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The National Law Center is a non-profit 501(c)(3) Research and Educational Corporation. © Copyright, 1996
Baker & McKenzie
Elisabeth E Elijuri (Caracas)
(58-2) 953-0833
On 4 July 1995 Congress approved the agreement opening the oil sector, formally known as "Risk Exploration of New Areas and the Production of Hydrocarbons in the Profit Sharing Scheme of 1995," setting forth the framework for the new areas of private investment. The Agreement sets the stage for bidding on ten (10) areas located in the west (5), central zone (3), and the southern zone of Lake Maracaibo (2). After passing through a pre-selection process that began in August, seventy-seven qualifying companies will submit their bids in 1996. The Agreement is only the first step in the approval process since Congress must approve each of the ten joint venture agreements chosen in the bidding process.
According to the Agreement, the investor bears all risks during the exploration phase. The Venezuelan Government only becomes involved in the development and production phases through a designated affiliate (Corporación Venezolana de Petróleo). This is very important to investors since the exploration phase is not only extremely expensive, but also represents the greatest risk.
The Agreement provides for several joint venture arrangements with safeguards assuring governmental control at various levels, as required by Venezuelan law. The first safeguard entails the establishment of a management committee and the second calls for the creation of a mixed (private and government) company in the form of a corporation. The government maintains control over both bodies: the committee by a double vote, and the corporation through veto power.
When a significant hydrocarbon discovery is made, the management committee and the mixed company will approve a development plan. The affiliate and the investors will then create a consortium to develop that specific area. The consortium will not itself be a legal entity nor will it be a taxpayer. The applicable income tax will be 67.7 percent. The payment of a 16.66 percent per barrel royalty, will be treated as a deductible expense. Finally, another company will carry out the development and production activities and be managed by the mixed company.
The information contained in this article should not form the basis of any decision as to a particular course of action; nor should it be relied on as legal advice or regarded as a substitute for detailed advice in individual cases.
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