Volume 6, Number 3, Page 4

Participation of Private Investors in the Oil Industry of Venezuela

By Rodner, Martinez and Asociados

The legal provisions for the participation of private investors in the Venezuelan Oil sector and the right to exploit oil in Venezuela have seen substantial modifications since the nationalization of the oil sector in 1975.

Before nationalization, there were no restrictions on the participation of private investors in the oil sector. After nationalization, the participation of private entities generally has been limited to contracting for services or operative agreements (i.e. marginal fields, BOO (Build, Own and Operate) projects), or as partners in association agreements (i.e. Orinoco Belt projects). In any case, under the current law, private parties cannot be awarded concessions or a direct assignment of a region in which to exploit oil. Concessions no longer exist and the government may now only make the assignment of a particular region to PDVSA (Petróleo de Venezuela) or its affiliates.

Situation before nationalization (Concession System):

The Hydrocarbons Law (enacted in 1943, modified in 1967) previously governed the process of granting rights to drill for oil. Any Venezuelan or foreign party was free to request a concession from the Government to participate in the petroleum sector. Once the conditions set forth in the Hydrocarbons Law were met, the Government would then grant a concession, for a period of time and a specific region of the country.

Such concessions were published in the Official Gazette and registered before the pertinent Registry Office of the region. The owner of the concession was awarded a real property right to explore for oil in the given region, which could be mortgaged.

Basically, the Hydrocarbons Law established the system of concessions (real property rights) and taxes for the oil industry. The Hydrocarbons Law has not yet been repealed. However, according to Article 28 of the Nationalization Law, in the case of discrepancies between the two laws, the Nationalization Law shall take precedence.

Situation after nationalization (Assignment System):

In 1975 the oil industry was nationalized. The Venezuelan Congress enacted the Law Reserving the Petroleum Industry to the State (Nationalization Law 29-8-1975). This law limits all activities related to the oil industry to the public sector. Therefore, the participation of private entities in this sector was limited to the activities indicated in article 5 thereof. Some of the relevant guidelines for the oil sector established in such law are outlined below.

(i) Reservation to the Republic (Art.1): This law limits the exploration, exploitation, manufacture, refining, transport through special means, storage and internal or external commer-cialization of petroleum to public sector entities. As a result, all concessions granted under the Hydrocarbons Law were rendered null and void.

(ii) Creation of PDVSA (Art.6): For the purpose of carrying out the activities listed above, Venezuela set up PDVSA by Decree 1123. PDVSA is a holding company that caries out oil and gas activities through subsidiaries created for such purpose (i.e. Maraven, Lagoven and Corpoven). PDVSA is under a restructuring process and, as a consequence, the three operative affiliates indicated above merged as of January 1, 1998.

(iii) Development of the Oil Industry - Participation of Private Parties (Art.5): PDVSA and its affiliates can enter into two types of agreements with private parties (Service or Association Agreements), which have been extensively used by PDVSA since 1991 in the process the opening of the Venezuelan oil sector to the participation of private investors.

Service or Operative Agreements: (i.e. marginal oil fields, BOO (build, own and operate) and technical assistance agreements, etc.). In such contracts the Republic of Venezuela (through PDVSA) will always hold real property rights.

Association Agreements: (i.e. Orinoco Belt Projects for the exploitation of heavy oil, Profit Sharing Agreements). Under these types of contracts it is possible that the private investor be the owner of real property rights. For this reason, some special requirements must be met (i.e. approval of the Association Agreement by both Chambers of Congress, the association must have a fixed term and the Republic must maintain control).

(iv) Rights of Exploitation (Art.21): The National Executive, through the Ministry of Energy and Mines will determine the geographical regions in which the entities created according to the provisions of Art.6 (PDVSA and affiliates) will perform their activities.

Rodner, Martinez and Asociados is a law firm located in Caracas, Venezuela.