The New Venezuelan Legal Regime for
Natural Gas: A Hopeful New Beginning?
UISDEAN R. VASS†† & ADRIANA LEZCANO‡‡
SUMMARY
I.
INTRODUCTION .......................................................................................................... 100
II.
THE VENEZUELAN NATURAL GAS BUSINESS ............................................................ 102
A. Description of the Resource .............................................................................. 102
B. Some Historical and Business Background....................................................... 103
III.
THE VENEZUELAN CONSTITUTION AND THE NATURAL GAS BUSINESS ...................... 105
A. Ownership of Hydrocarbons in Place. .............................................................. 105
B. Petroleum Activity ............................................................................................. 106
C. The Future of PDVSA and Its Affiliates ............................................................ 106
D. The Taxing Powers of the Municipalities .......................................................... 107
E. Gas Distribution——Potential Conflict ................................................................ 110
IV.
DECREE 310: A LEGAL BASE FOR A NEW REGIME .................................................... 111
A. The Genesis and Status of Decree 310 .............................................................. 111
B. The Scope of Decree 310................................................................................... 112
C. The Regulatory Authorities ............................................................................... 114
1. The Ministry of Energy and Mines............................................................. 114
2. The Municipalities...................................................................................... 114
3. The National Gas Agency .......................................................................... 115
D. Pricing and Tariffs ............................................................................................ 117
E. Prohibition on Vertical Integration................................................................... 118
F. Open Access ...................................................................................................... 120
G. Public Utility and Public Interest...................................................................... 120
H. Unitization......................................................................................................... 121
I. Licenses and Permits......................................................................................... 121
1. Licenses...................................................................................................... 122
2. Permits ....................................................................................................... 123
J. Arbitration......................................................................................................... 123
K. Servitude Rights, Temporary Occupation of Real Property, and
Expropriation Rights ......................................................................................... 125
L. Natural Gas Liquids .......................................................................................... 126
†† Uisdean R. Vass is a partner in Macleod Dixon, an international law firm headquartered in Calgary and
with offices in Caracas, Moscow, Almaty and Toronto. Vass is based in the Caracas office, Despacho de
Abogados miembros de Macleod Dixon, S.C. He holds an LL.B. (Honors) from the University of Edinburgh
Faculty of Law in Scotland and an LL.M. (with specialization in oil and gas law) from Louisiana State University
Law School. Vass is licensed to practice law in Scotland and Louisiana and holds a special permit to practice
international law in Venezuela.
‡‡ Adriana Lezcano Huncal is a senior associate with Despacho de Abogados miembros de Macleod Dixon
S.C in Caracas. She holds a law degree from Universidad Católica Andrés Bello (Caracas). She is admitted to
practice in Venezuela and is a member of the Caracas Bar Association.
99
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Industrialization ................................................................................................126
National Preferences .........................................................................................127
Royalty...............................................................................................................127
State Companies ................................................................................................128
Effect of Decree 310 on Prior Laws ..................................................................128
V.
DECREE 307: ENCOURAGING CHANGES IN INCOME TAX ...........................................129
A. Reduction in Income Tax ...................................................................................129
B. Tax Credits ........................................................................................................130
C. The Power to Exonerate ....................................................................................131
VI.
DECREE 319: SKETCH OF THE NEW ELECTRICITY REGIME ........................................131
A. Principal Provisions of Decree 319 ..................................................................131
1. Scope of Decree 319...................................................................................131
2. Regulatory Authorities................................................................................132
3. Management of the National Grid ..............................................................132
4. The Spot Market.........................................................................................133
5. Generation ..................................................................................................133
6. Transmission...............................................................................................133
7. Distribution.................................................................................................134
8. The Concession Regime .............................................................................134
9. Commercialization......................................................................................135
10. The Users....................................................................................................135
11. Municipalities .............................................................................................135
12. Prohibition Against Vertical Integration.....................................................136
13. Prices and Tariffs........................................................................................136
14. Sanctions ....................................................................................................136
B. The Gas-to-Power Convergence........................................................................137
VII. CONCLUSION .............................................................................................................138
VIII. APPENDIX: RECENT DEVELOPMENT ..........................................................................139
I.
INTRODUCTION
Since he was elected President of Venezuela in November 1998, Hugo Chávez Frías
has transformed the political map of Venezuela, South America’’s foremost oil producer. In
a single year, Chávez triumphed over his political opponents, routing Venezuela’’s now
discredited traditional political parties. Most significantly, Chávez won approval from the
people in a referendum held on December 15, 1999 for the much heralded constitution of
the Fifth Venezuelan Republic. For Venezuela, 1999 was the year of politics par
excellence.
By contrast, in 1999 the Venezuelan economy stagnated, despite rising oil prices.
Unemployment and under-employment soared, and the economy contracted. Levels of new
direct foreign investment collapsed by up to 75% of 1998 totals. To top it all, the country
suffered one of Latin America’’s worst natural disasters on December 15 and 16 when
mudslides caused by torrential rains killed thousands of people, destroyed tens of thousands
of homes, and caused billions of dollars worth of damage. The oil industry faced a difficult
year, which saw the resignation of Luis Giusti, the market-oriented former president of
Petróleos de Venezuela, S.A. (PDVSA) before Chávez took office; the appointment of
Roberto Mandini, the ex-president of Corpoven, S.A. (a former PDVSA affiliate); and
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Mandini’’s subsequent resignation on August 28. Mandini´s replacement is Héctor
Ciavaldini, a staunch Chávez supporter. The new Minister of Energy and Mines, Alí
Rodríguez Araque, though an opponent of the Oil Opening (Apertura) policies of the
Caldera Administration (1994––1999), is well respected in the oil industry.
The energy policy of the Chávez Administration took shape during the past year or so.
The new Venezuelan government believes in taking a leading role in the world oil market
for the Organization of Petroleum Exporting Countries (OPEC). Minister Rodríguez was a
prime mover in agreeing and implementing deep new oil production cuts, which he claims,
perhaps justifiably, have stabilized world oil prices at the current high levels. This policy,
as implemented in Venezuela, has led to production cuts of more than six hundred thousand
barrels of oil per day, and a distinct lack of enthusiasm for new oil exploration. However,
rises in the price of oil have transformed Venezuela’’s budgetary situation.
But in sectors of the energy industry which do not relate to exploration and production
of oil, the policy of the government is much different. The government seeks to attract new
investment in oil refining in Venezuela, to encourage private investment in Orimulsión, and
to treble Venezuelan petrochemical production by the year 2008. The electricity industry is
to be opened up to private investment, and some of the existing state electricity companies
are to be privatized. Most importantly, the Chávez Administration has from the outset
announced its intention to expand and transform Venezuela’’s Cinderella natural gas
business by opening it up to foreign and domestic private investment.
The constitutional and legislative provisions establishing the gas opening are in place.
But legal analysis of the Venezuelan gas regime is challenging at this time: A brand new
Constitution has never been interpreted by Venezuelan courts; a new gas law has similarly
never been interpreted; and multiple supporting resolutions bearing on specific activities
such as transportation, the upstream regime, and so on, have not yet appeared. The first
mid-stream project, the Anaco-Puerto La Cruz gas pipeline, was announced and opened for
expressions of interest in February 2000. Accordingly, the Chávez Administration has not
yet used its powerful new tools to offer multiple concrete opportunities for investment in
natural gas to private investors. These opportunities should begin to appear during 2000.
This article will first give a brief summary of the principal economic and historical
aspects of the Venezuelan gas business. Second, there will be a review of the articles of the
new Venezuelan Constitution as they affect the gas business. Next, there will be a detailed
analysis of Decree 310 of September 12, 1999.1 As we shall discuss, Decree 310 creates a
regime of licenses for the exploration and production of non-associated gas reservoirs, and a
regime of permits for a host of other midstream and downstream activities. There will then
be a review of important new legislation in the area of tax and electricity, and both will have
a very significant stimulating effect on the gas opening.
With the advent of the new Constitution and Decree 310, there are now two distinct
Venezuelan hydrocarbon regimes. The petroleum regime (liquid hydrocarbons) will remain
reserved to the State and will still allow major opportunities for private investment. PDVSA
will dominate the petroleum regime. However, a new and separate gas regime is now nonreserved and is designed to attract private investors as the dominant players.
As a legal and economic precedent, the enactment of Venezuela’’s new open gas
regime arguably represents the most significant philosophic change in Venezuelan energy
1. See Decreto con rango y fuerza de la ley orgánica de hidrocarburos gaseosos [Decree with Status and
Force of Organic Law on Gaseous Hydrocarbons], Gaceta Oficial No. 36,793, 23 de septiembre de 1999
[hereinafter Decree 310].
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policy in favor of the free market in forty years.2 Furthermore, the creation of two very
distinct but intimately related regulatory systems——one for liquid hydrocarbons and the other
for gaseous hydrocarbons——constitutes an interesting legal experiment, one not often seen in
the world of oil and gas.3 If the gas opening is successful, this may have profound
consequences for the future development of general Venezuelan economic policy.
II.
A.
THE VENEZUELAN NATURAL GAS BUSINESS
Description of the Resource
Venezuela’’s proven reserves of natural gas stand at an official 146 trillion cubic feet
(Tcf), the sixth largest in the world.4 It is estimated that a further 36 Tcf and 47 Tcf
represent respectively probable and possible reserves. The huge majority of Venezuelan gas
reserves are associated with oil, and 91% of overall reserves are reckoned to be associated.
On the other hand, these figures likely understate Venezuela’’s gas potential, as until now, oil
companies did not explore for natural gas. For instance, PDVSA and the Ministry of
Energy and Mines (MEM) postulate that Venezuela’’s further undiscovered gas reserves
amount to between 46 to 80 Tcf, with most of this total located offshore.5
Venezuela has two separate gas pipeline infrastructure systems——one in the West and
the other in the East. Joining the systems, which is being planned, would represent a major
infrastructure project. Venezuela boasts about 5,000 kilometers of gas pipelines, with a
daily capacity of around 2.6 billion cubic feet (Bcf). Considerable demand for gas exists in
the West. Major customers for gas include the Complejo de Refinación Paraguaná (which
includes the Amuay and Cardón refineries), the El Tablazo petrochemical complex, and
major electric utilities. On the other hand, there exists virtually no commercial production
of non-associated (gas well) gas in Venezuela today. Given the heavy use of associated gas
in oil operations, actual disposable gas for sale is less plentiful than the huge reserve figures
suggest. Of Venezuela’’s nearly 6 Bcf of daily gas production, over 70% is used for gas
injection, gas lift, as operations fuel, or for other operations related purposes. About 30%
goes to the domestic market where the main users are power generators (32%);
petrochemical plants (21%); and steel/aluminum plants (21%). Residential demand stands
at a tiny five percent.6 Natural gas accounts for approximately 20% of Venezuelan electric
generation, while hydroelectric power supplies over 70%.
One of the many ironies of Venezuela’’s oil and gas industry is that demand for gas in
some regions is now outstripping supply in the country with the world’’s sixth largest gas
reserve, almost all of it onshore. From recent projections of MEM/PDVSA, it appears that
2. See CONSTITUCIÓN DE LA REPÚBLICA DE VENEZUELA, Gaceta Oficial No. 662 Extraordinario, 23 de enero
de 1961 (stating that all new hydrocarbon concessions must be approved by Congress). Not since before the
Constitution of 1961 have private companies been entitled to acquire contractual rights with the government
which would enable them to explore for and produce hydrocarbons——of any variety, whether gaseous or liquid——
without Congressional approval.
3. See Decree 310, supra note 1. While almost all oil and gas systems to some extent have special rules for
gas (e.g., in the areas of gas pricing, transportation, distribution, and so on), few indeed are the systems where oil
is reserved to the State and gas is open to the market and where oil and gas are subject to radically different tax
systems. Additionally, different upstream regimes for oil and gas are rare.
4. See Uisdean R. Vass & Ruben Eduardo Luján, Venezuela Hatching Big Plans for Jump-Starting Natural
Gas Sector, OIL & GAS J., Aug. 9, 1999, at 48. The proven gas reserves of the United States are only 18 Tcf larger,
for a total of 164 Tcf.
5. See Ministerio de Energía y Minas (MEM) & PDVSA, Venezuelan Gas Plan (Nov. 1999) (unpublished
Powerpoint presentation, on file with The Texas International Law Journal).
6. See Vass & Luján, supra note 4, at 51 (referring to the table reflecting the breakdown of Venezuela’’s gas
consumption).
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total gas production in Venezuela by 2009 should run to between 12.5 to 15 Bcf per day.
While some of this huge increase will come as associated gas via increased oil production,
the higher production figures will only come through a major expansion of non-associated
gas production.
B.
Some Historical and Business Background
Prior to nationalization on January 1, 1976, the Venezuelan oil industry was managed
on a concessions basis, under which private companies explored for and produced
hydrocarbons, paying royalties and taxes to the national government. After nationalization
PDVSA acquired all of the rights of the former concessionaires. Under Articles 1 and 2 of
the law entitled Ley orgánica que reserva al estado la industria y comercio de los
hidrocarburos (Organic Law Reserving Hydrocarbon Industry and Commerce to the State)
(LOREICH), which many commentators refer to as the ““Nationalization Law,””7 PDVSA
was granted monopoly rights over the exploration, production, transportation, storage,
refining, exportation and retailing of all hydrocarbons, including gas. PDVSA has been
formed and run as a commercial enterprise, even though it has a single shareholder, the
Republic of Venezuela.
In the 1990s it became plain that PDVSA did not have the capacity, on its own, to take
advantage of its massive business possibilities. This thus began the process of the Apertura,
which has led PDVSA to seek international (and to a lesser extent, national) partners to
develop offshore dry gas as liquid natural gas (LNG) (Cristóbal Colón); explore for and
produce light and medium crude (the Exploratory Round); to produce, transport, and
upgrade heavy crude from the Orinoco Oil Belt (Petrozuata, Sincor, Cerro Negro and
Hamaca Projects); to produce, transport, and market Orimulsión (Conoco-Statoil-Project);
to reactivate non-producing or under-producing oilfields (the First, Second, and Third
Reactivation Rounds, and the Boscán Project); to carry out a variety of major outsourcing
projects such as PIGAP II (gas injection), the Maracaibo Water Injection Project, the Jose
Terminal (oil storage and shiploading), and ACCRO III & IV (liquids extraction); and the
list goes on. In addition, PDVSA and the new private players have generated a vast market
for all kinds of oil-related equipment and services. The Apertura unquestionably represents
the major policy initiative of the government of Rafael Caldera (1994––1999), although the
process itself began earlier——arguably in 1989.8
7. See Ley orgánica que reserva al estado la industria y comercio de los hidrocarburos (Law Reserving
Hydrocarbon Industry and Commerce to the State), Gaceta Oficial No. 1,769 Extraordinario, 29 de agosto de 1975
[hereinafter LOREICH].
8. See id., art. 5. ““The activities related directly or indirectly with the transport and distribution of
hydrocarbon for the collective consumption, constitutes a public service””. These vehicles are the Convenios
Operativos (Operating Agreements) and Convenios de Asociación (Association Agreements).
The basis for Operating Agreements is laid out in the first paragraph of LOREICH, Article 5, in the following
terms: ““The State may enter into such operating agreements as are necessary for best performing its [monopoly or
reserved] functions without said [operating agreements] affecting the essence of the [monopoly or reserved]
activities.”” It is understood that under these Operating Agreements any type of private company may assist the
State or the state companies in performing the reserved hydrocarbons activities listed under LOREICH, Articles 1
and 2 (exploration, production, transportation, storage, refining, exporting, and so on). However, private company
activity under the Operating Agreements may not affect the essence of the monopoly or reserved activity being
carried out by PDVSA and its affiliates. Private companies do not take title to hydrocarbons production under
Operating Agreements. Private activity under Operating Agreements is considered to be ““normal”” business
activity.
The second arrangement is the Association Agreement defined under Article 5, Único (Sole Paragraph). The
Sole Paragraph is actually the second paragraph of Article 5. The principal characteristic of the Association
Agreement is that, under these types of associations, private companies are allowed to do what would otherwise
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The fundamental assumption underlying the Apertura was that Venezuela, although
continuing to be a member of OPEC, could expand its daily production with scant regard for
OPEC constraints. Luis Giusti and his management team believed that it was better to sell
more oil——even if at cheaper prices——and that the real key to the new world oil market was
to gain market share. PDVSA has aggressively pursued the latter goal over the past ten to
fifteen years, acquiring major refining and marketing operations in the United States
(Citgo), Europe, and Asia.
The Chávez Administration has taken a very different view, however, and now the
emphasis is to maintain oil production at favorable prices within OPEC quotas——albeit
without any change in the worldwide marketing strategy——and promote new developments
in oil industry activities unrelated to the exploration and production of light and medium
crude oil. It should be added that the Administration has generally respected contracts
entered into by previous governments pursuant to Apertura policies.9
As this century begins, the legacy of nationalization is that the Venezuelan gas
business is today a virtually seamless monopoly. Virtually all of Venezuela’’s nearly 6 Bcf
of daily gas production is produced by PDVSA’’s operating affiliate which engages in
exploration and production of petroleum, PDVSA Petróleo y Gas, S.A.10 Almost all of this
gas production is associated with petroleum. And all transportation of gas by gas pipeline in
Venezuela is carried out by another PDVSA affiliate, PDVSA Gas, S.A. The latter affiliate
also carries out most——but not all——gas distribution.
Apart from the fact that most proven Venezuelan gas is associated——and hence is
produced as a result of and is needed for oil operations——a number of further factors account
for the comparatively small——but far from negligible——size of the Venezuelan domestic
violate the monopoly provisions of LOREICH, Articles 1 and 2, and which, therefore, do affect the essence of the
monopoly provisions. Under Association Agreements, private companies can undertake full ““hydrocarbon
activities,”” including taking title to hydrocarbons at the well head and taking title to fixed assets. Despite
important exceptions covering integrated projects involving offshore gas, heavy crude, and Orimulsión, private
companies under Association Agreements pay a special income tax levied at a 67.7% rate. See Gaceta Oficial No.
5,390 Extraordinario, 22 de octubre de 1999. For a further discussion, see infra section IV.A. PDVSA affiliates
engaged in the exploration and production of hydrocarbons and connected activities are also subject to this special
income tax. A legally constituted Association Agreement involves: (i) a ““venture”” of some type between the State
or a state entity and a private company; (ii) which must be in the public interest; (iii) which must be for a limited
period; (iv) which must provide for ““State control””; and (v) which must be approved by the National Executive
and then by the National Assembly.
The eight Exploratory Round Association Agreements, the four Heavy Crude Strategic Association
Agreements, the Orimulsión Strategic Association Agreement, and the Offshore Gas Strategic Association
Agreement were all approved under LOREICH, Article 5, Sole Paragraph. All Reactivation Operating
Agreements, the Boscán Project agreement and the major outsourcing agreements have been entered into as
Convenios Operativos. All traditional oil services contracts are also Convenios Operativos. Surprisingly, given
Venezuela's immense importance as an oil producer, very few legal articles have been written on its petroleum law
system. See generally Jay G. Martin, Venezuela as an Opportunity for Investment in the Petroleum Industry, 20
ENERGY JOURNAL 325 (1999); Elizabeth Eljuri, Corporate Structuring of Oil and Gas Projects in South America:
Views From the North and the South, in OIL & GAS DEV. IN LATIN AM. 10A (1999); Jose Urdaneta Pérez,
Venezuela: Giant Energy Play, in OIL & GAS DEV. IN LATIN AM. 2 (1999); UISDEAN R. VASS ET AL., A GUIDE TO
LATIN AMERICAN PETROLEUM LAW (1997); ANTONIO RAMÍREZ UZCÁTEGUI ET AL., TEMAS DE DERECHO
PETROLERO [TOPICS IN PETROLEUM LAW] (1998).
9. For a discussion of Venezuela’’s new energy policy, see Elizabeth Eljuri, Critical Developments in
Venezuela: Politics, Petroleum and Natural Gas (unpublished PowerPoint presentation given at Latin America
Upstream 1999, on file with The International Law Journal).
10. Considerable associated gas may be ““produced”” by private operators under the three reactivation rounds,
but this gas is ““produced”” for and is the property of PDVSA Petróleo y Gas, S.A. With a few exceptions, the
Apertura contracts allowing for exploration and production do little to encourage gas production. See Uisdean R.
Vass & Elizabeth Eljuri, The Legal Framework for Gas in Venezuela, in 1 OIL & GAS L. & TAX’’N R. 30, 32––34
(1999). One way to boost Venezuelan gas production may be to change the reactivation contracts to provide
incentives for contractors to produce gas.
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market for gas: (1) the legal regime for gas has in the past been chaotically unclear; (2)
prices for gas have been regulated for decades at rock-bottom rates; (3) gas sales were
formerly subject to a royalty of 16.66% and a 67.7% income tax levied against profits; (4)
Venezuela has developed significant hydroelectric power which competes with gas as an
alternative energy source; (5) until recently, the transportation and storage of gas was
considered a state monopoly activity and private equity capital was excluded——therefore
markets were not developed; and (6) Venezuelan industry in general has remained relatively
undeveloped and the petrochemical industry, a major potential customer for gas, has not
grown as vigorously as it might have.
Hopefully, this dismal record may begin to change.11
III.
THE VENEZUELAN CONSTITUTION AND THE NATURAL GAS BUSINESS
The Venezuelan Constitution of 1999 lays the basis for and is consistent with a
market-oriented and open natural gas business.12 As befits a non-strategic industry, the
Constitution says little that is specific to natural gas. However, certain articles are of critical
importance.
A.
Ownership of Hydrocarbons in Place.
Article 12 of the Venezuelan Constitution states that reservoirs ““of minerals and
hydrocarbons”” existing in the National Territory, in the Territorial Sea, in the Exclusive
Economic Zone, and in the Continental Shelf belong to the Republic; are under the regime
of public ownership; and hence give rise to inalienable and imprescriptible national rights.13
This is a perfectly standard article. Outside the onshore United States, it is practically
universal that governments own the rights to hydrocarbons in place in the reservoir, or at
least the right to produce such hydrocarbons. This kind of provision does not limit the
government’’s ability to allow State or private companies the right to explore for and
produce the hydrocarbons in place in return for a royalty and subject to all applicable
regulations.
The important thing to note about Article 12 is that it talks about reservoirs of
““hidrocarburos”” as being the property of the State.14 This word refers to all chemical
hydrocarbons from the lightest such hydrocarbon (methane (CH4)) to ultra-heavy bitumen.
In other words ““hidrocarburos”” clearly includes hydrocarbon gases, as well as liquid
hydrocarbons and bitumen. Article 12 thus lays the most basic foundation for Venezuela’’s
new and distinct regimes for natural gas and petroleum.
11. Our approach is to avoid an in-depth review of Venezuela’’s former regime for natural gas, which was
uncertain, irrational and often chaotic. See generally id.; Freddy Vásquez, Legal Framework for the Exercise of
the Industrialization, Transportation Storage, Distribution and Commercialization of the Gas, in OIL & GAS
DEV. IN LATIN AM. 15A (1999).
12. See CONSTITUCIÓN DE LA REPÚLICA BOLIVARIANA DE VENEZUELA, Gaceta Oficial No. 36,860, 30 de
diciembre de 1999 [hereinafter CONST].
13. LOREICH, supra note 7, art. 12.
14. Id.
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B.
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Petroleum Activity
Article 302 speaks to how the State must manage ““petroleum activity.”” The article is
translated as follows:
The State reserves, through appropriate Organic Laws and for reasons of national
interest, the petroleum activity and other industries, exploitations, services and
goods of public interest and strategic character. The State will promote the
national refining [or treating] of basic products derived from the exploitation of
non-renewable natural resources, with the objective of assimilating, creating or
innovating technologies, generating employment and economic growth, and
creating wealth and public well being.15
It is possible to critique the article based on the discretion it apparently gives to the
State to define what ““industries, exploitations, services and goods”” are of ““public interest
and strategic character,”” and which hence may be ““reserved”” to the State. This may be a
valid concern in general terms. However, from the standpoint of hydrocarbons, the article
gives rise to little uncertainty. ““Petroleum activity”” will be reserved. What is equally clear
is that the natural gas business as regulated by Decree 310 is not ““petroleum activity”” under
Article 302 of the Constitution. The word ““petroleum”” used in this context does not extend
to the hydrocarbon gases, but only to liquid hydrocarbons. The natural gas business is,
therefore, not subject to any mandatory state reservation and is not likely in the future to be
reserved under the theory that it is of ““strategic character.””
C.
The Future of PDVSA and Its Affiliates
Article 303 of the Venezuelan Constitution states:
For reasons of economic and political sovereignty and national strategy, the State
will remain the owner of all of the shares of Petróleos de Venezuela, S.A., or the
entities created to run the oil industry——[but this disposition] shall not apply to
the shares of the——[PDVSA] affiliates, strategic associations, firms or other
entities which have been constituted, or will be constituted as a consequence of
the development of the business of [PDVSA].16
The original form of this article in the initial Chávez constitutional project constituted
a rather statist attempt to provide that the shares of PDVSA and its affiliates involved in
““hydrocarbon activity”” could not be sold to the public.17 However, the view of many——
including Hector Ciavaldini, President of PDVSA——was that such a clause did not belong in
the new Constitution.18 But instead of dropping the provision entirely, the National
Constituent Assembly, which drafted the new Constitution, came to the surprising
15. CONST. art. 302.
16. CONST. art. 303.
17. Article 372 of the original proposed Constitution, which was the predecessor of current Article 303 in
the Chávez Constitutional Project of October 14, 1999, simply stated: ““The State will retain ownership of all of
the shares of Petróleos de Venezuela, S.A., or the entity created to manage the national oil industry because of
considerations of political and economic sovereignty and national strategy.”” ANTEPROYECTO DE CONSTITUCION
DE LA REPUBLICA DE VENEZUELA [Draft of the Constitution of the Republic of Venezuela] art. 372 (on file with
The Texas International Law Journal).
18. Luisa A. Maracara & Patricia V. Nicolás, Prohíben a PDVSA nuevos convenios [Prohibiting New
Agreements to PDVSA], ECONOMIA, 29 de noviembre de 1999.
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conclusion that the language should be modified to reflect that, while the shares of PDVSA
must remain the property of the Republic in perpetuity, this principle does not extend to the
shares of PDVSA affiliates and mixed companies, such as Petrozuata, S.A. (a
Conoco/PDVSA joint venture company formed to carry out the so-called Conoco/Maraven
heavy crude Strategic Association Agreement).
A plain reading of Article 303 would lead one to the conclusion that, while the State
may never sell the shares of PDVSA, which is a holding company ““created to run the oil
industry,””19 it can sell shares directly or indirectly held by PDVSA in PDVSA affiliates.
Given that the business of PDVSA is conducted through its affiliates, principally PDVSA
Petróleo y Gas, S.A., Article 303 represents a major legal departure in the direction of
liberalization. But notwithstanding the permissive principles of Article 303, Article 6 of
LOREICH continues to provide that PDVSA and its affiliates which carry out reserved
activities must be fully owned by the State.20 Hence, in addition to Article 303 of the
Constitution, there would have to be a change in LOREICH before the government could
attempt a real privatization of the oil industry.
However, it is interesting to note that in the wake of Decree 310 the natural gas
business——with the exception of the production of associated gas——is non-reserved. One
supposes, therefore, that in light of Article 303 of the new Constitution the Venezuelan
government is free to sell all or part of the shares in PDVSA Gas, S.A., a company solely
engaged in the transportation and distribution of gas, which are non-reserved activities.
D.
The Taxing Powers of the Municipalities
Venezuela has a federal structure with three levels of executive and legislative power.
First, there is the ““National Power,”” which is the federal government. Second, there are the
twenty-three States. The States cover almost all of Venezuela’’s land area. However, in
addition, there are a number of small Federal Territories——mainly offshore islands——and the
Federal District. Lastly, the States are divided into self-governing municipalities. The
Municipalities are like counties, and the whole of Venezuela’’s mainland area and of the
shore state of Nueva Esparta is broken up into Municipalities. Under the 1961 Constitution
the States had fewer powers than either the National Power or the Municipalities, and that
situation is not significantly different under the new Constitution. Critically, the States’’
powers to tax are very limited.21 On the other hand, the Municipalities, under both the
former and current Constitutions, have the general power to levy a tax on gross income
arising from commercial and industrial activities carried out in their Municipalities. There
is no specific constitutional or legislative provision which serves to ““cap”” rates of municipal
tax at a particular level.
The Municipalities’’ power to levy taxes on gross income is a major problem for
private companies involved in the hydrocarbon industry.22 Oil and gas companies, which
often engage in operations which occur in multiple Municipalities, face aggressive
municipal tax rates (which function like royalties). Typically, there exist two rates of
municipal tax: residente (resident) status and transeunte (transient) status. Companies that
are resident are generally subject to lower rates. Oil and gas contractors commonly pay
19. CONST. art. 303.
20. See LOREICH, supra note 7, art. 6
21. See CONST. art. 167. For purposes of this analysis the power of the States to tax is simply discounted.
22. See LOREICH, supra note 7, art. 7 (exempting PDVSA and all of its affiliates engaging in reserved
activities from paying state or municipal tax).
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residente rates of from one to five percent, and companies with transeunte status pay higher
rates, occasionally higher than seven percent.23 Municipalities are often reluctant to confirm
residente registration. Every Municipality needs to be dealt with as a separate jurisdiction.
Nor are there clear apportionment rules regarding income producing activities in more than
one Municipality. Any disputes between taxpayer and Municipality must be resolved in
local courts.
In light of all this, if oil and gas companies can avoid
being subject to municipal tax, this is a big positive factor. We believe that the new
Constitution achieves this positive result with respect to all licensees and most permittees
under Decree 310.
In a seminal decision of the Venezuelan Supreme Court handed down in 1999, the
Court held that the private investors who had won the eight areas bid for under the terms of
the 1996 Exploratory Round were not obligated to pay municipal tax. We shall refer to this
decision as the ““Exploratory Round Decision””.24 The Court reached its conclusion on the
basis that the Exploratory Round investors had been authorized by the Venezuelan Congress
to carry out full hydrocarbon activities (exploration, production, transportation, exportation,
and retailing) pursuant to LOREICH, Article 5, Sole Paragraph. And under the Venezuelan
Constitution of 1961, Article 136, it was stated:
It is within the competence of the National Power: . . . .
8. The organization, collection and control of taxes on income, on capital and
successions and donations, . . . on mines and hydrocarbons and the other taxes
and charges not granted to the States and the Municipalities by this Constitution
and the law . . . .
10.
The regime and administration of mines and hydrocarbons . . . .25
Since the hydrocarbon business, in particular the taxation of the hydrocarbon business,
was under ““the competence of the National Power,”” the Court in the Exploratory Round
Decision reasoned that the Municipalities had no power to levy taxes on such activities.
The new Constitution contains very similar provisions regarding the competence of the
National Power. In this respect, Article 156 states as follows:
It is within the competence of the National Power: . . . .
12. The creation, organization, collection, administration and control of taxes
on income, on successions, donations and other related things, on capital, on
production, on value added, on hydrocarbons and mines, on the import and
export of goods and services, of taxes which fall on the consumption of liquors,
alcohols . . . cigarettes and other tobacco products, and all other taxes and
charges not granted to the States and the Municipalities by this Constitution and
the law . . . .
16.
The regime and administration of mines and hydrocarbons . . . .26
23. Unfortunately companies involved in the oil and gas business through Operating Agreements under
LOREICH, Article 5 are engaged in ““normal”” economic activity and are subject to municipal taxation. See
Federico Araujo Medina, Operating Agreements as Vehicles for the Development of Reserved Activities, Effects
Thereon of the Industry and Business License Tax, in OIL & GAS DEV. IN LATIN AM. 14B (1999).
24. See Declaratoria sin lugar del recurso de nulidad de las cláusulas xxx del artículo 2 [Declaration Without
Nullification of Clause 30 From Article 2], La Corte Suprema de Justicia, 17 de agosto de 1999, Expediente No.
812-829, http://www.tsj.gov.ve/sentencias/tplen/cp17081999-xxx.html (last visited Jan. 10, 2001) [hereinafter
Exploratory Round Decision].
25. CONST. DE 1961, art. 136.
26. CONST. art. 156 (emphasis added).
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In fact, Article 156 of the new Constitution is slightly more favorable to oil and gas
companies on this issue than Article 136 of the former Constitution because Ordinal 12
states that ““the creation, organization, collection and administration of”” and not just ““the
organization, collection and control of”” taxes on hydrocarbons is subject to the National
Power. And under Article 156, Ordinal 12, as under Article 136, Ordinal 8, it appears that
the powers to tax granted to the National Power are those taxing powers ““not granted to the
States and the Municipalities by this Constitution . . . .””
It is likely that future courts will interpret Article 156, Ordinals 12 and 16, in
accordance with prior decisions of the Venezuelan Supreme Court interpreting Article 136
of the 1961 Constitution including the Exploratory Round Decision. Under the terms of
both the 1961 and 1999 Constitutions, the term ““hidrocarburos”” clearly covers natural gas,
as well as petroleum. A favorable interpretation of Article 156, Ordinals 12 and 16, will
exempt most of the activities covered by Decree 310 from municipal tax. As a matter of
policy, it seems preferable that the Municipalities should have no power to tax or regulate
Venezuela’’s oil and gas business.27
27. On the other hand, some commentators question whether a favorable interpretation of the new
Constitution following the reasoning of the Exploratory Round Decision will be forthcoming on the taxing powers
of the Municipalities, given the wording of Article 180 of the new Constitution, which states:
The taxing power of the Municipalities is distinct and autonomous from the regulatory powers which
this Constitution or the laws attribute to the National or State Power regarding specific matters or
activities.
Tax immunities against the taxing powers of the Municipalities, in favor of the other political powers
[the National and State Powers] only extend to those juridical persons created by such political
powers, but not to concessionaires or other contractors of the National Administration or of the States.
Under this view, paragraph one of Article 180 means that the ““taxing power”” of the Municipalities is not
affected (““distinct and autonomous””) by the specific regulatory powers explicitly granted by the Constitution or
the laws to the National and State Powers. These would include the ““regulatory”” powers granted to the National
Power by virtue of Article 156. The second paragraph of Article 180, according to this view, is complementary in
that it states that to the extent that the National or State Powers create juridical entities, only these entities will
enjoy immunity from municipal taxation, and this immunity will not extend to ““any concessionaires or contractors
of the National Administration or of the States.”” Thus, so goes the argument, the Municipalities, because they
have ““autonomous”” taxing powers, can tax companies involved in hydrocarbon activities, notwithstanding the
other provisions of the Constitution, including Article 156, Ordinals 12 and 16. And while the National Power or
its juridical entities could clearly carry out activities under Decree 310 on a municipal-tax exempt basis, licensees
and permittees of the ““National Administration”” are not exempt because they fall under the category of
““concessionaires or other contractors.””
We do not find this argument convincing. First of all, Article 180 refers to the ““taxing power of the
Municipalities.”” These taxing powers are elaborated under Article 179. Article 179 studiously avoids giving the
Municipalities the power to tax any distinct activity (including hydrocarbons) mentioned in Article 156 as being
under the competence of the National Power. However, Article 179 gives the Municipalities the following limited
but still ample power to raise ““taxes on economic activities of industry, commerce, services, or other activities of
similar nature, within the limitations established in this Constitution”” (emphasis added). ““The limitations
established in this Constitution,”” in our view, are principally those established in Article 156, Ordinal 12, which
as we have seen, gives the National Power the right to ““create, organize, collect, administer and control”” taxes on
hydrocarbons and many other distinct economic activities.
In addition, Article 183, Ordinal 1 of the new Constitution prohibits the Municipalities and the States from
levying taxes on the ““revenue-producing activities under the competence of the National Power.”” A similar
provision existed under Articles 18 and 34 of the 1961 Constitution. Article 183, Ordinal 1, in our view,
envisages an exclusion of municipal tax competence relative to the revenue producing activities subject to the
competence of the National Power under Article 156, including hydrocarbons. This understanding is confirmed
by the fact that Article 183 ends by saying that Municipalities can only tax the activities of agriculture, animal
raising, fishing, and forestry subject to a (forthcoming) national law which will stipulate if and how such a tax
shall be levied. Interestingly, Article 156, Ordinal 25 merely reserves to the competence of the National Power
““the national policy”” for these four industries. In our view, the referenced language in Article 183 provides for an
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Gas Distribution——Potential Conflict
One of the few cases where ““gas”” is explicitly mentioned in the Constitution is in
Article 156 which reads, in pertinent part, as follows:
It is within the competence of the National Power: . . . .
29. The general regime of public services to private houses and, in particular,
electricity, drinking water and gas.28
We believe that, in this instance, the reference to ““public service”” of domestic ““gas”” is
to the distribution of methane by gas distribution networks. This reference may have been
included because the scope of the ““regime and administration . . . of hydrocarbons”” under
Article 156, Ordinal 16 of the Constitution, may not in and of itself extend to distribution of
methane.29 The intent may have been to dispense with any possible regulatory power which
the Municipalities traditionally have had over methane distribution, and to prevent them
from attempting to tax distribution companies. If so, it would have been much better to
have specified that all distribution of methane——whether domestic or commercial——is
subject to the competence of the National Power, and not merely distribution ““to private
houses.””
However, a further problem arises from the wording of Article 178, which provides, in
pertinent part:
It is within the competence of the Municipalities the governing and
administration of their interests and the management of the matters assigned to
them by this Constitution and the national laws, as respects to local life, in
exception to the general rule that the Municipalities may not tax the revenue-producing industries, which are
under the competence of the National Power.
The second paragraph of Article 180 also alludes to the fact that juridical entities formed by the National or
State Powers are, like the National and State Powers, themselves immune from municipal tax. The second
paragraph then states that neither ““concessionaires nor other contractors [n]or the National Administration [n]or of
the States”” share this immunity. But in our view, Article 156 does not render companies involved in hydrocarbon
activities ““immune”” from municipal tax. Instead the best interpretation is that Article 156, Ordinal 12, serves to
exclude the municipal taxing power. Accordingly, the Municipalities do not have the power to tax such activities,
and there is hence no question of immunity.
However, in any event, licensees and permitees under Decree 310 are neither ““concessionaries [n]or other
contractors.”” Instead, ““concessionaires”” may refer to public concessionaires under the law entitled Decreto con
rango y fuerza de ley orgánica sobre concesiones de obras públicas y servicios públicos nacionales [Decree with
Status and Force of Organic Law on Concessions for National Public Works and Utilities], Gaceta Oficial No.
5,394 Extraordinario, 25 de octubre de 1999. Neither are the licensees nor permittees ““contractors,”” as they are
not ““contracted”” to do anything, but instead have independent rights to carry out the activities covered by Decree
310 without governmental compensation of any type.
Finally, in case there remains any possible doubt about the National Power’’s exclusive power to tax companies
involved in hydrocarbon activities, recourse may be had by the National Power to Article 156, Ordinal 13 of the
new Constitution, which states:
It is within the competence of the National Power: . . . .
13. The enactment of legislation to guarantee the coordination and harmonization of the different
constitutional taxing powers, to define principles, parameters and limitations, especially for the
determination of the types of taxes and rates chargeable by the States and Municipalities, and for the
creation of funds which will assure interjurisdictional solidarity.
It is probable that in light of Article 156, Ordinal 13, the National Power (through the National Assembly) may
enact legislation to clarify that Municipalities cannot tax hydrocarbon activities.
28. CONST. art. 156.
29. Id.
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particular the ordering and promotion of economic and social development, the
providing and performing of domestic services to private residences——the
improvement, in general, of the conditions of life of the community, in the
following areas:
6.
Distribution of drinking water, electricity and domestic gas . . . .30
Article 178, Ordinal 6 arguably gives the Municipalities competence over areas which
are declared by Article 156, Ordinal 29 to be within the competence of the National Power
(drinking water, electricity, and domestic gas). It may be that Article 178, Ordinal 6 can be
read to give the Municipalities only the power to promote or uphold the distribution of
““drinking water, electricity and domestic gas,”” but not to regulate these industries. This
argument may be plausible, albeit not totally convincing, given Article 178’’s vague
introductory language. On the other hand, the better approach would be to amend Article
156, Ordinal 29 so as to put ““the distribution of methane to all users”” within the ambit of the
National Power, and to amend Article 178 to take away any regulatory or fiscal authority of
the Municipalities over the distribution of methane.31
IV.
A.
DECREE 310: A LEGAL BASE FOR A NEW REGIME
The Genesis and Status of Decree 310
On April 26, 1999, the Ley orgánica que autoriza al presidente de la república para
dictar medidas extraordinarias en materia económica y financiera requeridas por el interés
público (Organic Law Authorizing the President of the Republic To Dictate Extraordinary
Measures in Economic and Financial Matters Required for the Public Interest) (Enabling
Law) came into effect.32 This omnibus law gave the President power to legislate without
Congressional approval with respect to a number of key economic and administrative
matters, including tax, banking, gas, electricity and mining.33
Specifically, the Enabling Law empowered the President to create a new legal
framework for the gas industry from exploration and production to industrialization. The
objectives of the new gas legislation envisaged by the Enabling Law may be summarized as
follows: (a) expand and intensify the gas business, including use of gas as a fuel (with a
special emphasis on distribution) and as a feedstock for industrialization (petrochemicals)
and even for export; (b) maintain the Republic as the owner of all natural gas reservoirs in
situ; (c) regulate all gas activities including exploration and production of non-associated
gas, as well as the transportation, storage, distribution, and national and international
commercialization of gas (whether deriving from associated or non-associated production)
by private investors——national or foreign——with or without state participation; (d) establish
that investors will have to give fair and equal consideration to Venezuelan products in
project procurement; (e) fix the economic participation of the State in the exploitation of the
resource (including royalties) and empower the National Executive to diminish or eliminate
the state take where this is clearly justified on technical or economic grounds as well as give
30. Id. art. 178.
31. Gaceta Oficial No. 36,860, 30 de diciembre de 1999.
32. Ley orgánica que autoriza al presidente de la república para dictar medidas extraordinarias en
materia económica y financiera requeridas por el interés público [Organic Law Authorizing the President of the
Republic to Dictate Extraordinary Measures in Economic and Financial Matters Required for the Public Interest],
Gaceta Oficial No. 36,687, 26 de abril de 1999 [hereinafter Enabling Law].
33. See id.
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the National Executive the power to adapt or alter other taxes applicable to gas; (f) establish
conditions which will encourage the industrialization of gas in Venezuela through private
capital, whether national or foreign; (g) preserve the regulatory power of the National
Executive in the natural gas sector; (h) create an autonomous Natural Gas Regulatory
Agency which will be empowered to develop the gas sector, establish standards, and
regulate the transmission and distribution businesses, which are natural monopolies; and (i)
guarantee a gas delivery service to the public, at acceptable prices.34
Using his authority under the Enabling Law, President Chávez signed Decree 310 on
September 12, 1999. Arguably, Decree 310 is in substantial conformity with the
requirements of the Enabling Law. However, as we shall see infra at Section III.O, Decree
310 provides for a fixed royalty on the production of all hydrocarbon gases, and contains no
mechanism which would allow for a reduction of the State take where this is justified on
““technical or economic”” grounds.35 It is interesting to note that it was the old oppositiondominated Congress which gave Chávez his wide-ranging authority under the Enabling
Law. However, what the Chávez Administration really wanted but failed to receive was the
authority to rewrite the nation’’s entire hydrocarbon law, including oil as well as gas.36 In
reviewing the provisions of Decree 310, it is important to bear in mind that the
Administration hopes to have the new National Assembly enact a new Organic
Hydrocarbons Law, which, while preserving the provisions of Decree 310, will constitute a
new ““umbrella”” code for the entire Venezuelan oil and gas business. The MEM had
prepared a first draft of this new law by summer 1999.
It is very important that Decree 310 is ““organic.”” Under Venezuelan law, an ““organic””
law is a law which takes precedence in its subject matter over all prior laws (including
previous organic laws) and over all future conflicting non-organic laws or subsidiary
legislation such as decrees, resolutions, and so on.37 But organic laws are, of course,
inferior to the provisions of the Venezuelan Constitution. An organic law may be changed
or revoked by a subsequent organic law on the same subject.
B.
The Scope of Decree 310
Article 1 of Decree 310 states that all reservoirs of ““hydrocarbon gases”” existing in the
Venezuelan National Territory or in the subsoil of the Territorial Sea, Maritime Contiguous
Zone, and Continental Shelf, belong to the Republic of Venezuela and are inalienable and
imprescriptible.38 This is fully consistent with Article 12 of the Venezuelan Constitution.39
Article 2 of Decree 310, which is the principal provision establishing the scope of the
law, translates as follows:
The exploration activities in the areas indicated in Article 1 above [the National
Territory, the Territorial Sea, etc.], seeking non-associated gaseous hydrocarbon
reservoirs, and the exploitation of said reservoirs, as well as the gathering,
storage and utilization of both the non-associated natural gas derived from such
exploitation and the gas that is produced associated with oil or other fossils; the
34. See id. art. 1(4).
35. Decree 310, supra note 1, art. 34.
36. See id. The Exposición de motivos (Legislative History of Decree 310) appears prior to the text of
Decree 310.
37. See JOSÉ PEÑA SOLÍS, LINEAMIENTOS DE DERECHO ADMINISTRATIVO [PARAMETERS OF ADMINISTRATIVE
LAW] 37––38 (1995).
38. See Decree 310, supra note 1, art. 1.
39. See supra Section II.A.
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processing, industrialization, transportation, distribution, and domestic and
foreign trade of all said [hydrocarbon] gases are governed by this Law and may
be performed by the State directly or through entities owned by the State, or
through national or foreign entities, with or without the State’’s participation, in
the terms herein established.40
All matters related to the liquid hydrocarbons and non––hydrocarbon components
contained in gaseous hydrocarbon production, as well as the gas derived from the process of
oil refining, are also within the scope of this Law.
A number of important principles emerge from Articles 1 and 2 of Decree 310. First,
Decree 310 covers the exploration for and production of reservoirs of non-associated
gaseous hydrocarbons.41 ““Gaseous hydrocarbons”” are not defined in Decree 310, but
clearly included are all hydrocarbons which are ordinarily produced in gaseous form——
which include, at a minimum, methane, ethane, propane, and butane.42 And a ““nonassociated gaseous hydrocarbon reservoir”” is a reservoir which is characterized by such
non-associated gaseous production, but which might include a certain amount of ““liquid
hydrocarbon[s] . . . components contained in [the] gaseous hydrocarbon production.””43
Clearly, the precise manner in which ““non-associated gaseous hydrocarbon reservoirs””
will be defined will prove critical because reservoirs which fail the test will be subject to
regulation either under LOREICH or pursuant to a future new Organic Hydrocarbons Law,
reserving the exploration and production of reservoirs characterized by liquid hydrocarbon
production to the State.
Second, Decree 310 covers ““the gathering, storage and utilization [of all natural gas,
whether associated with petroleum or not].””44 These words reflect how narrow the gas
activity not covered by Decree 310 is. This excluded activity, now subject to LOREICH, is
limited to the production of associated gas to the wellhead.45 The ““gathering, storage and
utilization”” of that gas——even in the area of the field——is subject to Decree 310. Thus gas
gathering lines, gas compression, gas injection, and other activities in the field seem all
subject to Decree 310, even if the gas is associated.46
Third, Article 2 makes clear that Decree 310 covers the processing, industrialization,
transportation, distribution, and domestic and foreign commerce of all of the hydrocarbon
gases, no matter whether these derive from associated or non-associated production. On its
face, Article 2 covers all transportation of hydrocarbon gases, and not merely transportation
by pipeline. Thus Decree 310 creates a broad new non-reserved midstream and downstream
regime for the hydrocarbon gases. In this context, the ultimate legal definition of
““hydrocarbon gases”” will be critical as only these substances will fall within the midstream
and downstream regime of Decree 310. Article 2 also states that Decree 310 covers any
non-hydrocarbon gas production from non-associated reservoirs (for example valuable gases
such as helium, dangerous waste products like Hydrocarbon Sulphide which need treatment,
40. Id. art. 2.
41. See id.
42. See ANN CHAMBERS, NATURAL GAS & ELECTRIC POWER IN NON-TECHNICAL LANGUAGE 23 (1999).
Ann Chambers classifies methane, ethane, propane, butane, pentane, hexane and heptane as being ““hydrocarbon
gases.””
43. Decree 310, supra note 1, art. 2.
44. Id.
45. We characterize the reserved activity remaining under LOREICH as being merely the production of
associated gas, as no one intentionally explores for associated gas. Associated gas is a by-product of successful
exploration for petroleum.
46. See LOREICH, supra note 7, art. 5.
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and so on), and any methane or other hydrocarbon gases which may be produced through
chemical processes of oil refining. All of the activities covered in Article 2 are collectively
referred to herein as ““the gas activities.””
Article 3 of Decree 310 goes on to state important national goals relative to the new
non-reserved gas business. According to Article 3, activities under Decree 310 must be
principally directed towards national development, including the ““intensive and efficient””
use of the hydrocarbon gases, both as fuel and feedstock, with petrochemicals or fuels, such
as LNG, being exported ideally after value added processes have been carried out in
Venezuela.47 The gas activities under Decree 310 must be carried out in accordance with
the rational use of Venezuela’’s gas resources and in harmony with the environment. MEM
will award licenses and permits based on these considerations.
C.
The Regulatory Authorities
1.
The Ministry of Energy and Mines
As this analysis of Decree 310 will reflect on a subject by subject basis, the National
Executive, through the MEM, has nearly exclusive regulatory authority over the gas
activities. Article 6 of Decree 310 states that the MEM is empowered ““to plan, guard,
inspect and fiscalize”” the gas activities in accordance with the goals of Decree 310.48
Companies involved in gas activities are required to supply MEM with all the information
that it may require relative to corporate gas operations.49 Such companies have a right to
require MEM to safeguard this information under conditions of confidentiality.50 As
discussed in Section III.D, the Ministry of Production and Commerce (““MPC””) also has
important functions relative to gas pricing.
Decree 310 provides a short section on sanctions for failure to meet the conditions
under which a license or permit is granted; for violation of any provision related to the
construction of infrastructure, management, operation, and security of Gas Activities; for
evasion or non-application of official tariffs or prices; and in general, for the violation of
any provision of Decree 310. Basically, the Ministry of Energy and Mines may decide
between imposing a fine that goes up to 10,000 Tax Units (currently a Tax Unit is U.S.$15)
or shutting down the activity for up to six months, depending on the severity of the violation
and the past record of the licensee or permittee.51 These sanctions, of course, do not
exclude the application of any other civil or criminal actions that might be applicable under
other laws, and as referenced in Section III.I, licenses and permits may be permanently
revoked if the licensee or permittee engages in certain infractions of Decree 310.
2.
The Municipalities
Article 36 of the law entitled Ley orgánica del régimen municipal (Organic Municipal
Law) states that the distribution of gas is subject to the competence of the Municipalities.52
47. Decree 310, supra note 1, art. 3.
48. Id. art. 6.
49. Id. art. 14.
50. Id. art. 14.
51. Id. art. 51.
52. See Ley orgánica del régimen municipal [Organic Municipal Law], Gaceta Oficial No. 4,109
Extraordinario, 15 de junio de 1989.
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Article 41 of the same law states that distribution can be carried out by the Municipalities
themselves, Autonomous Institutes and State bodies, as well as private concessionaires.53
However, Article 2 of Decree 310 specifies that the distribution of the hydrocarbon gases is
one of the ““gas activities”” and falls under the competence of MEM.54 Article 11 of Decree
310 states that the National Executive will ““guarantee the conditions of operation of the
current system of transportation and distribution of the hydrocarbon gases.””55 And Article
27 of Decree 310 states that the MEM has the right to grant distribution permits.56
These and other provisions of Decree 310 lead one to conclude that Decree 310 is in
conflict with the Organic Municipal Law. Arguably, Decree 310, as a subsequent organic
law dealing with gas, should prevail on this point over the Organic Municipal Law, a prior
organic law dealing with the powers and responsibilities of Municipalities. In this
connection, Article 58 of Decree 310 states that any prior provision of law that conflicts
with Decree 310 is derogated.57 Therefore, in our view, Decree 310 probably derogates the
Organic Municipal Law to the extent that the latter law purports to give the Municipalities
competence over the distribution of gas. Unless Article 178 Ordinal 6 of the new
Constitution is construed to alter this conclusion (see discussion in Section II.E), the
competence of the Municipalities over gas distribution may be at an end. On the other hand,
we should note that under Venezuelan constitutional theory, the only way to be sure that an
Organic Law has served to derogate a prior law is to obtain a judgment to that effect from
the Venezuelan Supreme Court.
3.
The National Gas Agency
The major regulatory innovation of Decree 310 is the creation of the Ente Nacional
del Gas (National Gas Agency). The National Gas Agency was originally envisaged as a
powerful and independent governmental body which would be empowered to decide on
such issues as gas prices, tariff rates, and open access matters. The original model for the
National Gas Agency was Argentina’’s Ente Nacional de Regulación del Gas (National Gas
Regulation Agency), which is widely viewed as a strong, independent administrative body
which has effectively stimulated the development of Argentina’’s booming natural gas
sector.58
The National Gas Agency, created by legislative fiat, is a functionally autonomous
administrative body without juridical personality that operates under the auspices of the
MEM.59 The National Gas Agency will be run by a Board of five members, all of whom
will be designated by the Minister of Energy and Mines, having previously consulted with
the President of the Republic.60 There will be a President, Vice-President, and three
Directors of the National Gas Agency.61 The members have to be appropriately qualified
53. See id.
54. See Decree 310, supra note 1, art. 2.
55. Id. art. 11.
56. See id. art. 27.
57. See id. art. 58.
58. For a description of the Argentine gas regulatory system and the functioning of the Ente Nacional de
Regulación del Gas, see Emilio J. Cárdenas, Natural Gas in Argentina: From Monopoly to Competition——An
Overview of Legal Instruments, 7 OIL & GAS L. & TAX’’N REV. 267 (1995); Daniel Bianchi, Privatization of the
Oil and Gas Industry in Argentina: A Model for Latin America, 8 OIL & GAS L. & TAX’’N REV. 257 (1993).
59. See Decree 310, supra note 1, art. 36. Until the National Gas Agency is ““up and running,”” its functions
will be discharged by MEM. See id. art. 55.
60. Id. art. 39.
61. Id.
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with technical, professional and/or management experience in the area; and members will
serve for three-year terms, renewable for similar periods.62 The members must be
committed to working full-time with the National Gas Agency and are not allowed to have
any economic interests in any company with activities regulated by Decree 310.63 Decree
310 does not specify how the members may be removed. The general objective of the
National Gas Agency will be to ““promote the development of the [gas] sector and the
competence in all of the phases of the hydrocarbon gas industry related with transportation
and distribution and to help in the coordination and protection of these activities.””64
The National Gas Agency’’s powers over pricing and tariffs are dealt with in Section
III.D immediately below. Equally, the National Gas Agency’’s powers regarding the gas
distribution regions are dealt with in Section III.E. As we shall see later in Section III.I, the
MEM itself has the power to grant licences or permits to companies wishing to undertake
Gas Activities, or to hold bidding rounds for the awarding of such licenses or permits.
Apart from important advisory powers over pricing and definition of distribution
regions, the National Gas Agency’’s duties are: to promote and supervise the transportation,
distribution, storage, and retailing of gas; to promote a secondary market for space in the
gas transportation, storage, and distribution systems; to ensure open access to the gas
transportation, distribution, and storage system under the terms of Decree 310 and any
future Regulations hereunder; to promote best practices in the gas industry; to propose
qualification guidelines for companies interested in becoming involved in the activities of
transportation, storage, distribution, and trading of gas; to advise companies on the correct
calculation of gas prices and tariffs; and so on. Further duties are more general——such as
upholding the rights and duties of the participants in the gas activities and promoting
compliance with the relevant laws and norms.65
62.
63.
64.
65.
Id. art. 40
See id. art. 41.
Id. art. 36.
For the record, Article 37 of Decree 310 gives the National Gas Agency twelve specific functions:
1. To promote and supervise the development of the gas transportation, storage, distribution and
commercialization activities with the purpose of seeking their efficient performance.
2. To control, and inform the Ministry of Energy and Mines of the existence of, non-competitive,
monopolistic and discriminatory conduct in the first sale of gas and among the participants in the
transportation, storage, distribution and commercialization activities, and also, to encourage the
corresponding economic equilibrium.
3. To propose to the Ministry of Energy and Mines, for its approval, the delineation and
modification of the gas distribution regions. 4. To promote the development of a secondary capacity
market among transporters, distributors, traders and major consumers with the purpose of facilitating
competition, the efficient use of the systems and the transparency of transactions in this market
5. To propose to the Ministry of Energy and Mines, for its approval, conditions to qualify the
companies that would perform gas transportation, storage, distribution and commercialization
activities.
6. To propose to the Ministry of Energy and Mines and the Ministry of Production and Commerce,
for their approval, according to the provisions hereof [referring to the provisions of Decree 310] and
as long as no effective conditions of competition exist, fair transportation and distribution rates,
seeking the least possible cost for consumers and a guaranty of quality of the transportation, storage,
and distribution activities.
7. To ensure free access to the gas transportation, storage and distribution systems in the terms
established herein and in the Regulations hereto.
8. To promote the efficient use and application of the best practices in the gas industry, in its
utilization as fuel or raw material.
9. To ensure the rights and duties of the participants in the gas industry.
10. To ensure compliance with the national laws and norms applicable to the gas industry.
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A regulation is expected to be issued in the near future specifying in much greater
detail the powers and duties of the National Gas Agency. This regulation, which of course
must be consistent with Decree 310, is expected to maximize the powers and responsibilities
of the National Gas Agency, to the extent possible. All told, the legislative powers of the
National Gas Agency are somewhat weaker than some had hoped.
D.
Pricing and Tariffs
Article 12 of Decree 310 provides as follows:
The Ministry of Energy and Mines is empowered to determine the prices of
hydrocarbon gases from the production and processing centers, taking into
consideration equitable principles.
The Ministries of Energy and Mines and Production and Commerce will fix the
tariffs to be applied to final consumers and to services rendered pursuant to this
Law.
The National Gas Agency will elaborate the bases for the determination of these
tariffs.
Sole Paragraph: The tariffs for small consumers will be the sum of:
(a) the price of acquisition of the gas;
(b) the transport tariff;
(c) the distribution tariff.66
As noted above in Section III.B, Article 2 of Decree 310 states that it applies to the
““utilization”” of all gas production——whether associated or non-associated in nature.67 We
read Article 12 to empower the MEM to regulate, if it so desires, first sales of all
hydrocarbon gases, whether such gas derives from associated or non-associated production.
In addition, under Article 37(2) the National Gas Agency has the power to prohibit
monopolistic practices with respect to first sales of gas.68 In the case of sales to final
consumers, and with respect to all service tariffs, the MEM and the MPC have joint
decision-making power. The National Gas Agency is empowered to prepare the bases for
gas prices and service tariffs. Article 12 finally provides that the overall costs to small
consumers——which is not a defined term——will be the total of: (1) the price of the
acquisition of the gas; (2) the transportation tariff; and (3) the distribution tariff.69 While the
National Gas Agency has an important role relative to the appropriate policy for setting gas
prices and service tariffs, it will not actually fix such prices and tariffs.70
11. To advise the several participants in the gas industry on the proper application of the bases and
formulae for the calculation of gas prices and rates and to give timely attention to the claims of users
regarding this matter.
12. The other powers conferred on it under this law and the Regulations hereto.
66. Decree 310, supra note 1, art. 12.
67. See id. art. 2.
68. See id.
69. See id. art. 12. See also supra note 65 and accompanying text. We take it that ““the price of acquisition
of the gas““ refers to the small consumer’’s cost and not his distributor’’s cost. In other words, we assume that the
distributor’’s profit is included in the acquisition concept.
70. See id. Article 12 appears to presume that there will be two sales of methane. The first sale is at ““the
production and processing centers,”” and the second will be a sale to ““final consumers.”” And ““final consumers””
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Tariffs for storage, transportation, and distribution services must be fixed subject to
certain principles and guidelines. Such tariffs must guarantee: (i) efficiency of operations;
and (ii) sufficient income to satisfy adequate operational and maintenance costs, as well as
to cover taxes, depreciation, amortization of investments, and a reasonable profitability.71
Profitability has to be reasonable compared to the profitability of other activities with
similar risks and in light of the efficiency of the services provided.72 Tariffs must also take
into account the particularities of the services provided, such as the geographical location,
distance between sale and production points, and other modalities to be defined in the
regulations.73 Finally, tariffs should allow for the lowest possible cost for consumers while
at the same time assuring a stable supply for the market.74 Article 54 of Decree 310
provides that new pricing rules under Decree 310 will not affect prices agreed to in prior
supply contracts.75
A regulation should promptly issue which will detail the process for fixing prices and
tariffs under Decree 310. By virtue of Article 58 of Decree 310, decrees, regulations, and
resolutions bearing on the gas business which antedate the effective date (September 23,
1999) of Decree 310 remain in full force and effect——to the extent that they are not
inconsistent with Decree 310——until such subsidiary legislation is replaced. The present
rules on methane prices are contained in the resolution entitled Resolution 450 and 315 of
the Ministry of Energy and Mines and the Ministry of Industry and Commerce dated
November 6, 1998 (Resolution 450).76 Resolution 450 contains complex and varying
formulas for determining methane prices for domestic, commercial, industrial, and electric
generation customers, with different prices applying in different locations.77 For a review of
the effect of Article 12 of Decree 310 on natural gas liquids, see Section III.L.
While it is clear that Decree 310 envisages that gas producers and other players in the
gas activities must be able to make a reasonable profit from the sale of gas or provision of
services, it is not clear that the Chávez administration intends to follow the Argentine
example and move toward deregulation of gas prices. It might be noted, however, that
Resolution 450, Article 3 presently allows the parties to a methane sales contract for
industrial use who need medium to long term supply to agree to their own unregulated price,
albeit subject to MEM approval.78 Since the Venezuelan market is, and will probably
remain, principally an industrial gas sales market, a continuation of the trend of Resolution
450, Article 3 would be most encouraging. Clearly the new regulation and policies on
pricing and tariffs will be critical to the whole gas initiative of the Chávez Administration.
E.
Prohibition on Vertical Integration
Article 9 of Decree 310 provides as follows:
(an undefined term) would appear to cover all possible end users, from a major petrochemical plant to a single
individual user. However, particularly in the case of major industrial users, there is often only a single sale. Does
the MPC have a role in determining price in such cases? Additionally, it appears as if the word ““tariffs”” as used in
the second sentence covers both gas prices and service tariffs. It would be preferable to reserve the word ““tariff””
for service tariffs.
71. See id. art. 13.
72. Id.
73. Id.
74. See id. art. 13.
75. See id. art. 54.
76. See Resolution 450 and 315 of the MEM and the Ministry of Industry and Commerce, Gaceta Oficial
No. 36,735, 6 de noviembre de 1998 [hereinafter Resolution 450].
77. See id.
78. See id. art. 3.
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The same person cannot simultaneously carry out or control, in the same region,
two or more of the activities of production, transport or distribution provided for
in this law.
When the viability of the project [in question] requires it, the Ministry of Energy
and Mines can authorize the same person to carry out more than one of the
referenced activities [production, transport and distribution] in which case the
authorized person must establish separate accounting systems for the separate
activities.79
Article 9 prohibits the same person from carrying out or controlling entities which
engage in two or more of production, transportation, or distribution in the same region.
Article 9, a critical provision, is designed to prevent the vertical integration of the new gas
business. We do not interpret work ““production,”” as used in Article 9, to refer to associated
gas production, as such production is not ““provided for in this law.””80 Therefore,
production only refers to non-associated production. Article 9 prohibits the same investor
from carrying out two or more of the referenced activities using separate juridical entities
which it ““controls.”” Decree 310 does not define what ““control”” means, but this will be
specified in a regulation shortly to issue. The term ““control”” probably envisages a 51% or
more voting control. Very importantly, the prohibition against vertical integration only
relates to production, transportation and distribution (and not to other gas activities——e.g.,
there is nothing to stop a company engaging simultaneously in transportation, processing,
and retailing), and this only applies to activities within a region.
Under Article 37(3) of Decree 310, the National Gas Agency will be responsible to
propose to MEM, ““for its approval, the establishment and modification, scope or limits of
the gas distribution regions.””81 We understand that the proposal will create four to five
major gas distribution regions.
Not surprisingly, the MEM is authorized to permit companies to perform two or more
of production, transportation and distribution within a single region if ““the viability of the
project requires it.””82 We envisage that this permission may be granted where, for instance,
the producer of a remote gas reservoir is, as a commercial matter, obligated to take a major
equity interest in a gas pipeline which will take the gas to an emerging new market. Even if
MEM gives permission to a company to carry out such an integrated operation, the company
must keep separate accounts for the distinct activities, such as production and transportation.
For a review of the application of Article 9 of Decree 310 to natural gas liquids, see Section
III.L.
Article 56 of Decree 310 provides that companies engaged in the integrated business
of transportation and distribution as of September 23, 1999 have two years in which to fully
comply with the new requirements of Article 9.83 The MEM has the right to extend the twoyear divestment period, upon application by the affected companies.84 As of September 23,
1999 the only affected company appeared to be PDVSA Gas, S.A.
79.
80.
81.
82.
83.
84.
Decree 310, supra note 1, art. 9.
Id. art. 37(3).
Id.
Id. art. 9.
See id. art. 56.
See id. art. 56.
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Open Access
The open access principle of Decree 310 is contained in Article 10:
Companies carrying out the storage, transportation and distribution of
hydrocarbon gases and their by-products are obligated to allow other companies
who also carry out such storage, transportation and distribution to use their
facilities when these facilities have spare capacity. Such use will be subject to
such contractual arrangements as the parties may agree. If the parties cannot
agree on conditions, the Ministry of Energy and Mines shall establish such
conditions.85
Under Article 10, companies involved in the storage, transportation and distribution of
hydrocarbon gases are obligated to offer available space in their facilities only to other
companies involved in the same storage, transportation and distribution businesses. This
open access obligation does not extend to producers, traders or major end users.
Additionally, Decree 310 nowhere prohibits storage, transportation and distribution
companies from buying and selling gas, in addition to providing service. This open access
regime is not as free and open as one might have hoped. Producers, gas traders and major
users have no explicit right to open access. Additionally, since transporters and storage
companies can buy and sell methane, as well as provide service, such companies may have a
greater than normal motive to refuse to transport or store the methane of producers and gas
traders who may be their potential business rivals.
Another interesting point is that if a party invokes its right to open access, the parties
may come to a private agreement on contractual arrangements——which probably includes
tariffs. We wonder why this should be an exception to Article 12 of Decree 310 which
provides that service tariffs will be fixed by MEM and the MPC.
G.
Public Utility and Public Interest
Article 4 of Decree 310 states that the works and infrastructure used to carry out the
gas activities are of ““public utility.””86 This means that such works and infrastructure can be
expropriated by the National Executive without approval by the National Assembly.87
Activities related directly or indirectly with transportation or distribution of the hydrocarbon
gases to the public are deemed to be a ““public service.””88 Such a ““public service””
designation means that the government has heightened regulatory powers. Indeed Article 11
of Decree 310, states that the National Executive is required to ““guarantee the operating
conditions of the current system of transportation and distribution of the hydrocarbon
gases.””89 Storage companies and transportation and distribution companies under Decree
310 are obligated to provide a continuous service, subject to all legal norms and appropriate
technical standards of efficiency, quality and security.90
85. Id. art. 10.
86. Id. art. 4.
87. See Ninoska Rodríguez-Laverde, Servicio Público y Potestad Administrativa [Public Service and
Administrative Authority], in SERVICIO PÚBLICO BALANCE Y PERSPECTIVA [PUBLIC SERVICE BALANCE AND
PERSPECTIVE] 71 (1999).
88. Decree 310, supra note 1, art. 5.
89. Id. art. 11.
90. See id. art. 8.
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121
Unitization
Article 20 of Decree 310 provides that in cases where a common non-associated
hydrocarbon gas reservoir (the common reservoir) underlies two or more license areas, the
parties will enter into a unitization agreement which MEM must approve.91 If the parties
cannot reach an agreement, then MEM will impose its own unitization terms.92 This
provision also presumably applies to situations where PDVSA Petróleo y Gas, S.A. or any
company authorized under LOREICH, Article 5, Sole Paragraph holds the rights to explore
and produce hydrocarbons on one of the areas overlying the common reservoir.93 Article 20
goes on to say that where part of the land overlying the common reservoir is not the subject
of a license under Decree 310 or an assignation under LOREICH, the MEM will ““take the
necessary measures to protect the rights of the Republic.””94 Such measures might include,
inter alia, directly negotiating95 the unallocated area to the successful nearby exploration
licensee, putting the area out for competitive bidding, allocating the area to a ““State
company”” under Decree 310, or even, holding the acreage in the direct name of the State
under Decree 310, Article 22.96
Article 21 of Decree 310 deals with the more complex situation where the common
reservoir underlies international boundaries. This is a distinct possibility——especially in
connection with the maritime boundary with Trinidad. In such a case, any transnational
unitization agreement between the parties having rights over the common reservoir must be
approved by MEM and the Venezuelan National Assembly. If a ““timely agreement”” is not
achieved quickly (and hence there is a danger that production is not being fairly allocated),
MEM can take ““all necessary measures,”” including the right to revoke the exploration and
production license.97
I.
Licenses and Permits
Decree 310 provides that companies interested in engaging in exploration for and
production of reservoirs of non-associated hydrocarbon gases must obtain a license from
91. See id., art. 20.
92. See id.
93. It should be borne in mind that the advent of Decree 310 did nothing to expropriate PDVSA Petróleo y
Gas, S.A.’’s rights to explore and produce all kinds of hydrocarbons (including non-associated hydrocarbon gases),
granted by MEM pursuant to LOREICH, Article 21, prior to Decree 310. PDVSA and its affiliates do not have
the power to explore for and produce hydrocarbons in the whole territory of Venezuela, but only in such areas as
are allocated to them under said Article 21.
94. Decree 310, supra note 2, art. 20.
95. While upcoming regulations may clarify the position one way or another, there appears to be nothing in
Decree 310 that would prohibit MEM from directly negotiating the award of an upstream license in circumstances
similar to those described above in the text, as long as any award is in the interests of the Republic. Decree 296
was also executed by the President pursuant to specific authority granted in the Enabling Law, does, as a general
rule, require competitive bidding, and Decree 296 clearly applies to MEM, PDVSA and all of its wholly owned
affiliates, including PDVSA Gas, S.A. Decreto con rango y fuerza de ley de reforma de la ley de licitaciones de
5 de septiembre de 1999 [Decree with the Force and Status of Law Reforming the Bidding Law of September 5,
1999], Gaceta Oficial No. 5,386, Extraordinario de 11 de octubre de 1999 [hereinafter Decree 296]. However,
Decree 296 only regulates contracts for the acquisition for goods and contracts for services. Licenses and permits
under Decree 310 do not fit that category, as they typically constitute authorizations to conduct independent
activities. For an analysis of important new provisions of Decree 296 applicable to the national oil industry,
including new rules favoring national preferences, see Lynne H. Glass & Uisdean R. Vass, The New Bidding Law
in Venezuela, 3 INT’’L ENERGY L. & TAX’’N REV. 88 (2000).
96. Decree 310, supra note 1, art. 22 (stating that the State can carry out gas activities directly).
97. Id. art. 21.
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MEM. Companies interested in carrying out the other Gas Activities listed in Article 2 of
Decree 310 must do so under color of a permit, which is also granted by MEM.98 In broad
terms, similar rules apply to licenses and permits.
1.
Licenses
MEM is empowered to decide which areas under Venezuelan mineral jurisdiction will
be opened up for exploration and production of non-associated hydrocarbon gas.99 In fact,
the MEM proposes to announce Venezuela’’s first upstream exploration round for gas later
this year. A regulation is pending which will provide detailed rules for exploration and
production of reservoirs of non-associated hydrocarbon gases under Decree 310. Decree
310 itself is rather skeletal with respect to the regime of licenses and permits.
Article 24 of Decree 310 provides that all licenses must contain the following
provisions: (1) a description of the project, with an indication of who will or may consume
or utilize any resulting production; (2) that the maximum possible term for the license will
be thirty-five years, subject to a maximum possible extension of a further thirty years;100 (3)
a maximum exploration program of five years; (4) a precise indication of the exploration
area; and (5) a statement of any special payments which are stipulated in favor of the
Republic.101
Furthermore, all licenses are deemed to include the following provisions, whether or
not these appear in any given license: (1) all fixed assets and other equipment or goods
dedicated to license operations shall be subject to reversion to the Republic whenever the
license ends, for whatever termination cause; and (2) Venezuelan choice of law governs the
license, and that disputes between the parties which ““cannot be settled in a friendly manner
between the parties, including arbitration”” must be referred to the Venezuelan courts.102
Article 25 of Decree 310 goes on to state that exploration and production licenses are
assignable by the license holders to third parties with the permission of MEM.103 However,
Article 25 states that licenses cannot be mortgaged or pledged, and are not subject to seizure
in judicial proceedings against the licensee.104 This provision does not apply to permits. A
license may be revoked for the following reasons: (1) failure to complete the exploration
program; (2) failure to make the special payments to the Republic; (3) attempted assignment
of the license without MEM’’s approval; (4) the occurrence of any events of termination
specified in a particular license; and (5) entering into an unauthorized international
unitization agreement.105 Licensees who propose to use production for their own
downstream projects will have inherent power to carry out such downstream projects, for
example a petrochemical plant, without a separate permit.106
98. See id. art. 22.
99. See id. art. 23.
100. See id. art. 24. A request for extension should be made after half of the original term of the license has
passed and prior to five years before the license would otherwise expire.
101. See id. We do not interpret this article to say that every license must inevitably specify an exploration
program. We understand that licenses may also be for production only (in cases where the reservoir is proven).
102. Id. art. 24(6).
103. See id. art. 25.
104. See id.
105. See id.
106. See id., art. 26. We take this to mean that in the hypothetical case involving the petrochemical plant,
the owner of the petrochemical plant, who would also be the gas producer (licensee), would not need a separate
industrialization permit for the plant. If this is a correct understanding, there may possibly be a conflict with
Decree 310, Article 29, which states in pertinent part: ““When associated or non-associated gaseous hydrocarbon
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123
Overall, Articles 24 to 26 of Decree 310 paint a minimal picture of Venezuela’’s future
regime for the exploration and production of reservoirs of non-associated hydrocarbon
gases. It is hoped that the pending regulation on licensing will create an open marketoriented system. The reference to ““special payments”” to the Republic probably envisages a
competitive allocation system using bid variables such as up-front bonuses or royalty or
profit share bids. The critical arbitration issue is discussed at Section III.J.
2.
Permits
The regime for permits is very similar to that adopted for licenses, with certain
differences. The permit, which is also to be granted by MEM, will have a maximum term of
thirty-five years, subject to extension for a further maximum thirty years, and there must be
an indication of any ““special payments to the Republic.””107 However, in the case of a
permit, it is not appropriate to have exploration programs or technical descriptions of
exploratory areas. The same implied terms on reversion, choice of law, and arbitration are
also included in all permits. However, as an important exception, there will be neither fixed
terms nor reversion provisions for permittees engaged in the processing or industrialization
of hydrocarbon gases, or for permittees engaged in the commercialization of natural gas
liquids. Permits can be assigned with the approval of the MEM.108 MEM is entitled to
terminate permits for broadly similar reasons as in the case of licenses: unauthorized
assignment; failure to comply with a work program; or the occurrence of any contractual or
regulatory event of termination.109
A regulation on transportation and distribution is the first expected regulation under
Decree 310. For the moment, Resolution 323 regulates the transportation and distribution
of methane and ethane by pipeline in Venezuela.110 It is expected that the new regulation
will rely to some extent on the provisions of Resolution 323.
J.
Arbitration
Decree 310, Article 24(6)(b) is as follows:
producers develop projects for the utilization of gaseous hydrocarbons produced by them, they must be subject to
the permits and other provisions hereof.”” (Emphasis added).
Curiously, Article 29 of Decree 310 states that producers of hydrocarbon gases (whether of associated or nonassociated origin) may sell such hydrocarbon gases to companies holding permits under Decree 310. We interpret
this language to mean that first sales of hydrocarbon gases may only be made to companies holding permits. The
difficulty is that unless the concept of ““utilization”” as expressed in Article 2 of Decree 310 is given a broad
meaning (and ““utilization”” is not defined), electric generation plants and major industrial users such as steel and
aluminum plants will not hold permits under Decree 310.
One of the drawbacks of Decree 310 is that it does not pay enough attention to the category of ““major users.””
107. Id. art. 27.
108. See id.
109. See id. art. 28.
110. Normas para el ejercicio de las actividades de industrialización, almacenamiento, transporte,
distribución y comercialización de los gases métano y étano en el territorio nacional [Norms Regulating
Industrialization, Storage, Transportation, Distribution and Commercialization of Methane and Ethane in National
Territory], Gaceta Oficial No. 36,585, 19 de noviembre de 1998 [hereinafter Resolution 323]. For a detailed
review of Resolution 323, see Uisdean R. Vass & Elizabeth Eljuri, The Developing Framework for Natural Gas
in Venezuela, 5 OIL & GAS L. & TAX’’N REV. 143 (1999).
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In licenses [and also in permits]111 the following model clauses are part of the
contract, even if they do not expressly appear:
Doubts and controversies of whatever nature arising out of the license [or
permit] which cannot be settled in a friendly manner between the parties,
including arbitration, shall be settled by the competent courts of the Republic,
subject to its laws, without ever giving use to foreign claims.112
There are two possible ways to read Article 24(6)(b). First, one can interpret the subsection to mean that the envisaged ““arbitration”” is a friendly non-binding procedure, more in
the character of conciliation than arbitration. Under this scenario, the parties would always
have ultimate recourse to ““the competent courts of the Republic”” in order to vindicate their
rights.113 An alternative reading of this admittedly difficult language is that the words
““which cannot be settled in a friendly manner”” refer to an extra-judicial resolution of the
dispute which ““includes arbitration.””114 This arbitration is final and could be domestic or
international. But if the parties do not stipulate for arbitration in the license or permit, the
only ultimate recourse, if all other ““friendly”” measures fail, is to the ““competent courts of
the Republic.””115 Regulations to be issued on the regime of licenses and permits and
possible subsequent decisions of courts and arbitration panels will provide authoritative
guidance on which is the correct interpretation.
In any event, licenses and permits under Decree 310 will ““be subject to [Venezuelan]
laws.””116 The words ““without ever giving rise to foreign claims”” has a long history in
Venezuelan constitutional law and refers not to ““foreign claims”” by an aggrieved party to
the license or permit under foreign law or in a foreign court or arbitral tribunal, but rather to
claims by a foreign state against the Republic arising out of losses suffered by its corporate
citizen in Venezuela.117
It is possible, therefore, that under Decree 310, Article 24(6)(b) the parties to a license
or permit are free to stipulate for binding national or international arbitration. Such a view
is consistent with the letter and spirit of the new Constitution. For instance, in Article 258,
the new Constitution states: ““The Law shall promote arbitration, conciliation, mediation and
other [non-judicial] alternatives for the solution of disputes.””118
111. By virtue of Decree 310, Article 27 the mandatory model clause of Article 24(6)(b) on arbitration also
appears in all permits.
112. Decree 310, supra note 1, art. 24(6)(b).
113. Id.
114. Id.
115. Id.
116. Id.
117. See CONST. art. 258; ALLAN-RANDOLPH BREWER-CARÍAS, CONTRATOS ADMINISTRATIVOS
[ADMINISTRATIVE CONTRACTS] 137 (1997).
118. More specifically, provisions of the new Constitution probably favor arbitration of disputes between the
Republic of Venezuela and its instrumentalities and private parties under ““contracts of public interest.”” In the
Exploratory Round Decision, the Supreme Court was asked to review the legality of the international arbitration
clauses in the Exploratory Round Association Agreements. In that case, the Supreme Court, accepted that the
Exploratory Round Association Agreements were ““contracts of public interest,”” being between a PDVSA affiliate
and the various private investors and requiring (and receiving) Congressional approval. See Exploratory Round
Decision, supra note 24. Given that premise, the Supreme Court was required to interpret Article 127 of the 1961
Constitution, which was as follows:
In contracts of public interest, and in cases where such a provision does not contradict the nature of
the contract, there is considered to be incorporated, even when not expressly stated, a clause pursuant
to which any doubt or dispute that may arise in connection with such contracts and which cannot be
amicably resolved by the parties, shall be ruled upon by the competent courts of the Republic, in
accordance with its laws, without for any reason or cause giving rise to foreign claims. (emphasis
added)
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THE NEW VENEZUELAN LEGAL REGIME FOR NATURAL GAS
125
Servitude Rights, Temporary Occupation of Real Property, and Expropriation Rights
Decree 310 grants all licensees and certain permittees the right to request servitudes,
temporary occupation authorizations, and expropriation in order to carry out Gas Activities.
Pursuant to Article 16 of Decree 310, the permittees who are entitled to these rights are
those authorized to engage in transportation, distribution, storage, and processing of
hydrocarbon gases.
Ideally, one obtains servitudes on private property by negotiating and executing
agreements with the land owners. However, Decree 310 provides that failing such an
agreement, the licensee or permittee seeking the servitude can request to have one imposed
on the landowner by the courts through a special judicial procedure.119 This special
procedure requires the petitioner to file a writ in the Court, to issue a notice to the
landowners, and to appoint expert land appraisers to determine the amount of probable
damages and just indemnification to be paid by the petitioner to the landowner and making a
deposit of such amount.120 Once the deposit has been made the Court will allow the
petitioner to commence work on the land.121 If the landowner accepts the amount deposited,
the Court will issue a ruling creating the servitude; whereas if such amounts are contested by
the landowner, the parties will have to engage in a full trial procedure to determine the
appropriate damages.122
Servitudes on state-owned lands need not be obtained through the special judicial
procedure outlined above.123 The licensee or permittee is simply required to execute an
agreement with the Republic of Venezuela and pay an amount negotiated with the state.124
Decree 310 even provides that Regulations may allow for the exoneration of such
payments.125
The Supreme Court held that the exception language of Article 127 of the 1961 Constitution enabled the
National Government, subject to the subsequent approval by Congress, to determine on a case by case basis,
taking into account the circumstances of the negotiations, the suitability of including arbitration clauses in
contracts of public interest. This decision was consistent with a line of authorities interpreting the exception
language of Article 127 liberally. The Supreme Court thus upheld the arbitration clauses in the Exploratory
Round Association Agreements.
The National Constituent Assembly, which drafted the Constitution approved on December 15, 1999, debated
the elimination of the exception language of the old Article 127 in the new Constitution. But after a strong
campaign in favor of international arbitration, the Assembly decided to incorporate Article 127 of the old
Constitution into the new Constitution on a word for word basis as Article 151.
While a future Supreme Court might interpret the new Article 151 more strictly than the same language has
been construed in earlier jurisprudence, this is not very likely, as future major energy projects in Venezuela are
likely to require international arbitration in order to be financeable. The new management of PDVSA has come
out in favor of the continuing availability of international arbitration. It is probable that international arbitration
will continue to be available in contracts of public interest of a commercial nature. For further analysis of
arbitration, and ““contracts of public interest”” in the context of the Venezuelan oil industry, see Thomas L. Hughes,
The Calvo Clause Revisited, 7 LATIN AM. L. & BUS. REP. 2 (1999).
On the other hand, if Decree 310 is construed to limit the type of arbitration available in licenses and permits,
this is not contrary to the Constitution.
119. Decree 310, supra note 1, art. 17.
120. See id.
121. See id.
122. See id.
123. See id. art. 18.
124. See id.
125. See Decree 310, supra note 1, art. 18.
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To obtain the expropriation of private property, licensees and permittees are required
to follow the general procedure established in the Ley de expropiación por causa de utilidad
pública o social (Law on Expropriation for the Public and Social Good).126
L.
Natural Gas Liquids
For purposes of this subsection, ““natural gas liquids”” refers to the hydrocarbon gases
covered by Decree 310 which are heavier than methane. As alluded to above, we still await
a legal definition of what constitutes, in chemical terms, the hydrocarbon gases under
Decree 310, but ethane, propane, and butane will clearly be covered. Apart from the
upstream opening——exploration and production of non-associated reservoirs of hydrocarbon
gases——Decree 310 opens up the midstream and downstream sectors of the natural gas
liquids business, no matter whether the natural gas liquids derive from associated or nonassociated production. Very importantly, the exportation of natural gas liquids is now an
open activity, no longer reserved to the State under LOREICH, Articles 1 and 2.
Article 12 of Decree 310, on prices and tariffs, applies to the natural gas liquids, as
well as to methane.127 As we have noted, transportation of hydrocarbon gases as mentioned
in Article 2 of Decree 310 is not limited to transportation by pipeline, and it appears to be
the intention of Decree 310 is to regulate transportation of natural gas liquids by road and
their commercialization.
How should Article 9 of Decree 310, which prohibits vertical integration of the gas
business, be applied to natural gas liquids? We believe that the real intent of Article 9 is that
it should apply to the production of non-associated reservoirs of hydrocarbon gases
(including natural gas liquids production) but only to the transportation of hydrocarbon
gases by pipeline, and only to the distribution of methane by pipe. However, the article can
be read to generally apply to all hydrocarbon gases and to all forms of transportation and
distribution.128 But this reading would not make much sense, as the intent of Article 9 of
Decree 310 is to prohibit producers from also owning the natural monopoly business of
transportation and distribution of gas using pipelines. However, transportation of natural
gas liquids, other than by pipeline, is not a natural monopoly, and hardly even a separate
business. ““Distribution”” of natural gas liquids does not exist as a business; the better
concept is ““commercialization.”” Hopefully, regulation will soon clarify the correct
interpretation of Article 9 of Decree 310 as it affects natural gas liquids.
M.
Industrialization
The Chávez Administration envisages that the petrochemical sector will grow to be the
biggest customer by type for hydrocarbon gases in Venezuela.
We understand
““industrialization”” to be essentially the chemical or other transformation of any of the
hydrocarbon gases to achieve a petrochemical or an enhanced value fuel such as liquid
natural gas (LNG) or synthetic crude (GTL).129 Decree 310 contains specific provisions on
industrialization, clearly a priority activity. Industrialization of hydrocarbon gases can be
126. Ley de expropiación por causa de utilidad pública o social [Law on Expropriation for the Public and
Social Good], Gaceta Oficial No. 22,458, 6 de noviembre de 1947.
127. See Decree 310, supra note 1, art. 12.
128. See id. art. 9. Under this interpretation, a licensee might be prohibited from transporting by road and
retailing its propane production in a nearby city, because this would be engaging in production, transportation and
distribution of hydrocarbon gases in the same distribution region.
129. ““Industrialization”” is not defined in Decree 310, but Resolution 323 defines the word to mean ““the
chemical, physical, or physical/chemical transformation of gas.”” Resolution 323, supra note 110, art. 2.
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THE NEW VENEZUELAN LEGAL REGIME FOR NATURAL GAS
127
undertaken directly by the State, by State entities, or by foreign or domestic private
companies with or without the participation of the State.130 The National Executive is
obligated to prepare regulations which will include provisions for: (1) the development of
industrial estates in areas with a plentiful supply of hydrocarbon gases; (2) the guarantee of
feedstock from refineries and processing plants; (3) the supply of feedstock under
acceptable contractual conditions, including price; (4) the stimulation of the participation in
the gas business of banks and financial institutions; and (5) to encourage companies
involved in industrialization to submit their products for further valued added processes in
Venezuela.131 The National Executive will give priority to industrialization projects that
include higher levels of national capital, and use of higher aggregate national goods, the
ultimate products of which will be competitive in international markets. Industrialization
projects must be registered with MEM.132
N.
National Preferences
There is every sign that the Chávez Administration intends to take steps to increase
Venezuelan capital and business participation in the country’’s economic life. A clear
indication of this can be seen with respect to the industrialization of hydrocarbon gases,
where the National Executive is obligated to favor projects with higher levels of use of
national products and services, and so on. However, rules favoring national capital and
national goods are likely to be enacted relative to all of the gas activities. In this respect,
Article 7 of Decree 310 requires the National Executive, acting through the MEM, to take
such measures as will ““encourage the formation and participation of domestic capital”” in the
Gas Activities.133 Additionally, the government is required to ensure that vendors of
national goods and services are able to compete in the gas sector under ““transparent and fair
conditions.””134 It may very well be that the new regulation under Article 7 of Decree 310
will specify that certain projects will be reserved for national investors and that in other
projects, foreign investors will have to bid in consortia with national investors.
O.
Royalty
Decree 310 provides that the royalty now payable on all hydrocarbon gases, whether
of associated or non-associated origin, is fixed at a flat twenty percent rate.135 This royalty
applies to all production that is not re-injected.136 Thus the royalty applies to all
hydrocarbon gases which are sold, used as energy in industry operations, or flared.137 The
MEM can decide to receive the royalty in kind, but there is a presumption that the royalty is
payable in cash.138 If payable in cash, the monetary value is calculated on the basis of
twenty percent of the total market value of the gas in the field.139 An important regulation
defining how precisely royalty values will be calculated is pending.
130. See Decree 310, supra note 1, art. 30.
131. See id. art. 31.
132. See id. art. 33.
133. Id. art. 7.
134. Id.
135. See id. art. 34.
136. See id. art. 34.
137. See id. art. 34.
138. See id. art. 34.
139. See id. art. 35 (stating that producing companies will pay the taxes that the laws establish on gas used
as fuel in operations). We take this language to literally refer to taxes and not to further possible royalties.
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The new twenty percent royalty on hydrocarbon gases actually represents a rise in
royalty rates over the prior regime. Formerly, there was a sixteen and two-thirds percent
royalty rate applicable to all hydrocarbons, and the MEM had discretion to reduce this rate
on request of the producers if it could be shown that the reservoir would not be
commercially viable without such a reduction.140 The higher flat royalty of Decree 310
reflects the stated policy of Alȓ Rodríguez Araque in favor of receiving a higher proportion
of hydrocarbon revenue through royalties.141
P.
State Companies
Article 43 of Decree 310 provides that the State can create entities, including
companies with a single shareholder, ““to carry out the [gas activities].””142 These entities
(Article 43 Companies) must be owned exclusively by the State.143 The Article 43
Companies may themselves create wholly owned affiliates or companies with mixed state
and private shareholding which can carry out gas activities.144 Article 43 Companies and
their wholly owned affiliates are subject to inspection and fiscalization by MEM, and they
must follow the policy direction of MEM.145 An Article 43 Company has the power,
through a shareholder’’s meeting, to cause its wholly owned affiliate to merge, to enter into
an association with another company, to dissolve or liquidate itself, or invest its capital in
other entities.146 Additionally, an Article 43 Company has the power to change the by-laws
of any of its affiliates.147 The State or other state companies may freely transfer assets and
rights to the Article 43 Companies and their wholly owned affiliates. If an Article 43
company or its wholly owned affiliate is obligated to issue shares to the State or a state
company to reflect any increase in its capital occasioned by such transfer of assets or rights,
this increase in capital shall be exempt from capital registration tax.148
Decree 310’’s articles on state companies may serve to provide a basis for the
““creeping privatization”” of PDVSA Gas, S.A.’’s near monopoly position in methane
transportation and distribution. But since PDVSA Gas, S.A. was formed prior to September
23, 1999 (the effective date of Decree 310), it does not seem to be an Article 43 Company
itself. See discussion above in Section II.C.
Q.
Effect of Decree 310 on Prior Laws
Article 58 of Decree 310 explicitly states that Decree 310, which has ““the force and
status”” of being an ““organic”” law, derogates the Ley que reserva al estado la industria del
gas natural (Law Reserving the Natural Gas Industry to the State) (Natural Gas Act of
1971),149 and any other provision of law contrary to Decree 310.150 The Natural Gas Act of
1971, then, has no more force and effect. However, Decree 310 also derogates LOREICH
140. See Ley de hidrocarburos [Hydrocarbons Law], Gaceta Oficial No. 1,149 Extraordinario, 15 de
septiembre de 1967.
141. Alí Rodríguez rechaza eliminación de regalías, ECONOMÍA, 23 de julio de 1999.
142. Decree 310, supra note 1, art. 43.
143. See id.
144. See id.
145. See id. art. 47.
146. See id. art. 44.
147. See id. art. 45.
148. See Decree 310, supra note 1, arts. 48, 49.
149. Ley que reserva al estado la industria del gas natural [Law Reserving the Natural Gas Industry to the
State], Gaceta Oficial No. 29,594, 26 de agosto de 1971 [hereinafter Natural Gas Act of 1971].
150. Decree 310, supra note 1, art. 58.
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129
in that it ““de-reserves”” and ““de-monopolizes”” the exploration and production of reservoirs
of non-associated hydrocarbon gases, and the utilization, collection, storage, transportation,
processing, marketing and exporting of all hydrocarbon gases.151 In other words, the gas
activities are no longer regulated by LOREICH. Petrochemicals and distribution had never
been regulated by LOREICH.
Additionally, the Ley que reserva al estado la explotación del mercado interno de los
productos derivados de hidrocarburos (Law Reserving Domestic Exploitation of the
Internal Market for Hydrocarbon Products to the State)152 is derogated to the extent that it
governs the internal market for hydrocarbon gases. Finally, as we have seen, Decree 310
probably derogates the Organic Municipal Regime Law to the extent that the latter law
provides that distribution of gas falls under the competence of the Municipalities. It is quite
possible that the effect of Decree 310 may be to derogate other laws, but those mentioned
above are the most important for our purposes.
V. DECREE 307: ENCOURAGING CHANGES IN INCOME TAX
President Chávez signed Decree 307, entitled Decreto con rango y fuerza de ley de
reforma parcial de la ley de impuesto sobre la renta (Decree with Status and Force of Law
Partially Reforming the Income Tax Law) (Decree 307) on September 12, 1999.153
Significantly, Decree 310 was signed into law on the same day. The provisions of Decree
307 have a big positive impact on the prospects for success of Decree 310.154
A.
Reduction in Income Tax
Under the previous Income Tax Law, PDVSA affiliates and any company authorized
by the Venezuelan Congress under LOREICH, Article 5, Sole Paragraph, to explore for and
produce natural gas was obligated to pay an income tax of 67.7%.155 The only exception
was for integrated offshore gas projects, which were subject to a 34% income tax rate.156
Decree 307 changes that rule. Now companies engaged in the activities (whether integrated
or not) ““of exploration and production of non-associated gas, processing or refining,
transport, distribution, storage, commercialization, and exporting of gas and its
components”” are subject to the normal corporate tax rate.157 That means a maximum tax
151. Compare Decree 310, supra note 1, with LOREICH, supra note 7.
152. See Ley que reserva al estado la explotación del mercado interno de los productos derivados de
hidrocarburos [Law Reserving Domestic Exploitation of Hydrocarbon Products to the State], Gaceta Oficial
No. 1,591 Extraordinario, 22 de junio de 1973.
153. See Decreto con rango y fuerza de ley de reforma parcial de la ley de impuesto sobre la renta [Decree
with Status and Force of Law Partially Reforming the Income Tax Law], Gaceta Oficial No. 5,390 Extraordinario,
22 de octubre de 1999 [hereinafter Decree 307]. Decree 307 actually became law on December 21, 1999, despite
its publication in the Official Gazette on October 22, 1999. This is because the Código orgánico tributario
(Organic Tax Code) provides that tax laws shall become effective sixty days after their publication in the Official
Gazette, if the law does not specify another effective date. Decree 307 does not specify another effective date.
Código orgánico tributario [Organic Tax Code], Gaceta Oficial No. 4,727 Extraordinario, 27 de mayo de 1994
[hereinafter Organic Tax Code],
154. Chávez was also authorized to enact Decree 307 by virtue of the Enabling Law, supra note 32.
155. Ley impuesto sobre la renta [Income Tax Law of 1994], Gaceta Oficial No. 4,727 Extraordinario, 27
de mayo de 1994, art. 9.
156. Id.
157. Decree 307, supra note 153, art. 11. Ley de impuesto sobre la renta [Income Tax Law], Gaceta Oficial
No. 4,727 Extraordinario, 27 de mayo de 1994, art. 11.
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rate of 34% on the gas activities. Companies involved in petrochemicals, and in distribution
of methane have always been and continue to be subject to the maximum 34% rate.158
B.
Tax Credits
In addition to cutting the rate of income tax applicable to the gas activities, Decree 307
creates a major tax credit for new gas investments. Article 57 of Decree 307 creates the
parameters for a general new investment tax credit, as follows:
It is granted a ten percent (10%) tax credit of the amount of the new investments
that have been performed within the five (5) years following the effective date of
this Law, to the taxpayers that have income from industrial, agroindustrial,
construction, electricity, telecommunications, science and technology activities,
different from hydrocarbon and related activities, and in general, all industrial
activities that represent an investment to satisfy the advanced or leading
technology requirements, represented in new fixed assets, other than real estate,
destined to effectively increase the production capacity or new companies,
provided [such credits] have not been used by other companies.159
The same article goes on to state: ““FIRST PARAGRAPH: The tax credit established
in this article shall also be granted to the taxpayers that are dedicated to the activities which
are mentioned in the second paragraph of Article 11 of this law.””160
The taxpayers mentioned ““in the second paragraph of Article 11 of this Law”” include,
inter alia, those companies engaging in the activities of ““exploration and production of nonassociated gas, processing or refining, transport, distribution, storage, commercialization,
and exportation of gas and its components.””161 This ten percent tax credit represents ten
percent of all qualifying investments made during the fiscal year. This sum is then
deductible against the total amount of income tax payable by the taxpayer in respect of
revenue deriving from a qualifying activity. The tax credit may be more than the total tax
otherwise payable in any given fiscal year, and excess credits can be carried forward for
three further years.162
Article 149 of Decree 307 states that with certain exceptions, Decree 307 enters into
force with respect to individual taxpayers in their first fiscal year following December 21,
1999.163 Interestingly, one of the few ““early exceptions”” to this rule specified in Article 149
is that the investment tax credits are applicable immediately.164 Clearly, the government did
not want companies with fiscal years beginning on, say, November 1, to lose the incentive to
make gas investments before November 1, 2000.
158.
159.
160.
161.
162.
163.
164.
See Decree 307, supra note 153, art. 11.
Decree 307, supra note 153, art. 57.
Id.
Id. art. 11.
See id. art. 58.
See id. art. 149.
See id.
2001]
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131
The Power to Exonerate
Article 147 of Decree 307 gives the President an important new power to exonerate on
a total or partial basis certain classes of taxpayers from income tax liability. In pertinent
part, Article 147 provides as follows:
The President of the Republic, in Council of Ministers, pursuant to fiscal
strategies required because of the general economic situation or because of
specific circumstances affecting industrial sectors or regions, can exonerate on a
partial or total basis, the Income Tax otherwise levied by this law on income
obtained in sectors considered to be of particular importance for the national
economic development or which generate a high level of employment, and also
that income generated by industries or projects which are established or
developed in particular areas of the country.165
Exoneration decrees under Article 147 must explain the extent of the benefit offered
and the requisites needed to obtain such benefits. Exoneration decrees must be general in
nature, extending benefits to companies engaged in certain activities, or in certain regions,
but in no case to particular taxpayers.166 Given the importance which the Chávez
Administration accords to the gas business, it would not be surprising if the gas activities, or
particular gas activities, receive the benefit of partial or total exoneration under Article 147.
Such exonerations probably cannot last longer than five years.167
VI. DECREE 319: SKETCH OF THE NEW ELECTRICITY REGIME
President Chávez signed Decree 319, entitled Decreto con rango y fuerza de la ley del
servicio eléctrico (Decree with Status and Force of Law on Electric Utilities) (Decree 319),
on September 17, 1999.168 The purpose of this section is to briefly summarize the
provisions of Decree 319 and then comment on the new synergies between gas and
electricity in Venezuela.169 With the exception of Article 156 Ordinal 29 and Article 178
Ordinal 6, discussed above in Section II.E, the Constitution has little to say specifically
about electricity.
A.
Principal Provisions of Decree 319
1.
Scope of Decree 319
Decree 319 is intended to provide the new rules of the game for the national electricity
industry, including specifically the activities of generation, transmission, management of the
National Grid, distribution and commercialization of electricity and electric capacity (the
165. Decree 307, supra note 153, art. 147.
166. See id.
167. See Organic Tax Code, supra note 153, art. 66 (stating that tax exonerations cannot last longer than
five years).
168. Decreto con rango y fuerza de la ley del servicio eléctrico [Decree with Status and Force of Law on
Electric Utilities], Gaceta Oficial No. 36,791, 21 de septiembre de 1999 [hereinafter Decree 319]. Decree 319
was also enacted pursuant to authority granted to the President in the Enabling Law.
169. Much of this section is taken (with the authors’’ permission) from Uisdean R. Vass & Sergio Parra, A
Review of the New Venezuelan Electric Services Law, 17 OIL & GAS L. & TAX’’N REV. 370 (1999).
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electric activities).170 The State as regulator is obligated to promote an electricity industry
characterized by economic equilibrium, trustworthiness, quality, equality, solidarity, nondiscrimination and transparency.171 All of the electric activities are open to private
participation, except for the generation of hydroelectric power from the basins of the rivers
Caroní, Paragua, and Caura, and the management of the National Grid.172 In fact, the State
is obligated to encourage private participation in the electric industry.173 The electric
activities constitute a ““public service,”” and the infrastructure of electricity is declared to be
of ““public utility.””174 These latter concepts are discussed above in Section III.G.
2.
Regulatory Authorities
The regulation of the electricity industry is the responsibility of the National Executive
through the MEM. Decree 319 creates a new regulatory authority called the Comisión
Nacional de Energía Eléctrica (National Commission on Electric Energy) (CNEE), which
will be responsible for ““the regulation, supervision, fiscalization and control”” of the electric
activities.175 The CNEE will have operational, administrative and financial autonomy,
under the auspices of the MEM. The CNEE is given thirty-five specific responsibilities,
ranging from elaborating the optimum methodologies for the functioning of the new Spot
Market for electricity and the calculation bases for electric tariffs, to the establishment of
technical norms and hearing of customer complaints.176 It is envisaged that the CNEE will
be obligated to call extensive public hearings on regulatory matters. The CNEE will be run
by a five man Board of Directors, three of which will be selected by the President of the
Republic, one by the Minister of Energy and Mines, and one by the Minister of Production
and Commerce.177 The members must have experience in the electric/energy business, or
otherwise in public administration/regulation.178 The CNEE will be a much more powerful
agency than the Natural Gas Agency.
Decree 319 requires that the CNEE be established within two years of September 21,
1999. Prior to that, the responsibilities of the CNEE will be discharged by the MEM.179
The creation of the CNEE is one of the major innovations of Decree 319.
3.
Management of the National Grid
Another major innovation of Decree 319 is the establishment of the function of
management of the National Grid as a business, which will be carried out by a presently
unnamed State Company (the Dispatch Company).180 The Dispatch Company need not be
exclusively State owned.181 The Dispatch Company will have two principal functions. The
first will be the management of the National Grid, which will involve the co-ordination of
170.
171.
172.
173.
174.
175.
176.
177.
178.
179.
180.
181.
See Decree 319, supra note 168.
Id. art. 2.
Id. art. 3
Id.
Id. arts. 4, 5.
Id. art. 15.
See Decree 319, supra note 168, art. 17.
See id. art. 19.
See id.
See id. arts. 102, 103.
See id. art. 33.
See id.
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electric flows between generators and buyers (whether distributors or major users) using the
transmission system.182 The second will be the management of the future Spot Market.183
4.
The Spot Market
A major goal of Decree 319 is to create, by September 21, 2002, a Spot Market for
electric sales in Venezuela.184 At the moment, Venezuelan generating companies either use
their electricity to service their own distribution systems, or enter into contracts to sell their
electricity to other distribution operations or directly to major users. Typically, these
contracts may be of short to medium term duration. Prices are subject to regulation on a
company-specific basis. The Spot Market concept envisages that the Dispatch Company
will receive demands for electric supply from distributors, brokers, or major users on a very
frequent (perhaps hourly) basis, and would request offers of supply from the generators on
the same frequent basis, in volumes and at prices nominated by generators. Thus, the
Dispatch Company will operate on an economic level as a kind of electric sales
clearinghouse. But it is not yet known how precisely the Spot Market will function.185
5.
Generation
Except for the generation of hydroelectricity from certain river basins, the generation
of electricity is open to the private sector. In order to engage in such activity, would-be
generating companies must obtain an authorization (as opposed to the concession system for
certain other activity) from CNEE.186 Facilities used to generate electricity are not subject
to reversion to the State.187 Except for companies who merely generate power for their own
business (auto-generation), generators must put their capacity and electricity at the
““disposition”” of the Dispatch Company, must obey the instructions of the latter, must
operate subject to all applicable norms, and must submit to fiscalization and audits by the
CNEE.188 Generators must also inform the Dispatch Company about the terms of their sales
contracts, supply all necessary information required for participation in the Spot Market and
collect all special contributions from their clients which are specified in Decree 319.189
6.
Transmission
Transmission is also open to the private sector. Transmitters will not be allowed to
buy and sell electricity, hence, their remuneration will be solely tariff based.190 Concessions
will be granted for transmission activities. Transmitters must obey the instructions of the
Dispatch Company.191
182.
183.
184.
185.
186.
187.
188.
189.
190.
191.
See Decree 319, supra note 168, art. 33.
See id.
See id. art. 117.
See id. arts. 78, 117.
See id. art. 43.
See id. art. 24.
See Decree 319, supra note 168, arts. 24, 25.
See id. art. 25
See id. art. 27.
See id. art. 29.
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Distribution
Distribution is also open to the private sector through the award of a concession,
granted by MEM.192 Future distribution system awards must be made by competitive
bidding.193 Distribution concessions will relate to an exclusive geographic area, and the
concession will also specify a non-exclusive area for possible expansion, where there exist
no services as of the date of the award of the concession.194 Construction of service
installations into such an expansion zone will convert the zone into an ““exclusive”” area.195
Distributors, unlike transmitters, may purchase and sell electricity, but can also simply
provide service.196
8.
The Concession Regime
Distribution and transmission are, as we have seen, awarded on a concessions basis.
These concessions will have an initial term of up to thirty years from the date of their
execution, subject to extension for up to a further twenty years.197 In the event that a
concession is going to terminate, a bidding process for a new concession relating to the
same activity will occur beginning within three years of the end of the original
concession.198 Concessions cannot be assigned without the approval of the granting
authority, in conformance with Decree 319.199
When a concession terminates, the installations revert to the State though the
concessionaire has the right to receive compensation for any non-depreciated part of
192. See id. art. 35.
193. See id. art. 45.
194. See Decree 319, supra note 168, art. 47.
195. See id.
196. See id. art. 37.
197. See id. art. 46.
198. See id.
199. See id. art. 48. Decree 319, Article 49 provides that concession contracts must contain the following
mandatory provisions:
(a) Identification and domicile of concessionaire;
(b) Detailed description of the activity to be carried out by the concessionaire, stating the latter’’s
obligation to carry out the activity at its own risk and cost;
(c) In the case of distribution concessions, a definition of exclusive service area, and the criteria for
the definition of the expansion zone;
(d) In the case of transmission concessions, identification of the portion of the National Grid subject
to the concession;
(e) Term of concession;
(f) Tariff determination mechanisms, including requirements of efficiency, and procedures to change
tariffs;
(g) Inventory of assets dedicated to the activity;
(h) Rights and obligations of concessionaire;
(i) Quality requirements and attention to users;
(j) Coverage goals and extension of service to areas without coverage;
(k) If relevant, programs to manage demand:
(l) Guarantees of compliance with contractual obligations;
(m) Regime for sanctions, as such sanctions apply to the concessionaire and the users;
(n) Causes for regulatory intervention and applicable procedures;
(o) Methodology for valuing the assets dedicated to the activity, for all legal purposes;
(p) Procedure to terminate the concession.
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installations prudently constructed.200 Significantly, Decree 310 contains no equivalent
provision relative to assets reverting to the Republic under Article 24(6)(a).201
The CNEE, after receiving authorization from the MEM, may ““intervene”” in the
concession in cases: (a) where the concessionaire has failed in its contractual obligations, or
has gone bankrupt; or (b) in order to prevent the concessionaire from putting the electric
service in danger or because of repeated violations of Decree 319, or pursuant to orders
from the relevant authorities.202
9.
Commercialization
This activity, in its pure form, is essentially one of brokerage, in which broker A buys
electric from generator B to sell to major user C. Such brokers, like generating companies,
must receive special authorization from the CNEE, and are obligated to submit to all of the
regulatory provisions of Decree 319, including providing all contract terms to the Dispatch
Company, subjecting themselves to the sanctions regime of Decree 319 and generally
providing all information requested by the CNEE.203
10. The Users
Users have a right to receive electric supply and receive all pertinent information
relating to their rights from the electric companies.204 Users are granted significant rights to
make complaints against offending companies, with a last resort being to the CNEE itself.
Major users will have a right to buy their electricity at free market rates on the Spot Market
from the generators.205 Until such time as the CNEE decides to the contrary, ““major users””
are those who use more than five megawatts.206
11. Municipalities
Article 42 of Decree 319 gives the Municipalities a role largely focused on the
promotion of adequate electric service in their jurisdictions, and to serving as a watchdog,
checking that electric companies comply with the standards of service prescribed by the
CNEE, ensuring that the sanctions provisions of Decree 319 are implemented, hearing
customer complaints, etc.207 Municipalities may provide public lighting themselves, but
cannot otherwise directly engage in the Electric Activities.208
200. See Decree 319, supra note 168, art. 50.
201. Compare Decree 319, supra note 168, art. 50 with Decree 310, supra note 1, art. 24(6)(a). However,
provision for this critical issue could be made on a contractual basis as part of the license or permit contract.
202. See Decree 319, supra note 168, arts. 50, 51.
203. See id. arts. 38, 39.
204. See id. art. 40.
205. See id.
206. See id. art. 108.
207. See id. art. 42.
208. See Decree 319, supra note 168. Interestingly, this is precisely the kind of non-regulatory role that may
arguably be envisaged for Municipalities in the Constitution, Article 178, Ordinal 6. See supra Section II.E.
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12. Prohibition Against Vertical Integration
No single company may exercise two or more of the following activities: generation,
transmission, management of the National Grid, and distribution.209 However, this
prohibition will not prevent the same investor from participating in the various electric
activities using multiple separate juridical entities. The thinking is that all activities will be
heavily fiscalized, and the rate of return on many of the electric activities will be fixed by
tariff. Hence, transactions should be at arms length.210
Decree 319 also lays down limits to the national coverage which companies may
obtain in certain defined electricity markets. For example, until the CNEE decides
differently, (1) no company is allowed to attain more than 25% of installed thermoelectric
capacity in the country, and (2) no company is allowed to have more than 25% of all
national distribution billings.211
13. Prices and Tariffs
The generation of electricity will be sold in the Spot Market on a free market basis.212
As we have seen, the activities of transmission and distribution will be remunerated on a
tariffs basis. Generally speaking, tariffs must: (1) foster efficiency and the rational use of
resources; (2) assure the minimum cost to the consumer compatible with a stable and good
quality supply of electricity; (3) have regard to the costs involved in different kinds of
service to the different locations of users and to other factors taken as relevant by the
CNEE; and (4) allow transmitters and distributors to obtain a reasonable rate of return on
investment, taking into account rates of return on activities of similar economic risk.213 In
the case of distribution, the tariff must take into account the costs of acquiring the electricity
from the generator, the cost of transmission, the cost involved in using the Dispatch
Company, the cost of distribution in conditions of maximum efficiency, the costs of
commercial management, and costs which may be incurred through the functioning of the
CNEE.214 Tariffs payable to the Dispatch Company should reimburse operational and
management costs, cover investments, and provide reasonable profitability.215
14. Sanctions
Decree 319 contains powerful provisions on sanctions. The sanctions provided for in
Decree 310 are weak by comparison.216 Companies involved in electric activities may be
fined in an amount up to ten percent of their gross income in the twelve months prior to the
month of the infraction if they commit any one of twelve specific violations which include:
failing to comply with norms relating to installations; failing to comply with instructions
from the Dispatch Company; repeated failure to provide CNEE with requested information;
209. See Decree 319, supra note 168, art. 6.
210. Compare Decree 319, supra note 168, with the quite different prohibition of vertical integration in
Decree 310, supra note 1, art. 9 (prohibiting vertical integration). See supra Section III.E.
211. See Decree 319, supra note 168, art. 119.
212. See id. art. 78.
213. See id. art. 79.
214. See id. art. 85.
215. See id. arts. 81, 82, 83.
216. See supra Section III.C.
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failure to supply electricity as contracted without just cause; repeated failure to provide
good quality service; etc.217 Companies involved in electric activities may be fined in an
amount up to two percent of their gross income in the twelve months prior to the month of
the infraction if they commit any one of eight lesser offenses.218
B.
The Gas-to-Power Convergence
One of the biggest new customers for gas in Venezuela over the next ten years will be
the power generation business. Despite Venezuela’’s huge hydroelectric generating capacity,
gas-fired power will be strongly competitive for peak demand, industrial and isolated
markets. Most hydroelectric generating capacity is in the Southeast of Venezuela, and much
of Venezuela’’s industry is in the Center West and West.
Decree 319 marks a critical transition because, up until now, virtually all electric
generation, all electric transmission, and most electric distribution has been in the hands of a
few integrated State electricity companies, the largest of which are Edelca, Cadafe and
Enelven. Until recently, the only significant private player has been Electricidad de
Caracas, which, as its name suggests, serves the Caracas area. Indeed, prior to Decree 319
the Venezuelan electricity business was not subject to any specific general statute that could
be called an ““Electricity Law.”” Instead, the sector was regulated by subsidiary legislation,
such as pricing resolutions. Hence, Decree 319 does not need to be an ““organic”” law.219
However, with the advent of Decree 319, the principal rules of the game are clear
although, as in the case of Decree 310, a mass of supporting regulations is pending: the
integrated State companies will be broken up (and some are slated for privatization),
generation of electricity (with the exception of certain hydroelectric generation) is
confirmed as a non-reserved activity, and the pricing system is moving toward a free market.
At this time, regulation of prices and tariffs for electric generation, transmission and
distribution is done on a company-specific basis. Small new generating companies who sell
electricity at unregulated prices are coming onto the market. Some of these generators have
built short distribution lines for local businesses and capitalize on price, security of supply,
and quality of delivery.220 Other generators sell directly to the distribution companies.
Brown-outs are common in Venezuela outside Caracas, and some major industrial
companies engage in auto-generation, the most important example of which is PDVSA
itself.
All told, the gas-to-power option is likely to be attractive in Venezuela for specific
target markets such as peak demand and industrial demand. Nothing in either Decree 310 or
Decree 319 forbids a gas producer under Decree 310 from using its gas to generate
electricity under Decree 319, although there would no doubt have to be some system of
valuation of the gas in the field for purposes of royalties. Additionally, there is a separate
investment tax credit for new investments in the electric activities, which may make gas-topower projects doubly interesting for gas producers who can market electricity.221
217. See id. art. 88.
218. See Decree 319, supra note 168, art. 89.
219. The only prior law which came close to being an ““electricity law”” was the Ley de servidumbres de
conductores eléctricos [Law on Electric Cable Easements] of July 19, 1928. Decree 319 derogates this ancient
law with the exception of two articles.
220. See, e.g., Turboven: Dedicated to Venezuelan Industry, DAILY JOURNAL (SPECIAL PETROLEUM SUPP.),
July 13, 1999, at 13. Turboven serves commercial markets in the Central Region and has total capacity of 200
megawatts with 25 miles of distribution lines. It is a classically independent power project company.
221. See Decree 307, supra note 153, art. 56.
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Yet, how precisely Venezuela’’s future market for gas-fired electric generation will
function is unclear. Clearly, gas fired generators will be able to participate in the Spot
Market, and hopefully this will work well, creating a true free market. Additionally, we
understand that merchant generators will be able to sell to distributors on a local basis. It is
presently unclear whether these local sales, which would not be made on the National Grid,
would impact the Spot Market. It is also unclear how future distribution concessions, which
will have exclusive geographic coverage, will jive mesh with the commercial distribution
lines of independent power projects.
However these questions are resolved it is clear, from an economic standpoint, that in
Venezuela, as elsewhere in Latin America, gas-to-power will be a preferred and attractive
method to monetize gas reserves.222
VII.
CONCLUSION
The new open regime for natural gas in Venezuela should be rated as one of Latin
America’’s most significant recent developments in energy. The new gas regime,
complemented by encouraging tax legislation, may be successful in its goal of transforming
the Venezuelan gas business and priming the economy.
In another sense, the task is only now beginning. How will the government of Hugo
Chávez Frías ““demonopolize”” the midstream sector of the gas business? In what form will
gas pipe-line projects be offered? How effective will the National Gas Agency be? Will the
MEM move toward deregulation of gas prices? On what terms will the first upstream
bidding round be offered to private investors? How will the government seek to encourage
the involvement of national investors in the gas business? What happens if licensees find
petroleum reservoirs instead of gas? The list of questions at this point is endless.
And yet the direction in which the government should go is clear. The goal must be
the creation of a market-oriented system in which every type of participant, from producer
to end user, is a winner. The government should make exploration acreage easily available
to producers, liberalize prices, guarantee open access, and use the tax regime to create
economic incentives. If the government enacts a new Organic Hydrocarbon Law this year it
should take the opportunity to establish open access rights in gas infrastructure in favor of
gas producers, traders and major users, and not just transporters, storage companies and
methane distributors as is the case under Decree 310, Article 10. A new Organic
Hydrocarbons Law should also clarify that Decree 310 allows for final and binding
arbitration clauses in licenses and permits. Every possible step should be taken to exclude
the gas business from the ambit of the regulatory and fiscal powers of the Municipalities.
If Venezuela’’s bifurcated hydrocarbons system should prove successful that would
surely send a message to the Mexican authorities, who have opened up gas transportation
and distribution, but whose upstream sector remains tightly closed. For Petróleos
Mexicanos, like PDVSA, gas is of low priority compared with oil. Mexico soon faces the
prospect of major gas imports from the gas-hungry United States.223
There is no reason why Venezuela cannot have a booming private gas business. Major
reserves exist even without further discoveries.
222. Very little has been written on the Venezuelan legal regime for electricity. For an excellent short book
on the Venezuelan electric system, see generally CESAR QUINTINI ROSALES, INVESTIGACIÓN APLICABLE EN EL
SECTOR ELÉCTRICO VENEZOLANO [RELEVANT RESEARCH ON THE VENEZUELAN ELECTRICITY SECTOR] (1999).
223. For a full discussion, see Rogelio López-Velarde, Mexico’’s Gas Liberalization Not Enough: The Need
for Further Reform, 9/10 OIL & GAS L. & TAX’’N REV. 239 (1999).
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APPENDIX: RECENT DEVELOPMENTS
During the course of 2000, the Chavez administration enacted Decree 840 entitled
““Reglamento de la Ley Orgánica de Hidrocarburos Gaseosos”” (““Gas Regulation””). The Gas
Regulation is made up of 109 articles. For an in-depth review of the Gas Regulation, see
Uisdean Vass & Gabriela Rachadell de Delgado, An Analysis of the New Venezuelan Gas
Regulation, INT’’L ENERGY L. & TAX’’N REV., Nov./Dec. 2000 at 285.
The Gas Regulation makes further provision for local content rules; develops the rules
on prohibition of vertical integration (Decree 310, Article 9); defines and prohibits the sale
of ““Essential Assets;”” specifies license relinquishment obligations; expands the concept of
open access (Decree 310, Article 10); develops the rules on arbitration; speaks to what
happens in the event of an oil, condensate, or associated gas discovery; sets forth rules on
royalty and pricing; establishes special rules for LPG; and so on.
After the Gas Regulation, many of the issues arising in the wake of the Organic Law
on Gaseous Hydrocarbons are still not settled, or are settled in an unsatisfactory manner.
Details on transportation tariffs, gas prices, and royalties are expected soon through the
issuance of resolutions.
Overall, the ““Gas Opening”” advanced at a snail’’s pace in 2000. A new president of
PDVSA, General Guaicaipuro Lameda, was appointed in October 2000, and Alí Rodríguez
Araque, Venezuela’’s respected Minister of Energy and Mines, resigned late in the year to
become Secretary General of OPEC. His successor is Alvaro Silva Calderón, a lawyer with
a long history in the oil business.
Two pipeline projects (Anaco-Jose and Barbacoa-Margarita) are in the process of
licitation. A further Upstream Bidding Round for eleven gas licenses was opened last year.
As of January 19, the pre-qualification stage for this latter round was ending.
Hopefully, 2001 will see awards of numerous concrete gas projects, and the aggressive
development of Venezuela’’s natural gas industry.
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