Good afternoon, Mr. President of the National Assembly and members of the leadership; Mr. Secretary; fellow members of the National Assembly; members of the press corps; ladies and gentlemen.

Before I begin, I would like to thank you on behalf of the National Executive and the Ministry of Energy and Oil for the opportunity to speak before a plenary session of the National Assembly on a number of issue relevant to the future of our oil industry and national development.

In this regard I would like to go into depth on a topic that is often complex, a topic full of complex concepts and mechanisms. I feel the best stage upon which to express those is that of the National Assembly, the body that represents the will of a sovereign people and has the means to open this discussion to our people.

In recent days I participated in a five-hour meeting with members of the Permanent Commission on Energy and Mines, in which we discussed in detail the documents that will be ratified by the National Assembly. Similarly, we received important feedback on the proposed documents and the laws the National Executive has presented for their modification and approval since last year.

I would like to read excerpts of Resolution 1803 of the General Assembly of the United Nations, passed on December 14, 1962:

- The right of the people and sovereign states over their natural resources should be exercised in the interest of national development and the well being of the people of that state.
- The exploration, development and use of such resources, just as the importation of foreign capital for those purposes, must occur in accordance with the rules and conditions that those people or states freely deem necessary to authorize, limit or prohibit those activities. In those cases where authorization is granted, the capital introduced will follow said regulations, existing national law and international law.
- The gains obtained must be shared, in a proportion convenient to each individual case, between investors and the state that receives those investments, while maintaining care not to restrict for any reason the sovereignty of said state over its natural resources.
- The violation of the sovereign rights of a people and nation over their riches and natural resources is contrary to the spirit and the principles of the Charter of the United Nations and places obstacles before the development of international cooperation and the preservation of world peace.
- Agreements on foreign investment between sovereign states should be maintained and executed in good faith.
- States and international organizations must respect in strict and scrupulous fashion the sovereignty of people and nations over their riches and natural resources in accordance with the Charter and the principles contained in this resolution.

In this resolution, the poor countries of the Third World expressed their right to state independence and to exercise sovereignty over the natural resources on their national territory, among those the hydrocarbons that old colonial powers have sought to maintain control over using a concessionary system subject not to national law, but rather to international business laws and regulations.

In Venezuela, though, at the moment this resolution was endorsed, the situation was quite different. With our independence, national laws regulated the Venezuelan system of concessions and all disputes were be settled through national tribunals in which foreign claims were not permitted. Moreover, with the reform of relevant laws in 1943, all those granted concessions in Venezuela were obligated to recognize the sovereign rights that the Venezuelan state maintained over the country’s natural resources. As such, for 30 years Venezuela served as an example to other oil-exporting countries. Venezuela served as a reference, specifically, for members of the Organization of Petroleum Exporting Countries (OPEC) in the exercise of their sovereignty and the development of their oil industry. These fellow OPEC countries collectively joined Venezuela in 1973 in what was known as the OPEC Revolution, during which time they participated in the nationalization of their state oil industries.

With the OPEC Revolution and the position taken by oil producers, consumers had to accept not only the sovereign rights of those countries but also the right of all oil-producing countries to regulate production and, to that end, the price of oil, it being a non-renewable and finite natural resource. In prior times, these rights had been regulated by the International Oil Cartel, the so-called “Seven Sisters,” who along with the cooperation of the United States regulated the international oil market before the existence of OPEC.

In terms of a historical retrospective, and given the important battles that took place in support of our sovereignty over our natural resources, an uncountable number of strikes, protests and political confrontations took place that maintained Venezuela in the vanguard of the management of vital natural resources like oil.

But after the nationalization of our oil industry, it seemed irreconcilable what happened thereafter in the time of the Fourth Republic. After having celebrated our sovereign right to control oil production and our natural resources, we turned to celebrating the thesis of globalization of those same resources, a thesis that involved a system of production quotas managed, as has happened in the past, by the powerful consumer countries by way of the World Trade Organization (WTO).

That’s to say, the confrontation over oil is an international problem, one in which it is in the national interest of those producing countries to regulate the exploitation of their primary natural resource for the benefit of all and against the interests of the predatory tactics of industrialized global powers, the consumer countries, those which seek to gain control over our natural resources so as to drain them as they had in other parts of the world.

On balance, the oil policies pursued by the Fourth Republic, known as “oil opening,” clearly demonstrates that those elite classes, dominated by the national oligarchy and PDVSA’s old guard, controlled our national industry and put themselves at the service of transnational interests and consumer countries, much to the detriment of our national interests. Towards the end of the Fourth Republic, neoliberal economic policies were in vogue, policies with which the Venezuelan state was expected to abdicate its responsibilities and any form of participation or planning of their economy, thus allowing the national oligarchy and transnational interests to capture the oil rents in their entirety.

How can that process be explained? How can we justify that a country with a tradition of defending our national sovereignty in the area of oil production and management of natural resources proceeded to complete a 180-degree turn in its oil policies? How is that we came to opening up our oil industry, and more importantly, how did we get to the point where we accepted the compromises made by those national elites during the Fourth Republic? We have to speak of how this was possible, in great part because it involved the capture of our national oil industry by transnational interests.

This capture of our national oil industry has its roots in the nationalization of the industry itself. The way that foreign interests captured PDVSA is described in the literature on the history of oil.

This nationalization was reversed in part in the late 1990s and early 2000s, as it allowed the oil industry to be led by the same class of managers that represented the transnational interests, repeated the same business schemes, worked under the same commercial relations and was tied to the same technologies. In short, incubated within the heart of our national oil industry were people that were able to eventually take control of it.

This capture converted the old PDVSA into a true Trojan horse aligned against the interests of the Venezuelan state, a means through which those claiming to be defending the national interest used the National Congress, the courts and the National Executive to introduce measures to dismantle the control of the state over oil policy and regulation and limit state sovereignty over natural resources.

This opening of the country’s oil industry involved some key points, listed below:

1) The privatization of PDVSA through policies of outsourcing, in which PDVSA granted a number of its important functions to private interests, including the control of the industry’s tankers and other. This privatization occurred slowly, but in its most important regard it became apparent that PDVSA’s most important activities were being outsourced through operational conventions.
2) Internationalization, a perverse mechanism through which more than $14 billion was transferred out of the country for use in the acquisition of goods (refining systems, ports, docks, tubes, etc.) and to grant discounts of PDVSA supply for the refining of oil abroad. As such, the Fourth Republic was playing the role assigned to it by the United States – a low-cost provider of energy for the largest economy in the world.
3) Strategic associations in the Orinoco Belt, which granted over 600,000 barrels of oil per day to transnational interests under conditions that negatively impacted the country.

There are still a few elements of the anti-national strategy to be discussed. But the theme of this presentation is operational conventions, and the report we will present to this assembly will demonstrate what they contain, how they were crafted, which aspects are plainly illegal and what the government of President Hugo Chavez is doing to bring them into accordance with the current legal framework and the Constitution of the Bolivarian Republic of Venezuela.

To speak of these operational conventions we must start with the Organic Law to Reserve for the State the Industry and Commerce of Hydrocarbons, better known as the Law of Nationalization, which in Article 1 states: “Reserved for the state, for reasons of national convenience, are the exploration of oil, asphalt and other hydrocarbons in the national territory; the exploitation of such sites; the manufacture or refining and transport and storage; the commercialization on the national and international level of those exploited and refined resources; and the means required for the such as signaled by this law.” In this article, the state reserves the right of the primary production of oil and the property where it is found.

In Article 5 of the law, introduced by way of then President Carlos Andres Perez, established the following: “The State will exercise the activities described in Article 1 of this law through the National Executive or institutions in its control, employing operational conventions as necessary to best complete those activities, but without taking any steps that might affect the essence of those activities outlined in Article 1.” That’s to say, the legislation introduced a system of contracts known as operational conventions and allowed their use as long as they didn’t affect the essence of the production of oil articulated in Article 1 of the law.

In 1992, the meritocracy, which had taken absolute control of PDVSA, exercised its full power to liberally interpret Article 5 and began to grant rights of exploitation and production in areas that had been until then reserved for the Venezuelan state, using the pretense that they were simple service contracts. During three rounds of bidding in 1992, 1993 and 1997 and through a process of mediation in 1995, activities once reserved for the state in Article 1 of the Law of Nationalization were ceded with the support of the Supreme Court and sold to the public as operational conventions.

If anyone is left with a doubt that our primary activities were being turned over, one only has to review the 32 conventions that existed through December 31, 2005, signed by PDVSA and the private sector. In these contracts, PDVSA is noted for its absence. Upon exploring any of these conventions, one would find a foreign manager who exploited and produced and had control over the operations and the oil and would later simply sell the oil to PDVSA, which was obligated to buy it from them through a complicated system of value addition by which we were forced to pay for the barrels of oil than it would take for us to produce them ourselves. The new PDVSA has undertaken an exhaustive investigation of this situation. These reports are available for the National Assembly to discuss in further detail.

The first round of operational conventions took place in 1992 and 1993, and included three conventions that in 2005 were producing 30,000 barrels of oil per day. In those conventions, areas covering 5,540 km2 and 280  km2 were turned over. In that moment, the fields turned over were qualified as marginal and abandoned. There was a deliberate attempt to say that they were areas that had no value and that we would be lucky if anyone would take control of them. Two complex mechanisms of remuneration of that production were established, known as OpFee and CapFee, and included payments for operation, capital costs and investments.

The Ministry of Energy and Oil has been working arduously to dismantle this anti-national strategy. I should mention that accompanying me here are the Vice Minister, Dr. Bernard Mommer and the president of the Venezuelan Oil Corporation (CVP), Eugolio Del Pino, with whom we have worked cooperatively since last year to clarify the numbers and bring these final reports on national sovereignty to the National Assembly.

This complex structure of payments for the supposed provision of certain services was conducted not only to throw a veil over these operations and avoid their control but also to conceal a service contract. They tried to adapt to a situation that could not be hidden from public view, because upon revision we discovered that the payment the corporations received was indexed to the price of oil, that’s to say, they simply benefited from volume and the consequent prices of oil and they sold oil to PDVSA as such. This reveals that these were not service contracts more than they were oil concessions. 

A basket of crude was established so as to fix the price with which was indexed the formula, and in many cases the price set was for light crudes even though the fields used produced heavy crudes. We have these practices clearly documented.

During the second round that took place between 1993 and 1995, some 11 operational conventions were granted that produced in 2005 some 200,000 barrels of oil per day. In this round the granting of lands increased substantially, growing to 8,980 km2, a huge concession. Our law only allows the concession of 1,000 km2 and only with the permission of the Council of Ministers. In this round, these were better fields, though they were qualified as marginal, and they were conceded no less.

In these fields the right of exploration and exploitation of the deeper areas was granted, that’s to say, with each concession of fields more and more is granted. In this second round one development occurred – incentives for the production of oil were established.  

In the majority of the contracts, when a field turns out to be more important than originally thought, having larger and better reserves, or when a large volume is produced, the owner of the reserves claims a larger role, meaning that a more productive field than expected has been exploited. In this case the meritocracy at the old PDVSA did the opposite, establishing a volume of production that once surpassed forced the state to pay the private entity more for incremental production.

And as such we came to an absurd situation last year when we realized that we were being forced to pay a private operator under one of these operational conventions $1 million every two days for the oil they produced as part of an incentive program being given to corporations throughout the country. All of this had a certain rationality to it – in being economically unsustainable, this would lead to a de facto privatization of PDVSA, because when the elites that signed those contracts would be asked to justify them, they could argue that the Venezuelan state wouldn’t have to take responsibility for production and could instead privatize the oil industry.

In 1995 the direct adjudication of one case proved emblematic for the strategy in favor of transnational corporations – that of the Boscan field, in the State of Zulia. In that case, the field was producing 80,000 barrels of oil per day but was qualified as a field of marginal importance. Imagine what was behind this action – one of our most important fields, with more than 110,000 barrels of oil per day, was turned over in a clear policy of privatization.

Here was introduced another element – the old PDVSA agreed to cover the costs and guaranteed a fixed profit per barrel of oil, independent of what would happen with the price of oil, a fixed profit starting at $.35 per barrel and increasing to $.50 a barrel, $.75 a barrel, $1.32 a barrel and ending at minimum profit of 16.5 percent on the exploitation of oil.

In the third round in 1997, 17 operational conventions were negotiated that in 2005 produced 170,000 barrels of oil per day. The fields granted varied in size between 428 km 2 and 40 km2. Again, the fields were qualified as “marginal,” even though they were producing 50,000 barrels of oil per day. In this instance the private companies were granted tax breaks that they could then use on the Tax on Rent (TOR).

To have a better idea, I will now present slides that summarize the 32 operational conventions. On slide 1 we can observe how the volume of oil produced increased with each operational convention granted, until it reach 500,000 barrels of oil per day in 2005, an important part of our production, a part that is now privatized. In slid 2 we determined the overall value of the production of oil. In slide 3 we see a review of the percentages that the operational conventions made up at the time that we ordered them paralyzed, noting that private contractors were taking 60 percent of the value of the production of oil – resulting in a de facto privatization of 500,000 barrels of oil per day.

There is one specific case worth noting – the operational conventions for Oritupano-Leona. The Commission of Energy and Mines of the National Assembly will review each one of these conventions. We have already studied their volumes, their prices and their formulas, but we wanted to bring these ones here because the old meritocracy at PDVSA was quite negligent in the business they conducted.

All those stories about the excellence about the meritocracy were put to rest during the oil sabotage of December 2002 because it was demonstrated that we were able to operate our oil industry and that they were able to provoke losses.

In slide 4, from 1998 and 1999, we can observe a full year of losses. This evidence shows how poorly the meritocracy administered the very deals they negotiated. I bring this information as evidence as to the negligence with which the old PDVSA ran its business – they would fix the sum paid to contractors when oil prices were high, leaving open the possibility that contractors could start operations when prices were low and still benefit from profits fixed to high oil prices.

There are many more cases like these, some 32 discovered thus far. But we’re also going to speak of the fiscal participation of the state, which is the backbone of energy sovereignty. A state that is unable to impose taxes or limits on exploitation of its natural resources cannot be sovereign. Starting now we are going to see what the impact on the state’s tax base was, because up until now we have seen how PDVSA has turned over reserved operations to the private sector. We’re going to see how that affected our tax base, and we’re going to talk about the taxes on oil rents.

Many of these operational conventions pretended to be mere service contracts, and as such they were able to ensure that their tax share was considered non-oil, that’s to say, they were taking away from the state’s tax base, because under the old law they were only paying 30 percent and under the new law 34 percent when they, as oil producers, were supposed to be paying 67.7 percent under the old law and 50 percent under the new law. This is to say that some people that were producing 500,000 barrels of oil per day paid the same taxes as a bakery, a pharmacy or a chicken vendor. It was a scam, an evasion of Venezuelan taxes, and in this participated the old PDVSA, which permitted it and even caused it. That’s why we say that the old PDVSA was a Trojan horse dismantling our state.

To achieve this, the Fourth Republic wad dismantling the state and its control mechanisms. Not only did the Ministry of Energy and Mines (now the Ministry of Energy and Oil) become an empty shell that had no ability to regulate or control oil activity, but there was also intense pressure in 1986 to do away with a commission that linked the Ministry of Interior to the Ministry of Energy and Mines. That’s to say, a fiscal structure used to exist to vet the oil deals and the Fourth Republic did away with it, not only as a mechanism of coordination but they also thereafter weakened it in completely and began treating the operational conventions like any other business deal.

We also noticed that in the 1990s the law on oil rents was modified which permitted many companies to avoid taxes because of the lax control mechanisms. These companies always claimed they were in debt, because they always listed the investments they had made as losses, and as such only had to pay 34 percent of their profit in taxes as they didn’t have to pay any taxes on oil rents.

Our concept is that if an oil business is not capable of paying a regalia, then we rather leave our oil in the underground soil until we wait for better conditions, but what we will no longer allow is for the private investors interests to try to demand from the Venezuelan government that in order for them to produce a barrel of oil then we have to give up on the regalia, decrease the regalia by 2%, give up on the taxes, and demand every type of exemptions for increasing their profits in a detriment to our country.

The subject of the regalia kept moving as part of this theory up to the point when in the core of the old PDVSA there was a project, the Project Araguaney, that the chief economist for PDVSA, Ramon Espinasa, motivated by the then Minister of Energy and Mines, was already working on. The project consisted on a group of very complicated calculations that intended to bring the regalia rates from 16 2/3% to 5%, always with the expectation of being able to lower these rates even more.

These gentlemen were not counting with the people of Venezuela, these gentlemen were not counting with President Chavez, and thus the adjustment of the regalia rates from 16⅔ to 30% was never within their plans.  Today we begin to understand the ferocity and belligerence of the old PDVSA that brought us to the beginnings of the coup and the sabotage of the oil industry.

Another subject that we need to talk about is the Fiscal Value of Exports, a tax that was imposed on the oil sector in 1992. This tax was equivalent to the additional 30% of ISLR over the regalia rate that was in force, for a total of 46.67%.  In total, the cooperative agreements would have given losses if these mechanisms of fiscal sovereignty would still be in force. For this reason there was pressure to eliminate this tax in 1993. These shady deals against our fiscal revenues were created in the old National Congress.

As a conclusion, with these antecedents, a very important aspect is that the opening of the oil unfolded the way it did, not only because the traditional political elite of the IV Republic gave in to the multinational interests but because the old PDVSA assumed the role of manager of the natural resource and a regulator of the oil activity, when faced with the operative agreements and what came next.

Note how important this is; this role corresponded to the Ministry of Energy and Mines, the institutional seat, as a representative of the State and the oil policy. This was put aside, and the construction of the oil policy was handed irresponsibly to a technocratic elite that was trans-nationalized, having as a consequence an oil policy that was against the interests of the nation.

There is a very important issue in the calculations that we have obtained from the fiscal conditions that were granted as a benefit for the companies, not only during the operative agreements but also during the partnership agreements of the Orinoco Oil Strip. We found that these fiscal conditions were more damaging to the country than any other concession in our entire history of oil policy, as they were more damaging than in the Gomez era when the worst concessions were given to transnational companies, by the then General Juan Vicente Gomez, that only paid a regalia of less than 5%.
Here a good portion of the production with a regalia of only 1% was handed out, and later it was done in the Strip, and you will remember that in the Bolivarian Government, on October 10th, 2004, the regalia rates that were in force for the strip were adjusted from 1% to 16⅔%; but those were the types of deals made by the IV Republic. As a matter of fact, while reading the news today, they were criticizing our business meeting at the Commission of Energy and Mines and they called us the IV Republic; no gentlemen, the IV Republic was the one doing what we are seeing here, the IV Republic was the one that could make deals even showing their backs to the interests of the nation. We are here, in front of the sovereign National Assembly so that it can know, discuss, question, comment and suggest the modifications that the National Executive is exposing to the country, in the subject of a policy that is so vital for our future as the oil policy is.

We will mention the fiscal aspect, the horrible business that was established in the figure of cooperative agreements that has to do with the arrangements of disputes and judicial sovereignty.

Throughout Venezuelan history, in the legislation that rules the mining and oil matters, the Venezuelan state always established that any dispute would be resolved before our national courts, with national jurisdiction. Once again it is an expression of the sovereignty of the management of our main resource. The old PDVSA in an effort to depose our control of a fundamental activity, established in the first round, that any dispute in the operative agreements will be resolved by arbitrage in accordance with the rules of the Venezuelan Code for Civil Processing, which would take place in Caracas.  

In the second round, PDVSA agreed to settle the disputes by arbitrages that would still take place in Caracas, but in accordance with the rules of the International Chamber of Commerce in Paris, France.  In the third round, the old PDVSA finally imposed over the country that any dispute would have to be resolved by arbitrage in New York, US in accordance to the rules of the International Chamber of Commerce in Paris.

PDVSA also agreed to irrevocably quit to its sovereign privileges as a State Company. Once again arbitrage was still being applied to our sovereignty, now in the subjects related to the resolutions to controversies. Until very recently, very little was introduced as something new in the new projects, like something that would attract private capital, because it turns out that this oil matters cannot be, as established by our constitution and our laws, subject to arbitrage nor be submitted to a resolution overseas.

We vindicated ourselves and we will see that vindication in the future in our own proposed model to the National Assembly. All disputes linked to issues related to oil sovereignty would be decided and elucidated here, in our national courts. We will not accept arbitrage as a mechanism for dispute resolution.  

The OPEC is a group of sovereign countries that are regulating the production in defense of the price of oil and the natural resources. However, what the meritocracies wanted was to bring the quota system outside of the OPEC. Remember that Venezuela became under the old PDVSA a dulling and sabotaging agent for the OPEC policies.
They wanted to take a quota system outside of the organization and establish that quota system in the center, once again, of the World Trade Organization, where, of course, the biggest consuming countries control their decisions. For that fact, then, in order to fulfill what was articulated by the OMC, our oil resource would become a commodity, and once again it had a clear objective: make it become a tradable asset, that was not a natural resource, that was never exhausted and that therefore could be regulated by OMC, like the production of cars or shoes or any other thing is regulated. Then, this policy was taking that direction.

Finally, and after evaluating the operative agreements, we maintain firmly that they are illegal. In their own origin they mocked the law that was in force at that time, they disguised the real concessions under the pretext of service contracts, and that had devastating consequences for our income and the sovereign control of our resources.

We had a de facto privatization of our oil industry, 500 MBD of oil were then in the hands of private companies, that as we have already shown were illegal because Article 5 of the Law of Nationalization that was in force at the moment when the agreements were signed, quoted “…it must be very clear that in any case –referring to the operational agreements – these formalities should affect the main essence of the attributed activities”.

We already saw it. “The celebration of agreements or contracts with private companies is not excluded, for the execution of specific projects or services for which the latter would receive payment in the form of money or species, without compromising, in this last case, a fixed percentage of production of a given field. We have seen in the graphs that 60% of production was committed to be delivered to contractors… or the delivery of a substantial quantity of oil that would redraw the figure of a simple service or operation contract”.

If in this Assembly or in a building we hire someone to paint it, we should not end up in a situation in which we would need to give the building to the painter in order to pay him for his labor.  That is a service contract; it cannot position the person that demands the services, due to its nature, in almost bankruptcy. It is intended to contribute to the realization of operations.

We have concluded in the evaluation period that, from the 32 operational agreements, 60% of the gross production corresponded to private companies and that the remunerations were given by PDVSA. The operational agreements had such an economic importance, that it made its framework unviable as part of Petroleos de Venezuela, and that is why we took some measures that we will announce straight ahead.    

It is important to listen to other references of what is a service contract and for that we can quote a glossary of the Petroleum Engineers Society, the Petroleum World Council and the American Association of Geologists, where a simple service contract is defined in the following terms:

“A pure services contract is an agreements between a contractor and a government that typically covers a defined technical service that has to be given on a determined timeframe or has to be completed in a specific term. The contractor’s investment is typically limited to the value of the equipment, tools and personnel used to provide the service. In the majority of cases the reimbursement to the services company is established in the contract, which doesn’t have significant links with the project development or market factors. The payment of the services is normally based on daily our hourly rates, a fixed amount for turnkey solutions, or another specific amount. The payments could be made periodically or when the service is complete. The payments in some cases could be linked to field operations, the reduction of operating costs or other relevant parameters. The contractors’ risk in this type of contract is usually limited to non-recuperative overpricing, loses derived from the clients or contractors breach of contract of contractual disputes”. These agreements generally are not exposed to the volume of production or its market price, and consequently, in most cases, do not recognize reserves.”

In the middle of this situation, the Bolivarian Government assumed the conduction of our oil policy in 1999. The nation may be asking why this situation was not stopped, and was prolonged until 2005 and 2006. And here is where we have to put the facts in context. In the report from PDVSA’s Commissioner for the years 1999 and 2000, the administration that was taking over started to realize the conditions in which the industry was given to us. Here you can find all the signals of how expensive and out of control where the operational agreements, the signals of how expensive was the internationalization policy and the signals of what was the outsourcing policy that was guiding us towards privatization.

As a product of these reports, the former Minister of Energy and Mines, Dr. Ali Rodriguez Araque, and later Dr. Alvaro Silva Calderon, established a group of guidelines and recommendations in the various minutes of the Shareholders Assembly, where it was ordered to PDVSA to review this structure in which our oil sovereignty was given away. The old PDVSA denied the information and had a “corporate veil”. This name was given to them due to its operations and shareholders represented by the Ministry of Energy and Mines.

The old PDVSA didn’t allow the Bolivarian Government to have access to the gigantic black box that the deals of the oil opening signified. Then came the coup, where the active and militant political position of that meritocracy was clarified. The old PDVSA was involved in the coup and that is why, we as Ministers, did not sign the 2002 budget, because we know that that budget financed the mobilizations that then precipitated the April 11th coup.

Then the meritocracy led the industry to the oil sabotage, an incident without precedents in history. But then, like we said in that moment, it was not that they were evil or crazy, no, this was a dangerous simplification. This was the clear expression of a model that contrasted with what was proposed in our Constitution and that in a worthy way represented President Hugo Chavez. These were two views of a country in which the imposition of a neo-liberal model was passed, in a necessary way, due to its control of our main economic activity, its control of the oil revenues, and its introduction of international capital that weakened our national interests. For that reason, the old PDVSA led the industry to sabotage, and to a violent confrontation with our people.

This action is unprecedented in any other place of the planet. When North American troops invaded Iraq, the first thing they occupied was the Ministry of Petroleum, the first thing they occupied were the facilities. Nobody destroys the oil facilities as the meritocracy has done, named like that without blushing. By the way, they believed they were excellent. Nobody acted like that; here there was a confrontation of two models and what was behind was: a lot of money, much interest, and much international interest.

Once we defeated the oil sabotage – when I say we, I am talking first of all of our people, our Armed Forces, our workers, our patriotic managers- when the Bolivarian Government defeated the oil sabotage nobody imagined that an industry that on January 1st, 2003 was producing only 25,000 barrels of oil, would be producing in March of the same year, 3 million barrels of oil. We spent the entire year 2003 reestablishing our production and I think that our workers have done it very well. Once again it is the magic of our Revolution, the internal fire of our people and the leadership of President Chavez.

Once we reestablished and stabilized our production, we begun to review our papers. Remember that we were here last year, on May 25th before the National Assembly, exposing all of this issues together and now we will be attacking them one by one, in this case the operational agreements. To make it possible for us to obtain the copies of what had been signed in the old Congress to authorize the partnership agreement of the Strip, we had to threaten the companies because, simply, they had disappeared from the Assembly, they disappeared from the Ministry and the sabotaging meritocracy destroyed them in PDVSA.

Therefore, once we begun to have access to information and the ability to articulate all of these elements –it is not a simple issue because it was done on purpose so it would be very complicated—we begun to take the precise actions for the culmination, in this case, of the issue of the operative agreements.   On April 12th, 2005 the Ministry of Energy and Petroleum issued an instruction to the Boards of Directors of Petroleos de Venezuela, where it was order to end the operative agreements in a period that should not exceed one year. That period expires on the 31st of this month.

The same way, in that instructive session it was ordered to PDVSA that, since the operative agreements would affect the performance and viability of the company, there had to be a ceiling on the payouts of up to 66.6%. I mean, that at least the regalia should be paid. 

The third instruction was to end the payments that were made in dollars- they charged in dollars and they paid our workers in bolivares. One hundred per cent was paid to these companies in dollars, and so an instruction was given to put an end on these payments, review and only recognize the ones that corresponded to the cost structure in dollars, like the ones that PDVSA had to pay to rent a driller overseas, but everything else was paid in bolivares.
And we gave companies a term until December 31,2005 for them to subscribe to a commitment, what we called the agreement of transition, where we were telling them “you have an illegal operational figure, you have a group of debts with the Venezuelan Government, you have to pay them all, you have to pay everything that you owe the State and only after that, you will have the possibility of migrating to a figure that could be contemplated in our law, that is the figure of mixed enterprises”.

Here we would like to stop, because we were very confused, and I must inform the country that all of this policy has been discussed, conducted by the President of the Republic, and that is what we have called it the policy of Full Oil Sovereignty. And the option to expropriate or migrate was widely discussed as well. We were analyzing our law, that incorporates in article 22 the existence of the private capital participation, but subject to a series of regulations that guarantees the majority and the Venezuelan state’s control by its national operator, in this case PDVSA.

I will allow myself to read that article, because it is important for the whole country to understand this figure, which we are proposing as an option, it is in our legal framework, it is part of our Organic Law for Hydrocarbons, and I read: “Chapter III. For the exercise of primary activities. Article 22: The primary activities as indicated on Article 9, will be done by the State, directly by the National Executive or by companies that exclusively belong to it. Similarly, it will be able to do it using companies where it can have control over their decisions, by maintaining a participation of over 50% of the social capital, the ones that for the effects of this Decree of Law are denominated mixed enterprises. The enterprises that will be dedicated to performing primary activities will be operating enterprises.”

And then in article 33, section III. On mixed enterprises: it establishes: “ The constitutions of mixed enterprises and the conditions that will rule the realization of primary activities, will require the previous approval of the National Assembly, for that effect the National Executive, as an organ of the Ministry of Energy and Mines, will have to inform it of any circumstances related to that constitution and conditions, including the special advantages provided in favor of the Republic. The National Assembly would be able to modify the proposed conditions or establish those ones that it would consider convenient”.

Then the spirit of the legislator is expressed here and it shows that we can have the presence of private companies, but if they are clearly regulated, clearly subject to our laws that rule for the national companies and by a previous approval of the National Assembly. By doing so, the Executive is guaranteeing that an ample discussion would take place and that the interests of our country would be preserved.

Well then, that process that we call migration has been a process of a lot of tension and it is important to know that we have been conducting, every day of the year 2005, a policy on the road to establishing our Full Oil Sovereignty. And because of that, we have decided that our oil policy in this stage is a policy of Full Oil Sovereignty, a national policy, because it reestablishes our sovereignty and control of our resources; a popular policy, because it should rest over the shoulder of our people; and a revolutionary policy, because here the revolutionary and what can set us apart from the actions of other oil producing countries is how the oil rent is stipulated, in favor of whom the oil rent is distributed, and we say, the President of the Republic has said, it is in favor of the people.

And that is why we have seen, starting from the defeat of the oil sabotage, the extraordinary situation in which our oil revenues are being used for the Nation’s Development Plan, to sustain the Missions, all the Missions: Barrio Adentro Mission, Ribas Mission, Robinson Mission, and Mercan Mission. This is what bothers our opposition; this is what bothers those elites that traditionally disposed, for their own benefits, the oil rent. This is what is being disputed here: who controls and distributes the oil rent.

The Venezuelan State is an expression of the collective interest of every Venezuelan and if we are determined to the development of socialism, then we must have the capacity and the ability to plan and direct our economy in benefit of our big national majorities. It is all about that.

In this migration process, companies are very clear –we told the country- that until December 31, 2005 they had the possibility of signing the transitioning agreements, because since November 2005 we had named the Executive Transitioning Committees. I mean, we had already prepared the group of engineers and managers of Petroleos de Venezuela that will be in charge of those operational agreements.

The deadline was December 31, and all of the companies were signing their contracts, first the government companies, then the medium size companies and then the bigger ones. At the end, ExxonMobil did not want to sign and instead preferred to sell the participation that it had in the operational agreement of Quiamare-La Ceiba., to Repsol; and then Repsol signed on December 31, 2005.

On January 1 of this year, we, by means of CVP, started to take effective control of those fields. We have our kids there; they got together with the President of the Republic on January 2, who gave the last directions for the activities that we are doing right now. We have told the companies and our country: “ We are going to extinguish the operational agreements by the first trimester of this year”. For that reason we are submitting to the National Assembly the model that will regulate the constitution of those mixed enterprises. The Assembly will have to review them, discuss them, and approve them because all of the companies will have to be constituted as part of that general model.

We will not have mixed enterprises tailored made to a specific situation, here we will have a model that will be approved by the National Assembly and starting on this upcoming Wednesday, in the core of the Commission on Energy and Mines, we will start to bring, every number corresponding to each of the 32 operational agreements, so that the entire country is informed, by means of the National Assembly, of which are, not only the general conditions of this proposed model, but also the specifications of each of these future mixed enterprises. We are going through that process right now.
Mentioning some aspects – and I am thankful for the attention, because truly it is a subject that needs to be exposed in detail—the model that we are proposing to the Assembly to be the framework where the mixed enterprises will work, has an extensive set of articles, but it is important to note at this moment, publicly to the nation, some strategic and substantial elements of it.

For example, the State participation: Our Law established that we could have at least 50%. We decided that in order to have an effective control of the future mixed enterprises we must have, at least, a majority of 60% to 70% in those companies, and that was a line that we drew with the companies; in any of the mixed enterprises you will se that the State would have a participation of less than 60%.

The other issue is that the mixed enterprise will be the one that will become an operator, not the private one. It is the operator that is under control of our national enterprise with a strong ownership of the majority of shares. For that reason, we have already designed and planned the future operations of those mixed enterprises.

Let me provide you with some numbers: last year, 2005, even though we put a ceiling on what was being paid for the operational agreements, Petroleos de Venezuela still needed to pay 4 billion dollars to produce 500 thousand barrels of oil. This year, in order to produce the same 500 thousand barrels of oil, we will not exceed a billion dollars.

We have net saving of 3 billion dollars for Petroleos de Venezuela, and that is a saving that belongs to the shareholders. It was not like it happened before, that it was invested in businesses that were against the shareholders. No, now they are reported to the shareholders and are delivered as dividends or as social contributions, like we have been doing since last year for our businesses abroad where, as the President of the Republic already mentioned, the Citgo deals, for the first time, have brought dividends to the country: 900 million dollars converted in the Mercal Mission, Barrio Adentro Mission, and in everything that is needed by our people for their development. The type of control that the Venezuelan State will have over the mixed enterprises is very clear. Nobody should have any doubts about that.

The second important aspect is that we are preserving the hydrocarbon reserves. And it should be clear: that it is a Constitutional Rule that has its origins in the Liberator’s Decree of Quito in 1829, that established that the oil and hydrocarbons reserves found in underground soil belong to the Venezuelan state. Nobody can transfer them as a bond, or make any kind of commercial transaction using them as collateral. That was happening with the operational agreements, where companies were entering in their books, for their financial statements, the reserves as part of their property.

It should be very clear that what the Venezuelan State if granting to mixed enterprises is a right for exploitation. The reserves are ours; they belong to the Venezuelan State.

The Ministry of Energy and Petroleum has every authority, as a representative of the Venezuelan State to revoke both the rights and assigned areas.  Let me inform the National Assembly that in this migration process from operational agreements to mixed enterprises we are reverting, for the advantage of the State, 60% of the areas in which the operational agreements were operating. These were operating in 40,000 squared kilometers and now the production plan for mixed enterprises estimates as a sufficient area, 15000 squared kilometers.

And what is the interest of transnational companies with the areas? That it gives them future strength. A private company that is granted areas and areas, with a big oil prospects, can still obtain financing and make operations using spaces that belong to the Venezuelan State as collateral.

All of the reserves and every oil area belong to the Venezuelan State, by means of the Ministry of Energy and Petroleum. Even the ones assigned to PDVSA. That is a very important conceptual subject. We do not doubt that the oil reserves belong to us.

Then we have the transfer of all of the tangible assets that are located in the Republic – that would be the old companies’ assets- to the mixed enterprises. Starting on January 1 we have deployed as part of the different operational agreements close to 250 independent auditors, auditing each agreement, each investment that was made, verifying if they were true, if they are valid, and if we are going to use them. Because as part of that discussion of investments is that we will be able to decide the percentage of participation from private companies. We will not recognize here what they aspired to obtain of a deal that still had 13 or 14 additional years of development.

Also, the policies and procedures of Petroleos de Venezuela in reference to the extinction are very important. The mixed enterprise is not supportive of the debts and commitments that the company operating the operational agreements had. We have ordered environmental auditing to try to determine if in those areas environmental remediation is needed, which will be a responsibility of the companies that operated the operational agreements.

Additionally, we are preserving the laborers rights for the operational agreements. All of the legal obligations that have to deal with the work activity in the operational agreements are preserved, and we will be assumed in the framework of the mixed enterprises and for the stability of our laborers, which will pass, or course, as part of the conditions of the collective oil contracts.

Sales of Hidrocarbons. Article 3 of the Law establishes that the monopoly for commercialization is exclusive to the Venezuelan State by means of its State Company. In that sense, the mixed enterprise must sell to PDVSA all of its production and all of the gas. Now we will establish a supply contract, for the sales of hydrocarbons, very clearly, with the formulas that the Ministry of Energy and Petroleum is developing to place an exact value on the type of crude oil and the quality of what is produced, to have a real value of these volumes of oil.
The operation, personnel and technology. The mixed enterprise is an operator. In the board of directors meetings of these companies, the CVP –that will be the entity of Petroleos de Venezuela that is responsible of the activity—will have at least three representatives from a total of five. By this way we will have effective control of the operations. The hiring of new personnel will be done with the approval of the CVP, since it will become a human resource that will become part of an entity of Petroleos de Venezuela.

Transfer of shares. We will not accept that the private capital participation in a mixed enterprise be transferred in an international operation, like what used to happened in the operational agreements. Before, in the international transactions, the operational agreements were sold, were passed like a pot owned by these companies. Now we are establishing, in a very clear way that, any transfer or change of a shareholder in the core of the mixed enterprise, has to be approved by the office of the Ministry of Energy and Petroleum, as well as any change that wanted to be introduced in the own figure of the mixed enterprise, has to be summated for the approval of the sovereign National Assembly for the purpose of vigilance and activity control.

Applicable law and jurisdiction. I literally read Article 7: ”This contract will be ruled and interpreted in accordance with the laws of the Republic and any dispute or controversy that may arise in relation with it, and that could not be resolved in a friendly manner between the parties, will be submitted exclusively to the decision of the competent courts of the Republic”. The arbitrage is over as well as submitting our oil and non-oil activities to arbitrage by a foreign legislation. We are reestablishing our sovereignty.

We are setting a 20-year time limit as the duration of the enterprise; the Law establishes 25, but lets consider 20 years a time frame good enough to evaluate this enterprise in the future.

Additionally, it is clearly established that the mixed enterprise must pay regalia of 30% and a tax rate of 50% as contemplated by the Law. Here, as we said, we won’t have new extensions or fiscal flexibility in detriment of our people.

As another part, as it is established by Artcile 22 of the Law, we are introducing special advantages for the new mixed enterprise. We proposed to the Assembly, besides the regalia of 30%, to establish a special advantage of an additional 3.33%. This has a purpose very much linked to the social role that these companies will have both in the municipalities were they are established as well as their neighboring municipalities where the mixed enterprises will be located. This 3.33% will be the object of discussion; the Executive has a proposal of use, but has the orientation of taking care of the subjects linked to social development as Petroleos de Venezuela is already doing.

The President of the Republic has instructed that Petroleos de Venezuela establish social districts. Now, in each district were there is someone responsible for producing or refining oil and gas, that same person, in that same district, is responsible for all of the PDVSA social activity.

This is why we have decided that 10% of our investment budget, in addition to everything we have in our social budgets, be destined to alleviate the terrible social problem that we have.

A special advantage, that is very important, is established here: the difference between the gross revenues, the regalia payment and taxes. The aggregate value of all of these will generate a special advantage where the State will guarantee 50% of the participation in the gross revenues of the mixed enterprises. Here we are reestablishing an element of our old data in our oil tradition: commonly known as the “fifty-fifty”, with the difference that now we are imposing that rule on 50% of the gross revenues; I mean, the mixed enterprise will have to make every effort to give at least 50% of fiscal contributions to the Venezuelan State for the right and the exploitation of what we are conceding from our hydrocarbons.

Similarly, to finalize, we are establishing a tax, an additional special advantage of 1% for the endogenous development plans, in addition to the ones previously mentioned. What does this mean? That we want to out an end to a relationship to provide assistance that the hydrocarbons industry had with the region: they painted a school or fixed a well. We want to have a sustained investment each year for endogenous development projects, in the agricultural sector, the scientific sector or in the industrial sector; as well as, of course, the educational or social development projects that we already have.

This, Representatives, is in general lines the proposal that we bring to the National Assembly. I wanted to solicit from this sovereign Assembly, the maximum amount of possible discussion on behalf of the Executive; by what we have rightfully called “street legislating”, in which all of these issues are brought for debate with our people, our country, our Armed Forces. Our Representatives can discuss in detail every fundamental subject of our oil policy, of the Full Oil Sovereignty.

This will not be the last time we will come. After this migration process, we hope and need to have by the 31st of this month the approval of the various stages of the composition of mixed enterprises, for the effect of all of the policy that we have deployed. We will bring to the Sovereign Assembly; the issues linked to the association agreements of the Strip, as a well as all of the issues pertaining to our commercialization.

We will dismantle together with the entire Venezuelan State, one of the aspects linked to the oil opening. I must say that the National Executive is working, in a very articulated way, on all of these issues. With the Ministry of Finance, by means of the Seniat, we are working to collect and demand in favor of the Venezuelan State all of the evaded taxes in the oil opening. We will reestablish all of the rates that correspond to the oil activity; we are working together on a reform of the Tax on the Rent Law to reestablish the oil chapter that existed in our law before the nationalization. It is necessary that our fundamental economic activity, such as the production of oil and gas, have a special chapter for everything that needs to be collected as a sovereign country. We will reestablish the regalia rates; we will reestablish the hydrocarbons industry harmony in our country.

Finally, I would like to thank, on behalf of our entire working team, the National Assembly for its support and its time. We are convinced that the entire Venezuelan State, whether it is the Executive, the Legislative Power, our Armed Forces or the Judicial Power, will work articulately to return to our people every resource that belongs to them. Thank you very much.