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Domestic market overview

Production

What is the extent of oil and gas production in your jurisdiction?

Gas According to Petróleos de Venezuela SA’s (PDVSA) results for 2012’s first semester, the production of natural gas is approximately 7,471 million cubic feet per day (MMcfd). PDVSA’s official short-term target seeks to increase natural gas production to 11,947 MMcdf by 2019.

Access to production information has been limited in the past few years. 

Oil In the past couple of years the production levels disclosed and reported by the government have been subject to controversy. It was reported that the average oil production in 2011 was 2.9 million barrels per day (including conventional and synthetic crude oil), but sources argue that production was lower and has been decreasing ever since.

Consumption

How does domestic energy consumption break down with respect to oil and gas, as well as imports and exports?

Gas Since 1999 natural gas consumption in the economic sector has not grown due to shortages in gas production. In fact, there are many gas-consuming projects that have not materialised due to the high level of uncertainty regarding future gas supply.

In its strategic plan 2006 to 2012, the PDVSA established that natural gas production for 2010 was 115,000 MMcfd. This represents an increase of only 5,200 MMcdf since 2005 to cover the deficit in the domestic market, gas injection projects, new petrochemical projects and new PDVSA requirements. The plan was revised in 2008 and a new natural gas production target of 12,600 MMcdf was set for 2013.

Natural gas production is currently approximately 7,125 MMcdf and the deficit to supply the internal market is around 1,400 MMcdf.

Oil Most of Venezuela’s energy requirements are met through oil, followed by natural gas and hydropower. In 2010 the total consumption of energy was approximately 1,004 million barrels per day, of which 54% came from oil (fuels), 33% from natural gas and 13% from hydropower.

Trends

What are the current trends and future prospects for oil and gas supply and demand in your jurisdiction, and what policies has the government adopted to address these?

In the past couple of years there have been no new regulations enacted pertaining to the supply and demand of oil and gas in Venezuela.

Regulatory overview

Regulation

What are the primary laws and regulations governing the oil and gas industry in your jurisdiction?

The primary laws and regulations governing the oil and gas industry are:

  • the Constitution;
  • the Organic Hydrocarbons Law; and
  • the Gaseous Hydrocarbons Law and Regulations.

Which government bodies regulate the oil and gas industry and what is the extent of their powers?

The Ministry of the People’s Power for Petroleum is the main administrative body in the oil and gas field.

The ministry has the broadest powers when it comes to oil and gas. Within the ministry, there are several vice-ministries which actively participate in day-to-day operations. 

Exploration and production

Rights

Who holds the rights to oil and gas reserves in your jurisdiction?

According to the Constitution, the republic owns all natural resources in its territory.

Upstream non-associated natural gas activities may be performed by:

  • the state;
  • a state-owned company; or
  • national or international companies that hold an exploration and production licence granted by the ministry.

Upstream oil activities may be conducted by:

  • the state;
  • a state-owned company; or
  • a mixed company with private and government participation, in which the government must have control of decision-making by owning a shareholding interest greater than 50%.

Is there a distinction between surface and sub-surface rights?

There is no difference between surface and sub-surface rights according to Venezuelan legislation.

What rules and procedures govern the grant of rights for exploration and production purposes (eg, through licences, leases, concessions, service contracts, production sharing agreements)?

The basic terms and conditions for the exploration and exploitation of non-associated natural gas reservoirs are provided by:

  • the licence that grants the licensee the right to perform the activities;
  • the Gaseous Hydrocarbons Law; and
  • the law’s regulations.

The basic terms and conditions for the performance of upstream activities in the oil industry are provided by:

  • the Framework Agreement for the Incorporation of the Mixed Company;
  • the National Assembly Accord for the Incorporation of the Mixed Company;
  • the Mixed Company Creation Decree;
  • the Mixed Company Transfer Decree;
  • the Delimited Area Resolution; and
  • the Organic Hydrocarbons Law.

What criteria are considered in awarding exploration and production rights (eg, are there any restrictions on the participation of foreign investors/companies)?

The applicable legislation for oil and gas activities provides no restriction regarding the participation of foreign companies.

According to the legislation, the Ministry of the People’s Power for Petroleum is entitled to set the criteria (eg, financial expertise, operational experience and the possibility to introduce new technologies into the country) for the selection of the participants in any specific bidding round. However, the ministry has selected participants for the latest oil and gas projects through direct award, which is possible according to the applicable legislation.

Joint ventures

Do any special legal provisions apply to joint ventures?

A mixed company joint venture can perform upstream activities in the oil industry. Such companies must comply with all the provisions for incorporation provided in the Organic Hydrocarbons Law.

The Gaseous Organic Hydrocarbons Law provides no regulations regarding joint ventures.

Third parties

Can exploration and production rights be transferred to third parties?

There are specific procedures in Venezuelan legislation regarding the assignment of upstream rights to a third party.

In general, the assignment requires prior written authorisation by the ministry in order to be valid.

Fracking

Is hydraulic fracturing (‘fracking’) permitted in your jurisdiction?

There is no provision banning hydraulic fracturing in Venezuela.

Transport and storage

Legal framework

What rules and procedures govern the transportation and storage of oil and gas resources in your jurisdiction?

Transportation and storage of oil and gas resources are regulated by:

  • the Organic Hydrocarbons Law;
  • the Gaseous Organic Hydrocarbons Law; and
  • the law’s regulations.

Transportation

How is cross-border transportation of oil and gas resources regulated?

There is no specific provision in Venezuelan legislation regarding cross-border transportation of oil and gas.

Are there specific provisions governing marine and ground transportation of oil and gas resources?

Yes, there are regulations relating to the transportation of oil and gas resources.

Most of these regulations apply to ground transportation. Administrative authorisation is required for this purpose, as well as permits regarding compliance with environmental and health and safety requirements.

Construction and infrastructure

How are the construction and operation of pipelines, storage facilities and related infrastructure regulated?

According to the applicable legislation, all the works and infrastructure required for the performance of oil and gas activities are declared of public utility and social interest.

Moreover, the legislation for both oil and gas provides that the land and permanent works – including installations, accessories and integral equipment, and any other goods acquired for the purposes of the activities, whatever their nature or title of acquisition – must be kept in good condition to be handed over to the republic, free of encumbrances and without compensation, when the term for the performance of the activities is extinguished for any reason, in a way that guarantees the continuity of the activities or cessation with the least economic and environmental damage.

However, as a matter of policy the government has reserved ownership of all oil and gas transportation infrastructure.

What rules govern third-party access to pipelines and related infrastructure?

There are no specific rules regarding third-party access to pipelines and related infrastructure, pertaining to the oil sector.

Under the Gas Law, companies involved in the storage, transportation and distribution of hydrocarbon gases are required to offer available capacity in their facilities to other companies involved in the storage, transportation and distribution businesses. The regulation is more liberal, granting open access to all users.

Trading and distribution

Regulation

How are oil and gas resources traded in your jurisdiction and what (if any) regulations and procedures apply to oil and gas sales, distribution and marketing activities, both nationally and internationally?

According to the Organic Hydrocarbons Law, a state-owned company should commercialise natural hydrocarbons; thus, mixed companies without an upgrader must sell their products to a state-owned company, according to the terms and conditions of the hydrocarbon purchase agreement executed for this purpose.

Mixed companies with an upgrader can sell their upgraded crude oil directly in the international market, considering that this product cannot be characterised as a natural hydrocarbon.

For the sale of non-associated natural gas, it will depend on whether the specific licence authorises the licensee to export part of its production or if it must all be sold to a state-owned company to supply the internal market.

Is oil and gas pricing regulated in your jurisdiction?

Prices of non-associated gas for the internal market and other by-products are regulated by the Ministry of the People’s Power for Petroleum.

Prices of oil are not regulated by the applicable legislation.

Occupational health and safety and labour issues

Health and safety

What health and safety regulations and procedures apply to oil and gas operations (upstream, midstream and downstream)?

All issues relating to safety and health are regulated by the Organic Law of Prevention, Conditions and Working Environment.

Labour law

Are there any labour law provisions with specific relevance to the oil and gas industry (eg, with regard to use of native and foreign personnel)?

Labour relations in the oil and gas industry are regulated by the Petróleos de Venezuela SA’s (PDVSA) Collective Bargaining Agreement and the Organic Law of Labour and Workers.  

The agreement classifies employees into two main categories:

  • contractual; and
  • non-contractual.

Only contractual employees are entitled to the application of all benefits and conditions set forth in the agreement. Contractual employees are those in low and medium-level positions. Non-contractual employees are expressly excluded from the agreement. However, benefits for non-contractual employees should be no less favourable than those established in the agreement. The following positions are considered non-contractual:

  • directors;
  • managers;
  • administrators;
  • industrial relations chiefs;
  • personnel chiefs;
  • ship or aircraft captains;
  • employees who represent their employer before third parties and other employees;
  • employees who participate in their employer’s decision making; and
  • employees who represent their employer in the discussion of collective bargaining agreements.

In addition, the Organic Hydrocarbons Law establishes that employees entitled to the application of the agreement are protected by labour stability.

Regarding hiring foreign personnel, according to the agreement and the Organic Law of Labour and Workers, at least 90% of the payroll in companies with 10 or more employees should be held by Venezuelan nationals. Certain positions (eg, industrial relations, personnel managers, human resources, ship or aircraft captains and foremen) require the engagement of a Venezuelan national, subject to certain exceptions. Non-Venezuelan national employees must:

  • have Venezuelan descendants;
  • be married to a Venezuelan national;
  • have set up domicile in Venezuela; or
  • have resided in Venezuela for five or more years.

What is the state of collective bargaining/organised labour in the oil and gas industry?

The PDVSA Collective Bargaining Agreement was in force for the period from 2015 to 2017. It will remain in force until a new collective bargaining agreement is finalised.

Environmental protection

Authorisation

What preliminary environmental authorisations are required before commencing oil and gas-related activities?

Before commencing oil and gas activities, the following preliminary authorisations are required:

  • a permit to occupy the land;
  • a register of activities affecting the environment;
  • a permit to drill water wells;
  • authorisation to use water resources;
  • authorisation to discharge into a body of water;
  • authorisation to affect natural resources; and
  • authorisation to deforest and move soil.

Requirements

What environmental protection requirements apply to the operation of oil and gas facilities?

Most of the environmental protection requirements regarding the operation of oil and gas facilities are regulated by the Environment Organic Law.

The main protection for the operation of oil and gas facilities includes:

  • co-responsibility;
  • prevention;
  • precaution;
  • liability for environmental damages; and
  • evaluation of environmental impact. 

Breach

Any conduct or activity that contravenes the Environmental Organic Law may be construed as a breach of environmental obligations.

Further, the Penal Environmental Law is the instrument that regulates all conduct that can be construed as environmental crime.

What are the consequences of failure to observe the relevant environmental regulations and to what extent can operators be held liable for environmental damage?

Breach of the environmental regulations applicable to the oil and gas industry might generate civil, criminal and administrative liability for the breaching party.

Taxes and royalties

Taxes

What taxes (direct and indirect) and/or royalties apply to oil and gas activities in your jurisdiction (upstream, midstream and downstream)?

Gas:

  • royalty – 20%; and
  • income tax – 34%.

Oil:

  • royalty – 30% (may be reduced to 20% by the Ministry of the People’s Power for Petroleum);
  • income tax – 50%;
  • surface tax – 100 tax units per square kilometre;
  • own consumption tax – 10% of the value of each cubic metre of produced and consumed hydrocarbon by-products;
  • general consumption – between 30% and 50% of each litre sold in the international market of hydrocarbon by-products;
  • extraction tax – one-third of all hydrocarbons produced, calculated according to the same procedure as royalties;
  • export registry tax – levied on all exported hydrocarbons and calculated at 0.1% of the value of the exported hydrocarbons; and
  • windfall – levies on extraordinary or exorbitant prices of oil which give the government a percentage of the windfall produced by high prices.

The following are found in the National Assembly Accord for the Incorporation of Mixed Companies:

  • special advantages for the government;
  • shadow tax; and
  • an investment fund in indigenous development projects.

Imports and exports

What taxes and duties apply to oil and gas imports and exports?

Please see above.

Decommissioning

Regulation

How is the decommissioning of oil and gas facilities regulated?

The decommissioning of oil facilities is not regulated by the Organic Hydrocarbons Law; mixed companies develop their own decommissioning programmes approved by the board of directors, which require the favourable vote of state-appointed directors.

This issue is regulated differently for the non-associated natural gas industry. In the various bidding rounds for gas projects, different formula have been used for setting a decommissioning account. However, it seems to be largely accepted that licensees must set up a fund for this purpose.

Dispute resolution

Disputes

How are oil and gas disputes typically resolved in your jurisdiction?

All disputes relating to the oil and gas industry must be resolved according to the laws of Venezuela and before Venezuelan courts. The applicable legislation for oil and gas activities provides arbitration as a non-binding dispute resolution mechanism; thus, parties in such disputes must turn to the ordinary jurisdiction.

Venezuela has executed more than 30 bilateral investment treaties, which may be used to structure foreign investments in oil and gas to have recourse to international arbitration.

Anti-corruption measures

Dishonest practices

What regulations and procedures are in place to combat bribery, fraud, collusion and other dishonest practices in the oil and gas sector in your jurisdiction?

The Law Against Corruption is the main regulation regarding bribery, fraud, collusion and other dishonest practices. Nevertheless, certain provisions in the Criminal Code may be applicable to some of the practices mentioned.