1 Legal and regulatory framework
1.1 What role does the national state play in the oil and gas industry in your jurisdiction? Are oil and gas rights owned by the state or is private ownership allowed?
The regulatory framework for Venezuela's oil and gas industry – and the role played by the state within that context – has been subject to several structural shifts and changes over the past 100 years. Since 1975, the Venezuelan state has played a starring role in the country's oil and gas industry. On the one hand, it legislates, regulates and taxes the sector; and on the other, it is in charge of upstream and midstream activities and international marketing. The Venezuelan state has adopted several regulatory and legislative reforms in the context of a long-term policy known as ‘oil sovereignty', including:
- the 2001 Organic Hydrocarbons Law, partially reformed in 2006; and
- the Organic Gaseous Hydrocarbons Law, passed in 1999 (‘Gas Law').
More specifically, upstream activities are reserved to the state and are undertaken by the national oil company, Petróleos de Venezuela, SA (PDVSA), either through its affiliates or through majority-owned, public-private incorporated joint ventures (‘mixed companies'), in which Corporacion Venezolana de Petroleo, SA (CVP) – itself a PDVSA affiliate – holds a controlling stake. There are no such restrictions for upstream activities under the Gas Law, which allows even total private ownership of licensed operators.
New refineries can be operated by private sector entities, but the international marketing of crude oil and derivatives is currently reserved to PDVSA and its affiliates.
Hydrocarbon deposits are reserved to the public domain and state ownership, pursuant to Article 12 of the Venezuelan Constitution.
1.2 Which national legislative and regulatory provisions govern the oil and gas industry in your jurisdiction?
Oil activities in Venezuela are governed mainly by the Hydrocarbons Law, as well as by a handful of key constitutional provisions, which lay the foundations of the industry.
The framework for the natural gas industry is primarily set out in the Gas Law and the Regulations to the Gas Law, enacted in 2000.
1.3 What other national legislative and regulatory provisions have relevance for oil and gas activities in your jurisdiction?
In addition to the Hydrocarbons Law, other relevant oil sector provisions can be found in the following laws, all of which were instrumental to the structural shift from the joint operating agreement model of the mid-1990s to the joint venture model currently in place:
- the Private Participation in Upstream Activities Regularisation Law (2006);
- the Orinoco Oil Belt's Operating Agreements and Shared Risks and Profits Agreements Migration to Mixed Enterprises Law (2007);
- the Law on the Effects of the Migration from the Orinoco Oil Belt's Operating Agreements and Shared Risks and Profits Agreements to Mixed Enterprises (2007);
Another key statute is the Organic Law Which Reserves to the State Assets and Services Related to Hydrocarbons Upstream Activities (2009).
In 2020 a state of emergency was declared for the energy and oil and gas sector through Presidential Decree 5, which has been further extended until at least 19 February 2022. The decree (see the recitals to its February 2020 extension) makes reference to the Anti-Blockade Constitutional Law for the National Development and Guarantee of Human Rights – a statute passed in late 2020 by Venezuela's Constituent National Assembly (a parallel body established between 2017 and 2020 to counter to the opposition-controlled National Assembly elected in December 2015), which allows the executive branch to directly undertake measures to incentivise the participation, management and operation of the private sector in the development of the national economy.
1.4 Are there any regional treaties or laws that need to be taken into account?
There are no sector-specific treaties that directly affect the Venezuelan oil and gas sector. However, Venezuela does have international commitments and quotas that arise from its participation in regional and international initiatives such as Petrocaribe and the Organization of the Petroleum Exporting Countries.
1.5 Which national regulatory bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?
Oversight powers over both oil and gas activities in Venezuela fall to the Ministry of Petroleum, which has ample discretionary powers to regulate both industries, including its direct control over PDVSA (and, indirectly, its affiliates).
Additional oversight powers specifically for the gas industry are conferred upon Ente Nacional del Gas, which functions as an industry watchdog and development-promoting entity; although in practice its relevance has been rather limited.
Pursuant to Presidential Decree 5 (see question 1.3), a presidential commission – the Alí Rodríguez Presidential Commission – was appointed to oversee the reorganisation and restructuring of the oil and gas industries. This commission has ample discretionary powers over hydrocarbon activities in general, including the exercise of direct control over PDVSA's operations. Notably, the commission is chaired by the vice president of economy and not by the minister of petroleum.
Finally, the Anti-Blockade Constitutional Law for the National Development and Guarantee of Human Rights (see question 1.3) created the International Centre for Productive Investment, which will function as a single, centralised coordination agency to oversee private investment in different industries, without any exclusions or carve-outs in relation to oil and gas.
1.6 What is the national regulators' general approach in regulating the oil and gas industry?
The regulatory activity carried out by the Ministry of Petroleum – as well as by the national legislature and executive – tends to be rather reactive and responds to particular circumstances, contingencies and temporary issues as they arise – in particular, those potentially affecting domestic upstream activities and international markets, such as cyclical downturns. However, in the past couple of decades, executive orders and regulations have tended to be consistent with underlying long-term strategies in connection with the Oil Sovereignty Plan, under which the local energy industry has strayed further from engagement with international oil companies and private investment.
On the other hand, no comprehensive plans to attract foreign investment and develop further capital-intensive projects (eg, the Carabobo project in the Orinoco Oil Belt and offshore non-associated gas projects) are currently in place.
1.7 What role do provincial, state and/or other local government regulatory bodies play in the regulation of the oil and gas industry?
State and municipal authorities have virtually no oversight, taxing or regulatory powers over the oil and gas sector, because these powers are reserved to the state (ie, the national government). For its part, under the revenue-sharing provisions of the Constitution, PDVSA and the national government are obliged to appropriate portions of the national tax income and royalties to the local and authorities in the annual budgets.
2 Oil and gas industry
2.1 How mature is the oil and gas industry in your jurisdiction?
The Venezuelan oil industry dates back to the early 20 century, when prospectors drilled the first wells in western Venezuela, in the Lake Maracaibo basin.
The industry is thus mature and well developed, having undergone different phases during which the balance between the involvement of private international oil companies (IOCs) and state intervention has continually shifted.
Given the relevance of oil revenues to Venezuela's fiscal income and the country's reliance (dependence, even) on such revenues to leverage economic development, the country's economy has expanded in sync with oil output. Thus, ancillary financial, engineering, technical and legal services are well tailored to serve and support Venezuela's energy sector.
The gas industry lacks the same level of industrial development, making the stranded-asset risk for natural far greater than it currently is for liquid hydrocarbons. For example, Venezuela currently does not have liquefied natural gas export facilities.
2.2 What are the key oil and gas products which are produced in your jurisdiction and where are activities typically based?
Venezuela holds the largest crude oil reserves in the world, with around 303 billion barrels of proved oil reserves. Oil activities are generally divided between western Venezuela (the Lake Maracaibo basin) and eastern Venezuela (including the deposits in Monagas State, as well as the abundant extra heavy oil deposits of the Orinoco Oil Belt). Thus, a significant portion of the territory is relevant for upstream activities.
In addition, free gas reservoirs can be found in central Venezuela, as well as in offshore blocks sitting both in western Venezuela and on the northeast Atlantic coast, close to Trinidad and Tobago. With about 200 trillion cubic feet of proved natural gas, it ranks among the world's largest gas reserves.
2.3 Who are the key players in the oil and gas industry in your jurisdiction?
The state. As may be expected in any state which is so highly dependent on its oil revenues, the oil and gas industry in Venezuela is essentially a function of political and macroeconomic decision making, rendering the Venezuelan state (at the federal level) and the state-owned national oil company the key players.
The role of the private sector has generally waned since the nationalisation of the industry in the mid-1970s, with a short revival during the privatisation wave of the 1990s, which saw increased influence being exercised by IOCs.
2.4 How are the following reflected in the domestic energy mix?
(a) Oil and gas
(b) Imports and exports?
Venezuela's energy mix is mainly focused on oil, derivatives, gas and gas liquids. Transportation is mainly gasoline and diesel dependent. Power generation is comprised of both hydropower generated in the Caroni River basin and thermoelectrical diesel and gas-powered generation.
(a) Oil and gas
Both oil and gas play a significant role in Venezuela's energy mix, accounting for the vast majority of the total energy supply matrix (hydroelectric being the only other relevant source). Subsidised natural gas and gas liquids play a significant role for domestic consumers, at least from two points of view:
- Methane is made available to limited urban centres through a pipeline network; and
- Butane, propane and gas liquids are widely distributed in canisters to suburban and rural locations.
The eastern and western regions of Venezuela are not interconnected for gas distribution purposes. As a result, a large portion of the associated gas produced in eastern Venezuela must be flared. Interconnection would allow that gas to be reinjected into the mature fields of western Venezuela.
(b) Imports and exports
Venezuela has traditionally been a net exporter of crude and derivatives, but mainly crude. Gas is not currently exported from Venezuela because Venezuela does not have liquefied natural gas terminals and almost all gas liquids are used domestically.
3 Exploration and production
3.1 What rights are required to undertake exploration and production in your jurisdiction? Do these vary depending on the type or location of the activity?
Under the Hydrocarbons Law, upstream activities may be carried out:
- directly by the state;
- through wholly owned state-owned enterprises; or
- by mixed companies (see question 1.1).
Thus, private participation in upstream or ‘primary' activities (as defined under the Hydrocarbons Law) must be carried out indirectly through minority equity holdings in mixed companies, in which the national oil company (NOC) – through Corporacion Venezolana de Petroleo, SA (CVP), an affiliate – will hold a majority stake.
No such restriction exists under the Gas Law, which allows privately owned operators to undertake upstream activities.
3.2 What regulatory or contractual requirements must be satisfied to obtain exploration and production rights?
To conduct upstream activities, a mixed company must obtain:
- legislative approval, in the form of a National Assembly accord;
- an executive decree assigning the surface area in which the activities in question will be performed; and
- a separate executive decree granting the rights to undertake upstream activities.
Finally, it is also necessary for the involved parties to enter into the relevant project-related contracts, including:
- a standardised, National Assembly-approved shareholders' agreement; and
- the incorporation documents (which are also in standardised form).
Gas upstream activities require a prior licence issued by the Ministry of Oil.
3.3 If there is state ownership of oil and gas rights in your jurisdiction, what is the procedure for obtaining exploration and production rights? How long does this typically take?
See questions 3.1 and 3.2.
3.4 Who can own exploration and production rights in your jurisdiction? Do specific requirements or restrictions apply to foreign operators? Do any indigenous ownership requirements apply?
No specific legal restrictions apply to foreign participation in upstream oil and gas activities. In practice, however, IOCs and other private players can only undertake upstream oil operations in Venezuela through minority stake holdings in mixed companies, which narrows the field for such investments. Furthermore, vertical integration is possible only for the NOC.
There are no indigenous ownership requirements in Venezuela.
3.5 If there is state ownership of oil and gas rights in your jurisdiction, what fees and other charges are incurred in obtaining exploration and production rights?
In addition to taxes and royalties, special bonus payments are often expressly required under the terms and conditions of specific tender and bidding proceedings. The specific payment terms are usually governed by contractual agreements entered into by the Venezuelan state and the private investor.
3.6 What is the duration of exploration and production rights? What is the process for renewal?
Mixed companies in the oil business can operate for a term of up to 25 years. This term can be extended for up to 15 additional years, provided that the specific terms and conditions agreed in the project-related documents allow for this (ie, the shareholders' agreement and the mixed company's bylaws).
Natural gas licences can have a term of up to 35 years and may be subject to a one-off renewal period of 30 years.
In both instances, renewal or extension of the initial term is subject to the following requirements:
- At least the initial term should have elapsed; and
- The pending term must be at least five years.
3.7 What are the operator's rights and obligations under exploration and production rights?
In a nutshell, authorisations for either mixed companies (in the oil industry) or private licensees (in the gas sector) provide the beneficiary with the rights to perform all upstream activities within the specified geographic area, for the term of such authorisation. In the case of gas licences, the licensee usually has the right to nominate an operator. Typically, the mixed company is the operator and has the right to explore and exploit oil; but all crude produced must be sold to Petróleos de Venezuela, SA (PDVSA) or an affiliate, which is legally vested with the power to market the crude internationally. Licences are normally granted together with a business plan and a development plan that will include investment production milestones that, if not met, may be cause for termination of the licence.
3.8 Are there any requirements re relinquishment of exploration and production rights or part of the area covered by such rights?
Withdrawal rights and investor exits are usually covered by the terms and conditions of the project documents entered into by either an oil mixed company or a natural gas licensee.
3.9 Can exploration and production rights be transferred or assigned? If so, how and subject to what government consents? Do any fees, taxes or other charges apply to direct or indirect transfers?
The transfer of equity in mixed companies is contractually restricted and must adhere to right of first offer provisions set forth in the standardised forms of both the shareholders' agreement and bylaws, pursuant to which CVP holds a pre-emptive right over such shares. The Ministry of Oil is also involved in the authorisation process.
The transfer or assignment of gas operation licences must be approved by the Ministry of Oil.
3.10 Can security be taken over exploration and production rights?
The grant of security interests and the pledge of shares in a mixed company require the prior authorisation of the Ministry of Oil.
Licensees in gas projects are usually precluded from granting security interests over their rights.
3.11 What contractual or regulatory provisions apply with regard to cessation of exploration and production or abandonment of exploration and production rights?
Grounds for immediate termination of a licence granted under the Gas Law include:
- the cessation and abandonment of activities; and
- deviation from exploration and/or production schedules.
4 Surface rights
4.1 Does the law of your jurisdiction distinguish between exploration and production rights and surface rights? If so, how does an owner of exploration and production rights acquire surface rights?
Venezuela has historically distinguished between surface rights and ownership of hydrocarbon deposits. Hydrocarbon deposits are reserved to the public domain and state ownership, pursuant to the Venezuelan Constitution. As such, the state is free to carry out all prospecting and production upstream activities over such deposits, which in practice means control over the surface area.
4.2 Where surface rights are acquired, what are the operator's rights and obligations as regards the landowner? And what are the landowner's rights and obligations as regards the operator?
A landowner may be entitled to special remedies and compensations for the use of its property to develop upstream oil and gas activities, pursuant to Article 40 of the Hydrocarbons Law. Under no circumstance does a landowner hold any claim, title or right in connection with the hydrocarbon deposits; meaning that the economic value of those resources will not be a function of any forthcoming compensation or consideration due for use of the property.
4.3 Is there a process for the mandatory acquisition of surface rights? If so, what does this involve?
If the landowner and the state agencies involved in a private negotiation process fail to agree on definitive terms and conditions for the use of the property, the state (usually acting through Petróleos de Venezuela, SA or an affiliate) may file for a court-mandated injunction allowing the use of a specified area in order to undertake upstream operations. Additionally, the state is free to carry out the expropriation of the property, pursuant to the terms of the 2002 Expropriation Law.
4.4 Are any native title issues applicable?
4.5 Are any other rights needed to use the land (eg, zoning permissions or planning requirements)?
No. Oil and gas activities are directly assumed at a federal level by the central government.
5 Processing, refining and export
5.1 What requirements and restrictions apply with regard to the processing and refining of oil and gas?
The refining of both natural hydrocarbons and hydrocarbon by-products is open to private investors, through either:
- a licence and the right to carry out the refining of natural hydrocarbons; or
- a permit to process hydrocarbon by-products.
The licences and permits are granted by the Ministry of Oil.
The Hydrocarbons Law expressly reserves all existing refining facilities for state ownership (see Article 10 of the Hydrocarbons Law).
5.2 What requirements and restrictions apply to the export of oil and gas?
The export of oil is restricted to Venezuela's national oil company, meaning that in practice, Petróleos de Venezuela, SA (through its affiliates) is the sole offtaker for oil projects undertaken by mixed companies (see Article 57 of the Hydrocarbons Law). However, the export of upgraded oil (in upgrading facilities such as those developed in certain Orinoco Oil Belt projects) may be directly undertaken by the operating mixed company.
No such restrictions apply to natural gas, where the impediments to export derive from installed capacities rather than regulatory restrains. Multiple capital-intensive projects for exporting gas to neighbouring countries (eg, by pipeline to Trinidad and Tobago) have been drawn up over the years.
6 Transport and storage
6.1 What requirements and restrictions apply with regard to the transport and storage of oil and gas? Do these vary in the case of cross-border transportation?
The operation of initial oil storage and transport facilities falls under the scope of upstream or primary activities in Venezuela, and is thus carried out by Petróleos de Venezuela, SA, its affiliates or mixed companies. For details of restrictions on exports, please see question 5.2.
The transportation of non-associated natural gas requires a permit issued by the Ministry of Oil.
6.2 What requirements and restrictions apply to the construction and operation of transport and storage infrastructure?
The operation of facilities for the main transportation of oil and gas within Venezuela is expressly reserved to the state. This includes all further development work over these facilities, pursuant to Article 10 of the Hydrocarbons Law. Typically, the development of new initial storage and transport infrastructure:
- will be covered under a project-specific business and/or development plan; and
- will be undertaken by either a mixed company or a licensee (in the case of non-associated gas operations), to be operated for the remainder of the term of the project, subject to subsequent reversion to the state.
7 Environmental issues
7.1 What environmental authorisations are required to undertake oil and gas activities in your jurisdiction? Do these vary depending on the type or location of the activity?
Specific regulatory approvals – in the form of authorisations, permits, licences and concessions, among others – may be needed from the Ministry for Eco-socialism. Pursuant to Articles 23, 24 and 25 of the Environment Organic Law of 2006, these approvals must conform with an underlying environmental plan, in which a sustainable socioeconomic development balance is struck between economic growth and the environment and ecosystems.
The state may allow the development of industrial activities which may adversely impact on or degrade the environment, as long as:
- they are carried out following territorial planning;
- their effects are tolerable;
- socio-economic benefits arise as a trade-off; and
- applicable procedures and standards are met.
The specific terms, conditions, limitations and restrictions are determined and established on a case-by-case basis in the specific authorisation (see Article 83 of the Environment Organic Law).
Businesses that operate in an industry which could potentially affect the environment (eg, oil and gas) must register with the Ministry for Eco-socialism's Registry of Activities Capable of Degrading the Environment.
7.2 What environmental regulations or contractual obligations must the operator observe while oil and gas facilities are operational?
Upstream operators must follow the guidelines on drilling and wellhead operations specified by the Ministry for Eco-socialism in the specific administrative authorisation. These should address issues such as:
- conditions for injection; and
- mud and wastewater management.
Pursuant to Article 80(2) of the Water and Air Quality Law (2015), the Ministry for Eco-socialism may also order the drilling of wells at groundwater level, as a monitoring and control measure for permanent injection operations, in addition to requiring the use of techniques such as:
- electrical, flow, pressure and temperature recording;
- cementing tests; and
- any other mechanism that allows the fluid injected into the aquifer or receiving reservoir to be monitored and controlled.
7.3 What environmental regulations or contractual obligations must the operator observe in relation to decommissioning?
The decommissioning of assets and facilities should follow the guidelines issued by the Ministry for Eco-socialism and should take place under the direct oversight of the Ministry of Oil, pursuant to Article 15 of the Water and Air Quality Law. Specific terms and conditions regarding decommissioning are usually included in the project-related documents and agreements (eg, licences, permits, mixed company agreements).
7.4 What are the potential consequences of breach of these requirements – both for the operator itself and for directors, managers and employees?
In addition to contractual non-compliance (subject to the remedies specified therein), operation breaches that result in environmental hazards may render the operator liable to civil, administrative and even criminal liability. Civil and administrative liability may include indemnification, damages and remediation costs. Criminal liability may include prison terms for the company's owners, shareholders, directors, managers and executives, pursuant to Article 11(1) of the Environment Criminal Law of 2012.
7.5 Which national, provincial/state and/or local government regulatory bodies are responsible for enforcement of environmental obligations?
The Ministry for Eco-socialism, along with the Ministry of Oil.
7.6 What is the regulators' general approach in regulating the oil and gas sector from an environmental perspective?
See question 7.1.
8 Health and safety
8.1 What key health and safety requirements apply to oil and gas operators in your jurisdiction?
There are no specific regulations applicable to oil and gas operators regarding health and safety. In general, employers in the oil and gas sector must comply with the minimum legal standards to ensure the safety of employees.
The minimum requirements that employers must fulfil are set out in occupational health and safety law and include the following:
- Inform employees of the risks associated with their work and the measures necessary to prevent dangerous or unsanitary conditions;
- Provide training on health and safety measures and the use of safety equipment;
- Set up a health and safety programme with the participation of employees and implement the programme once it has been approved by the health and safety authorities;
- Set up an occupational health and safety committee, consisting of elected employee representatives and employer representatives in equal numbers. The number of representatives in the health and safety committee should be based on the number of workers at the workplace;
- Set up a health and safety service (a body composed of professionals of different areas related to health and safety, including doctors, nurses, epidemiologists, hygienists and engineers);
- Supply all equipment necessary to protect each employee;
- Conduct periodic medical examinations of employees;
- Observe the limits on overtime and ensure that work breaks are given during working hours;
- Ensure that employees take annual leave when appropriate;
- Provide proper training to employees on the prevention of accidents and labour-related illness, based on the tasks required of each employee;
- Set up programmes, with employee participation, of activities for employees' free time and make them available to all (eg, intra-company sports competitions, visits to tourist sites and holidays for employees' children).
- Ensure employees' safety on the way to and from the workplace. Employers are liable for any accidents that take place en route.
8.2 Which national, provincial/state and/or local regulatory bodies are responsible for enforcement of health and safety regulations or obligations? What reporting requirements apply with regard to oil and gas accidents in your jurisdiction?
The workplace health and safety committees and the National Institute for Prevention, Health and Safety at Work (INPSASEL) are responsible for enforcing the regulations. Inspectors from INPSASEL have the authority to enter premises and investigate potential breaches.
Overall, work accidents must be notified to INPSASEL within the hour. Employers can choose to report the work accident:
- online (if the employer has previously registered a user account at www.inpsasel.gov.ve);
- by calling the INPSASEL hotline (0800-4677273); or
- directly at INPSASEL's offices.
A formal statement must then be filed with INPSASEL within 24 hours of the event. The statement must include specific information and follow the terms of the statement sheet as set out on INPSASEL's website. It is important to provide all required information; otherwise, the formal statement will not be deemed to have been filed.
In the case of a work-related illness, the employer must provide the required formal statement within 24 hours of such illness being diagnoses, under the same terms as a work accident.
The unions and the occupational health and safety committee must also be notified.
8.3 What are the potential consequences of breach of these requirements – both for the operator itself and for directors, managers and employees?
Failure to comply with the obligations set out in the occupational and safety legislation may result in the imposition of fines. Breaches of the rules are categorised as ‘mild,' ‘serious' or ‘very serious', depending on the number of employees affected.
The employer's representatives can be held liable for civil damages and may even incur criminal liability if an employee dies or is seriously injured as consequence of the employer's breach of health and safety regulations.
Occupational and safety legislation also provides for indemnities which are payable by employers to employees in case of labour-related accidents or illnesses.
Employers are generally liable for all labour-related accidents or illnesses, even if they have taken the necessary measures to avoid the accident or illness; although compliance with the required standards is a mitigating factor in determining liability. However, this rule does not apply in criminal law, where only ‘very serious' breaches result in liability for the employer.
8.4 What best practices in relation to health and safety should operators consider adopting in your jurisdiction?
Best practice is to follow the minimum legal standards in health and safety. It is also advisable for operators to carry out a risk assessment of the workplace and work processes in order to identify the risks that are specific to its activities.
8.5 What is the regulators' general approach in regulating the oil and gas sector from a health and safety perspective?
Because oil and gas activities involve hazards and dangerous conditions, the regulators tend to be severe and thorough in enforcing the health and safety regulations.
9 Taxes and royalties
9.1 What national, provincial/state and/or local taxes, royalties and similar charges are levied on oil and gas operators in your jurisdiction? How are these calculated?
Upstream operations are subject to a royalty levied at a rate of 30% on the volume of extracted hydrocarbons, which must be paid in cash or in kind, at the option of the Venezuelan government. This rate may be reduced to 20% for mature reservoirs and extra-heavy crude oil. The price for calculating the royalty is capped at $80 per barrel. An additional royalty of 3.33% typically applies to mixed companies. A production tax calculated at a rate of one-third of the value of all liquid hydrocarbons extracted from an oil field is applicable in parallel, provided that royalties are deductible from the taxable amount.
Upstream oil operators are subject to income tax at a flat rate of 50% of their net income. However, for specific projects in the Orinoco Belt, certain special treatments may be warranted, such as:
- favourable deductions;
- amortisation; and
- loss carry-forward.
Oil activities may also be subject to value added tax (VAT) at a rate of 16% on sales, services and imports. Exporters are entitled to a refund for a significant portion of VAT paid through the Venezuelan tax authorities' issuance of tax recovery certificates which can be used to satisfy future tax liabilities. Sales of crude oil by mixed companies to Petróleos de Venezuela, SA (PDVSA) or its affiliates are subject to a rate of 0%, which may lead to an accumulation of VAT tax credits (although the tax authorities generally delay the reimbursement of such credits).
Venezuela also imposes a windfall profits tax for ‘extraordinary' and ‘exorbitant' prices, which is payable by exporters of natural or upgraded liquid hydrocarbons and mixed companies selling natural or upgraded liquid hydrocarbons and by-products to PDVSA or its affiliates. The windfall profits tax applies at a rate of 20% rate to the difference between the prices established in the Venezuelan national budget and the monthly average international prices for the basket of Venezuelan hydrocarbons.
Upstream mixed companies are also subject to a surface tax, calculated at an annual rate of 100 tax units per square kilometre or fraction thereof of unused concession area (with an annual increase of 2% for five years and 5% in subsequent years).
Finally, an alternative minimum ‘shadow' tax, providing for fiscal revenues of no less than 50% of gross oil proceeds, is triggered if the tax take does not reach at least 50% of the gross profits after applying royalties, taxes and other levies.
Natural gas is subject to lighter taxation than petroleum activities, with a 20% fixed royalty and a standard income tax at the corporate rate of 34%.
Oil and gas companies are not subject to municipal business taxes.
In addition to the specific taxes and contributions applicable to the oil and gas industry, operators may be subject to the following special contributions:
- the science and technology contribution (1% of gross profits);
- the anti-drugs trafficking contribution (1% of net profits); and
- the sports contribution (1% of net profits)
9.2 Are any tax incentives available for oil and gas operators?
Certain tax breaks and incentives may be subject to direct negotiation between investors, operators and the Venezuelan government. To the extent that a foreign company provides capital expenditure in a new project, it may benefit from a more favourable tax regime. This is the case for foreign companies participating in the Carabobo and Junín Oil Belt projects, in which the Venezuelan government has agreed – subject to specific terms and conditions – to reduce royalties and taxes and grant additional tax incentives.
9.3 What other strategies might oil and gas operators consider to mitigate their tax liabilities?
Early engagement in negotiations with the Venezuelan government from the outset of a tendering process on the fiscal terms and conditions applicable to the specific project is advisable. Such discussions should, as far as possible:
- include representatives from the Ministry of Economy and the tax authorities; and
- be consistent with the project-related cash flows projections, amortisation schedules and business and/or development plans.
In addition, the effect on the calculation of taxes of Venezuela's high inflation rate and currency devaluation should be considered.
9.4 Have there been any significant changes to the taxation rates applicable to oil and gas operators in the last three years?
An income tax exemption applicable to PDVSA, its affiliates and mixed companies – enacted by presidential decree – lapsed without any further renewals or extensions in fiscal year 2019. Therefore, as from fiscal year 2020, PDVSA, its affiliates and mixed companies are again subject to Venezuelan income tax.
10.1 In which forums are oil and gas disputes typically heard in your jurisdiction?
Arbitration under the rules of the International Chamber of Commerce (ICC) is commonly used in the context of oil and gas projects. However, most contracts and project-related agreements submit disputes to the jurisdiction of the local courts.
Claims regarding direct or indirect expropriation and unlawful termination are usually brought before the International Centre for Settlement of Investment Disputes (ICSID) or are subject to ad hoc arbitration under the UNCITRAL rules in cases where these remedies are available to the investor (at least apparently) under a bilateral investment treaty. Venezuela denounced the ICSID Convention in 2012.
Additionally, several trade and financing claims have been filed against Petróleos de Venezuela, SA (PDVSA) (and its affiliates) in the United States (mostly in New York, Texas, Florida and Delaware) and in the United Kingdom.
10.2 What issues do such disputes typically involve? How are they typically resolved?
The migration from the operating agreements of the 1990s to the incorporated joint venture model of the 21st century resulted in extensive litigation against the Venezuelan state, mostly concerning direct and indirect expropriation. PDVSA and its affiliates have also been involved in extensive litigation abroad, mainly brought by:
- joint venture partners;
- vendors and suppliers; and
- financial creditors for defaulted debt (usually in the form of bonds and promissory notes).
PDVSA has also often been pulled into litigation as co-defendant with the Venezuelan state – even in matters unrelated to oil and gas activities.
10.3 Have there been any recent cases of note?
In 2018, in Crystallex International Corporation v Bolivarian Republic of Venezuela, a Delaware district court held that PDVSA was Venezuela's alter ego; and that as such, its assets were liable to actions brought forward by the state's creditors.
11 Trends and predictions
11.1 How would you describe the current oil and gas landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
The oil and gas industry in Venezuela is facing severe challenges, due mainly to:
- the lack of access to financing; and
- the loss of the United States and other natural markets for petroleum products, due to US sanctions imposed on the country and its oil industry.
These circumstances have reduced foreign participation in the oil and gas industry: few international oil companies are still active in the country; and those have remain have reduced their operations to wind-down minimums due to externalities such as US sanctions and oil market conditions (in the context of the energy transition).
Any short-term development would be largely dependent on US policies towards Venezuela; as well as the government's strategic ability to provide private sector incentives, in order to attract the foreign investment (and much-needed capital expenditure) needed to tap the country's vast hydrocarbon resources.
12 Tips and traps
12.1 What are your top tips for oil and gas operators in your jurisdiction and what potential sticking points would you highlight?
The oil and gas potential of Venezuela is well known. The country has not only vast hydrocarbon deposits, but also adequate facilities and infrastructure. However, operators in Venezuela should be aware of two key undercurrents that affect the viability (and potential profitability) of oil and gas businesses:
- First, the internal dynamics of the industry, shaped by the country's dependence on oil exports, mean that political, macroeconomic and even social considerations play an essential role in the business strategy and long-term goals of the national oil company. This symbiosis between the state and the oil industry cannot be ignored.
- Second, external factors have immediate effects on Venezuela's oil and gas industry, which extend beyond cyclical or market considerations – as reflected by the US sanctions.
Numerous distressed M&A opportunities currently exist for oil and gas assets in Venezuela, so specialised investors may be persuaded to evaluate prospective deals in the country.
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