Venezuela

Carlos Omaña and Arnoldo Troconis

D&Empaire Reyna Abogados

  1. 1.What is the legislation applicable to oil and gas activities in your country? Is it federal or state legislation, or both?

    Oil and gas regulation in Venezuela is reserved to the federal government. Neither state nor municipal governments have the power to regulate or tax oil or gas activities. Crude oil (liquid hydrocarbons and associated gas) are regulated in the Organic Hydrocarbons Law (the “Hydrocarbons Law”), and regulations thereunder. Gas (gaseous hydrocarbons) is regulated in the Organic Gaseous Hydrocarbons Law (the “Gas Law”), and regulations thereunder.

    There is also an Organic Law that reserves to the Venezuelan state assets and services related to primary oil activities (the “Oil Contractor’s Law”), which reserves to the state the assets and services connected to the primary oil activities previously carried out directly by Petróleos de Venezuela, SA (“PDVSA”, Venezuela’s state-owned oil and gas holding company), and its affiliates, and which had been outsourced to third parties. Specifically, the assets and services subject to the Oil Contractor’s Law are:

    • water, steam and gas injection facilities that enhance reservoir recovery;

    • gas compression; and

    • assets linked to activities in Lake Maracaibo: personnel, submarine and maintenance transportation boats, rig boats, diesel, industrial water and other supplies; transportation boats, tug boats, underwater cable, ports and levies, among others.

    The Ministry of Energy and Petroleum (the “MEP” or the “Ministry”) has the power to determine, via a resolution, specifically which assets and services fall under the reservation set forth in the Oil Contractor’s Law.

  2. 2.Are oil and gas activities carried out by the state or a state-owned agency or national oil company (NOC)?

    Upstream or “primary oil activities”, as defined in the Hydrocarbons Law, are reserved to the state which may carry them out directly or through entities in which the state controls more than 50 per cent of the equity; these entities are known as mixed companies (empresas mixtas). Primary oil activities are: oil exploration, production, gathering, transportation and initial storage.

    Hydrocarbons reservoirs belong to the state. Title to hydrocarbons passes at the well-head to the corresponding concessionaire namely, PDVSA, PDVSA Petróleo, SA (PDVSA’s Venezuelan operating subsidiary) or to the corresponding mixed company.

    Oil and derivatives distribution (commercialisation) is also reserved to the state, who may also distribute oil and derivative products directly or through mixed companies. Note that, The Hydrocarbons Law allows the marketing of natural hydrocarbons only to wholly-owned state companies. Therefore, mixed companies producing “natural hydrocarbons” can only sell their production to PDVSA.

    Midstream or refining activities in new refineries may be legally carried out by private enterprises, for which a concession is required. Existing refineries are reserved to the state.

    Currently, there are no private entities (eg, entities that are majority-owned by private parties) undertaking refining activities in Venezuela. It is not currently anticipated that there will be any private refineries in the foreseeable future. This is because the government has announced that its future oil and gas plans will be carried out through mixed companies.

  3. 3.Is oil and gas a regulated business that can only be carried out by companies that are licensed or that receive government concessions to operate?

    All activities related to oil, even if carried out by mixed companies, require a concession. All activities related to gas require either a concession, referred to as a “licence”, which is required for exploration, production, and transportation, or a permit, which is required for gas distribution. The main difference between a licence and a permit is that, unlike a concession, upon expiration of a licence, the assets deployed in the licensed activity revert to the state in exchange for no compensation, since the value of those assets are deemed to have been amortised during the life of the license.

  4. 4.What are the regulatory agencies charged with regulating oil and gas activities?

    The MEP is the entity with oversight over the oil and gas industry. The national gas entity (Enagas) has some oversight and regulatory powers over the gas sector, but it is mainly an advisory and technical body.

  5. 5.Are all hydrocarbons in your country deemed to be originally owned by the state? If so, when does ownership transfer to the extractor or buyer of the hydrocarbon?

    Hydrocarbon reservoirs belong to the state.

  6. 6.How are oil and gas exploration rights or concessions granted? Is there more than one method for granting such rights (ie, concession and joint exploration agreements) or co-existing regimes applicable to different exploration or exploitation areas?

    They are granted by the Republic through MEP and require approval by the National Assembly. Joint exploration agreements or some other type of association agreements are not specifically contemplated under the law.

  7. 7.Is there a public bidding or similar process? If so, is it open to foreign investors?

    Oil

    Concessions are granted via bidding processes. More specifically, participation of less than 50 per cent in mixed companies have recently been awarded to consortia formed by local and foreign investors through bidding processes for several blocks in southern Venezuela that form part of the Carabobo basin.

    Gas

    Concessions are tendered via bidding processes.

  8. 8.Are there any minimum local content requirements related to international bidding processes?

    Generally, there are no minimum local content requirements related to international bidding processes. This matter is normally handled on a case by case basis on the conditions issued for the bidding processes. Normally, if the bidding process involves a highly specialised service, the local content will not be a requirement.

  9. 9.Are there any restrictions on foreign participation in such rights or concessions or in companies holding any such rights?

    Oil

    The restrictions are applicable to foreigners and Venezuelans alike, which may only hold less than a 50 per cent equity participation in any mixed company engaged in primary activities.

    Gas

    There are no restrictions solely based on nationality applicable to activities in the gas sector.

  10. 10.Are there any restrictions on the participation in such rights or concessions by local national oil companies?

    Privately owned national companies (that is not wholly owned by the state which are free to perform “primary” oil and associated gas activities) are subject to the same restrictions explained with respect to the foreign participation. Therefore, they may hold less than 50 per cent stake in a mixed company. Please see answer to question 9.

  11. 11.Are companies or consortia that are awarded exploration rights given priority to operate and exploit the fields? How is priority structured and documented?

    As previously explained, the state either directly, or through mixed companies, are awarded exploration and exploitation concessions. Under the law only the mixed companies (or companies wholly owned by the state) will be the “operating company”. Therefore, the operating company will be controlled by the state.

  12. 12.Who has title to assets imported to develop and produce petroleum hydrocarbons?

    The mixed company or the contractor, provided that its activities are outside the scope of the oil contractor’s law.

  13. 13.How are federal, state and local governments recompensed for granting companies rights or concessions to conduct oil and gas exploration and production?

    The federal government is compensated via royalties, which are paid by the mixed company to the state at a rate of:

    • 30 per cent of extracted hydrocarbons volumes;

    • surface tax, paid for by the mixed company to the state and is levied over the surface of oil fields;

    • income tax, levied at 50 per cent on the mixed company’s net income;

    • dividends, paid for by the mixed company to its shareholders, including the state or PDVSA; and

    • windfall tax, levied on export volumes when international oil prices are above certain thresholds.

  14. 14.May companies or consortia that hold oil and gas exploration rights compulsorily acquire property or rights of way to carry out exploration or production activities? Are these compulsory acquisitions governed by special judicial or administrative proceedings?

    Both the Organic Hydrocarbons Law and the Gas Law have provisions of compulsory takings and easements that basically allow for an expedited taking, easement, or a right of passage while negotiations or litigation is pending with the owner.

  15. 15.Are natural gas exploration and production activities regulated separately or subject to the same regulation applicable to oil exploration and production? Are there different royalties or other government charges payable by companies that conduct natural gas production activities?

    Gas exploration and production activities are regulated by the Gas Law. This is a separate law from the Hydrocarbons Law which governs oil exploration and production activities. Gas exploitation is subject to a royalty equivalent to 20 per cent of produced volumes.

  16. 16.Do foreign ownership restrictions apply to the oil and gas sector in your country?

    No, existing restrictions are applicable to the private sector in general, regardless of nationality.

  17. 17.Are there any minimum domestic participation rules or any labour law rules relating to domestic and foreign workers (eg, permits for foreign workers)?

    Not more than 10 per cent of a company’s total workforce can be foreign. In addition, foreign workers’ aggregate compensation may not exceed 20 per cent of the Venezuelan portion of an employer’s workforce. These restrictions are not specific to the oil or gas sector, they are applicable in Venezuela to all companies that employ more than 10 persons.

  18. 18.Does local law mandate a particular entity with authority over the sector?

    The MEP has broad oversight and regulatory powers over the sector.

  19. 19.Are there any limitations on vertical integration in the oil and gas industry?

    There are currently no restrictions on vertical integration in the oil sector.

    Vertical integration requires authorisation from the MEP in the gas sector.

  20. 20.Are oil and gas activities carried out through incorporated entities with limited liability or by consortia or other types of unincorporated joint ventures? Are joint venture partners jointly and severally liable for the obligations undertaking?

    Currently, oil activities are carried out through mixed companies, which are corporations (sociedades anónimas) with limited liability in which the Venezuelan government, through Petróleos de Venezuela, SA or a subsidiary, owns 60 per cent of the capital stock, the remaining 40 per cent is owned by private companies. The aforesaid 60/40 split has been applied as a matter of policy even though the Hydrocarbons Law permits private participation of up to 49 per cent.

    In the past, oil activities where conducted through unincorporated joint ventures, the so-called “consorcios” (for example the Cerro Negro project, which was transformed into a mixed company in 2007). Consortium members are joint and severally liable for the project’s obligations because consortia have no legal personality and do not have limited liability.

    Investments in the gas sector have been undertaken via corporations or other entities with limited liability.

  21. 21.May oil and gas be pledged or encumbered to secure the repayment of debt? How?

    In theory it could, but in practice it is very cumbersome and politically sensitive. Specifically, oil and gas may not be encumbered to secure indebtedness while in the reservoir. This is because while underground, the hydrocarbons belong to Venezuela and are consequently not susceptible of being encumbered.

    Title is transferred at the wellhead to PDVSA, more specifically to PDVSA Petróleo, SA (the PDVSA subsidiary in charge of upstream activities in Venezuela) or to the mixed company.

    Some financings in the oil sector have been structured as advance prepayment facilities for oil exports. However, PDVSA has not recently pledged oil. Such a pledge, under certain circumstances, could raise negative pledge issues for PDVSA as well as for the Republic.

  22. 22.Can oil and gas rights that are subject to a lien be sold or transferred freely by the secured creditor?

    Any such transfer requires approval from MEP.

  23. 23.Is oil and gas output freely exportable in your country? Are there any limits or quotas applicable to oil and gas production? Is there access to export pipelines? What licences are required for oil and gas exports? Are duties applicable?

    Crude exports may only be carried out by PDVSA, its subsidiaries and affiliates and mixed companies. Venezuela is a member of OPEC, therefore Venezuela generally abides by the production limits and quotas applicable to oil production and export quotas set by OPEC. There are no export pipelines in Venezuela.

  24. 24.Are prices for oil and gas set or fixed by the government?

    The Ministry sets the prices for gasoline, diesel, propane, methane and other derivatives for the domestic market.

  25. 25.Are oil and gas exports taxed under the general income tax regime or is there specific petroleum tax legislation?

    In general, taxes and contributions payable by oil and gas operating companies are contained in various separate laws namely:

    • the Income Tax Law;

    • the Value Added Tax Law;

    • the Hydrocarbons Law;

    • a resolution of the Ministry of Energy and Petroleum, containing a Special Contribution on Extraordinary Prices of the International Hydrocarbons Market (windfall tax);

    • a law known as the “anti-drug law”;

    • the Agreement of the National Assembly that created the IJVs; and

    • the Science, Technology and Innovation Law

    Income Tax

    The general income tax regime applies to mixed companies, including certain provision concerning amortisation. Pursuant to the Venezuelan Income Tax Law (ITL), income obtained from oil and gas exports is subject to a flat 50 per cent tax rate on said net income. As a result, the tax rate for this type of activity is applicable after determining the net income of the company in accordance with the ITL.

    Value Added Tax

    Any entity selling and buying goods in Venezuela (which are subject to the Value Added Tax Law (VAT Law)) falls under the system of debit and credit of the VAT Law, whereby they should deduct from the VAT owed (as a result of its sales) the VAT paid in its input purchases. The current rate is 12 per cent.

    Exporters are subject to a 0 per cent VAT rate, since exported goods are usually taxed in the country of destination, but exporters are entitled to recover the VAT paid in their input purchases. The recovery of such credits can only be made through special certificates for tax refund “certificados especiales de reintegro tributario” (CERTs), which can be assigned or used to pay national taxes or other amounts deriving from a tax obligation such as interests, penalties or judicial expenses. Application for CERTs is subject to compliance and verification by the tax administration.

    The Hydrocarbons Law allows the marketing of natural hydrocarbons only to wholly-owned state companies. Therefore, operating companies producing natural hydrocarbons can only sell their production to companies which are wholly-owned by the government. However, an exception is made for mixed companies which are considered as exporters under the VAT law being entitled to recover the VAT they paid via CERTs.

    Hydrocarbons law

    Royalty (Regalía)

    Oil and gas operating companies must pay the Republic a 30 per cent royalty on gross production of hydrocarbons extracted from any reservoir.

    Surface Tax (Impuesto Superficial)

    This tax is based on the extension of the area not subject to exploitation; consisting in 100 tax units for every unused square kilometre, increased by 2 per cent annually over the first five years and 5 per cent annually after the sixth year.

    Extraction Tax (Impuesto de Extracción)

    Oil and gas operating companies must pay to the state (national government) one third of the value of all liquid hydrocarbons extracted from any reservoir, calculated on the same basis as that applied to the payment of royalties in cash.

    Fuel Consumption Tax (Impuesto Consumo Propio)

    This tax is levied at 10 per cent of the value of each cubic meter of hydrocarbon by-products, produced and used as fuel by the mixed company to run their operation, calculated on the price at which the product is sold to the end user.

    Tax on registration of exports (Impuesto Registro de Exportación)

    Exporting oil and gas operating companies must pay to the state, 0.1 per cent on the value of all hydrocarbons exported from any Venezuelan port, calculated on the price sold to the purchaser.

    Additional Royalty (Regalía adicional)

    Oil and gas operating companies must pay an additional royalty of 3.33 per cent on the value of the volume of crude extracted from the site; 2.22 per cent corresponds to municipalities (in substitution for payments previously received under the operating agreements converted into joint venture companies) and 1.11 per cent to finance projects directed at endogenous development (desarrollo endógeno) pursuant to the National Plan of Development.

    Special Advantage (Ventaja Especial)

    Mixed companies must pay to the state on a yearly basis the difference between:

    • 50 per cent of the value of the hydrocarbons extracted from the area of operation during each calendar year; and

    • the additional royalty payments made by the mixed company (including the additional royalty described above) plus the income tax or any other taxes based on income (gross or net) plus the 1 per cent social investment of profits before taxes. The amount of this ‘special advantage’ will be zero if the sum of all previous components is higher or equal to 50 per cent of the value of the hydrocarbons extracted.

    Social Investment

    Mixed companies must pay 1 per cent of their earnings before taxes corresponding to the previous calendar year, in accordance with their audited financial statements. Mixed companies need to create and implement a plan for social investment aimed at developing programs for improvement; this plan must be approved by the national government. Mixed companies need to create a policy of endogenous development (desarrollo endógeno) based on principles of cultural and biological diversity, minimising the negative impact on the environment and social responsibility contained in the Plan for National Development.

    Windfall tax

    On 18 April 2012, the government issued a Decree modifying the Special Contribution Deriving from Extraordinary Crude Prices in the International Markets. The Decree establishes special contributions on “Exorbitant Prices” of oil (monthly average of the international quote of the Venezuelan basket of liquid hydrocarbons, as follows; (i) 80 per cent when the prices are between US$70 and US$90; (ii) 90 per cent when the prices are between US$90 and US$100; and (iii) 95% for prices over US$100).

    Formally, this contribution does not apply to mixed companies since they are not taxpayers of it. However, the formula for the calculation of the price to be paid by PDVSA to joint venture companies for the crude sold has embedded the effect of this variation in price, which consequently could result in the mixed company receiving a lower amount of revenues (shadow tax). The General Direction for Royalties and Export Prices of the Ministry of Energy and Petroleum has to settle this contribution monthly and must pay it to the National Development Fund (FONDEN) within five business days following the date of the return notice (liquidation form).

    Anti-drug law

    Any entity with 50 or more workers must allocate 1 per cent of its annual net profits to drug use prevention programmes for its workers and their close relatives; 0.5 per cent of said percentage must be used for programmes involving the protection of children and teenagers. This tax is payable on yearly basis within the first 15 days of each calendar year.

    Science, Technology and Innovation Contribution

    Mixed companies must contribute or invest on a yearly basis 2 per cent of their gross annual income generated in Venezuela to activities listed in article 42 of the Science, Technology and Innovation law.

  26. 26.Do special environmental rules apply to oil and gas exploration and production?

    The general Venezuelan environmental regime is applicable to oil and gas

    companies. In addition, there are special regulations issued by MEP that are specific to the oil and gas sectors.

  27. 27.Are environmental regulations in your country consistent with any international standards?

    Venezuela’s Criminal Environmental Law, which is one of the general laws that compose the Venezuelan environmental law framework, is generally considered as more stringent than those of other countries in the region but less stringent than those of the United States or western Europe.

    Specifically, to comply with the aforesaid law companies must take many environmental measures that generally include monetary allotments for atmospheric emissions control, treatment and disposal of solid and toxic waste, treatment of industrial wastewater, treatment of oil-tainted residues, contingency plans for oil spills and other emergencies, and for environmental impact studies.

  28. 28.Must companies in the oil and gas industry obtain special environmental or other government permits (other than licences or concessions to carry out oil and gas exploration and production) in to operate in your country?

    Oil and gas companies must obtain environmental permits and registrations to operate in Venezuela and in certain cases prepare environmental impact studies.

  29. 29.Does the government (including any development banks or agency) provide financing, subsidy or other support to companies undertaking oil and gas exploration or production?

    There is currently no general policy enacted by the government to provide financing, subsidies or other financial support to companies undertaking oil and gas exploration or production.

  30. 30.Are there any tax stability or similar regimes available to foreign investors undertaking investment in the oil and gas industry in your country?

    Tax stability agreements are permitted under Venezuelan law. However, so far there have been no tax stability contracts entered into Venezuela and private investors.

  31. 31.Are oil and gas activities generally protected under bilateral investment treaties entered into by your country?

    Yes, oil and gas activities are protected under bilateral investment treaties entered into by Venezuela, which has entered into bilateral investment protection treaties with: Argentina, Barbados, Belgium, Luxembourg, Bolivia (not yet effective), Canada, Chile, Costa Rica, Cuba, Czech Republic, Denmark, Ecuador, France, Germany, Lithuania, Paraguay, Peru, Portugal, Spain, Sweden, Switzerland, the United Kingdom and Uruguay. Venezuela terminated the BIT with the Netherlands.

  32. 32.Are there any dispute resolution systems specific to the oil and gas industry? Does state immunity apply in disputes?

    There are no dispute resolution systems specific to the oil and gas industry.

    In joint ventures, PDVSA has accepted arbitration clauses under ICC rules, but the governing law has always been Venezuelan law and the place of arbitration has been Venezuela.

    Immunity

    Pursuant to Venezuelan law, neither PDVSA, nor its affiliates, nor any of their properties located in Venezuela, have immunity from suit, set-off, or any other legal process or action filed against them (whether the action has been commenced through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise). However, pursuant to article 97 of the Law of the Office of the Attorney General of Venezuela (Ley Orgánica de la Procuraduría General de la República) an attachment prior to judgment, attachment in aid of execution, execution or otherwise, on properties located in Venezuela that are affected to the rendering of a public service, such as oil and gas distribution and transportation, must be stayed for a period of 45 days after notice is given to the Venezuelan Attorney General pursuant to which the Venezuelan government may take any action in order to avoid interruption of the services, including taking possession of such assets if such attachment endangers the continuity, quality or security of the services provided. If the Attorney General does not notify the court about the provisional measures taken by the Venezuelan government to avoid discontinuance of the service within such 45-days notice, the court may continue with such enforcement or foreclosure.

    PDVSA and its affiliates have accepted to submit to the jurisdiction of New York and UK courts, but only in financing transactions.

  33. 33.Do anti-corruption rules apply to the oil and gas industry?

    The Venezuelan Anti-Corruption Law is applicable to PDVSA, its subsidiaries and to mixed companies.

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