New Petrochemical Law Enacted - International Law Office

International Law Office

Energy & Natural Resources - Venezuela

New Petrochemical Law Enacted

August 10 2009

Scope of Petrochemical Law
Impact on Foreign Companies


The new Organic Law For the Development of Petrochemical Activities was published in the Official Gazette on June 18 2009. This new law imposes important restrictions on a sector that until now was fully open to foreign or national private investment.

Scope of Petrochemical Law

The Petrochemical Law applies to all petrochemical activities performed in Venezuela and establishes that basic and intermediate petrochemistry, as well as the works, property and facilities that the handling of the same requires, are reserved to the state.

The state may exercise these activities:

  • directly;
  • through companies which it exclusively owns; or
  • through mixed companies in which it has control of their decisions and an interest of at least 50% of their capital stock.

'Basic petrochemistry' is defined as the industrial processes related to the chemical or physical transformation of the basic components of hydrocarbons that involve a molecular change, which are understood to be the products obtained from hydrocarbons that have a defined chemical formula.

'Intermediate petrochemistry' is defined as the industrial processes related to the chemical or physical transformation of products obtained from basic petrochemistry.

The incorporation of petrochemical mixed companies must be duly approved by the Ministry of the Popular Power for Energy and Petroleum, which proposes the incorporation, and the National Assembly.

Previously, petrochemical activities were regulated as the industrialization of hydrocarbons. If the raw material was gaseous, activities were regulated by the Organic Gas Law, and if the raw material was derived from crude, activities were regulated by the Organic Hydrocarbons Law. Industrialization activities did not require the prior approval of the National Assembly, but projects were required to be registered with the Ministry of the Popular Power for Energy and Petroleum.

In addition, the Petrochemical Law regulates the activities of Pequiven, the Venezuelan state-owned company in charge of petrochemical activities.

Impact on Foreign Companies

As a result of the Petrochemical Law, new projects in this area cannot be carried out by entities that are not mixed companies with a state participation of at least 50%. This means that foreign companies that wish to engage in petrochemical activities must necessarily incorporate mixed companies with the Venezuelan state. This results in a series of legal implications deriving from the fact that these mixed companies will be considered to be state-owned companies and will be regulated by a series of public laws in addition to the laws that are applicable to all commercial entities.

Another difficult situation is the treatment of existing joint ventures. During the 1990s, Pequiven incorporated 16 companies (generally with a minority participation) with foreign and local companies to develop petrochemical projects. The table below shows some examples of these companies.

Company

Activity

Participation (%)

Fertilizantes Nitrogenados de Venezuela, Fertinitro CEC

Production and sale of fertilizers (two plants producing ammonia and urea)

Pequiven - 34.99

Koch - 34.99

Snamprogetti - 19.99

Fertlizantes Nitrogenados de Oriente - 0.001

Metanol Oriente

Production of methanol

Pequiven - 37.5

Mitsubishi Corporation - 23.75

Mitsubishi Gas Chemical - 23.75

Inversiones Polar - 10

International Finance Corporation - 5

Olefinas del Zulia

Production of ethylene and propylene

Pequiven - 40.67

The Law Debenture Trust - 59.33

PROPILVEN

Production of polipropylene

Pequiven - 49.4

Promotora Venoso - 17.8

Grupo Zuliano - 17.8

Mitsui USA - 1.68

Mitsui LTD - 0.96

Mitsui Venezuela - 12.02

Since the Petrochemical Law fails to establish a grandfathering clause with regard to previous joint ventures or to state that it will automatically apply to these joint ventures, their legal status is somewhat uncertain. However, companies that existed before the Petrochemical Law was promulgated will not be rendered illegal companies. If the Venezuelan state wishes to begin a mandatory migration process, it must issue a future legislative or administrative act in order to implement or regulate a possible obligatory migration. Provided that this does not happen, existing companies are legally empowered to continue with their course of business.

However, the precedents in Venezuela are clear. In 2005, three years after the enactment of the Organic Hydrocarbons Law, which contained similar provisions and which reserved to the state the exploration and exploitation of crude, the Ministry of the Popular Power for Energy and Petroleum instructed PDVSA to begin the migration of operating services agreements and joint ventures into mixed companies.

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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