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Carabobo Project begins to take off - International Law Office

International Law Office

Energy & Natural Resources - Venezuela

Carabobo Project begins to take off

May 04 2010

On January 28 2010 two consortia presented offers to participate as partners of PDVSA or CVP in the incorporation of mixed companies that will develop the fields subject to the Carabobo Project bidding process (a project that involves upstream activities in the Orinoco Basin to produce extra heavy crude and its transport and upgrading). Repsol (Spain), Petronas (Malaysia), Oil and Natural Gas Corporation (India's state-owned company), Oil Indian Limited and Indian Oil Corporation presented a bid for Carabobo Block 1; and Chevron (United States), Inpex and Mitsubishi (Japan) and Suelopetrol (Venezuela) presented a bid for Carabobo Block 3.

Since no other offers were presented, the consortia were awarded the blocks for which they bid. Initially, 19 companies had acquired the data pack to participate in the Carabobo Project bidding round.

The process has progressed rapidly and on April 15 2010 the National Assembly approved the incorporation of two mixed companies and established the main conditions for their incorporation. The highlights of these conditions are as follows:

  • The mixed companies are authorized to carry out primary activities (exploration for and exploitation of extra heavy crude) and secondary recovery activities in order to reach a 20% recovery factor within a 40-year period from the date of incorporation of the mixed companies.
  • The mixed companies are authorized to upgrade the extra heavy crude, blend it and directly commercialize the upgraded crude, the blended crude and other products derived from the upgrading of the extra heavy crude.
  • Crude oil produced before the start-up of the upgraders must be sold to PDVSA or a PDVSA affiliate up to a maximum of 300 million barrels of accumulated production or within 84 months of incorporation of the mixed companies (whichever occurs first). Crude oil production during upgrader shutdown will also be sold to PDVSA.
  • The mixed companies are authorized to operate for 25 years, with the option of a 15-year extension, provided that the upgrader has begun to operate and 40 million barrels have been produced through hot production (secondary recovery).
  • The mixed companies will pay all applicable taxes and:
    • income tax at the 50% rate for hydrocarbon producers; specifically:
      • investments in upstream assets will be deductible in whole in the tax year in which they are incurred;
      • investments in downstream assets will be deductible for 10 years through straight-line depreciation; and
      • losses may be carried forward for 10 years;
    • a royalty of 33% on the value of all crude produced (the royalty may be reduced to 20% if it is determined that investments will not be recovered within seven years of commencement of commercial production); and
    • a special advantage to the state, equivalent to the difference between 50% of the value of the crude produced and the sum of all payments made to the state by the mixed company (ie, royalty, taxes and social contributions).
  • All geological, geophysical and other technical information related to upstream activities will be owned by the state as soon as it is produced and the mixed company may use such information to perform only authorized activities.
  • The mixed companies will invest 1% of their profits before taxes during the previous tax year in social and environmental plans.
  • The minority shareholders of the mixed companies will pay the bonuses offered to the state under the bidding procedure as regulated by separate bonus payment agreements. The consortium headed by Repsol offered $1.05 billion and the consortium headed by Chevron offered $500 million.

The rest of the terms and conditions applicable to the development of the blocks by the mixed companies are included in the contracts for incorporation and administration of the mixed companies and the charter/by laws of each mixed company, which have not yet been made public.

For further information on this topic please contact Vera de Gyarfas at Travieso Evans Arria Rengel & Paz by telephone (+58 212 918 3333), fax (+58 212 918 3334) or email (vbg@traviesoevans.com).

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