 billion dollars. According to this Plan, 3,203 MBD (55% of the production goal) should come from Joint Venture Companies (JVC) with private partners, including an output of 1,835 MBD from new JVCs in the Orinoco Belt.⁹

It is therefore foreseeable an increased participation of foreign investors in the process of reaching the goals established in PDVSA's strategic plans. We should see more bidding rounds or direct awards to international oil companies. Many international players are already present in Venezuela, ready to expand their participation through new investment opportunities in the country.

There are currently forty existing Joint Venture Companies (JVC) engaged in the performance of oil activities. In all of them, the State, through CORPORACIÓN VENEZOLANA DEL PETRÓLEO, S.A. (CVP),¹⁰ holds at least 60% of the capital stock. More than forty international and Venezuelan companies hold a minority participation of up to 40% in those JVCs. In recent years we have noticed an increased participation of National Oil Companies (NOC) among the minority shareholders of JVCs, however we can also appreciate an important presence of International Oil Companies (IOC).

Twenty seven of those forty JVCs are engaged in reactivation of mature fields, ten of them perform their activities in the Orinoco Belt (extra heavy crude oil), and the remaining three are involved in off-shore projects.

Regarding private participation in gas exploration and production, there are sixteen gas licenses in force, where we can find a dozen private companies, including major players like Chevron, Statoil, Total, Repsol, ENI, Gazprom, among others. In twelve of those projects, private investors hold a majority interest in the license or even hold 100% of the license. Only in four of those licenses there is a majority participation of PETROLEOS DE VENEZUELA, S.A. (PDVSA).

The difference between oil regulation and non-associated gas regulation is remarkable. The differentiated approach starts at the constitutional level, with only oil activities reserved to the State, although private participation is permitted within certain limitations and exclusions. On the other hand, exploration and production activities for nonassociated gas are completely open for private participation and projects can be carried out completely by private investors.

[Page 12F-5]

This difference is an obvious consequence of the economic reality behind those two activities. Oil export is the main source of fiscal revenues and therefore of vital importance to the Venezuelan...