Treaty on long-term financing
Further agreements
Possible implications for new projects

A recently published law approves the treaty executed between Venezuela and China on cooperation for long-term financing. The law was published in the Official Gazette on September 16 2010.

Treaty on long-term financing

The treaty establishes that the China Development Bank Corporation and its affiliates will grant a line of credit to the Venezuela Bank of Economic and Social Development to a maximum of $10 billion and Rmb70 billion. The maximum duration of each line of credit will be 10 years and the applicable interest rate will be jointly determined, based on direct negotiations and market principles.

The lines of credit will be paid for by Venezuela through the sale of crude, effected through PDVSA. During 2010 at least 200,000 barrels per day (bpd) should have been sold. For 2011 this amount must increase to 250,000bpd and from 2012 the minimum amount will be 300,000bpd.

The funds derived from the lines of credit will be used to develop major infrastructure, and for social development, energy, mining and agrarian projects in Venezuela. At least $4 million and Rmb70 billion will be used for cooperation projects undertaken by both countries. The cooperation projects will be jointly selected by both parties and, to the extent feasible under the law, part of the lines of credit can be used in China for cooperation projects.

The treaty stipulates the creation of a joint committee that will control and follow the execution of the agreement contemplated in the treaty, with the obligation to submit annual reports regarding the status of the implementation of the treaty. The treaty also indicates that the agreement for the purchase and sale of crude will contain a mechanism for coordination and resolution of disputes.

The treaty will enter into effect when the necessary legal requirements have been fulfilled in each country and will be in effect for 10 years.

Further agreements

Subsequent agreements will be executed as a result of the treaty's implementation, including:

  • a framework long-term Chinese-Venezuelan financing cooperation agreement;
  • a four party agreement;
  • financing agreements; and
  • an agreement for the purchase and sale of crude.

It is expected that these agreements will need to be approved by the National Assembly, as Article 150 of the Venezuelan Constitution requires that agreements executed with foreign states must first be approved by the National Assembly.

Possible implications for new projects

In 2010, Venezuela has suffered a reduction in the production of crude, as evidenced by the reduction of export volumes reported by the Organisation of the Petroleum Exporting Countries and the International Energy Agency. Venezuela's internal production capacity has been reduced. This means that the crude to be sold to China within the next 10 years will result from either a further reduction in the amount of crude exported to the United States or new production projects.

At present, none of the new projects - such as the Orinoco Project and other Orinoco Basin projects (involving mixed companies incorporated by CVP/PDVSA, as well as national oil companies) - is scheduled to start production before 2013.

For further information on this topic please contact Simón Guevara Camacho or Diego Alexandre Parra at Travieso Evans Arria Rengel & Paz by telephone (+58 212 277 3333), fax (+58 212 918 3334) or email ([email protected] or [email protected]).