June 01 2009
Impact on Foreign Oilfield Contractors
On May 7 2009 the organic law that reserves to the state the goods and services linked with hydrocarbon primary activities was published in the Official Gazette. It entered into force on the same date.
The purpose of this law is to reserve to the state all assets and services connected with the performance of primary activities under the Organic Hydrocarbons Law (defined under the Organic Hydrocarbons Law as "exploration for and exploitation of crude plus its initial gathering, transport and storage"). This means that all connected or inherent assets and services will be owned and provided only by the state, PDVSA and its affiliates, and mixed companies in which the state has a majority shareholding.
Article 2 of the new law establishes the scope of the reservation and indicates that it refers to assets and services involving:
The Ministry of the Popular Power for Energy and Petroleum will issue a resolution to determine the assets and services of companies or sectors that fall within the scope of Articles 1 and 2 of this law.
The ministry has issued two resolutions affecting 41 companies. The state has taken over these companies through the work of PDVSA personnel, aided by the National Guard. The law indicates that the affected assets and companies may subsequently be expropriated.
Impact on Foreign Oilfield Contractors
As a result of the new law, the assets and services of oil service contractors that are required to carry out primary activities will be owned or carried out only by the state, PDVSA and its affiliates, and mixed companies controlled by the state. This means that contractors, including foreign oilfield contractors, will no longer have the right to own these assets or provide these services in Venezuela.
However, there appears to be an inconsistency in the law. Article 2 specifies certain assets and services that will be immediately taken over once the ministry has issued its resolutions, but Article 1 reserves to the state all assets and services that are required to carry out primary activities. Providers of goods and services that are connected or inherent to primary activities, but are not included in Article 2, are uncertain whether the law applies to them (ie, drilling services providers). Although PDVSA has clarified that the law does not apply to such providers, there is a risk that they will also be subject to the new law.
This law creates legal uncertainty and risks of expropriation. Given that Venezuela's major industry is the oil industry, the possible impact of this law on private companies could be significant. In addition, Venezuela's production of crude levels could be seriously affected because PDVSA's capacity to provide oilfield services without the participation of foreign oilfield contractors is uncertain. It is believed that PDVSA will try to negotiate the incorporation of mixed companies with the major oilfield services providers - as was negotiated with the operating services agreements in 2005 and the association agreements in 2006 - resulting in the state taking full control of the Venezuelan oil industry.
For further information on this topic please contact Vera de Gyarfas at Travieso Evans Arria Rengel & Paz by telephone (+58 212 918 3333) or by fax (+58 212 918 3334) or by email (firstname.lastname@example.org).
ILO provides online commentaries as specialist Legal Newsletters. Written in collaboration with over 500 of the world's leading experts and covering more than 100 jurisdictions, it delivers individually requested information via email to an influential global audience of law firm partners and international corporate counsel. Please click here to register for the service.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.