backAmid a 1990s oil price decline, Venezuela adopted a series of policies designed to attract foreign investors to its oil industry. By doing so, Venezuela sought to secure the financial resources and the necessary technology to develop its vast hydrocarbon resources efficiently, particularly the extra-heavy oil deposits located in the Orinoco Oil Belt. The Venezuelan investment process, known as apertura petrolera or oil opening, resulted in: (i) 32 Operating Services Agreements designed to increase production in marginal fields; (ii) four Association Agreements for the production of extra-heavy crude in the Orinoco Oil Belt; and (iii) eight Shared-Risk-and-Profit Exploration Agreements, all signed with private mostly foreign investors. Depending on the type of project, the incentives offered by the Government included a general corporate tax regime as opposed to a more onerous special regime, reduced royalty periods, and access to international arbitration. Left-wing opposition leaders at the time harshly criticized and challenged the apertura initiatives. Notwithstanding these objections, the process continued and the challenged projects ultimately received the blessing of both the Venezuelan legislature and the Supreme Court of Justice.
Hugo Chvez, a former army Lieutenant Colonel who led a failed coup dtat in 1992, became Venezuelas President in February 1999. Chvez ran for office on a leftist platform, yet guaranteed that his administration would encourage and promote foreign investments. Just one day before winning the 1998 presidential election, Mr. Chvez stated that his administration would nationalize absolutely nothing. But change was in the air, and the aperturas principal detractor, Mr. Al Rodrguez-Araque, became the first oil minister of the Chvez era.
Starting in 2001, the Chvez administration adopted a series of measures designed to dismantle the apertura initiatives. The measures included: (1) enacting a new Organic Law on Hydrocarbons that abolished the existing hydrocarbon regime and established that hydrocarbon activities had to be carried out either directly by the State, through Petrleos de Venezuela, S.A. (PDVSA), or by mixed companies (empresas mixtas) in which the State held a majority participating interest (2001); (2) terminating more than 18,000 PDVSA employees including the companys top executives who had participated in a national strike (2003); (3) terminating a royalty reduction agreement that had been approved for extra-heavy oil projects (2004); (4) terminating the 32 operating agreements executed during the 1990s and ordering the forced migration of these projects into a mixed-company regime based on terms and conditions unilaterally imposed by the Government (2006); (5) establishing a new extraction tax that effectively increased the royalty paid by existing projects to 33.33% (2006); (6) raising the income tax rate applicable to ongoing oil projects from 34% to 50% (2006); (7) ordering the forced transformation of strategic association projects into mixed companies in which PDVSA or one of its subsidiaries would hold at least a 60% participating interest (2007); (8) pressuring PDVSAs service providers by delaying and stopping payments (2008-2009); (9) expropriating assets relating to water, steam, and gas injection services, gas compression activities, and maritime services in Lake Maracaibo; and (10) imposing a windfall profits tax (2011).
Foreign oil companies have not been the only target of the Governments nationalization policies. Banks, hotels, mining projects, supermarkets, power companies, farms, housing projects, coffee manufacturers, cement companies, steel and iron companies, airport operators, glass producers, soft drink bottlers, jewelry stores, agricultural companies, and food producers have experienced, to one extent or another, expropriatory measures. According to the website of the International Centre for Settlement of Investment Disputes (ICSID), twenty investment claims are currently pending against Venezuela for measures adopted by the Chvez administration. This alarming number prompted the Government to announce earlier this year its irrevocable decision to denounce the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention). While this announcement sends a negative signal for future foreign investors, the withdrawal will not affect ongoing disputes. Nor will the measure affect the non-ICSID dispute resolution mechanisms provided for in the bilateral investment treaties currently in force between Venezuelan and more than two dozen countries.
It is difficult to predict who will be the subject of the Governments next nationalization. It is much easier to forecast that, if future events follow the current path, and President Chvez maintains his promise to nationalize absolutely nothing, many more Venezuelan and foreign investors are likely to join the expropriation club.