Rebalancing Oil Contracts in Venezuela

Article excerpt

I. INTRODUCTION

II. THE REGULATORY HYDROCARBON
       REGIME IN VENEZUELA AND ITS CURRENT MAJOR
       ISSUES
       A. The Establishment of a Legal Framework Based
          on State Control
          1. The Takeover of Upstream Operations and
             Windfall Profit Tax (2005-2008)
          2. The Takeover of Service Companies and the
             Windfall Profit Tax Reform (2008-2011)
       B. Imbalances in the Contractual Framework for
          Mixed Companies
          1. Controls over Management and Oil Sales
          2. Contractual Restrictions of Investors' rights in
             Light of BITs

III. METHODS OF AWARDING CONTRACTS AS A SOURCE OF
       BALANCE IN THE VENEZUELAN'S PETROLEUM
       CONTRACT REGIME FOR ORINOCO BELT PROJECTS
       A. The Tender of the Carabobo Area
          1. The Inflexibility of the Original Contractual
             Conditions
          2. The Incentives Granted and the Auction Results.
       B. The Practice of Direct Negotiation of the Junin
          Area Blocks
          1. Incentive Mechanisms Granted through Direct
             Negotiation
          2. Most Favored Nation (MFN) Clause towards
             Orinoco Belt Projects

IV. CONCLUSION

I. INTRODUCTION

This Article is based on research of the regulatory framework for oil contracts in Venezuela, conducted during visits to Caracas in July and August 2009 and January 2010. (1) The study included reviewing Venezuelan legislation, petroleum contracts, and interviewing Venezuelan government officials, international oil companies (IOC) executives based in Venezuela and experts in the Venezuelan case. (2) Initially, the research concentrated on assessing the impact of the Carabobo tender on the contractual conditions for oil ventures in Venezuela. This was for two reasons: 1) The 2009-2010 auction of the Carabobo Project, located in the Orinoco Belt, was highly relevant to the pattern of Venezuelan oil contracts to exploit the vast reserves--estimated at 127.9 billion barrels--of heavy crude oil, (3) and 2) the reduction of the government's bargaining power when oil prices collapsed in 2008, and foreign investment in new projects was vital to increase oil production. (4)

Based on the dates for the tender approved by the Venezuelan Ministry of the People's Power for Energy and Petroleum (MPPEP) in early 2009, the research was conducted first in Caracas during a period that permitted observation of the auction's outcome, scheduled for August 14, 2009. (5) Nevertheless, on July 28, 2009, the Minister of Energy and Petroleum and President of Petroleos de Venezuela S.A. (PDVSA), Rafael Ramirez, announced the halt of the bidding process "without providing new dates." (6)

The delayed auction thwarted the initial attempt to assess the overall consequences for the contractual regime, but it brought new elements to light: 1) the existing contractual imbalances, which have limited the presentation of bids, (7) 2) the instability of the fiscal regime with the introduction and reform of new taxes, 3) the simultaneous implementation of both competitive bidding and direct negotiation to award contracts, (8) and 4) the shift in the government's position towards approving economic incentives, providing greater substantive investment protection rights, and granting access to international arbitration to encourage the participation of foreign companies. (9)

To improve the understanding of Venezuela's current oil-sector investment framework, Part II of this Article reviews the major issues of the Venezuelan hydrocarbon legal regime. This review will demonstrate that during a period in which the government has increased its oil-sector control, the government's overbearing position has created contractual imbalances, which should be assessed in light of the investor's rights under Bilateral Investment Treaties (BIT). Given the evolving negotiations between oil companies and the Venezuelan government, Part III of this Article will show how the heavy crude oil projects awarded after the February 2010 Carabobo Area tender, and the existing practice of directly assigning blocks in the Junin Area, also in the Orinoco belt, have led to a new balance in the contractual conditions which, if respected, might contribute in an influx of investment in the Venezuelan oil sector. …

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