Volume 4, Number 22, Page 3

Venezuela

Oil Exploration

Setting up the Legal Structure for an Oil Venture in Venezuela

by Bentata Abogados

Under legislation that allows profit-sharing business ventures with congressional approval, foreign investors interested in the Venezuelan oil industry can participate in the once government-controlled monopoly. Special rules that must be followed to engage in certain types of oil exploration are outlined below.

The Contractor

A subsidiary of Petróleos de Venezuela C.A. (PDVSA) may, through the mechanism of public tender, grant a foreign investor a maximum of five specified areas. An agreement is thereafter entered between the parties.

Structure of the Operation

The agreement must provide a control committee with an equal amount of members designated by both the subsidiary and the investor. The committee president, to be designated by the subsidiary, has the casting vote. The committee decides on all major issues.

Formation of a Stock Company

The operation must be established by a Venezuelan stock company of which 35% of shares are owned by the subsidiary and the rest by the investor. However, preferred shares ("golden shares") will be issued to the subsidiary, entailing certain prerogatives for its representatives. Any controversy generated by the utilization of preferred shares shall be referred to the committee.

Profit-Sharing Scheme

The identification and selection of the investment companies involved, after a process of pre-qualification regarding technical capabilities, expertise and financial standing, must be decided depending on the size of the State share of profits as offered by the bidders in a tender.

Allotment of State Profits

Government profits will be allotted to the state and city governments where the activity takes place.

The PDVSA selection process is as follows:

The government announces the opening of new geographic areas and publishes its announcement in both the national and international press.

* The interested parties may then contact PDVSA, which provides instructions for the tender in a promotional bulletin listing the heads of the agreement and the documents required.

* Pre-qualified entities are notified by PDVSA, after which they purchase an information package of the areas concerned and receive the terms of agreement, all considered confidential. PDVSA may add clarifications and allow the bidders to visit the geographical areas concerned.

* PDVSA makes its final decision. In case of a tie, the selection corresponds to the most favorable of the offers involved. If the offer reaches the maximum profit sharing of 50% in favor of the State, the tie will be broken by requesting a special bonus from the candidates involved, the highest to be favored.

Obligation to Explore

Investors are obligated to explore the areas allotted at their full risk. Once exploration is completed, its continuation must first be approved by the committee. The areas excluded from exploration revert to the subsidiary free of cost.

Exploitation

Exploitation must be carried out by a consortium where a subsidiary holds 35% with an option to reduce it to 1%. However, whatever the share of the subsidiary, its prerogatives must be maintained. In any case, when the investors substantially fail to perform their obligations without due justification, the subsidiary may carry it out for its own account.

Marketing

The consortium handles marketing. Each of its participants enjoys pro rata benefits and has a pre-emptive right to acquire the production.

Profit Sharing

The subsidiary shall receive its share of profits after the deduction of costs and expenses with a maximum of 50% of the total profits. Earnings are fully tax exempt.

Duration of the Agreement

Exploration agreements last three to five years and the commercial operation lasts 20 years. The exploration term may be extended by two to four years. However, in no case shall the global agreement last beyond 39 years.

Reduction of Production

If by reason of international agreements the government decides to reduce the production, the investor may be compensated by extending the term of operations.

Reversal of Assets

At termination of the agreement, all assets belonging to the investor revert to the State without compensation.

Preference for Nationals

When offers by nationals are comparable to international offers in cost, quality and delivery terms, preference will be given to nationals.

Technical Training

The consortium must maximize the use of national workers and set up technical training programs.

Other Investors

The subsidiary may set up a plan designed for the acquisition of its shares by a savings fund and national investors.

Foreign Currency

Investors may maintain their accounts abroad in foreign currency without limitations.

Standard Tax Benefits

The parties involved in the profit-sharing scheme are both state and municipal tax exempt.

Oil Tax

When minimum profitability margins cannot be met, the government may adjust the taxes provided in the special law.

Venezuelan Liability

The Republic of Venezuela assumes no liability in connection with oil agreements.

Applicable Law

The agreement will be governed by the laws of Venezuela. Except for issues relating to the designated control committee, all matters may be subject to arbitration according to the rules of the International Chamber of Commerce.

Formality of Approval

All agreements must obtain the consent of the Ministry of Energy and Mines and be approved by Congress.

Bentata Abgados is a multiple services law firm from Venezuela.