The 1922 blow out of the Barroso 2 oil well in the State of Zulia marked the beginning of the Venezuelan oil rush. That well alone produced an average of 100,000 barrels per day, so not surprisingly, Venezuela immediately caught the attention of the emerging international oil companies.General Juan Vicente Gómez, who ruled the country as his personal hacienda for almost 30 years, awarded oil concessions to either Gomecistas or close family members who later resold them to international oil companies.1 Gomez’s death in 1935 did not entail, however, the end of the concession regime. Although subsequent administrations gradually increased the government’s control and take, oil concessions remained valid until 1975, when Venezuela nationalized its oil industry.
In August 1975, the Venezuelan Congress (now National Assembly) approved the Organic Law that Reserves to the State the Industry and Commerce of Hydrocarbons (the “1975 Nationalization Law”). This law terminated the existing concession agreements and established a swift expropriation process. The 1975 Nationalization Law also entrusted Petróleos de Venezuela, S.A. (“PDVSA”), the newly-incorporated state-owned company, with the country’s oil and gas operations.
The Government staffed PDVSA and its affiliates with the local workforce of the former concessionaires, and the company rapidly gained international recognition. PDVSA, however, lacked the financial strength and the necessary technology to develop Venezuela’s vast hydrocarbon resources efficiently, particularly those extra-heavy oil deposits located in the Orinoco Oil Belt.
Amid the 1990s oil price decline, Venezuela adopted a series of policies designed to attract foreign investors to its oil industry. This process, known as apertura petrolera or oil opening, resulted in: (i) 32 Operating Services Agreements designed to increase production in marginal fields, (ii) four Association Agreements for the production of extra-heavy crude in the Orinoco Oil Belt; and (iii) eight Shared-Risk-and-Profit Exploration Agreements, all signed with private — mostly foreign — investors.
Depending on the type of project, the incentives offered by the Government included a general corporate tax regime, reduced royalty periods, and access to international arbitration. Left-wing opposition leaders harshly criticized and challenged the apertura initiatives. Notwithstanding these obstacles, the process continued and the challenged projects ultimately received the blessing of both the Venezuelan legislature and the Supreme Court of Justice.
Hugo Chávez, a former army Lieutenant Colonel who led a failed coup d’état in 1992, became Venezuela’s President in February 1999. Chávez ran for office on a leftist platform, yet guaranteed that his administration would encourage and promote foreign investments. Just one day before winning the 1998 presidential election, Mr. Chávez stated that his administration would nationalize “absolutely nothing.” But change was in the air, and the apertura’s principal detractor, Mr. Alí Rodríguez-Araque, became the first oil minister of the Chávez era.
In 2001, President Chávez, who had been empowered by the National Assembly to issue Decree-Laws, enacted a new Organic Law on Hydrocarbons that abolished the existing hydrocarbon regime and established that hydrocarbon activities had to be carried out either directly by the State, through PDVSA, or by mixed companies (empresas mixtas) in which the State held a majority participating interest. Although the Organic Law on Hydrocarbons did not contain a provision grandfathering the validity of prior contracts and projects, Venezuelan government officials assured investors that existing projects would remain unaltered. Those assurances were consistent with Venezuelan law principles that forbid the retroactive application of laws.
In December 2002, PDVSA’s managers joined a general strike protesting the policies and actions of the Chávez administration, including those affecting the “meritocracy” system by which PDVSA’s employees achieved levels of greater responsibility within the company. The strike halted oil and gas operations around the country for over a month, and eventually resulted in the firing of more than 18,000 PDVSA employees. During the strike, the Government took control of an oil terminal operated by Sociedad Williams Enbridge & Compañía (SWEC), a Williams-led consortium, and of PDVSA’s IT department, which had been outsourced to a joint venture formed by PDVSA and Science Applications International Corporation (SAIC), a San Diego-based company. The Government accused both SWEC and SAIC of committing acts of sabotage and disrupting oil operations during the strike. An international arbitration tribunal decided, however, that PDVSA had breached its contractual commitments towards SWEC and ordered compensation pursuant to the parties’ agreement. SAIC, on the other hand, received political insurance compensation from the Overseas Private Investment Corporation (OPIC).
On October 10, 2004, President Chávez surprised investors by announcing during his weekly television show — Aló Presidente — that the royalty reduction agreement that had been approved for extra-heavy oil projects during the apertura process would immediately come to an end. From that date on, heavy-oil projects were forced to pay a 16.66% royalty.
In April 2006, the National Assembly approved the Law of Regularization of Private Participation in Primary Activities (the “Regularization Law”) terminating the 32 operating agreements executed during the 1990s. The Government maintained that these agreements were illegal, but allowed their participants to “migrate” to a mixed-company regime based on terms and conditions unilaterally imposed by the Government. The Government showed the door to those companies that were not willing to accept the new conditions. Most investors, however, decided to abide by the Government’s terms.
In May 2006, the National Assembly approved a partial amendment to the Organic Law on Hydrocarbons establishing a new “extraction tax” that effectively increased the royalty paid by existing projects to 33.33%. Additionally, on August, 29, 2006, the Venezuelan National Assembly raised the income-tax rate applicable to ongoing oil projects from 34% to 50%.
In February 2007, President Chávez, again empowered by the National Assembly, issued Decree-Law No. 5200 on the Migration to Mixed Companies of the Association Agreements of the Orinoco Oil Belt and the Exploration at Risk and Shared-Risk-and-Profit Exploration Agreements. This Decree-Law ordered the forced transformation of the Petrozuata (ConocoPhillips), Sincor (Total, Statoil), Cerro Negro (ExxonMobil, BP), Hamaca (ConocoPhillips, Chevron), Golfo de Paria Oeste (ConocoPhillips), Golfo de Paria Este (ConocoPhillips, ENI, OPIC Karimum), La Ceiba (ExxonMobil), and Sinovensa (CNPC) association agreements into mixed companies created under the Organic Law on Hydrocarbons in which PDVSA or one of its subsidiaries would hold at least a 60% participating interest. Decree-Law 5200 further established that if an agreement on the migration to the new regime was not reached by June 26, 2007, PDVSA would assume the projects’ assets and activities.
ExxonMobil, ConocoPhillips, and OPIC Karimum rejected the Government’s new terms and conditions and subsequently filed international arbitrations against Venezuela.
According to industry sources, PDVSA’s excessive contributions to the Government’s social programs, widespread mismanagement, lack of experienced personnel, and underinvestment have taken a serious toll on the State-owned company’s capabilities to honor its contractual commitments. Reports indicate that PDVSA’s debt to its service contractors totaled already US$ 8 billion at the end of 2008. The Government’s answer to this crisis consisted in drafting a law that would make it easier for PDVSA to seize the assets owned by service companies and to offer limited compensation, if any.
On May 7, 2009, Venezuela enacted the Organic Law that Reserves to the State the Assets and Services Related to Primary Hydrocarbons Activities (the “Reserve Law”), which basically nationalized the assets relating to water, steam, and gas injection services, gas compression activities, and maritime services in Lake Maracaibo. Over the following month, PDVSA and armed members of the Venezuelan National Guard took over the facilities, equipment, vehicles, inventory, offices, and personnel of dozens of service companies, while pending debts remained outstanding. No public reports suggest that PDVSA paid any type of compensation for these takings, but at least four foreign investors (i.e., Universal Compression International Holdings, S.L.U., Tidewater Inc., John Wood Group, and the Williams Companies) have filed international arbitration claims seeking compensation.
In the wake of the 2011 oil price hike, the Venezuelan Government adopted measures to increase both the government take and production from the mixed companies. On April 18, 2011, President Chávez issued the Decree with the Rank and Force of a Law Creating a Special Contribution on Extraordinary Prices and Exorbitant Prices in the International Hydrocarbons Market. This law imposes an 80% windfall profits tax on oil exporters and the mixed companies that sell crude to PDVSA and its affiliates when the price of benchmark Brent crude hits the $70 per barrel threshold. The rate increases to 90% and 95% if oil prices reach the $90 and $100 thresholds, respectively. The law also provides that “new projects” and those projects that increase budgeted production targets could be exempted from this tax if Venezuela’s Ministry of Energy and Petroleum so decides.
Foreign oil companies have not been the only target of the Government’s nationalization policies. Banks, hotels, mining projects, supermarkets, power companies, farms, housing projects, coffee manufacturers, cement companies, steel and iron companies, airport operators, glass producers, soft drink bottlers, jewelry stores, agricultural companies, and food producers have experienced, to one extent or another, expropriatory measures. According to the website of the International Centre for Settlement of Investment Disputes (ICSID), seventeen investment claims are currently pending against Venezuela for measures adopted by the Chávez administration. The cases include:
- Vannessa Ventures Ltd. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB(AF)/04/6)
- Mobil Corporation and others v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/07/27)
- ConocoPhillips Company and others v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/07/30)
- CEMEX Caracas Investments B.V. and CEMEX Caracas II Investments B.V. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/08/15)
- Gold Reserve Inc. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB(AF)/09/1)
- Tidewater Inc. and others v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/10/5)
- Universal Compression International Holdings, S.L.U. v. Boli- varian Republic of Venezuela (ICSID Case No. ARB/10/9)
- Opic Karimum Corporation v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/10/14)
- Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/10/19)
- Highbury International AVV and Ramstein Trading Inc. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/11/1)
- Nova Scotia Power Incorporated v. Bolivarian Republic of Venezuela (ICSID Case No. ARB(AF)/11/1)
- Crystallex International Corporation v. Bolivarian Republic of Venezuela (ICSID Case No. ARB(AF)/11/2)
- Longreef Investments A.V.V. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/11/5)
- The Williams Companies, International Holdings B.V., WilPro Energy Services (El Furrial) Limited and WilPro Energy Services (Pigap II) Limited v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/11/10)
- Koch Minerals Sàrl and Koch Nitrogen International Sàrl v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/11/19)
- OI European Group B.V. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/11/25)
- Tenaris S.A. and Talta - Trading e Marketing Sociedade Unipessoal LDA v. Bolivarian Republic of Venezuela (ICSID Case No. ARB/11/26)
This list does not include, however, the various ongoing arbitrations and court cases that have not been submitted to arbitration under the ICSID Convention.
It is difficult to predict who will be the subject of the Government’s next nationalizations. It is much easier to forecast that if things follow the current path, and President Chávez maintains his promise to nationalize “absolutely nothing,” many more Venezuelan and foreign investors are likely to join this unfortunate list.