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Nationalization of Oilfield Services - International Law Office

International Law Office

Energy & Natural Resources - Venezuela

Nationalization of Oilfield Services

June 01 2009

Scope
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.

Scope

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:

  • water vapour and gas injection which permit increases in hydropower and the improvement of the recovery factor;
  • gas compression; and
  • activities in the Maracaibo Lake, including:
    • boats for transporting personnel;
    • diving and maintenance services;
    • boats for transporting materials;
    • diesel, industrial water and other inputs;
    • tug boats, flat barges and buoyages;
    • derricks for underwater tube and cable layout and replacement cuttings; and
    • the maintenance of boat workshops, berths and dikes of any type.

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 (vbg@traviesoevans.com).


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