21st-Century Transformation of the Venezuelan Oil Industry

Transcription

1 475 21st-Century Transformation of the Venezuelan Oil Industry By Elisabeth Eljuri and Victorino J Tejera Pérez* This article explores the evolution of Venezuela s oil industry during the period and addresses the related regression in the use of and respect for arbitration in oil industry projects. There has been a major transformation in the form of doing business within the oil sector in Venezuela. From structure and control issues, to the approach the state takes on arbitration, we have seen a 180-degree turn. Venezuela has gone from allowing direct private participation in all major oil activities to restricting those activities to Mixed Companies where the foreign company becomes a minority shareholder. This article first explores the historic background of the Apertura Petrolera in Venezuela, and then recounts the steps taken by Venezuela in the past years ( ) to reverse the Apertura. It then addresses some of the protective measures that companies can consider in similar situations to minimise risks and perhaps even benefit from the process undertaken by the current government. Finally, the article addresses the treatment that has been given to arbitration clauses in the oil business and explores recent developments in Venezuelan arbitration, within that specific context. Looking back over recent years there has been a major transformation in the form of doing business within the oil sector in Venezuela. From structure and control issues, to the approach the state takes on arbitration, we have seen a 180-degree turn. Venezuela has gone from allowing direct private participation in all major oil activities to restricting those activities to mixed companies where the foreign company becomes a minority shareholder. 1 * Elisabeth Eljuri is a partner based in the Caracas office of Macleod Dixon and is admitted to practise law in New York and Venezuela. She is a corporate and energy lawyer and is the head of the oil and gas practice in the Caracas office. She can be contacted by at elisabeth.eljuri@macleoddixon.com. Victorino J Tejera Pérez is a partner of the arbitration and litigation group of the Caracas office. He specialises in commercial and investment arbitration and can be contacted by at victorino.tejera@macleoddixon.com. 1 A Brewer-Carías, La Estatización de los Convenios de Asociación que Permitían la Participación del Capital Privado en las Actividades Primarías de Hidrocarburos Sucritos Antes de 2002, mediante su Terminación Anticipada y Unilateral y la Confiscación de los Bienes Afectos a los Mismos (2007), p 2.

2 476 Journal of Energy & Natural Resources Law Vol 26 No Even the 1999 gas opening is now, under the current presidential regime, seeing a reversal in terms of government participation and control levels. Originally, gas was intended to allow 100 per cent private participation and the Organic Gas Law 2 is consistent with that goal. However, the government, as a matter of policy, has expressed a desire to retain 60 per cent of gas projects as well. The foregoing is quite typical in times of high oil prices. Venezuela is not the only country that has taken measures to increase the government take and the role of the national oil company as a whole. Therefore, the government goals per se appear permissible as a matter of policy. The key question for lawyers is whether the process occurred legally and where it is more open to question. The development of international law in the area of the protection of investments is still evolving and investors learn from every situation, from one country to the next, to become wiser in protecting their investments. Arbitration has been closely linked to the oil industry and has historically been chosen as the alternative dispute resolution mechanism to solve disputes between private investors in the oil industry in Venezuela and the state-owned oil company, Petróleos de Venezuela (PDVSA) or the Venezuelan State. Arbitration has also been endorsed in the numerous bilateral investment treaties (BITs) entered into between Venezuela and two dozen countries. Recently, conflicts between private investors in the oil industry and the Government of Venezuela have brought into question the arbitration clauses in the contracts entered into by these parties. This article addresses the dismantlement process of the Apertura Petrolera in connection with the position that the current Venezuelan government has adopted with regard to arbitration clauses and recent developments in this particular area. The article first explores the historic background of the Apertura Petrolera in Venezuela, and then recounts the steps taken by Venezuela in the past years ( ) to reverse the Apertura. It then addresses some of the protective measures that companies can consider in similar situations to minimise risks and perhaps even benefit from the process undertaken by the current government. Finally, the article addresses the treatment that has been given to arbitration clauses and explores recent developments in Venezuelan arbitration, within the specific context of the oil business. 2 Published in Official Gazette No 36,793 of 23 September J Dargin, The Rising Tide of Expropriation in Venezuela: a Look at 21st Century Resource Nationalism, (2008) 6(2) Oil, Gas & Energy Law Intelligence 6.

3 21st-Century Transformation of the Venezuelan Oil Industry 477 Apertura Petrolera and its evolution into mixed companies The 1990s saw the development of the Apertura Petrolera process, through which Venezuela adopted a policy of attracting private investment to the oil industry. Specifically, in 1992 and 1993, the Venezuelan State Oil Company, Petróleos de Venezuela, SA (PDVSA) held the first and second rounds of operating agreements to reactivate 14 production fields, all of which were awarded to foreign investors. In 1996, PDVSA awarded rights to develop eight exploratory areas under association agreements. In 1993 and 1997, PDVSA entered into four strategic association agreements for extra-heavy oil. In 1997, PDVSA held the third round of bids to award operating agreements. 4 Overall, within the Apertura process, 32 operating agreements, eight exploration at risk and profit-sharing agreements, four strategic associations and one association agreement for production of Orimulsion 5 were entered into between PDVSA affiliates and private investors. 6 In essence, operating agreements were service contracts pursuant to which the private oil company operated an oil project for the benefit of PDVSA. However, they were unique in the sense that the private investor took significant risks in the project and the capital spent was all the risk of the contractors. In the case of exploration at risk and profit-sharing agreements, a PDVSA subsidiary, specifically Corporación Venezolana del Petróleo, SA (CVP), entered into agreements with the companies that had been awarded rights for the exploration at risk of the areas. In these agreements, the third party partners assumed all exploration risks, and if a commercially viable hydrocarbons discovery was made and declared, CVP had the right to participate in the profits of the find. Strategic associations and association agreements covered production, extraction, gathering, transport, storage, upgrading and commercialisation of hydrocarbons in the Orinoco Belt. We now turn to explain how the Chávez Administration began to dismantle the Apertura Petrolera process. We will explain in chronological order the transformation of the Venezuelan oil industry beginning with the enactment of 4 E Eljuri and M d Empaire, New Legal Framework for Hydrocarbons in Venezuela (2002) 20 JERL Orimulsion is an alternative boiler fuel obtained by mixing natural bitumen with about 30 per cent fresh water and a small amount of surfactant. It was developed and patented for industrial use by Intevep, the Research and Development Affiliate of Petroleos de Venezuela SA (PDVSA). 6 G Rachadell and N Vojvodic, Nationalization Trends in the Venezuelan Oil Industry, in Anniversary Yearbook of the Venezuelan-Canadian Chamber of Commerce (Caracas, 2007).

4 478 Journal of Energy & Natural Resources Law Vol 26 No the Organic Hydrocarbons Law (OHL) 7 in 2002 and ending with the migration of all the agreements of the Apertura Petrolera into mixed companies. Dismantlement of the Apertura Petrolera: required by the OHL? In January 2002, the newly amended OHL entered into force ending the possibility of expanding the Apertura Petrolera. The goal of the OHL is to considerably increase state control over oil activities and reduce the possibility of opening the oil sector to private participation. Under Article 22 of the OHL, private participation in upstream hydrocarbon activities, as well as primary activities, 8 is only possible through incorporated joint ventures in which the state has more than 50 per cent equity ownership, and therefore decision-making control (known as mixed companies). Even though mixed companies can adopt several legal forms, the Ministry of Energy and Petroleum (MENPET) gave preference to the sociedad anónima or compañía anónima, the equivalent to a corporation in the United States. Under this new regime, Venezuela has almost closed its doors to foreign investors to carry out upstream activities. 9 Since upstream activities must be carried out directly by the state or by companies in which the state holds a majority equity interest the state will need to invest heavily in exploration, and the risk associated with those activities cannot be transferred to private investors. The restrictions of the new regime may well be inconvenient to both private investors and the state. 10 Private investors are precluded from carrying out primary activities or any vertically integrated activities that include upstream and industrialisation activities, even though industrialisation activities are open to private investors while the state will bear the risks described above. 7 Published in Official Gazette No of 13 November We note that the OHL entered into force and effect on 1 January The OHL was subsequently amended in 2006; this amendment was originally published in Official Gazette No of 24 May 2006 and later corrected and republished in Official Gazette No of 4 August We refer below to this amendment as the Amendment. 8 Under art 9 of the OHL, primary activities include the activities of exploration, extraction in natural state, gathering, transport and initial storage of liquid hydrocarbons and associated gas. 9 A Brewer-Carías, La Terminación Anticipada y Unilateral mediante Leyes de 2006 Y 2007 de los Convenios Operativos y de Asociación Petroleros que Permitían la Participación del Capital Privado en las Actividades Primarías Sucritos antes de 2002, Revista de Derecho Público, 2007, no 109 enero marzo, p For instance, it appears that Nigeria has delayed some of its oil projects owing to the government having difficulty in coming up with the required cash contribution in the schedule time. E Harper, Nigeria s Oil Industry: A Cursed Blessing, Nigeria in Transition (online). Available at

5 21st-Century Transformation of the Venezuelan Oil Industry 479 In accordance with Articles 10 and 50 of the OHL, certain activities, such as refining and industrialisation, may be carried out jointly or separately either by the state or by private entities. The difference between these activities lies in the fact that they each have different authorisation procedures. On one hand, the right to carry out refining activities is granted through licences and, on the other, the right to perform industrialisation activities is granted through a permitting system. With regard to natural hydrocarbon commercialisation activities, the OHL establishes that such activities are reserved and therefore are to be exclusively carried out by 100 per cent state-owned companies. 11 In the case of hydrocarbon derivative products, it is very different; the OHL provides for the executive branch of the government through the president and by way of decree to reserve and therefore authorise exclusively the commercialisation of certain derivative products to 100 per cent state-owned companies. If the president does not reserve any specific hydrocarbon derivative product, such a product may be commercialised by private entities. 12 Despite the fact that the OHL did not expressly establish the obligation to convert agreements previously held under the Apertura process into mixed companies, the only way for the private sector to participate in primary activities in a new project as provided by the OHL is by the incorporation of a mixed company in which the state has more than 50 per cent equity ownership. Furthermore, the entitlement process for carrying out primary activities involves obtaining: (1) a National Executive decree assigning the geographical area in which the activities in question will be performed; and (2) a National Executive decree granting to the entity in question the right to carry out primary activities. In the case of a joint venture or mixed companies, the process also involves signing a contract that is subject to certain minimum conditions and National Assembly approval. The minimum conditions are basically: (1) a 25-year maximum term, renewable for a maximum of 15 years; (2) a description of the location and dimensions of the area in which activities will be performed; (3) an obligation to maintain the land, facilities and equipment used to carry out the activities and to assign such assets to the state on the expiration of the term of the contract; and (4) the inclusion of a clause stating that any matters that cannot be settled in a friendly manner by the parties, including by arbitration in cases permitted by law, shall be decided by Venezuelan courts. 11 The OHL expressly establishes that mixed companies that carry out primary activities are only allowed to sell the natural hydrocarbons they produce to 100 per cent stateowned companies. 12 Articles 57 and 58 of the OHL.

6 480 Journal of Energy & Natural Resources Law Vol 26 No First steps towards migration In March 2006, after months of negotiations with private participants, the National Assembly published an agreement approving the terms and conditions for the creation and operation of joint ventures or mixed companies. 13 At that same time, the National Assembly also approved the model contract for conversion to a mixed company, to be entered into between CVP and the different private entities that had previously executed the operating agreements and were in the process of conversion, and the model Articles of incorporation and by-laws for the joint venture or mixed companies. These documents were drafted using general terms that refer to all mixed companies to be incorporated within the framework of the conversion process of the operating agreements. State control over mixed companies is expressly provided for in the OHL. The creation of the mixed companies resulted in a significant decline of the private investor s share in the project since the state necessarily has at least 50 per cent of the company s stock. In turn, the decision-making powers in such companies are mainly subject to the will of CVP. Indeed, day-to-day decisions (ie, those taken by the board of directors or by the shareholders meeting with a simple majority vote) are adopted without having regard to the opinion of the private investors. Only certain decisions of greater significance are subject to a qualified majority vote in the shareholders meeting. Another distinctive feature of mixed companies is that the regularity with which private investors obtain their income derived from their participation in the oil projects as a result of the conversion process is significantly reduced when compared to the periodicity that characterised arrangements under the operating agreements. Indeed, given that private investors now participate as shareholders of mixed companies, the mechanism for obtaining their revenues mainly consists of dividends. In practice, this change may delay the flow of project revenues to private investors. Moreover, mixed companies are subject to a 50 per cent income tax rate (as opposed to the 34 per cent rate historically applied to the operating agreements), which negatively affects the internal rate of return of the projects. Additionally, the income tax rate, the royalties, the special advantages and other contributions that apply to mixed companies may result, if considered altogether, in a significant reduction of the project s profitability for private investors, when compared to the profitability experienced under the regime of the operating agreements. From a positive standpoint, private investors (as shareholders of mixed companies) will have direct participation in the sales of hydrocarbons by the mixed companies to PPSA. 13 Published in Official Gazette No of 31 March 2006.

7 21st-Century Transformation of the Venezuelan Oil Industry 481 Subsequently, and pursuant to the OHL, the National Executive, acting through the Ministry of the People s Power for Energy and Petroleum, requested the National Assembly specifically to approve the incorporation of a group of mixed companies between CVP and those private entities. On 31 March 2006, these investors executed memoranda of understanding (MOU) with CVP and PDVSA Petróleo, SA on the basic terms of their conversion. Following the National Executive s request, and pursuant to Article 33 of the OHL, the National Assembly approved the incorporation of 21 mixed companies. 14 Once the MOU was entered into, the private investor waived its rights to protest against the conversion process. Termination of operating agreements The Law of Regularisation of Private Participation in Primary Activities governed by Decree No with the Force of the Organic Hydrocarbons Law (the Regularisation Law ) of 18 April 2006 deals with the termination of operating agreements executed under the previous hydrocarbons law. This law was enacted to declare the content of such agreements as incompatible with the rules established by the new nationalisation regime. Such agreements were to be considered terminated and further execution of any of its regulations precluded once the new law was published in the Official Gazette (Article 2). 15 Notwithstanding the termination of the contracts, the private investors were allowed to remain in the projects as minority shareholders of a mixed company that directly owns the crude. In other words, beginning on 18 April 2006, operating agreements were unilaterally terminated. Furthermore, in terminating such agreements by way of a new law, it could be argued that the Regularisation Law was applied retroactively to existing projects. The Constitutional Chamber of the Venezuelan Supreme Court has established that the principle of the non-retroactivity of laws is constitutionally guaranteed in Venezuela. 16 The principle serves to guarantee that future laws will not modify the legal situation established under another law applicable at that time. 17 This view was shared by Bernard Mommer (the Vice-Minister of Energy and Petroleum at the time of writing), when the new Hydrocarbons Law was enacted. He concluded that such a law, consistent 14 Published in Official Gazette No of 5 May Published in Official Gazette No of 18 April Venezuelan Supreme Court, Constitutional Chamber, 25 September Case of Antonio Volpe González. 17 Article 24 of the Constitution of the Bolivarian Republic of Venezuela provides as follows: No legislative provision shall have retroactive effect, except where it imposes a lesser penalty.

8 482 Journal of Energy & Natural Resources Law Vol 26 No with the principle of non-retroactivity, could only be applied to new investors or investments. 18 As a result, some commentators have suggested that the state is accountable for any damages caused by the unilateral termination of the contracts, which constitutes nothing short of expropriating the other party s contractual rights, regardless of the legal technique adopted by the state when doing so. 19 This process of eliminating the participation of private capital as provided for in contracts executed before 2001 was verified by the Regularisation Law, and applied not only to the unilateral termination of existing operating agreements but also to association agreements, as well as exploration at risk and profitsharing agreements signed between 1993 and The only difference being that in the last case, the Migration Law, as defined below, provided for such agreements mandatorily to convert into mixed companies. Hence, in both cases the state has expropriated the contractual rights of the affected parties, with complete disregard for the expropriation procedure established by the Law of Expropriation for Public Utility or Social Cause and the Law for the Promotion and Protection of Investments, 20 which, in any case, and as provided by Article 115 of the Constitution of the Bolivarian Republic of Venezuela (CBRV), 21 results in a right of the affected parties to 18 B Mommer, Venezuela: A New Legal and Institutional Framework in Oil, Middle East Economic Survey, January 2002, vol 45, Issue A Brewer-Carías, The Early and Unilateral Termination of Operating and Association Agreements which allowed participation of private capital in primary activities before 2002, through laws enacted in 2006 and 2007, Venezuelan Public Law Review, January March 2007, no 109; G Rachadell and N Vojvodic, n 6 above, at Published in Official Gazette No 5390 of 22 October Article 11 of this Law provides as follows: No confiscations shall be decreed or carried out other than in the exceptional cases provided for in the Constitution; and, in the case of international investments and investors, under international law. Expropriations of investments or application thereto of other measures whose effects are equivalent to an expropriation shall only be carried out for reasons of public benefit or social interest, following the procedure legally established for the purpose, in a way that is non-discriminatory and with prompt, fair and effective compensation. The compensation is to be equivalent to the fair price of the expropriated investment immediately before the expropriation is announced by the legal mechanisms or made public, whichever is first. The indemnification, which is to include interest up to the date when payment is actually made calculated based on normal commercial criteria, is to be paid without delay. Sole Paragraph. Indemnification payable for expropriations of international investments shall be paid in convertible currency and shall be freely transferable abroad. (Emphasis added.). 21 Article 115 of the Venezuelan Constitution provides as follows: The right of property is guaranteed. Every person has the right to the use, enjoyment, usufruct and disposal of his or her goods. Property shall be subject to such contributions, restrictions and obligations as may be established by law in the service of the public or general interest. Only for reasons of public benefit or social interest by final judgment, with timely payment of fair compensation, the expropriation of any kind of property may be declared. (Emphasis added.) It was published in Official Gazette No 5453 of 3 March 2000.

9 21st-Century Transformation of the Venezuelan Oil Industry 483 seek compensation. 22 However, as a result of this, only one company, ENI Dación, filed for arbitration against the Republic before the International Centre for Settlement of Investment Disputes (ICSID) in Washington, DC. 23 In the case of ENI Dación, settlement was agreed by the parties and the proceeding discontinued at the request of the claimant. The other companies that were affected by the Regularisation Law (ie, British Petroleum and Total) presumably felt they had been justly compensated. Migration of the association agreements of the Orinoco Oil Belt and exploration at risk and profit-sharing agreements After finalising the migration process of the operating services agreements to newly formed mixed companies (a joint venture as commonly referred to in Venezuela) during 2006, in February 2007 the Venezuelan President issued Decree Law No 5200 concerning the migration of the association agreements in the Orinoco Oil Belt and the exploration at risk and profitsharing agreements into mixed companies, in accordance with the terms provided in the OHL (the Migration Law ). 24 According to the Migration Law, the activities carried out by private sector companies that were parties to the heavy oil association agreements and exploration at risk and profitsharing association agreements must be transferred to a mixed company in which the state would be entitled to a minimum shareholding participation of 60 per cent. The Migration Law provides the regulatory framework for the migration process. In particular, it governed the time frame in which the migration process was to be completed and the consequences for those cases where an amicable agreement could not be reached. As for the time frame, Article 4 of the Migration Law established two deadlines: (1) The parties to the association and exploration at risk and profit-sharing agreements were required to agree on the terms and conditions of their possible participation in the mixed companies within four months of the date of publication of the Migration Law in the Official Gazette (until 26 June 2007). (2) Two months were granted for submitting the agreed terms and conditions to the National Assembly for authorisation (until 26 August 2007). 22 A Brewer-Carías, n 19 above, at The case of Eni Dación BV v Bolivarian Republic of Venezuela (ICSID Case No ARB/07/4) was registered on 6 February Published in Official Gazette No of 26 February 2007.

10 484 Journal of Energy & Natural Resources Law Vol 26 No Article 5 provided that if an agreement could not be reached within the specified time the state would directly assume the activities carried out by the private participants. The weeks prior to 26 June 2007 witnessed intense negotiations between the foreign oil companies and PDVSA. Finally, agreements were reached by seven of the 11 participants in the four association agreements (Petrozuata, Cerro Negro, Sincor and Hamaca-Ameriven), and in the exploration and production profit-sharing agreements (West Paria Gulf, East Paria Gulf and La Ceiba). ExxonMobil, ConocoPhillips and others decided not to continue participating in oil activities in Venezuela. 25 As a result, PDVSA took over their operations. As of June 2008, no agreement has been reached with these companies as to compensation for surrendering their participation in the projects. In order to finalise the migration process, a Law on the Effects of the Migration Process of the Association Agreements of the Orinoco Belt and of the Exploration at Risk and Profit Sharing Agreements into Mixed Companies (the Effects Law ) was published in October The Effects Law established the extinction of all the association agreements and the exploration at risk and profit-sharing agreements, regardless of whether an agreement to migrate to a mixed company had been reached. Furthermore, the Effects Law provided for the transfer of ownership of the interests, shares, participations and rights in the associations in the companies incorporated to develop the relevant projects and in the assets used for the development of the activities of such associations, including property rights, contract rights and those of any other nature. In the case of the private participants that did not reach an agreement to migrate, the takeover was in favour of the mixed company incorporated as a result of the migration of the relevant association. In cases where none of the private participants in the association agreement reached an agreement to migrate, the takeover was temporarily in favour of the affiliate of Petróleos de Venezuela, SA that took over the activities of the association in accordance with the Migration Law. In short, the Chávez Administration has dismantled the Apertura Petrolera, which once opened up interesting possibilities for foreign investment in 25 According to the ICSID website, both ExxonMobil and ConocoPhillips filed investment arbitration claims against Venezuela before ICSID in Washington, DC. Mobil Corporation and others v Bolivarian Republic of Venezuela (ICSID Case No ARB/07/27) was registered on 10 October 2007 and ConocoPhillips Company v Bolivarian Republic of Venezuela (ICSID Case No ARB/07/30) was registered on 13 December Published in Official Gazette No of 8 October 2007.

11 21st-Century Transformation of the Venezuelan Oil Industry 485 Venezuela and has taken important measures aimed at significantly reducing the opportunities for private participation in oil projects by increasing the government take in the industry. This has been carried out through a series of laws enacted by the National Assembly in the past years that have completely redefined the conditions and legal framework applicable to the Venezuelan oil industry. The industry now operates through the mixed companies, which are the final product of the migration process. Although in the majority of cases migrations to the new mixed company structure were conducted with the agreement of the relevant parties, measures taken by the Venezuelan State against parties that did not consent to the migration of their respective projects (or their corresponding share in the same) can be regarded as an expropriation of the contractual rights of the affected parties. The legal and economic implications of this new structure, through which the Venezuelan oil industry is being operated, as well as its survival under different market conditions in the oil business, are still unclear. Arbitration in the oil industry and update Venezuela has a broad investment protection legal framework as well as a sound framework for commercial arbitration. The investment protection framework is made up of 21 BITs that are currently in force (as of June 2008) with the following countries: Argentina, Barbados, Belgium, Canada, Chile, Costa Rica, the Czech Republic, Denmark, Ecuador, France, Germany, Lithuania, Luxembourg, Paraguay, Peru, Portugal, Spain, the United Kingdom and Northern Ireland, Sweden, Switzerland and Uruguay. All these treaties were signed between 1990 and There are other countries with which Venezuela has signed BITs but which are not in force, such as Brazil, Cuba and Iran. 27 According to a press note in El Universal, published on eluniversal.com on 1 May 2008, 28 the Venezuelan Ministry of Foreign Affairs sent a letter to the representatives of the Netherlands in Venezuela on 30 April 2008, stating the intention of Venezuela to renegotiate the terms of the BIT. This was later confirmed by a press release of the Ministry of Foreign Affairs of the Netherlands, which indicated that on 30 April 2008 the Venezuelan 27 The authors have obtained verbal information from the Venezuelan Ministry of Foreign Affairs stating that the BITs with Cuba and Iran entered into force recently. Nonetheless, we have been unable to confirm this information with official sources. 28 M Párraga, Venezuela Denuncia Tratado de Inversiones con Holandai, El Universal (online). Available

12 486 Journal of Energy & Natural Resources Law Vol 26 No Government sent a notice of termination of this BIT. 29 Venezuela is also a party to the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the ICSID Convention ), which entered into force for the country in Furthermore, in 1999, Venezuela enacted a Law for the Promotion and Protection of Investments (the Investment Law ), 31 which offers protections similar to a BIT and contains a controversial provision (Article 22), 32 which some argue constitutes an open offer of ICSID arbitration. 33 On the commercial arbitration side, Venezuela enacted a Commercial Arbitration Law in 1998 based on the UNCITRAL Model. 34 Venezuela is also a party to the 1958 New York Convention, 35 as well as the two Inter-American Conventions on Recognition and Enforcement of Arbitration Awards. 36 On the top of this pyramid is the 1999 Venezuelan Constitution or CBRV, which contains two particular provisions (ie, Articles 253 and 258) favouring the use of alternative dispute resolution (including arbitration), but also including arbitration as part of the justice system. Also, Article 151 of the CBRV reflects the Calvo doctrine (developed later), according to which a foreigner cannot enjoy more favourable treatment than that extended to nationals. This opens the possibility of arbitration as a means of solving disputes concerning specific contracts entered into by the state Published in the Venezuelan Official Gazette No of 3 April Published in the Venezuelan Official Gazette (Special issue) No of 22 October Article 22: Disputes which arise between an international investor whose country of origin has a treaty or agreement in force with Venezuela on the promotion and protection of investments, or disputes to which the provisions of the Convention Establishing the Multilateral Investment Guarantee Agency (OMGI-MIGA) or of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) are applicable, shall be submitted to international arbitration according to the terms of the respective treaty or agreement, if so established therein, without prejudice to the possibility of using, when applicable, the judicial means contemplated in the Venezuelan legislation in force. 33 E Hernández-Bretón, Protección de Inversiones en Venezuela, in Inversiones Extranjeras. Derecho del Comercio Internacional y Actualidades (Caracas, 2004), p 58; A Brewer-Carías, Algunos comentarios a la Ley de Promoción y Protección de Inversiones: Contratos Públicos y Jurisdicción, in Arbitraje Comercial Interno e Internacional. Reflexiones teóricas y experiencias prácticas (Academia de Ciencias Políticas y Sociales, Series Eventos 18, Caracas, 2005), p 281; A Mezgravis, Las Inversiones Petroleras en Venezuela y el Arbitraje ante el CIADI, in Arbitraje Comercial Interno e Internacional. Reflexiones teóricas y experiencias prácticas (Academia de Ciencias Políticas y Sociales, Series Eventos 18, Caracas, 2005), p 355. G Lemenez de Kerdellau, State Consent to ICSID Arbitration: Article 22 of the Venezuelan Investment Law, in Transnational Dispute Management, Vol 4, No 3, June Published in the Venezuelan Official Gazette No of 7 April Published in the Venezuelan Official Gazette (Special issue) No of 29 December Published in the Venezuelan Official Gazette No of 15 January 1985 and No of 22 February 1985.

13 21st-Century Transformation of the Venezuelan Oil Industry 487 Limitations and restrictions on the inclusion of arbitration clauses in state contracts of national public interest Article 151 along with other rules contained in the Commercial Arbitration Law (ie, Article 3), as well as those contained in other laws (ie, the OHL and the Organic Law of the Attorney General s Office of the Republic (OLAGR)), 37 impose some restrictions or limitations (and in some cases formalities) on the use of arbitration clauses in oil contracts. In addition, Venezuelan case law from the Supreme Tribunal of Justice has construed the law in a way that has placed other formalities and restrictions on the inclusion of arbitration agreements. Hence, the Venezuelan Supreme Tribunal of Justice has held that an arbitration clause is valid only if it is made expressly and unequivocally with the intention of excluding the jurisdiction of judicial courts, since, according to the criteria provided by the Supreme Tribunal of Justice, arbitration is an exception to the constitutional jurisdiction of the courts. 38 The Supreme Tribunal of Justice has also ruled that arbitration agreements may only be executed by empowered officers or officers with the express capacity to enter into arbitration agreements. 39 Otherwise, such arbitration agreements may be deemed void. All these limitations and formalities become stricter and more relevant when dealing with contracts to be executed by the Republic, public entities and state-owned corporations. 40 Some of these limitations and formalities are ratione personae and others ratione materiae. As oil industry contracts are entered into with the Republic or PDVSA, this article will focus on the limitations and formalities surrounding contracts entered into with those entities. This section of the article first analyses PDVSA s capacity to execute a contract with an arbitration agreement (formalities ratione personae) and then comments on contracts entered into by the Republic itself. Ratione personae limitations This section will first look at who can enter into contracts containing arbitration clauses and then at the notion of public service, elements that are crucial when exploring arbitration clauses in oil contracts. 37 Published in the Special Official Gazette No dated 13 November Among others: Decision No of the Political and Administrative Chamber of the Supreme Tribunal of Justice of 31 July Among others: Decisions Nos 1209 and 832 of the Political and Administrative Chamber of the Supreme Tribunal of Justice of 20 June 2001 and 12 June In Venezuela, state-owned companies are considered public law entities.

14 488 Journal of Energy & Natural Resources Law Vol 26 No PDVSA has the capacity to incorporate an international arbitration clause into oil contracts. Pursuant to Article 4 of the Commercial Arbitration Law, in order for a company in which 50 per cent or more of its capital shares are directly or indirectly owned by the Republic (such as PDVSA), to validly enter into an arbitration clause or arbitration agreement, such clause or agreement must be approved in writing by the competent internal corporate governance body of that company and be previously authorised by the Ministry controlling the company. In the case of PDVSA, the internal corporate governance body would be the board of directors. 41 In the case of PDVSA, this requires approval by its board of directors and authorisation from its controlling Ministry (ie, the MENPET). Both the approval and the authorisation must be in writing. Great care must be taken with respect to both of these requirements. Some jurisprudence of the Supreme Tribunal of Justice (eg, the VTV case) 42 has been extremely rigorous in construing the requirements for stateowned entities to enter into arbitration clauses. In fact, in the VTV case, the Supreme Tribunal of Justice declared an arbitration clause invalid because the president of VTV, who signed the arbitration agreement (before the Commercial Arbitration Law was enacted), did not have the express statutory power to bind the company in arbitration. Republic entering into a contract with an arbitration clause. Where a contract is of national public interest, the OLAGR requires the prior favourable opinion of the Attorney-General s Office of the Republic before the Republic can include arbitration clauses in such a contract. Failure to do so will render any arbitration clause void. If the Attorney-General of the Republic s opinion is obtained, it is valid to include arbitration clauses in such contracts. The extent to which oil contracts can be considered to be contracts of national public interest is considered below. 41 Article 4 of the Commercial Arbitration Law, published in the Venezuelan Official Gazette No of 7 April 1998, establishes the following: should one of the parties to an arbitration agreement be a corporation in which the Republic, the States, the Municipalities or the Autonomous Agencies hold a participation equal to or higher than 50 per cent of its equity or a corporation in which the aforesaid persons hold a participation equal to or higher than 50 per cent of its equity, in order to be valid such agreement requires approval from the appropriate corporate entity and written authorisation from the controlling Ministry. The arbitration agreement must specify the type of arbitration and the number of arbitrators, which should, in no case, be less than three. 42 In particular, in the case of the appeal for annulment brought by Compañía Anónima Venezolana de Televisión (CAVTV) against the ICC arbitral award issued in Caracas in the arbitration sought by Elettronica Industriale SpA v VTV, Decision No of 5 April 2006.

15 21st-Century Transformation of the Venezuelan Oil Industry 489 Notion of public service. In the VTV case, the Supreme Tribunal of Justice held that VTV, despite being (like PDVSA) a state-owned company, was nevertheless governed in some matters by private law. The court also held that VTV renders a public service and in this context it is important to note that the Political and Administrative Chamber of the Supreme Tribunal of Justice has tended to issue decisions that restrict the possibility of arbitration for contracts related to public services. 43 In the VTV case, the Chamber ruled against arbitration since the corporate purpose of that company was essentially deemed a public purpose. On a preliminary basis, the authors do not believe that all oil contracts are of a public service nature. However, Venezuelan law provides PDVSA with several advantages typical for public service entities and thus there is an argument that all contracts entered into by PDVSA are related to public service activities. Ratione materiae limitations Notion of functions exclusively of the state or governmental persons or entities. The judgment in VTV developed several aspects of public law. It emphasised Article 3 of the Commercial Arbitration Law, which precludes submitting disputes to arbitration when the court considers that the particular contract relates to functions that are exclusive to the state. Article 3 indicates: Article 3: Any dispute subject of being settled, arising between persons with the capability to settle, may be submitted to arbitration. The following are exceptions: b. Disputes directly concerning the sovereign activities or functions of the State or governmental persons or entities. (Emphasis added by the Supreme Tribunal.) This provision establishes that there is a ratione materiae limitation in the Commercial Arbitration Law to the effect that, even when an arbitration clause exists, if the respective court considers that the dispute refers to a 43 Decision No 1753 of 18 November 2003, issued by the Political Administrative Chamber of the Supreme Tribunal of Justice in the case of República Bolivariana de Venezuela v Autopista Concesionada de Venezuela, Decision No 832 of 15 July 2004, issued by the Political Administrative Chamber of the Supreme Tribunal of Justice in the case of request of an arbitration between Minera Las Cristinas, CA (MINCA) and Corporación Venezolana de Guayana (CVG); Decision No of 5 April 2006 issued by the Political Administrative Chamber of the Supreme Tribunal of Justice in case of the appeal for annulment brought by Compañía Anónima Venezolana de Televisión (CAVTV) against the ICC arbitral award issued in Caracas in the arbitration sought by Elettronica Industriale SpA v VTV.

16 490 Journal of Energy & Natural Resources Law Vol 26 No function exclusive to public law entities, then the matter may not be submitted to arbitration. Although the authors do not believe that this provision should apply to most oil contracts, it is important to make reference to this limitation. It is relevant when taking into account the broad and protectionist language included in recent laws as well as in recent case law regarding public law entities. Certainly the phrase sovereign activities or functions of the State or governmental persons or entities in the Commercial Arbitration Law is very broad. In the authors view, the only activities that cannot be submitted to arbitration are those deemed sovereign activities or functions of the state or governmental persons or entities. All other activities can be submitted to arbitration. Thus, the activities regulated in most oil contracts should in principle be able to be settled through arbitration. However, in practice, the current restrictive trend of the Supreme Tribunal of Justice has to be taken into account. If the activities involve public policy, they may not be submitted to arbitration. Another ratione materiae limitation relates to activities considered to involve public policy. In that regard, if successfully demonstrated that the activities regulated in the specific oil contract are of public policy or that they involve public policy matters, the effectiveness and validity of an arbitration agreement may be undermined. This would be particularly relevant if the arbitration is to be conducted abroad. The important aspect to consider is whether the particular issue to be settled through arbitration affects public policy. Should that be the case, the arbitration agreement, and even the arbitral award, could be deemed ineffective. Indeed, in respect of the arbitration agreement, Article 47 of the Private International Law Statute 44 indicates: Article 47: Jurisdiction corresponding to Venezuelan courts under the former provisions may not be waived conventionally in favor of foreign courts or arbitrators deciding abroad, in cases where the issue refers to disputes related to rights in rem on real estate located in the territory of the Republic, or when dealing with issues not admitting settlement or affecting essential principles of Venezuelan public policy. (Emphasis added.) Also, pursuant to Article 5.II.b of the New York Convention, Venezuelan courts may refuse to recognise and enforce an arbitration award dealing with public policy issues: 44 Published in Official Gazette No of 6 August 1998.

17 21st-Century Transformation of the Venezuelan Oil Industry 491 Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that: (b) The recognition or enforcement of the award would be contrary to the public policy of that country. (Emphasis added.) Moreover, Article 3(a) of the Commercial Arbitration Law expressly states that disputes that raise a question of public policy cannot be submitted to arbitration. In general terms, Article 3 of the Commercial Arbitration Law states that any dispute susceptible of being settled, arising between persons with the capacity to enter into settlement agreements, may be submitted to arbitration, except: (1) disputes contrary to public policy, or involving crimes or offences, except with respect to quantification of civil liability, insofar as it has not been set by a final binding judgment; (2) disputes directly concerning the sovereign attributions or functions of the state, or governmental persons or entities; (3) disputes involving the civil status or capacity of persons; (4) disputes regarding items or rights of legally disabled persons, without prior judicial authorisation; and (5) disputes on which a final binding judgment has been issued, except the monetary consequences arising from its enforcement, insofar as they exclusively concern the parties to the proceedings and have not been determined by a final binding judgment. Oil contracts as contracts of national public interest. It is important to underscore the content of Article 151 of the CBRV, mentioned above, because it deals with the notion of contracts of national public interest. It states: Article 151: In public interest contracts, unless inapplicable by reason of the nature of such contracts, a clause shall be deemed included even if not expressed, whereby any doubts and disputes which may arise concerning such contracts and which cannot be resolved amicably by the contracting parties, shall be decided by the competent courts of the Republic, in accordance with its laws and shall not on any grounds or for any reason give rise to foreign claims. (Emphasis added.) The concept of contracts of national public interest has been much debated by Venezuelan constitutional scholars but there is no specific definition of this concept. The relevant consequence of a finding of national public interest is

18 492 Journal of Energy & Natural Resources Law Vol 26 No that, pursuant to Article 151 of the CBRV, submission to a foreign jurisdiction or to arbitration (whether domestic or international) cannot, in principle, exist in such contracts. Accordingly, disputes arising from these contracts would necessarily be subject to the jurisdiction of Venezuelan courts. It is therefore relevant to review what has been said by the Supreme Tribunal of Justice and commentators with respect to contracts of national public interest since PDVSA may argue that some oil contracts fall within this category even if PDVSA or the Venezuelan State had previously consented to arbitration clauses. The Supreme Tribunal of Justice has stated that such contracts are those entered into by the Republic, the purpose of which is decisive or essential for conducting the objectives and commitments of the State of Venezuela in achieving the satisfaction of individual and coincidental interests of the national community and not only of a particular sector. 45 This subjective criterion might support the conclusion that when one of the parties to a contract is not the Republic itself (which is the case of contracts entered with PDVSA), there is no national public interest contract. It may be noted, however, that in a subsequent case, Lucía Antillano et al, 46 the Constitutional Chamber of the Supreme Tribunal of Justice concluded that there was a contract of national public interest, even though the public entity that executed the contract was not the Republic, but CVG (an autonomous agency of the Republic). In order to reach this conclusion, the Supreme Tribunal said that contracts of national public interest in exceptional cases need not be entered into directly by the Republic, but may be entered into by a state-owned company, provided that they have such economic or social impact for the state that they must be approved by the National Assembly. 47 The authors are not of the view that the purpose of most oil contracts is decisive or essential for conducting the objectives and commitments of the Republic or that they have such an economic or social impact for the state that they must be approved by the National Assembly since most of these contracts are commercial and are entered into by PDVSA when conducting commercial activities. However, the restrictive views of the Supreme 45 Decision No of the Constitutional Chamber of the Supreme Tribunal of Justice of 24 September Decision No 953 of 29 April 2003, issued by the Constitutional Chamber of the Supreme Tribunal of Justice in the case of Lucía Antillano et al v the Memorandum of Understanding for the supply of electric energy, executed between the Republic of Venezuela and Federative Republic of Brazil et al. 47 Professor Allan R Brewer-Carías also opines that contracts executed by PDVSA could be deemed contracts of national public interest. See A Brewer-Carías, Nuevas Consideraciones sobre el Régimen Jurídico de los Contratos del Estado en Venezuela in VIII Jornadas Internacionales de Derecho Administrativo, vol II (2006, Caracas), p 451.