Identifier
Created
Classification
Origin
07CARACAS426
2007-03-01 16:16:00
CONFIDENTIAL
Embassy Caracas
Cable title:  

BRV PUBLISHES OIL NATIONALIZATION DECREE

Tags:  EPET ENRG EINV ECON VE 
pdf how-to read a cable
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RUEHAC/AMEMBASSY ASUNCION 0775
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RHEHNSC/NSC WASHDC
C O N F I D E N T I A L CARACAS 000426 

SIPDIS

SIPDIS

ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD
NSC FOR DTOMLINSON

E.O. 12958: DECL: 01/12/2017
TAGS: EPET ENRG EINV ECON VE
SUBJECT: BRV PUBLISHES OIL NATIONALIZATION DECREE

REF: CARACAS 411

Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D)

C O N F I D E N T I A L CARACAS 000426

SIPDIS

SIPDIS

ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD
NSC FOR DTOMLINSON

E.O. 12958: DECL: 01/12/2017
TAGS: EPET ENRG EINV ECON VE
SUBJECT: BRV PUBLISHES OIL NATIONALIZATION DECREE

REF: CARACAS 411

Classified By: Economic Counselor Andrew N. Bowen for Reason 1.4 (D)


1. (C) SUMMARY: The oil nationalization decree, which was
published on February 26 but publicly available on February
27, requires the four strategic associations, the three
profit sharing agreements, the Chinese Orimulsion company
Orifuels Sinoven S.A. and any related entities "that carry
out commercial activities in the Faja region" to convert to
PDVSA-controlled joint ventures. In addition to the terms
set out by President Chavez in his February 26 speech, the
decree states that transition committees that will sit on
association boards must be created within seven days.
Article 8 appears to give the BRV the ability to revoke joint
venture's property rights if operators do not meet the joint
venture's objectives. Article 9 permits the BRV to limit the
joint venture's block sizes. Joint venture employees will be
subject to the PDVSA collective bargaining agreement.
Lastly, the decree appears to eliminate international
arbitration for joint venture partners. END SUMMARY.

--------------
SCOPE OF THE DECREE
--------------

2. (SBU) The BRV published the oil nationalization decree in
the Official Gazette dated February 26. Copies of the decree
were not available until the afternoon of February 27. The
scope of the decree appears to be more limited than what
President Chavez stated in his February 26 speech (Reftel).
According to Article 1 the decree applies to the four
strategic associations, the three profit sharing agreements,
the Chinese Orimulsion company Orifuels Sinoven S.A.,
companies and consortia created to carry out the
association's activities, and affiliates of the previously
mentioned companies that "carry out commercial activities in
the Faja region." President Chavez appeared to state on
February 26 that the decree applied to third party companies
that carried out commercial activities in the Faja. Chavez'
comments appeared to indicate that service companies

operating in the Faja were subject to the nationalization
decree. It is not clear if Chavez misspoke or based his
statement on a previous draft of the decree. (NOTE: The
decree uses the term "associations" throughout. Given the
context, we believe the term refers to all of the private
sector entities in Article 1. A partner of the Baker &
McKenzie law firm told Petroleum Attache (Petatt) on February
28 that that was his interpretation as well. END NOTE)

--------------
CONTROL AND TIMING
--------------

3. (SBU) As President Chavez stated on February 26, the
decree states that the Venezuelan Petroleum Corporation
(CVP),the PDVSA affiliate that deals with foreign oil
companies, or another PDVSA affiliate will control at least
60% of the shares of the new joint ventures. The decree
empowers the Minister of People's Power for Petroleum and
Energy (MPPEP) to determine in each case the value of each
joint venture, the percentage of shares the PDVSA affiliate
will hold in each joint venture, and the economic and
financial adjustments that are necessary to create the joint
ventures.


4. (C) The decree also mandates that a transition committee
for each joint venture be set up within seven days of the
publication of the decree. The committees will be
incorporated into the board of directors of each of the
entities that is migrating to a joint venture. (COMMENT: At
this point, we are not sure how many entities are covered by
the decree or the number of transition committees that will
be formed. It is not clear how many consortia and affiliates
have been formed to carry out operations. For instance, an
ExxonMobil subsidiary carries out operations at the Cerro
Negro strategic association. We assume that it will need a
transition committee. Whether the BRV will form a separate
transition committee for the subsidiary or create a single
committee to cover both Cerro Negro and the ExxonMobil
operating subsidiary remains to be seen. END COMMENT)


5. (SBU) The decree states the private sector companies will
have four months from the date of publication to reach
agreement on the terms for their participation in the joint
ventures. The National Assembly will then have an additional
two months to authorize the joint venture under the terms of
the Organic Hydrocarbon Law. If terms are not reached within
the four month time period, PDVSA or one of its affiliates is
empowered to directly assume "the activities exercised" by
the private sector company.


6. (SBU) The infrastructure, transport services, and
upgrading services of the private sector companies will be
used along the lines set forth in resolutions by the Energy
Ministry (MEP). The costs of using the assets will be
jointly determined by the private sector companies and MEP.
However, MEP may determine the costs on its own if the
parties fail to reach agreement.

--------------
MOTHER OF ALL LOOPHOLES?
--------------

7. (C) Article 8 of the decree states the BRV, via decree,
will transfer to the joint ventures "the right to exercise
their primary activities". In addition, the BRV will award
property or other rights to real estate and other assets
under its control so that the joint ventures can carry out
their primary activities. However, the BRV reserves the
right to revoke these rights if "the operators" do not
"fulfill their obligations in such a way that it impedes the
objective for which the rights were transferred." The Baker
& McKenzie partner stated the section tracks the language of
Article 24 of the Organic Hydrocarbons Law (OHL). He stated
he thought the language was a double-edged sword. It appears
that any party to the joint venture could invoke the
provision.


8. (C) It is not clear what will constitute the primary
activities of the joint ventures. The Baker & McKenzie
partner stated the "fulfill their obligations" language is so
vague, it is impossible to determine what the criteria are
for the provision. Local analysts told Petatt on February 27
that they were concerned the BRV would use the provision to
force their private sector partners to significantly increase
their social development contributions. In addition, we note
that the provision could be used to force private sector
companies to invest in enhanced recovery projects in order to
increase recovery rates in the Faja. The BRV has been keen
to force oil companies in the Faja to adopt enhanced recovery
technologies to increase recovery rates for some time. Local
oil analysts and ExxonMobil executives have told us that the
BRV's plans may not make any sense given the nature of the
Faja's reservoirs. At the present time, the four strategic
associations are using cold flow production (the oil flows
naturally due to reservoir pressure). An ExxonMobil
executive stated that it may be 10 years before the reservoir
pressure is low enough to introduce the enhanced recovery
methods that PDVSA advocates.

--------------
BLOCK SIZE
--------------

9. (C) Under Article 9 of the decree, MPPEP, via a
resolution published in the Official Gazette, will delimit
the blocks where joint ventures can carry out their primary
activities. The maximum size of a block is 100 square
kilometers.

--------------
LABOR ISSUES
--------------

10. (C) All employees on the associations' payroll will be
covered by the Oil Collective Convention, the collective
bargaining agreement that governs PDVSA employees, upon entry
into force of the decree. The Baker & McKenzie partner
stated the provision means that none of the current private
sector employees can be fired. He speculated that the PDVSA
Oil Collective Convention would provide a floor for employee
compensation but not act as a ceiling. A partner at a local
Venezuelan law firm told Petatt on March 1 that the article
only applies to private sector employees who are subject to
previous collective bargaining agreements with their private
sector employers. Managers, for example, are not covered by
the provision. In addition, she stated contractors'
employees are not covered by the provision. Local analysts
believe that the private sector employees will eventually
face pay cuts when they fall under the PDVSA collective
bargaining agreement, since many employees in the former
operating service agreement fields had their pay cut after
the agreements were converted to PDVSA controlled joint
ventures.

--------------
ARBITRATION
--------------

11. (SBU) Article 13 of the decree states "all facts and
activities related to the present decree" and "the
controversies" that derive from them are subject to
Venezuelan jurisdiction in the form set forth by the
Venezuelan constitution. Article 34 (b) of the OHL seems to
state that international arbitration can only occur if both
parties agree to it.


12. (C) The Baker & McKenzie partner viewed the provision as
"fatal" to international arbitration. He noted the
"activities" language did not limit the provision to the
underlying contract. In addition the language on the
Venezuelan constitution in his opinion refers to Article 151
of the constitution. Article 151 states that public interest
contracts are considered to incorporate a clause that
requires the resolution of "doubts and controversies" by
Venezuelan courts. In addition, the doubts and controversies
do not give rise to foreign claims under any circumstance.


13. (C) The partner was not sure how far the BRV would go in
claiming that international arbitration could not be utilized
by private sector companies affected by the decree. He
opined that it would be difficult to make the claim if the
company in question fell under the protection of a bilateral
investment treaty with an arbitration clause.



BROWNFIELD