Venezuela recently adopted a new legal regime to regulate its gas industry that will open it to private project finance. The new Organic Law on Gas Hydrocarbons is the cornerstone of the government's new policy to foster the rapid development of the country's gas industry, primarily through private, foreign investment. The government's policy includes:
- the licensing of exploration and production rights in various parts of Venezuela;
- the use of build-own-operate (BOO) and build-operate-transfer (BOT) arrangements to increase the gas compression capacity of existing oil fields operated by the government and owned by the subsidiary PDVSA;
- the granting of permits to build and operate gas transportation systems throughout the country;
- the granting of permits to build and/or operate regional distribution and marketing systems throughout the country; and
- the granting of permits to produce natural gas and other gas and petrochemical products.
All licenses and permits are granted in accordance with the government's international bidding procedure.
Licences and permits
Licences and permits may be granted for an initial term of up to 35 years, although a 30-year term is more likely. They may be extended for a further period of 30 years at the government's discretion. They may also be cancelled if an investor breaches any conditions to the licence or permit or any other applicable regulations.
The new law provides that upon expiry of the license or permit, the assets owned by the licensee or permit holder automatically pass to the government, free of charge. Thus, generally, licensees and permit holders may not pledge (or otherwise encumber) such assets and they may not transfer or otherwise dispose of the assets without the government's approval. These restrictions do not apply to assets used by investors who change gas into more elaborate products nor do they apply to assets used in the production of LPG (liquid petroleum gas).
The new gas regime allows investors to use third-party assets under BOO, BOT or lease arrangements. However, investors must notify the government if such assets are assigned or otherwise transferred, should it be interested in continuing the arrangements in the event the licence or permit expires or is cancelled.
A licensee or permit holder may designate an operator to run its operations or business provided the government approves.
The new law prohibits a single investor from simultaneously controlling or engaging in production, transportation or distribution activities within the same region. However, the government may allow an investor to exercise two or more of these activities if it deems it necessary to ensure the viability of the desired project.
The law's general prohibition seeks to have production, transportation and distribution operated as separate businesses. Consequently, a gas exploration/production project must be finance separately from the pipeline system that transports it, which must in turn be finance separately from the distribution project that delivers it to consumers.
The law forbids producers from selling gas to anyone not holding a distribution permit. The law also forbids transporters from selling gas.
The Ministry of Energy and Mines has authority to set the price of methane gas at the point of dispatch (ie, where the producer's system connects with the transporter's pipeline). The ministry is also empowered to fix the transportation rates charged by each transporter and the distribution rates charged by each distributor. The government does not directly fix the price charged to end consumers. However, the distributor must abide by government guidelines which seek to maintain prices within a certain range (ie, consistent with what the price would be in an open market while allowing the producer, the transporter and the distributor a reasonable profit). The official pricing formulas have yet to be published.
The new law and its implementing regulations allow disputes to be settled by arbitration under the sponsorship of recognized international institutions such as the ICC (International Chamber of Commerce). The preferred venue, however, is Venezuela.
The new provisions on dispute resolution are a drastic change to the government's previous policy on this matter. Until now, disputes had to be settled in Venezuelan courts in accordance with Venezuelan Law. The new policy will allow investors to be confident that their disputes will be handled in accordance with international standards.
In Venezuela, subsoil minerals including gas are the property of the state. Licensees who extract gas from a licensed area must pay the government a royalty of 20% of the gas produced. The government may request that this royalty be paid in cash or in kind. If paid in cash, the gas is valued at the production field (ie, deducting the cost of transportation and distribution). Royalty payments are deductible for income tax purposes.
The role the municipal government will play in setting up a distribution system is an important issue. Venezuela adopted a new Constitution in December 1999 that grants the central government authority over all hydrocarbon activities carried out in the country (including the distribution of gas). At the same time, it granted municipalities authority over "the domestic distribution of gas" within their own territories.
Traditionally large municipalities have zealously defended their authority to handle and regulate the municipal rendering of public services. It is therefore likely that the Constitution's ambiguity will give some municipalities grounds for opposing the central government's plans to grant regionally-exclusive distributorship rights to private parties.
Venezuela also enacted an Investment Promotion and Protection Law last year that includes some of the provisions typically found in investment protection treaties. This law allows Congress to authorize the government to enter into special agreements with individual investors to freezes tax for up to 10 years.
For further information on this topic please contact Fernando Pelaez-Pier at Hoet Peláez Castillo & Duque by telephone (+58 212 263 6644) or by fax (+58 212 263 7744) or by e-mail ([email protected]).
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