EXPLORATION AND PRODUCTION OF OIL AND GAS IN VENEZUELA (ENGLISH VERSION)
| Jurisdiction | Derecho Internacional |
(2001)
EXPLORATION AND PRODUCTION OF OIL AND GAS IN VENEZUELA (ENGLISH VERSION)
Adriana Lezcano Huncal
Uisdean R. Vass
Despacho de Abogados Miembros de Macleod Dixon, S.C.
Caracas, Venezuela
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I. INTRODUCTION
This is an analysis of the contractual structures available in Venezuela for the participation of private investors in the oil sector. We will concentrate on the two main model agreements used during the Venezuelan "Apertura" (i.e., the Third Round Model Operating Agreement for the Reactivation of Marginal or non-producing Fields and the Model Association Agreements for Exploration and Production of Hydrocarbons under a Profit Sharing Scheme). It is important to note that even after the "Apertura" or "Opening" of the Venezuelan Oil sector, the oil industry continues to be reserved to the State. The "Apertura" process was a political and economic strategy designed to permit the participation of private investors in the oil sector using the existing mechanisms of the 1975 Nationalization Law. While analyzing these model agreements we will establish certain comparisons under the Colombian and Mexican regimes. Moreover, we will browse through the new Venezuelan legal regimen for hydrocarbon gases, which has been, to a great extent, denationalized. Finally, we will touch on the possible reform of the hydrocarbon regime that is currently being conducted in Venezuela.
The nationalization of Venezuela's oil industry occurred in 1975 with the enactment of the Law Reserving to the State the Industry and Commerce of Hydrocarbons1 (the "Nationalization Law"). The Nationalization Law came into effect on January 1, 1976 thereby abolishing the concession system that had previously existed. Assets used by holders of concessions were either purchased by the State or expropriated, and a new regime reserving upstream, midstream and downstream hydrocarbon-related activities to the State was created.
Pursuant to the Nationalization Law, the entire hydrocarbon industry, including all activities from the initial exploration to the ultimate sale of all hydrocarbons, is reserved to the State.2 Only recently has a new regime been created for the gas industry. The Gas Hydrocarbon Law (the "Gas Law"),3 enacted in 1999, partially derogates the Nationalization
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law to the extent that it allows for private investment through the issuance of licenses to private companies for the exploration and production of non-associated gas reservoirs and through the issuance of permits for a host of other midstream and downstream activities related to both associated and non-associated gas. We shall expand on this point further in the paragraphs that follow.
In short, the exploration and production of petroleum and associated gas, as well as the refining, transportation, storage and sale of petroleum (the "Reserved Activities") can be carried out only by the State directly or through State-owned corporations (all of which are affiliates of Petróleos de Venezuela, S.A. (PDVSA)). However, the Apertura process, which began in 1992, opened the door to participation by private entities in the Reserved Activities by means of two mechanisms established in Article 5 of the Nationalization Law,4 namely:
A. Operating Agreements: (i) agreements to reactivate marginal or non-producing fields; (ii) outsourcing contracts,5 which are structured as Construction, Ownership and Operation Agreements; and (iii) traditional service contracts.6 The basic difference between the agreement to reactivate marginal fields and the outsourcing agreement is that in the former contractor does not own the assets while under the outsourcing agreement, the contractor owns the asset used in the performance of the service through the "Build, Own and Operate" modality.7
B. Association Agreements: (i) Profit-Sharing Agreements to explore new Areas and to produce hydrocarbons; (ii) Specific Agreements: (a) Heavy-Crude Agreements to produce crude oil and Orimulsion(R) in the Orinoco Belt; and (b) Liquid Natural Gas projects.
It is important to mention that Venezuela's Ministry of Energy & Mines (MEM) plays an essential role in all hydrocarbon activities and supervises PDVSA and its affiliates in carrying out the reserved activities. MEM also supervises the private "Apertura" companies.
The Venezuelan structure is broadly similar to the Colombian system. In Colombia, exploration and exploitation of hydrocarbons are carried out by the Empresa Colombiana de Petróleos (Ecopetrol), either directly or by means of agreements with national or foreign public or private companies. The granting of areas in Colombia for hydrocarbons exploration
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by private companies is handled by means of two different processes: 1) Standard Association Contract in force, which consists of a direct contracting process under the first come first served criterion and 2) Areas available to be adjudicated by bidding or contest. In Colombia, Ecopetrol can also enter into operating and service type agreements.
In Mexico, the Energy Secretary (SE) supervises the National oil company, Petroleos Mexicanos (PEMEX). All activities related to hydrocarbons are conducted by PEMEX and its affiliates. The exclusive ownership of hydrocarbons is granted by the Mexican Constitution to the Mexican State (as does the Venezuelan Bolivarian Constitution). The Mexican legislation provides that PEMEX may enter into service or construction agreements and states that the payment to contractors shall always be in cash and can not include percentages of production. There is no possibility for association agreements as in the case of Venezuela or Colombia.
II SUMMARY OF DISTINCTIONS BETWEEN OPERATING AGREEMENTS AND ASSOCIATION AGREEMENTS IN VENEZUELA
The main differences between Operating Agreements and Association Agreements in Venezuela focus on: (i) title under which the activities are performed; (ii) title to the operating assets and the hydrocarbons; (iii) approval requirements; (iv) remuneration mechanism; and (v) applicable taxes.
Under Operating Agreements, contractors render services on behalf of the state-owned company and do not acquire title to the assets (unless it is an outsourcing contract) used to perform the services or to the hydrocarbons produced. By contrast, under an Association Agreement private investors carry out the activities on their own behalf and acquire title, proportionate to their participating interest under the Association Agreement, to the assets used in conducting the operations as well as to the hydrocarbons produced. Whereas the approval of Congress is not required in order to enter into an Operating Agreement, the conclusion of Association Agreements requires: (i) specific Congressional approval; (ii) that the State be guaranteed "control" of the project; and (iii) that the parties stipulate a limited term for such Agreement.
Another distinction between the two types of Agreements is that, whereas the remuneration rights of the contractors under an Operating Agreement are limited to the right to receive, in cash, a determined fee per barrel of production and a service fee (in addition to direct reimbursement for certain expenditures in specific circumstances), under an Association Agreement the remuneration rights of the investors are based in full equity ownership of production.
Finally, under an Operating Agreement contractors: (i) pay income tax at a rate of 34%; (ii) in our view, are subject to municipal taxes although there are some commentators that disagree with this position; and (iii) are not responsible for payment of the production royalty (such royalty is paid by the State-owned the company), although in some cases it is taken into account in the formula for paying of the service fee of the contractor. Under an Association Agreement investors: (i) pay income tax at a rate of 67.7%8 ; (ii) are not subject
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to municipal taxes; and (iii) are responsible for the payment of a 16-2/3% royalty on production.
III THIRD ROUND MODEL OPERATING AGREEMENT FOR THE REACTIVATION OF MARGINAL OR NON-PRODUCING FIELDS
With only one exception, all existing Operating Agreements for the reactivation of marginal or under-producing fields have been granted pursuant to three international tender processes, commonly referred to as the First, Second and Third Reactivation Rounds. The First Round occurred in 1992, the Second in 1993 and the Third Round in 1997. Each Round tendered reactivation projects under a particular Model Operating Agreement. The terms of the Model Agreements used in the First and Second Rounds are similar, and are in turn quite different from the Model Agreement used in the Third Round. This paper will focus on the Third Round Model Agreement (the "TROA") because it is the most recent and most complex Model used by PDVSA. The other types of Operating Agreements (i.e., outsourcing contracts and traditional services contracts) tend to be tailored to specific projects and therefore do not follow any model. The following section will introduce the key features of the TROA.
3.1 PDVSA-PG's Rights and Approvals9
Under the TROA, PDVSA-PG has the exclusive right, title and interest in and to any hydrocarbons produced by the contractors. PDVSA-PG has the right to approve specified matters, such as development plans, annual work programs and budgets, exploration activities, authorization for expenditures exceeding $2.5 million, any proposed modification to the minimum work obligation, etc.
3.2 Compensation Principles
Contractors provide all capital and operating funds and receive compensation for goods and services acquired for the provision of the operating services by way of a service fee per barrel of oil produced. No other payment or compensation of any kind is due or payable to the contractors regardless of whether...
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