CHAPTER 2 VENEZUELA: GIANT ENERGY PLAY (ENGLISH VERSION)

• Jurisdiction: Derecho Internacional

Oil and Gas Development in Latin America
(Mar 1999)
CHAPTER 2
VENEZUELA: GIANT ENERGY PLAY (ENGLISH VERSION)

José Urdaneta Pérez, General Counsel
PDVSA Exploración y Producción
Caracas, Venezuela

The decision made by Petróleos de Venezuela, S. A. at the beginning of 1990 to promote the creation of strategic associations between its operating affiliates and foreign companies for the development of the Orinoco Belt, taking into consideration the importance of heavy and extraheavy crudes produced in this area for the future of both the petroleum industry and the country, may be regarded as the birth of the process known as petroleum opening.

In 1977, the National Executive, by instrumentality of the Ministry of Energy and Mines, had assigned Petróleos de Venezuela, S. A. the responsibility to devise and execute the activities necessary for the evaluation and development of the energy resources in the Orinoco Belt, located north of the Orinoco River, on the southern part of the Venezuelan eastern basin, which extends some 700 kilometres east-west and between 50 and 100 kilometres north-south.

Obviously, the most recent antecedent was the promulgation of the Organic Law Reserving the Industry and Trade of Hydrocarbons to the State (published in the Official Gazette of 29 August 1975), whereby, for reasons of national convenience, all matters relating to the exploration, exploitation, manufacture or refining, transportation by special ways, storage, internal and external trade, as well as any works necessary for the handling of petroleum, asphalt and other hydrocarbons, were reserved to the State. This law materialised an eminently

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political and economical process the basis of which is contained in Article 97, that provides for the reservation of economical activities. A fundamental aspect of said Reserving Law is Article 5 thereof, which provides that the State will perform the reserved activities either directly or by instrumentality of government-owned entities, and that it may enter into operational agreements and, where convenient to public interest and in special cases, association agreements(strategic agreements) with private entities, so long such agreements provide for a participation guaranteeing the control of the State, are for fixed terms, and the prior authorisation of the legislative bodies in joint session has been obtained therefor within the term fixed by such bodies and upon notice given to the National Executive.

Article 5 sets forth the basic and general concepts under which third parties such as contractors or associations with private sector will be allowed to exercise and develop reserved activities. The effective application thereof to a correct proposal requires an interpretation and a critical analysis by the agencies of the State. In this sense, the Congress Bicameral Committee for Strategic Associations stated that the exercise of this right must be distinguished by the flexibility of the interpretation of the norm in light of the intention of the Reserving Law and the pertinent factual circumstances.

Thus, because of the limitation imposed by the Reserving Law, the only way for a third party to perform reserved activities is by means of association agreements or, indirectly, for account and by order of the State, by means of operational agreements.

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Now, the possibility contained in the Reserving Law is the result of a historical legal process, which must be mentioned before analysing the petroleum opening process and the opportunities it offers.

In this sense, this work will first refer to the legal system prevailing in Venezuela, then will establish the basis for the petroleum opening process in the exploration and production areas, and finally will detail the existing agreements which are a result of the processes undertaken to date.

I. The Venezuelan System for the Regulation of Petroleum and Mining Activities

The state-owning system prevails in Venezuela. This system may be either subject to the payment of royalties or domineering. The former modality was inherited from the Spanish Crown that assumed the ownership or dominion of mines and is defined as that system in which, even though the mines belong to the State, it is obligated to make permanent or temporary concessions to individuals who meet the requirements and conditions expressly provided by the law. In the latter, mines belong to the State that exploits them as owner either directly or through third parties freely chosen by it and that are granted the right of exploitation. In this latter modality, the concession is optional as opposed to the royalty modality under which the concession is granted by right or obligatorily.

The foregoing is of particular interest vis-à-vis hydrocarbons, especially petroleum, in order to determine the ownership of petroleum fields, which

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fact must be resolved taking into consideration not only the juridical aspects but also political, economical and social aspects.

A) The history of the norms governing the ownership of petroleum fields and other hydrocarbons may be divided into sundry periods: a first period comprising colonial times until 1874, during which the mines belonged to the owner of the land; a second period, beginning in 1874 with the application of mining ordinances of New Spain, during which the mines were owned by the Spanish Crown; a third period, beginning on 24 October 1829 with a decreed issued by Simón Bolívar in Quito, whereby the ownership of the mines passed on to the State; and a fourth period, beginning with the Federal Constitution of 1864 until the promulgation of the Hydrocarbons Law and from then until now, in which the State owns asphalt mines, petroleum fields and other hydrocarbons.

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