Venezuela: Legal And Economic Update

The Enabling Law has been in effect for 6 months; however, less than 25% of the laws to be enacted according to it have been passed. There are another six months to go and the Cabinet must work overtime to discuss, complete and enact important legislation in relevant areas such as finance, public administration, decentralization, and international contracting.

Energy:

Chapter Eight of President Bush’s National Energy Plan recommends the completion of negotiations of a Bilateral Investment Protection Treaty to improve the energy investment climate for the increased energy investment flows between Venezuela and the United States. Venezuelan petroleum experts reacted with a certain degree of concern but also some relief at President George W. Bush's new US energy policy. The concern stemmed from Bush's indication that the United States will look more at neighboring Canada and Mexico to meet increasing domestic energy demand. The relief was derived from the fact that Venezuela was specifically included in the plan.

CITGO Petroleum Corporation and Unocal Corporation jointly announced on May 1, 2001 the execution of a nonexclusive licensing agreement that grants CITGO the right to make and import cleaner burning gasoline using formulations patented by Union Oil Company of California, a Unocal subsidiary. The license agreement is effective January 1, 2001, and covers the three refineries CITGO operates in Lake Charles, Louisiana, Corpus Christi, Texas, and Lemont, Illinois, as well as all gasoline CITGO may import.

Bangladesh and Venezuela agreed to cooperate in energy and gas, information technology and rural development sectors, additionally to boosting bilateral trade. The broad-based agreement was reached at the official talks between Prime Minister Sheikh Hasina and visiting President Chavez.

As part of President Chavez’ visit to India, a crude oil supply agreement for an additional 100,000 bpd was executed with Reliance Petroleum Ltd. PDVSA and Reliance also signed a Memorandum of Understanding to explore strategic associations in the energy sector, including petrochemicals, electric energy, refining and transport of hydrocarbons.

Reportedly, Venezuela and China, as part of the President Chavez’ official visit, signed a 10 year energy cooperation agreement that will allow Chinese state and private enterprises to participate in oil exploration, exploitation and refining projects in Venezuela, including Chinese participation in the elaboration of Orimulsion. Additionally China would be granted a service contract for the reopening and operation of the Zumano oil field near Lake Maracaibo.

Reportedly, Carlos Jordá, President of PDV America, travelled to Germany in search of a new partner in the Ruhr Oel refinery because Veba Oel is expected to sell its participation in August of this year. It was announced that Lukoil (85% owned by the Russian Federation) is interested in acquiring 50% of this refinery. As a result of President Chavez’ visit to Russia, it is expected that Lukoil will enter into agreements with PDVSA for oil and gas exploration and exploitation.

On May 15, 2001 the Ministry of Energy and Mines sent the draft License to all the companies that have been pre-qualified for the Public Bidding process for 11 free gas areas, complying with the schedule announced during the Seminar held on April 23, 2001. The deadline for payment of the participation fees was May 25, 2001. The Ministry of Energy and Mines also sent the Final Tender Protocol to the qualified entities on May 30, 2001.

At a seminar organized by the Venezuelan National Council for the Promotion of Investments (CONAPRI) called "Opening of the Gas Sector: Opportunities for Private Enterprise", the Vice-Minister of Energy and Mines, Bernardo Alvarez, outlined the 4 main governmental gas policies: 1) Supply of the local market; 2) Development of the production of free gas; 3) Development of transport and distribution; and 4) Promotion of industrial development. He emphasized the importance of the formation of local capital investments as well as the creation of Venezuelan operators.

PDVSA is negotiating separate gas exploration agreements in three Third Round Operating Agreements, LL-652, Monagas Sur and Guárico Oriental. An estimated 200 Million cubic feet of natural gas could be produced per day. Since the object of the operating agreements was the extraction of liquid hydrocarbons at a fee, the agreements for the extraction of associated gas will have to be renegotiated.

PDVSA has announced that it plans to invest US$ 230 Million in the exploration for off shore natural gas, on the Delta Platform (Plataforma Deltana), US$ 32 Million of which would be spent this year in seismic, drilling, engineering and environmental studies. It is expected that operations will start in October 2001.

The time periods stipulated in the Law of the Electrical Sector for purposes of separating the activities of generation, transmission and trade of electrical power may be extended, as indicated by the President of the Permanent Commission of Energy and Mines of the National Assembly (Congress), Luis Salas. The Ministry of Energy and Mines responded in a formal questioning that these periods are feasible and must be complied with by the electrical companies.

Enelven requested that its shares be transferred from the Venezuelan Investment Fund (Fondo de Inversiones de Venezuela (FIV)), recently transformed into BANDES to the Ministry of Energy and Mines, as the government entity in charge of the control and supervision of the Venezuelan energy sector.

Finance:

Based on the Enabling Law, President Chavez passed the Law of Transformation of the Venezuelan Investment Fund (FIV) into the Bank of Economic and Social Development (BANDES). This new public bank will be engaged in the financing and support of regional development and medium and long term investment projects, among other financial activities. The bank will be supervised by the Superintendence of Banks and other Financial Institutions under the provisions of the law, and in a subsidiary manner by the provisions of the General Banking Law. The new law orders that the Ministry of Finance shall constitute a trust in the BANDES with the shares of electric public companies ENELVEN and ENELCO in order to continue with the process of incorporation of private capital into these utility enterprises.

The Venezuelan Central Bank (Banco Central de Venezuela (BCV)) began the sale of public debt bonds with short term repurchase agreement (repos) at an initial interest rate of 13.5%. The purpose of these bonds is to absorb excess liquidity in the market, create an alternative savings method, and reactivate the stock market. The bonds were initially bought by the banks to be repurchased by the BCV in a period of 30 days, but in the second week were traded in the stock exchange. The ultimate goal is for the passive interest rates to increase to normal standards, reducing the excessively high spread.

On May 29, the BCV flooded the local exchange market with US dollars reducing the exchange rate by Bs. 2.50. In the previous week large demands for US dollars had caused the exchange rate to rise up to Bs. 718.50 which was finally lowered to Bs. 715.

Electricidad de Caracas (ELECAR) announced that it will sell its 6.9% interest in Venworld, the consortium that manages CANTV. This has resulted in an increase in the price of CANTV shares in the Caracas Stock Exchange. Additionally, the Venezuelan National Securities Commission has decided that if Verizon or Telefonica want the shares, one or both will have to launch a tender offer for a minimum 75% of CANTV. Furthermore, any such acquisition must be carried out through a Public Offer of Shares, governed by the Venezuelan Capital Markets Law and its regulations.

Moodys improved the rating of Corporación Andina de Fomento (CAF), an entity of the Andean Commission that has as its main object the development of Andean trade and industry, from A3 to A2 with the rating of recommended investment and from P2 to P1 for short term debt.

BBO Financial Services denounced to the Venezuelan National Securities Commission that the acquisition of 57% of Digitel by Telecom Italia Mobile (TIM) violated the provisions of the Capital Markets Law since it failed to make a Public Offer of Shares. Reportedly, Digitel had withdrawn its registration from the Caracas Stock Exchange by the time the transaction actually took place.

Labor:

The SIDOR strike ended after 21 days of struggle between workers and the company, leaving enormous losses that are unlikely to help the company pay the bonuses promised to the workers in compensation for their return to work.

The unions, federations and confederations of workers of the oil sector have indignantly claimed that PDVSA did not pay their salaries during the various strikes and that PDVSA has initiated legal dismissal proceedings on the basis that the strikes have been illegal. It seems that the righteous application of the law is not welcome when it is not convenient to the interest of the workers.

A general increase in the salary continues to be discussed as well as the increase of the National Minimum Salary. There have been fierce discussions in the press between the Vice-President of the Republic and the Ministry of Labor. The Vice-President affirms that no decree increase has been even considered by the Executive, the Ministry of Labor says that such decree increase is mandatory since it is so established in the Organic Labor Law. Nobody knows what the result of such discussions will be, but it is clear that no increase was effectively authorized on May 1st.

Taxation:

On May 10, 2001 (GO 37.194) the SENIAT issued Ruling N° SNAT/2001/554 correcting Ruling N° SNAT/2001/529 dated March 20, 2001 which adjusted the Tax Unit from Bs. 11,600 to 13,200. The reason for the new ruling is that the old one stated that "the new Tax Unit will apply for the tax year 2001", the new one eliminated such mention. The reason for the amendment is that the old language could be interpreted in the sense that the Bs. 13,200 Tax Unit was applicable for the entire 2001 tax year and not to all tax periods starting after the effective date of the Ruling.

On May 18, 2001 (G 37200) the Ministry of Infrastructure issued Resolution N° 060 establishing the new fees for the use of the Maracaibo Lake Channel by carriers. The fees are the following: (i) hydrocarbons: US$ 0.1912 per barrel; (ii) general cargo: US$ 0.3039 per metric ton; (iii) industrial machinery, raw materials and industrial products intended for use in El Tablazo refinery: US$ 0.1929 per metric ton; and (iv) agricultural and livestock products: US$ $0.1905 per metric ton. Venezuelan and foreign war ships are exonerated from payment, carriers servicing the Venezuelan Central Government and Venezuelan flag ships will be entitled to a 10% rebate and carriers transporting goods within Venezuela (provided that goods being transported are not intended for export) will be entitled to a 50% rebate.

Telecommunications:

Mr. Jesse Chacón (former Manager of Operations of CONATEL) substituted Diosdado Cabello as the new General Director given that Mr. Cabello was appointed Minister of the Secretariat of the President of the Republic (Ministro de la Secretaría de la Presidencia de la República). The appointment of Mr. Jesse Chacón offers a sense of continuity to the position because Mr. Chacón has been with CONATEL since 1999 and participated in the drafting of the new Telecommunications Law, its regulations and their implementation.

CONATEL's Resolution No. 035 creating the Long Distance Operators' Committee and establishing the manner in which it will work was published in Official Gazette No. 37.192, dated May 8, 2001. The main purpose of this committee is to make recommendations to CONATEL regarding long distance services issues and specifically propose to CONATEL the entity that will be the Data Base Administrator for the National and International Long Distance Services Pre-Subscription Process.

On May 14, CONATEL posted on its web page a special consultation document regarding the introduction of 3G systems in Venezuela. The purpose of this document is to request opinions from interested parties in the telecommunications sector in order to obtain a greater understanding of the implications of 3G and prepare for the introduction of 3G in Venezuela. The document contains proposals regarding specific issues such as spectrum to be allocated, number of possible operators, network rollout obligations, standards, roaming, numbering, etc. and at the end of each section there is a list of questions to be addressed by the interested parties. This public consultation will have a special treatment due to its importance and all comments will be posted on CONATEL's web page. Comments/answers to the consultation will be received until June 15, 2001. CONATEL has prepared English and Spanish versions of the Consultation Document, which are available on its web page.

CONATEL also has posted on its web page, the National Chart for Allocation of Frequency Bands (Cuadro Nacional de Atribución de Bandas de Frecuencias (CUNABAF)) which establishes the services to be provided in certain frequency bands as well as the bands that are available for purposes of obtaining concessions for the use and exploitation of the radio spectrum, as established by article 107 of the Telecom Law. This is the final version of the CUNABAF into which the initial comments/modifications made by interested parties were incorporated (the first draft was presented in January).

The Procompetition Superintendency, Procompetencia, determined that Promofilm Venezuela, C.A., producer of the TV show "Justicia para Todos," and RCTV did not perform unfair competition acts by using the name of another TV show with the same name, produced by lawyer Ricardo Núñez Martínez and broadcast by Channel 11, Niños Cantores del Zulia. The decision of the agency was based on the finding that the notoriousness of "Justicia para Todos" was achieved through the use given by the TV show produced by Promofilm and transmitted by RCTV, and therefore, these two companies did not take advantage of the reputation of the other TV program.

The battle between the two major Venezuelan beer manufacturers returned to the headlines of newspapers in May. Polar and Regional have thrown mutual accusations of unfair competition related to the withholding of bottles in the warehouses of each company. Regional conducted a judicial inspection in some Polar warehouses, and it alleged that a significant number of Regional bottles were found during said inspection, and not all of them were empty. Polar claims that the practice of withholding bottles of other beer manufacturers is common in the industry. Procompetencia reopened the investigation against the two companies, after the First Court of Contentious Administrative Matters ordered it to do so, in the follow-up of a case brought by other beer manufacturers. The Superintendent encouraged those which feel affected by any practice restrictive of competition to make the appropriate denunciation before the agency. Both Regional and Polar had threatened the other to start actions in Procompetencia, but until now only the representatives of Regional (Organización Cisneros) have appeared before the Superintendency to explain the origin of the conflict and to inquire on the status of the procedure reopened after the Court order.

Procompetencia also opened an administrative procedure against Aeropostal, Alas de Venezuela, for the presumed performance of predatory practices in the Venezuelan market of air transportation. The request to open such procedure was filed by Aero Servicios Carabobo, C.A. Aserca, the closest competitor of Aeropostal, which claims that the latter is trying to exclude Aserca from the domestic flights market by offering predatory rates.

The First Court of Contentious Administrative Matters ratified Procompetencia’s decision on the Ascensores Schindler de Venezuela case, which had determined that the latter did not violate any competition norms by its refusal to sell spare parts or to have commercial dealings with Servicios Técnicos Schindler.

The merger of Chevron Venezuela and Texaco Venezuela received the favorable opinion of Procompetencia, as reported in El Universal on May 30, 2001. According to the analysis made by the agency, this operation of economic concentration will not change the level of concentration in the relevant market.

In an effort to control the development and propagation of non-native vegetable species, the Environment Ministry issued Resolution No. 60 (G.O. No. 37204, dated 05/24/2001) prohibiting the importation and use of certain types of fungus (Fusarium Oxiporium) presently used for the eradication of drug plantations. Note that the recently created Office of National Bio-diversity will be in charge of enforcing this resolution.

Miscellaneous:

Venezuela formally requested entry into Mercosur as a political member, to be regulated as Bolivia and Chile. There have been discussions as to whether this would affect the Andean Community agreements.

Article 162 of Decision 486 of the Commission of the Cartagena Agreement, that license agreements must be recorded in order to be effective against any third party. Failure to do so will only make the agreements valid between the contracting parties. In view of the above, any Trademark License Agreement should be recorded both with the Superintendence of Foreign Investments, (SIEX) and the Trademark Office in order to avoid cancellation actions based on non-use. Furthermore, the current legislation provides for the registration of License Agreements not only for trademark registrations, but for applications as well.