VENEZUELA: NEW PETROCHEMICALS LAW

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 001131

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E.O. 12958: DECL: 08/26/2019
TAGS: EPET EINV ENRG ECON CU VE
SUBJECT: VENEZUELA: NEW PETROCHEMICALS LAW

Classified By: Economic Counselor Darnall Steuart, for reasons
1.4 (b) and (d).


1. (C) SUMMARY: Venezuela passed a limited-scope
Petrochemicals Law in July that covers basic and intermediate
sector activities. It permits the Bolivarian Republic of
Venezuela (GBRV) to enter into mixed companies with the
private sector and attempts to preclude private company
recourse to international arbitration to settle disputes. In
an August 12 conversation, representatives of Koch Industries
described the "creeping expropriation" of their petrochemical
investments in Venezuela. END SUMMARY.


2. (SBU) Venezuela's Organic Law for the Development of
Petrochemical Activities entered into force on July 10, 2009.
(Note: It was originally published in the Federal
Register-equivalent on June 18, 2009, but was reprinted due
to material errors on July 10, 2009 (Official Gazette No.
39,218)). The new Petrochemicals Law does not regulate all
petrochemical activities, but has a limited scope of
application, beginning with the processing of raw
petrochemical products and ending with the transformation of
the products obtained from such processing. It does not
apply to activities regulated by the 2001 Hydrocarbons Law or
the 1999 Gaseous Hydrocarbons Law.


3. (SBU) The Petrochemicals Law reserves basic and
intermediate petrochemical activities for the State, as well
as the assets and facilities required for their handling. It
allows the State, through the Ministry of Energy and
Petroleum (MENPET),to create mixed companies in which the
GBRV will not only control 50% of the shareholder equity, but
also have effective control over the company decisions.
(NOTE: There were twelve petrochemical joint ventures at the
time the law was published, involving companies from the
U.S., Canada, Colombia, Spain, Italy, Japan, and the
Netherlands.) Creation of the companies requires
authorization by the MENPET and National Assembly. The
duration of joint ventures will be forty years, extendable
for successive periods of fifteen years. The legislation
mandates that certain investment incentives for the GBRV will
be required for authorization of a mixed company including,
technology transfer, incentives for industrial development,
infrastructure supply, facility maintenance, social
resources, import substitution, price advantages, and
estimated profits.


4. (SBU) The Petrochemicals Law gives priority to the supply
of the domestic market and the development of State and
socialist companies. Upon expiration of the term of a mixed
company, its works, ancillary facilities, and equipment shall
be delivered to the State, free of encumbrance and without
any indemnity whatsoever. Although the Petrochemicals Law
does not forbid arbitration as a dispute resolution method,
it does say that such disputes shall not give rise to
international arbitration. Commercial arbitration, as
mandated under Venezuela's Commercial Arbitration Law, is
cited as an acceptable means for amicably resolving disputes.


5. (SBU) Under the law, companies have sixty days to list
themselves on a National Registry of Petrochemical Companies
before they are authorized to operate. Companies that were
already engaged in activities regulated by the law were given
until August 18 to register - it is notable, however that the
registry is not functioning yet. Finally, per an amendment
to regulations for CADIVI, Venezuela's foreign currency
control board, published in the Official Gazette on August
11, 2009, mixed companies created pursuant to the
Petrochemicals Law are permitted to keep foreign bank

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accounts in foreign currency.

STATUS of U.S. INVESTMENTS IN THE PETROCHEMICALS SECTOR


6. (C) Embassy representatives met August 12 with
representatives of Koch Industries to discuss their
investments in Venezuela's petrochemicals sector. Koch has a
35 percent share in FertiNitro (Fertilizantes Nitrogenados de
Venezuela, an ammonia and urea project located in the Jose
petrochemical complex. Venezuela,s national petrochemical
company Pequiven has a 35 percent share, while an affiliate
of Italy's Snamprogetti S.P.A. has 20 percent and the
remaining 10 percent share is held by Empresas Polar.
According to the Koch representatives, Pequiven began
diverting a higher percentage of FertiNitro's production to
the domestic market in 2006. This was followed by a 2007
government regulation mandating that urea be supplied first
to the domestic market. Since then Pequiven has run the Jose
facility itself; Koch pulled its own people out in 2007.


7. (C) Koch has received verbal assurances from Pequiven that
the project would not be affected by the new petrochemical
legislation. In the event of nationalization, however, Koch
has prepared by registering its FertiNitro affiliate in
Switzerland to give it access to the Swiss Bilateral
Investment Treaty. A Koch representative added that
Pequiven's management of the facility could be termed a
"creeping expropriation" given that it no longer consults
with the FertiNitro Board or abides by other contract
provisions.


8. (C) Koch Industries also has a 35 percent share in
Profalca (Propilino de Falcon),a $100 million propylene
splitter plant located at the Paraguana refinery complex.
The other shares are held by Venezuelan companies including
Pequiven, 35 percent; Empresas Polar, 15 percent; and
Inelectra, 15 percent. The Koch Industries representatives
noted that the plant has not produced for a year because of a
shortage of natural gas.


6. (SBU) A summary of Venezuelan laws governing the various
aspects of the hydrocarbons industry follows:

Activity //Description//Regulating Law

Petrochemicals//Transformation of raw petrochemical products
of hydrocarbons by separation, purification, conversion and
combination of the products obtained using chemical,
physical, and transformation methods//2009 Petrochemicals Law

Refining of liquid hydrocarbons//Distillation, purification,
transformation of natural hydrocarbons to add value//2001
Hydrocarbons Law

Industrialization of refined hydrocarbons//Separation,
distillation, purification, conversion, blending and
transformation to add value by obtaining special petroleum
products and derivatives//2001 Hydrocarbons Law

Industrialization of gaseous hydrocarbons//Chemical, physical
or chemical-physical transformation processes to add
value//1999 Gaseous Hydrocarbons Law

Processing of natural gas liquids//Separation, extraction,
fractioning, storage and commercialization//Regulations of
the 1999 aseous Hydrocarbons Law


7. (C) COMMENT: Post beieves the Petrochemicals Law's 50-50
ownership slit between the GBRV ad the private sector came

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about through Japanese and Brazilian intervention. Early
drafts of the law reflected the same 60-40 split found in the
petroleum sector joint ventures. As noted above, Koch
Industries has received verbal assurances from Pequiven that
its projects would not be affected by the new legislation.
Koch was informed that it would receive a letter to that
effect which it has not received. The Koch representatives
reported that Japan,s Metor (Note: Metor is a joint venture
between Mitsubishi Gas Chemical and Pequiven) investment has
received such a letter from Pequiven. A 50-50 split,
however, reflects semantics, as the GBRV guarantees to itself
effective control over all management decisions. END COMMENT.

DUDDY