Speech of the People’s Minister for Energy and Petroleum and President of PDVSA, Rafael Ramírez, before the National Assembly

Caracas, February 14, 2008

Good afternoon:
Cilia Flores, Madam President of the National Assembly, and other members of the Board;
Representatives of the Permanent Committee on Energy and Mining of the National Assembly;
Representatives of our sovereign National Assembly;
Vice-ministers and heads of the People’s Ministry for Energy and Petroleum:
Fellow members of the Board of Directors of Petróleos de Venezuela;
Managers, fellow workers of our oil industry, Pequiven, electric power industry;
Honorable special guests, counselors, ladies and gentlemen representatives of the media

Allow me to thank the sovereign National Assembly for granting us the right to speak so that we are able to inform said National Assembly all facts related to the nationalization process of our oil industry, the development of our oil policy, and the events that are making headlines today and have had worldwide impact.

Our presence here today also responds to the constitutional mandates, as well as to the cooperation among the different State branches of power and in particular with the National Assembly and its competences concerning oil matters by virtue of the Hydrocarbon Organic Law currently in force.

We also want to remind that on May 25, 2005, we had the opportunity at the National Assembly plenary session to denounce, before the people’s representatives and the whole country, the oil opening process, the dismantling of our oil sector legal framework, and the outrageous consequences that the oil policy, mainly developed during the ‘90s, had for our country, our sovereignty, our economy, and the general development of the national life.

I’m going to allow myself, Madam President and Representatives, to make a brief recount of what we stated back then, before reporting the progress made concerning the resolution of the issues and problems concerning this issue and the implications this situation has had for our country.

The first thing we stated at that time was the topic related to the so-called internationalization policy of our oil industry. At that time we denounced that it was a systematic policy, developed since 1986, that reached its peak in the ‘90s. Our oil industry, Petróleos de Venezuela, was managed based on the criterion that it was a global energy corporation and that it was virtually transcending the national territory and placing investments abroad, which included substantial discounts in oil supplies. As a consequence, the Ministry of Energy and Petroleum registered that the country’s interests had suffered a loss in the order of 17 billion dollars, adding together discounts and purchases abroad. The old PDVSA had the possibility of establishing discounts and granting direct subsidies to the most powerful economies in the world, such as the US.

This was how the oil opening began to shape. Venezuela, before a globalized economy, before the interests of the US economy, was assigned the role of a satellite, a peripheral country whose only function was to supply large volumes of oil at subsidized prices to sustain that economy.

We also denounced the operating agreements, the privatization of the medullar activities of Petróleos de Venezuela. The strategies of the oil opening process began with the dismantling of the legal framework of the oil sector, had been a tradition in our country, as Representative Carlos Escarrá already explained. The backgrounds of our oil and mining legal framework dates back to the decrees issued by our Liberator Simón Bolívar, specifically the Decree issued in 1829 in Quito. This has signified a tradition according to which the Venezuelan State has maintained its control and has been the owner of all hydrocarbons in its territory. This is a matter of sovereignty over our natural resources.

The oil opening process took advantage of the loopholes in the legislation concerning the oil sector, particularly in article 5 of the Organic Law that Reserves Hydrocarbon Industry and Trade for the State (LOREICH), enacted in 1975, which is unofficially known as Nationalization Law.

I’m sure you remember the controversy the inclusion of that article raised. This article, at the instance of President Carlos Andrés Pérez, included the possibility that, even though basic oil exploitation and production activities were reserved for Petróleos de Venezuela, the state-owned oil company, agreements and service contracts be made with private companies to improve operability and contribute to the development of these basic activities. 

The 1943 Law included a significant modification. It established in article 3 that the Corporación Venezolana de Petróleo, the name of the company at that time, could perform the activities within its scope of competence and close agreements with private companies.

Lawmakers made sure that those agreements were monitored by the different national controlling entities, including the Congress of the Republic. They also provided for a number of requirements, set specific deadlines, established the control of the former Congress and stated that those agreements could be signed, but that under no circumstances conflicts between the parties could be submitted to international arbitration.

This is a relevant fact, because when the oil opening process began and in the light of the projects that Lagoven, a subsidiary of Petróleos de Venezuela, was advancing at that time, including the Cristóbal Colón project that, as we have already denounced, was a trial aimed at dismantling the oil legal framework that was then in force, the old PDVSA submitted to the High Court of Justice a remedy of construction of Article 5 of the Nationalization Law, and the judge responsible for handing down the decision, Duque Corredor, was quick to establish a number of criteria that were determining for the development of the country’s oil policy.

First, Article 3, which was included in the 1967 reform, was repealed. According to this article, differences between the parties could not be submitted to arbitration outside the Venezuelan jurisdiction. The remedy, in turn, stipulated that control was not a responsibility of the majority stockholders of Petróleos de Venezuela. In other words, majority was not necessary, but only a so-called Golden Share, according to which the Republic could have control over activities that, based on the Nationalization Law in force at that moment, were exclusive competence of the Venezuelan State.

As a consequence, the legal framework concerning the country’s hydrocarbon sector, which had been consecrated in the spirit of lawmakers when the 1975 Nationalization Law was enacted, began to collapse. Therefore, the inclusion of this provision in Article 5 left the door open to reverse the nationalizing spirit of the Law with the subsequent consequences this had for our economy.

Based on that collapse of our legal framework, the initiative of the operating agreements, a deceitful scheme, was imposed, and concessions were disguised as service contracts provided for in article 5. Through that scheme, at different rounds, Petróleos de Venezuela’s production and the medullar activity that was reserved for the Venezuelan State was transferred to both transnational as well as national companies.

These successive operating agreement rounds deserve analysis, because they meant the dismantling of the oil legal framework that was in force at that time.

First, operation and control were handed over to such an extent that more than 500 thousand crude oil barrels of our production were lost, that is, Petróleos de Venezuela had no longer anything to do with the operation of those crude oil volumes. In fact, these were concessions that received compensations based on complicated formulas, which had been designed in such a way that they were impossible to be reviewed or examined by the existing monitoring entities. In a few words, they were in fact concessions granted to transnational companies.

Arbitration was established at the different rounds to settle controversies between the parties. At the first round, arbitration was agreed but only within the national territory. At the second round, arbitration was maintained within the boundaries of the country, but according to the provisions of the International Chamber of Commerce, and at the third round, international arbitration was established concerning issues related to conflicts between the parties, that is, private companies and Petróleos de Venezuela.

Under that scheme, our oil industry was privatized and the dismantling of our legal framework began, not to mention the considerations made concerning the tax regime, because the oil company was of the opinion that since they were service contracts, the rate to be paid could not be the one that was in force for oil activities, that is 67.7%, but they classified it as a service activity and made the gracious concession of cutting back the rate to 34%.

These were the operating agreements, another pernicious scheme imposed by the oil opening according to which these contracts and concessions were out of the control and supervision of the Congress, because they were considered an exclusive matter of PDVSA and the service providers.

The third relevant element to be considered and that we are denouncing here concerning oil opening was the dismantling of the oil tax regime. As a result of successive actions, the old PDVSA, acting, as we already denounced, as a true Trojan Horse, was supposed not to proceed against the interests of the Nation: the old Ministry of Mining and Hydrocarbons and later the Ministry of Energy and Mining were eliminated, so that they could not effectively monitor oil activities because they were matter of the exclusive control by our oil company. Based on these considerations and on the national sentiment of having a company under the control of the State, the old PDVSA became a true Trojan Horse that brought about successive violations to the law, the spirit of lawmakers, and all our tradition concerning the oil question.

Now, with all their power, their lobbying and, of course, their complicity with the leading elites of the Fourth Republic that were already beginning to reveal what their true intentions were, private companies started to be granted a number of concessions concerning oil tax policies. 

As a result, export fiscal value was eliminated and its rates were successively reduced. This was a very powerful tool that the Venezuelan State used to receive oil revenues. Then a non-oil rate was established for the activities of the operating agreements. First it was a trial, but later they succeeded in cutting back the royalty rate, which is the one that goes to the Venezuelan State as owner of the resource.

It all started when the Cristóbal Colón project, the offensive to bring royalty rates down, applied a 1% rate; then in the Orinoco Oil Belt projects, with the complicity of the Ministry of Energy and Mining, rates were knocked down from 16 2/3 to 1% for the Orinoco association agreements, the so-called Strategic Associations.

The oil tax regime crumbled. If we analyze the decisions made back then by the oil industry, in the light of the oil opening process and the deep economic crisis that the country went through since the mid ‘80s to the ‘90s, we will realize that its decisions and actions directly brought about the impoverishment of millions of Venezuelans and the deterioration of the economic situation, which finally led us to the riots and social violence during the Caracazo in 1989.

Moreover, concerning all the Orinoco Oil Belt association agreements, the Fourth Republic introduced reforms in the Income Tax Law to include more concessions and incentives for transnational companies and decreased the income tax rate, as they had done in the operating agreements, to 34 percent, as if it were an ordinary manufacturing or trade activity.

The old PDVSA had a project (the President Hugo Chávez denounced this situation opportunely), the Araguaney Project, where oil meritocracy estimated that the royalty rate had to be based on the company’s profits and had to have a ceiling established of no more than 5 percent.

Perhaps the most conspicuous example of the State or Petróleos de Venezuela losing control of the activities that by law were exclusive matter of the Venezuelan State, during the oil opening process, were the Orinoco Oil Belt association agreement and the shared risk and profits exploitation agreements, the so-called Oil Belt strategic associations and agreements.

I’m not going to refer to the strategy through which transnational capital undervalued our assets in the Oil Belt and turned, thanks to the efforts of the so-called lobby-stars, the world’s largest crude oil reserves into bitumen.

It was a campaign launched by the major mass media, which talked about the Orinoco Bitumen Belt, as if it was not crude oil but something similar to coal and we had to be grateful that an international company made us the favor of taking charge of something that was not oil, but something mysterious that could not be handled or extracted. 

According to this criterion, which was really an anti-OPEC strategy of volumes vs. prices – because it was considered that this bitumen could be unlimitedly extracted and that the market could be flooded with huge volumes of Orimulsion or syncrude, as the International Energy Agency was quick to mention, and as a result of the oil opening – the Venezuelan State and the old PDVSA granted a number of concessions to transnational companies.

The first element was that those association agreements gathered all factors inherent with the oil opening process: they paid non-oil tax rates and 1% royalty rates, the authority of the State to allocate areas was handed over to the national company, Petróleos de Venezuela, and the oil industry were limited to a minority position with that resolution of the old Board of Directors and the former High Court of Justice, according to which majority was not necessary to be the controlling party, but only a modern golden share, that was in vogue, which allowed the State to have control over those associations.

Consequently, Petróleos de Venezuela had an average stake no greater than 43 percent in the different association agreements closed in the framework of oil opening, which produced up to 600 thousand barrels of crude oil. This, added to the 500 thousand barrels of the operating agreements, committed at least a third part or our oil production to private companies.

That was the most relevant development of oil opening, until the Commander and President Chávez won the 1998 election and the situation began to change.

Our Bolivarian Government, led by President Chávez, began implementing a policy aimed at defending sovereignty over our natural resources, over crude oil. Resuming the spirit of the 1999 constituent process, which reaffirmed the principles of our oil policy of maintaining sovereignty and control over our resources, the current Hydrocarbon Organic Law was enacted, according to which the principles of our traditional oil policy were guaranteed, the same that had been demolished in the oil opening process.

You have to remember, and the former minister Álvaro Silva Calderón, Bernard Mommer, vice-minister of hydrocarbons, and many who participated in this development process of our laws are here with us today; the sad role that the old PDVSA, led by General Guaicaipuro Lameda, who later was directly involved in the April 11, 2002 events, played in the discussions of the presidential committee. We saw our national oil company violating the laws established by the Venezuelan State and the lawmakers’ spirit that was consecrated in the Hydrocarbon Organic Law.

You have to remember, representatives, how transnational companies, which were operating in the Orinoco Oil Belt, pressured for their association agreements to be legally recognized, just like they were. In this regard, both the State and legislators maintained since then a firm stance in defense of the Full Oil Sovereignty policy. Of course, all this woke up the demons of conspiracy; the old PDVSA, its board of directors, its managers, all were directly involved in the April 11, 2002 coup d’état and later in the outrageous oil sabotage against our oil industry, our economy and the country, which started with the lockout of December 2002 and had terrible consequences for the population, the national oil industry and, of course, our economy.

We have to remember that as a result of the sabotage against the oil industry, on January 1, 2003, the country was producing only 23 thousand b/d, ports were blocked, refineries and control systems were sabotaged by international companies and a plot was organized in an attempt to topple President Chavez. We can never forget this; these events have to be deeply enrooted in the consciousness of our nation, of our workers. Therefore, when it comes to the oil question, we have to be as radical as we can be and as emphatic as the situation deserves.

Once the oil industry sabotage was defeated, we achieved the political conditions required to dismantle oil opening. Some so-called “analysts” and “experts” criticize and question that we waited until 2004 to dismantle oil opening. We could not have done that before. The shareholders that represented the Venezuelan State, through the Ministry of Energy and Mining, repeatedly requested PDVSA information on the operating agreements, supply discounts, contracts, and Orinoco Oil Belt agreements.

All this is recorded in the multiple shareholders’ meetings minutes, which were held since year 99, headed by Alí Rodríguez Araque and Álvaro Silva Calderón, both former ministers of Energy and Mining, and in the report by the licensed commissioner, Rafael Ramírez. All this information is documented. But it was impossible. Not even the National Assembly had information on the agreements that had been approved by the former National Congress, blatantly violating the authority of the National Assembly as a controlling body.

Madam president of the National Assembly, representatives, I’m sure you remember that along with the presentation made on May 25, 2005, we submitted to the National Assembly information concerning those contracts and agreements that were not recorded at the Ministry; the same that after putting a lot of pressure, we managed to obtain from the transnational companies. We could finally have them to provide us the information on what was signed and approved by the former National Congress.

It was not possible to advance the dismantling of the oil opening process without first gaining control over our national oil industry, without first gaining control over Petróleos de Venezuela. Once the sabotage against the oil industry was defeated, the operational levels were recovered, and all the conditions were created to retake the path toward the development of our oil policies, operations, normal exploration, production, processing, refining, and export activities; the Venezuelan State could start working with PDVSA as an operative and auxiliary arm of the Ministry of Energy and Mining, today the Ministry of Energy and Petroleum. We finally had the possibility of examining all contracts.

We repeatedly denounced the black box of PDVSA, a huge black box that was hidden to the Nation, out of the control mechanisms of the different national powers.

We started a process to re-establish all principles that oil opening had abolished as a result of its coordinated and permanent action. It would be suicidal to assume that those managers were mad or against the country. That was a line of thought that was being imposed by globalization, disseminated throughout Latin America, which privatized large state-owned oil companies, with the sad consequences already known.

This was a strategy applied by the major consumer countries and their think tanks that disseminated, propitiated and expanded an ideological stance about the role of the State and its intervention in the economy; a dissolution of sorts of the Venezuelan State in which it gave away its spaces to the private, national or transnational, interests.

Amidst these two different views about the country, the oil opening took place. Later, the project of President Chávez’s Bolivarian Government, which is reflected in the 1999 Constitution, is imposed and the Enabling Law was decisive and crucial to mark the revolutionary path of our Government.

We then began to re-establish, like we informed at that moment to the National Assembly, each element related to the rescue of our oil sovereignty. The first thing we did was re-establish the legal framework, to enforce the Hydrocarbon Organic Law, which was dead letter for the operating agreements and associations because PDVSA itself did not want our law to be enforced.

In 2005, the Ministry of Energy and Mining, in compliance with our Hydrocarbon Organic Law, determined that the scheme of the operating agreements, which were violating the law, disguised true concessions and consequently private companies had to migrate to the only scheme provided for by law: the mixed companies, otherwise they would have to cease operating in our country.

Therefore, the 32 operating agreements, after a process that had March 31, 2006 as a deadline, were successfully migrated to the status of mixed companies.

Of 32 operating agreements, 30 were migrated and became 21 mixed companies. It was a discussion that took place here, at the National Assembly; first in the Permanent Committee on Energy and Mining and then at the Plenary Session. It is worth mentioning that the proposed mixed company model is not only provided for in the current law, but it also re-established all the principles of our oil policies. In other words, it meant majority and indisputably absolute control by the Venezuelan State over medullar activities of the oil industry, its monopoly over commercialization, the payment of income tax and royalty rates provided for by law for this kind of mixed companies, and the rescue of the jurisdictional sovereignty to settle any difference with these companies within our territory, because this is a matter of sovereignty.

During this process, only two companies refused to migrate: France’s Total in Jusepín field and Italy’s ENI in the Dación field. When the deadline ended at 12 o’clock in the evening on March 31, 2006, the workers of our oil industry, in full exercise of their sovereignty, and on behalf of the Venezuelan State, occupied these fields and recovered them for the Nation.

At the same time, we began to adjust and re-establish the tax regime. During the first days of October, 2004, the President of the Republic, during the broadcast of his TV program Aló Presidente from the Refinery Puerto La Cruz, announced the adjustment of the 1% royalty rate to 16 2/3 for all projects being developed at that time at the Orinoco Oil Belt.

Since we already knew – and later we are going to talk about it and show documents about the kind of agreements and contracts that were signed here during the Fourth Republic, with the old PDVSA – that arbitration was contemplated in case of any sovereign decision made by the Venezuelan State, we started to prepare ourselves, in the event of an arbitration dispute, for a legal proceeding.

Thus, we adjusted royalties, as the 1943 law that was in force when those events occurred provided for. This law stated in article 41 that just like the Ministry of Energy and Mining had the authority to reduce royalties in the case of fields that were difficult to develop and, above all, mature fields, the Ministry could also increase the rate from one to 16 2/3 percent. This law, in full disregard for the spirit of lawmakers, was used to reduce royalties to 1% for fields that had not begun to operate, which means that they could not be mature.

In that case, some transnational companies began to send communications saying that we were disrespecting what they considered acquired rights for the development of their projects.

We moved forward and the reform of article 57 of the Income Tax Law was submitted to this sovereign Assembly, because this article stipulated the gracious rate reduction that the Fourth Republic had again granted transnational companies by establishing a non-oil tax rate for many of their activities, including the Orinoco Oil Belt agreements.

The National Assembly, along with the National Executive, decided that law and the rate for all oil projects, without exception, were adjusted to 50%. A number of exceptions were also eliminated, which transnational companies used to systematically avoid paying income taxes, as it was effectively determined by our main tax office, Seniat, based on the successive exams of the accounts, both of the operating agreements and the associations at the Orinoco.

Later, in May, 2006, the Hydrocarbon Organic Law was submitted to this Assembly in order to establish royalties and extraction taxes on a single basis for oil projects and activities in the country, including projects developed by PDVSA and private companies. This is the reason why we, for all projects without exception, have a basis of 33.33% for royalties and other taxes today.

In terms of the tax regime for 2006, we can say that the profit share the Venezuelan State had in the barrel gross value, which had been reduced to 45% during oil opening, now has been increased to 85.6%, which, in terms of the economy has had remarkable results for our country.

President Chávez, in his Accounts Report to the Nation, pointed out that the result of the set of measures taken in the context of the Full Oil Sovereignty policy and as part of the effort to recover our oil fiscal revenues – which we have the right to and something that nobody can be confused or mistaken about, because oil belongs to all Venezuelans and that moneys too – PDVSA contributed an additional 30,172,000,000 US dollars to the Venezuelan State, mainly due to the increase of 30% royalty rates, and the different measures taken by the Bolivarian Government since the enactment of the Hydrocarbon Organic Law, between January 2002 and December 2007.

Furthermore, as a result of the decisions to adjust our fiscal regime, oil transnational companies operating in the country paid, during the same period, additional revenues amounting to 40,408,000,000 US dollars to the Venezuelan State. Otherwise, these resources would have ended up in hands of those same transnational corporations or had been wasted by oil meritocracy in its investments abroad. This is the point. The point is who receives oil rent and whom this oil rent will benefit.

It is the same old conflict. Since the discovery of oil resources in our country, the desire of transnational interests has been to control our major company and take away the resources that belong to oil producing countries and, in this case, to the people of Venezuela, in order to continue to increase their lucrative profits.

We have already denounced: the coup d’état, destabilization attempts and aggressions against our Government. Sovereignty and decisions have a strong oil component and the interests of the major transnational companies are hidden behind them.

When our Government launched its Full Oil Sovereignty policy we knew that we would face the virulence of transnational companies. We were aware of it because we know very well what the Fourth Republic and the old PDVSA signed and allowed transnational companies to do in the country.

The issue that public opinion is discussing today and that made international headlines is that of arbitration. We have to make a pause here to talk about a matter of principle. In our tradition concerning oil legal regime, arbitration was never contemplated to settle issues related to sovereign decisions at any court and much less at courts outside our the jurisdiction of the Venezuelan State. This has been a principle of our legislation. In 1967, a reform was made to the law that was in force in 1943, in order to clearly and explicitly guarantee that arbitration was not possible concerning the oil question.

Arbitration itself is not a problem; this is a mechanism to settle trade differences between two entities at the international level. What we cannot admit is that sovereign issues be discussed in international courts, because the old National Congress and the old PDVSA allowed that differences arising from sovereign decisions concerning these oil opening agreements to be settled in international courts.

We have denounced this and we take this opportunity to explain the situation to the country and to submit the documents related to this arbitration issue to which our company and the Republic are subjected today. It is important to point out that there are two arbitration possibilities: the International Centre for Settlement of Investment Disputes (ICSID), which is an organ of the World Bank with a sad history of actions against sovereign states. Our country signed this agreement in 1993 and enacted a law to put in force this agreement, which provides for the possibility of taking the Republic before arbitration courts.

The other modality is the arbitration at the International Chamber of Commerce. In this case, oil opening agreements established that PDVSA could be subject to this instance if decisions were made that were clearly stipulated in the agreements.

Concerning arbitration against the Republic, I will refer to the Official Gazette of the Republic of Venezuela, number 36,224, dated June 10, 1997, according to which the Congress of the Republic of Venezuela approves the Association Agreement on Exploitation, Upgrading and Marketing of Extra-heavy Crude Oil to be produced in the area of Cerro Negro of the Orinoco Oil Belt, between Lagoven, a subsidiary of PDVSA, and Mobil Corporation and Veba Oil, this latter also a subsidiary of PDVSA, that was a company that participated at that moment in the Belt and that later sold its interests to British Petroleum.

I also want to read the 20th clause of the agreement: “The Association Agreement shall include provisions in order to authorize renegotiation thereof as it may be necessary to compensate any party other than Lagoven,” that is, transnational companies, “under equitable terms and conditions and for economically adverse consequences arising from decisions made by government authorities or changes in the legislation, which may result in a discriminatory treatment to the association.”

When the former Congress approved the association agreements, it provided for that a party other than the national company shall be compensated, that is, transnational parties, for any decision made by the government or the legislative body, which may affect the economic framework within which these agreements were signed.

Allow me to continue reading: “However, no entity or party, in their character as parties to the association, shall be considered to have suffered an adverse economic consequence as a result of any of said decisions or changes to the legislation at any time, in the event that the party is receiving revenues from the association, which result from a crude oil price over a maximum price that shall be specified in the association agreement. In the event that no agreement is reached between the parties, the corresponding changes to the association agreement, as well as the compensation for damages, shall be determined through arbitration.”

The 21st clause reads as follows: “The association agreement shall not be governed or construed in accordance with the laws of the Republic of Venezuela. Any controversy or claim arising in relation to said association agreement or to the activities of the project shall be settled by arbitration in a final and definite fashion, in accordance with the conciliation and arbitration rules of the International Chamber of Commerce, being said arbitration carried out in the jurisdiction the parties may agree.”

In other words, the former Congress established the possibility of compensating transnational companies for any decision arising from government actions or from any change in our legislation. This means that the leaders of AD and COPEI – this has to be clearly stated – established that transnational companies had to be compensated for any sovereign decision of the Venezuelan State because taxes and law enactment are exercise of sovereignty. But 21st clause provides for that controversies shall be settled through arbitration as per the provisions of the International Chamber of Commerce and in the venue decided by the parties.

When we analyze what the parties, i.e. the companies, established, it is important to take into consideration a very important criterion for the analysis: The old PDVSA was a Trojan Horse and became a hostage of transnational companies, because one cannot understand how in a controversy with a company the assets of a State can be confiscated or expropriated. Transnational companies needed a hostage, something to act, in the event of a dispute, against our sovereign decisions.

This is why we firmly believe that the internationalization policy was perfectly coordinated with the handing over of the Orinoco Oil Belt, that is, they were integrated projects. For instance: the Cerro Negro project has the Refinery in Chalmette assigned, which is located in the US and has PDVSA and Exxon as partners.

We are convinced in the light of what the old PDVSA signed, that those assets acquired abroad included the possibility that transnational companies take actions in order to be compensated, as the old National Congress contemplated against any sovereign action of the Venezuelan State.

Therefore, arbitration was established against the Republic, but since it would be very difficult for any company to confiscate a country, it would be necessary to invade it as in Iraq. This is why they contemplated the possibility of taking the conflict with the national oil company (PDVSA) before the International Chamber of Commerce and this is the reason why we say that these two ways of arbitration are intended for the hostage to assume responsibility for something the old Congress approved as compensation for the companies.

We also picked up this passage of the Cerro Negro Association Agreement, which in its 27th clause reads: “Applicable Law of Arbitration; Sovereign rights; part 18.2: Any dispute arising from or related to this agreement shall be exclusively and definitely settled by means of arbitration. Arbitration court shall consist of three arbitrators, except for the provisions established below in accordance with the conciliation and arbitration rules of the International Chamber of Commerce. Each party and groups, as the case may be, shall choose an arbitrator in agreement with the rules of the International Chamber of Commerce. The arbitrators so appointed shall agree within 30 days the appointment of a third arbitrator that will chair the arbitration court. In the event that more than two parties are involved in the controversy and said parties cannot agree in an expedite fashion to be grouped into two groups, then the three arbitrators, including the chairperson, shall be appointed by the International Arbitration Court of the International Chamber of Commerce in accordance to its rules.”

This means that if we do not submit ourselves to arbitration and do not appoint our arbitrator, the Chamber of Commerce shall appoint the arbitrator it considers appropriate and shall initiate the arbitration trial against the company, in this case, PDVSA.

This clause also provides for that “Unless all parties to the arbitration agree otherwise unanimously, all arbitration proceedings according to this agreement shall take place in the city of New York, United States of America.” These agreements that were approved by the former Congress were signed by PDVSA in the same city.

The enforcement of any decision made by the arbitration court or the arbitrator shall be accepted by any competent court, without review of the substance of the controversy. Well, the country was definitely held hostage with this kind of agreements that the old PDVSA signed.

Then, part 18.3 reads as follows: “Alternative mechanisms for the settlement of controversies: In the event that any arbitration or arbitration decision handed down in accordance with the previous section be declared void or unenforceable in Venezuela, for any reason whatsoever, the parties agree that at the request of any of them, controversies arising from or related to this agreement shall be submitted to compulsory arbitration before the International Centre for Settlement of Investment Disputes (ICSID), in accordance with its arbitration rules in force at the time of the controversy.”

The parties agreed that for the purposes of arbitration and according to the ICSID rules, activities included in this agreement are an investment. This is a very relevant issue because they take a dispute related to a natural resource to arbitration due to investment matters and distort the nature of the controversy. The Venezuelan State has the sovereign right to administer and set the exploitation rate of its natural resources; however, you can see that with these agreements signed during the oil opening process we ended up with an arbitration trial due to an investment issue.

This is not an investment issue; these are decisions made by the Venezuelan State concerning the control of the exploitation of our natural resources.

This is why we previously pointed out that it is a concession of consuming countries to make all OPEC and non-OPEC countries waive their jurisdiction for the discussion of issues related to natural resources. The intention of agreements like the European Energy Charter and FTAA, among others, is to globalize the administration of natural resources, which is a right inherent with the sovereignty over our territory.

Please, allow me to continue reading: “Sovereign right: This agreement as well as operation activities included herein shall, in no event, impose obligations on the Republic of Venezuela or curtail the exercise of their sovereign powers.” That is, the company is already a hostage, but you still maintain the appearance that you can decide independently. This is the point, representatives. This is why we had promised that we were going to discuss these subjects in the National Assembly.

I also want to read Resolution number 1,803 of the United Nations General Assembly, dated December 14, 1962, titled “Permanent Sovereignty over Natural Resources. The General Assembly, after a number of considerations, declares as follows:

“First: The right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and of the well-being of the people of the State concerned.

Second: The exploration, development and disposition of such resources, as well as the import of the foreign capital required for these purposes, should be in conformity with the rules and conditions which the peoples and nations freely consider to be necessary or desirable with regard to the authorization, restriction or prohibition of such activities.

In cases where authorization is granted, the capital imported and the earnings on that capital shall be governed by the terms thereof, by the national legislation in force, and by international law. The profits derived must be shared in the proportions freely agreed upon, in each case, between the investors and the recipient State, due care being taken to ensure that there is no impairment, for any reason, of that State's sovereignty over its natural wealth and resources.

Fourth: Nationalization, expropriation or requisitioning shall be based on grounds or reasons of public utility, security or the national interest which are recognized as overriding purely individual or private interests, both domestic and foreign. In such cases the owner shall be paid appropriate compensation, in accordance with the rules in force in the State taking such measures in the exercise of its sovereignty and in accordance with international law. In any case where the question of compensation gives rise to a controversy, the national jurisdiction of the State taking such measures shall be exhausted. However, upon agreement by sovereign States and other parties concerned, settlement of the dispute should be made through arbitration or international adjudication.” In this case, we refer to Venezuela.

The free and beneficial exercise of the sovereignty of peoples and nations over their natural resources must be furthered by the mutual respect of States based on their sovereign equality.

International co-operation for the economic development of developing countries, whether in the form of public or private capital investments, exchange of goods and services, technical assistance, or exchange of scientific information, shall be such as to further their independent national development and shall be based upon respect for their sovereignty over their natural wealth and resources.

Since year 1962, the UN recognizes the right of their member States to manage their natural resources in a free and sovereign fashion, and that their national legislations and national interests should prevail over any other particular interest of the involved parties.

In the mixed company agreements approved by the National Assembly, in accordance with article 33 of our Hydrocarbon Organic Law, the subject of national sovereignty and the fact that our controversies should be settled in our jurisdiction are clearly stated.

The following conditions were expressed in the Official Gazette number 345,265 of the Bolivarian Republic of Venezuela, dated March 31, 2006: “Applicable Law and Jurisdiction: This contract shall be governed and construed in accordance with the laws of the Republic and any dispute or controversy that may arise from said contract and that cannot be amicably settled by the parties shall be exclusively submitted to the decision of the competent courts of the Republic.

Before initiating any litigation, the parties shall seek, in good faith and in accordance with the Hydrocarbon Organic Law, the possibility of resorting to mechanisms to amicably settle any controversy that may arise, including the possible request of opinions on technical subjects from independent experts appointed by mutual consent.

It is understood that any major dispute, including, for instance, disputes related to the business plan, work programs, development plans, and budget shall be submitted to the top executives of both parties, who shall meet to try to settle the differences. In the event that said dispute is not resolved within the 60 days following the meeting, the parties shall notify the Minister the relevant details of the dispute.”

This clause eliminated the most remote possibility that a dispute may be submitted to international arbitration and our national courts were established as the only possible venue for the settlement of controversies.

What is the situation we are facing today? Several arbitration trials at different international instances against the republic or the national oil company, resulting from the agreements signed by the old PDVSA and the National Congress. The first action was the one concerning France’s Total and Jusepín field. Finally, Total relinquished arbitration. The migration process of the Orinoco Oil Belt was already initiated and we were determined not to continue dismantling the industry with any company that would take us to international courts.

In the case of Orimulsion, Italy’s ENEL brought an arbitration request before the International Chamber of Commerce in Paris, France. We won this case. Moreover, the court decided that Venezuela had to be compensated for the expenses related to the trial. We have been negotiating with Italy’s ENI in relation to the Dación field. Soon we will announce the termination of this arbitration.

There are still two arbitration processes pending with two US transnational companies: ConocoPhillips that has initiated arbitration against the Republic, but that, contrary to ExxonMobil, has requested an amicable settlement of the dispute. We are talking with this company and its CEO declared to the press that we are in the way to reaching an agreement.

It is important that the National Assembly know that the difference between economic estimations, that is, the appraisal of the assets between private companies and the State, is that these latter assume or aspire to huge compensations. Other are clearly abusive, because they wanted to obtain the value the business would have in 25 years from now based on scenarios that had nothing to do with the normal developments on oil market.

The Republic, based on the UN declarations and our legislation, has not refused to compensate the companies that leave the country, but this compensation should correspond to the book value of their assets that can be perfectly examined and audited, so that there is no possible agreement between the parties that goes beyond the justifiable amount. This is a sovereign nationalization action of the Venezuelan State. We are currently negotiating with ConocoPhillips to settle our controversy and we are close to an agreement.

What is the problem with ExxonMobil? This company requested arbitration in September 2007 against the Republic before ICSID. On December 28, 2007, they brought a lawsuit before de courts of the city of New York to freeze 300 million dollars of the account of PDVSA Cerro Negro, a subsidiary of PDVSA, the day after the answer concerning the outstanding debt for the association agreements was released. This strategy tries to torpedo our decisions; they have tried to harass us and create situations that commit our cash flow or financial strength.

Debtors and bond holders, after the nationalization announcement last year, requested us to immediately pay the debts of the former associations and agreements, because they had declared default. PDVSA immediately paid 750 million dollars to guarantee the control of those debts and in December it paid another 632 million dollars for the Cerro Negro debts. The following day, ExxonMobil, understanding that they could not face us under those terms, brought an action to freeze 300 million dollars of PDVSA Cerro Negro before the New York court. This decision was confirmed yesterday by the same judge in only two hours. ExxonMobil appointed an international arbitrator with a wide experience in litigations against our countries and we appointed our arbitrator before ICSID, who is an expert in defending oil producing countries, has a robust profile and is registered to work at those courts.

People are asking why we have international teams. Well, because we are being tried at international courts. We cannot act in those countries because you have to meet a number of requirements to be member of those courts.

This is all part of the misleading information campaign. The role that some anti-imperialists of the past are playing is very sad. They are today defending ExxonMobil’s interests, but the arbitration court has not been constituted; it may take a long time. We will prepare our allegations.

Then, last January 28, based on the agreements, ExxonMobil brought an arbitration lawsuit against the hostage, PDVSA, in New York, before the International Chamber of Commerce. We are also being prepared for that arbitration process.

I would like to share with you some of the issues of this case, concerning ExxonMobil’ arbitration request against our countries and their reasons to take us to arbitration. We brought all this information to the Assembly for it to be analyzed, reviewed and discussed in detail; to determine who is representing the interests of the transnational companies and who their representatives are here in Venezuela.

The document of the lawsuit begins as follows: “Before the International Centre for Settlement of Investment Disputes, Mobil Corporation Venezuela Holding has brought a lawsuit against the Bolivarian Republic of Venezuela.” Following the names of the ExxonMobil lawyers are mentioned: international lawyers of the International Department and the International Production Department of ExxonMobil; the law firm Covington & Burlin LLP, in Washington and a national law firm, Travieso, Evans, Arria, Rengel & Paz are suing together the Bolivarian Republic of Venezuela, represented in this case by Andrés A. Mezgravis.

On the second page of the book a summary of the arbitration request and of the controversy is included; the Cerro Negro Project affected on the Oil Belt and the La Ceiba project affected in the operating agreements. They declare what I will read now: “The special incentives arising from a law enacted in 1991 and modified in 1993 and 1994, the income tax rate applicable to the project, was reduced to 34% of the ordinary rate of 67.7%. The royalty rate applicable to the Cerro Negro project was cut by means of a contract closed between the Ministry of Energy and Mines of that time, PDVSA and the participating investors, including Mobil Cerro Negro. The contract dropped the applicable royalty rate from 16 2/3% to 1%.

I’m going to read a bit more: “The royalty rate applicable to the La Ceiba project was also reduced by means of a contract signed under the same conditions to a level ranging between 1 and 16 2/3”. The right of Mobil Cerro Negro to make efforts to increase production was expressly included in the succession agreement that governed the Cerro Negro project and that was approved by the Congress of Venezuela. In other words, this agreement hoped to be exempted of the sovereign decisions of the Venezuelan State to establish a production quota at the OPEC. This is why we were saying before that all this comes to be an anti-OPEC strategy, a strategy based on volumes that brought international oil prices down to the levels of 1999.

Then ExxonMobil refers to the illegal actions of the defendant, that is, the Republic. “In October 2004, the defendant,” i.e. the Republic, “violated the royalty reduction agreement and increase royalty rate to 16 2/3”, which we did in the context of sovereign decisions.

“In February 2005, the defendant,” that is the Republic, “breached the royalty reduction agreement concerning La Ceiba and increased royalty rate to 16 2/3. In June 2005, the defendant”, our Republic, “disrespected the rights of Mobil Cerro Negro to produce extra-heavy crude oil beyond the ceiling of 120 thousand b/d.”

The late Congress authorized that the production of this association agreement would be at 120 thousand barrels and we at the Ministry of Energy and Petroleum found that they were producing way over that volume. Consequently, the volumes exceeding those considered in the approved association agreement according to the 1943 law were submitted to the current rate established by law, that is, 30% and they are reporting this as another illegal action of the defendant, i.e. our Republic, which in June 2005 unilaterally increased to 30% royalty rates of the volumes exceeding their top volumes.

Furthermore, they maintain that in May 2006, the defendant imposed a sui generis tax, in this case the Republic, the Ministry and the sovereign National Assembly that approved this law which provided for a 33.33% increase of the royalty rates applicable to production. In August 2006, the defendant, including the sovereign National Assembly, modified the Income Tax Law to increase the rate applicable to this project from 34% to 50%. In April 2007, the defendant –and they are referring in this case to the Nationalization Law and Decree number 5,200 issued within the framework of the Enabling Law by President Chávez on February 27, 2007 – coactively took control of the operations related to Cerro Negro. In this case they are talking about the sovereign action when our workers and the Venezuelan State took the operational control of those projects.

“In 2007, concerning La Ceiba, the defendant prevented the plaintiffs from transferring abroad convertible funds related to the investments.” In this case they are talking about our decision to impose exchange controls.

ExxonMobil considers that the sovereign decisions of the Venezuelan State are illegal and this reflects the conspiracy and outrage against our Nation. In the case of the lawsuit of Cerro Negro against PDVSA, the reasons that motivated the lawsuit are included in the passage we read about the association agreement between both companies. However, in the same agreement a relevant issue is mentioned, which is a clear proof that our resources and interests had been given away.

I’m going to read clause 14: “Consequences of the governmental measures between the parties. In the event that any of the parties determines that a discriminatory action has been taken that could have an adverse impact, the foreign party shall immediately notify Lagoven”, that is, PDVSA, “such discriminatory action. As long as any other legal remedy may exist in order to reverse, or obtain compensation for, said discriminatory action, the foreign party shall initiate legal actions aimed at mitigating any damage arising from said discriminatory action. Lagoven,” or the old PDVSA, “shall collaborate with the foreign party in the exercise of the actions mentioned before and the parties shall negotiate in good faith compensations and/or eventual modifications of the agreement in order to re-establish the economic benefit that such foreign party would have received if said discriminatory action would not have been taken”.

Later the document specifies that the discriminatory actions that the foreign party, in this case ExxonMobil, is referring to will include, as per page 6 of the agreement concerning the definition of terms – I’m not a lawyer but I’m trying to convey the information in the best way possible – any change to the construction or application of the Venezuelan law or any governmental measure that may be unjust and applicable to the project or to any foreign party in its character of party to the project and that is not applied in a general fashion to public entities, with relation to tax rates, exchange controls or expropriation or occupation of the project’s assets.”

This is the bottom line of these lawsuits; this is the situation we are facing now. ExxonMobil is the only company that has decided to confront the Venezuelan State. Its partner in the former Cerro Negro project, British Petroleum, agreed to migrate to the mixed company status as well as Total, ENI, Sinopec, Ineparia, Chevron, among others.

Now, the press has manipulated the issue and there has been a big fuss over other legal actions additional to those introduced by ExxonMobil. In this case we are talking about very aggressive actions before courts in London, UK, and the Netherlands, that had a lot of resonance last Thursday. What are these actions about? We consider them outrageous and actions of judicial terrorism, and the State, despite our position, has maintained the responsible stance of taking this process, in accordance with our laws, to arbitration courts. We have taken all steps, negotiated, discussed differences, and we are on a successful path concerning this issue.

The actions taken by ExxonMobil are the death throes of the oil opening process. It had to be ExxonMobil, the heir of Standard Oil, Esso, Creole, with a history of outrages and interference in our country’s economy and politics and of abuses and arrogance at the international level. Former vice-president Al Gore clearly talks about the actions of ExxonMobil in its own territory and all over the world in his book. This is the same company that after the ecological disaster caused by the Exxon Valdez oil tanker in Alaska sued that state. This is a company linked to the US State Department. Yesterday a spokesperson of the State Department expressed their support to ExxonMobil. This company is closely related to the US extreme right and is one of the world’s most powerful corporations. That is our enemy; the one that is trying to ride roughshod over our Nation, that is trying to impose acts of judicial terrorism over our national oil company which has been taken hostage of the oil opening process. What is their purpose? Undoubtedly, to provoke anguish and unease in our country.

President Chávez already denounced that this action by ExxonMobil is part of the economic war against our revolution and our State. It is part of the conspiracy against our stance in defense of our sovereignty and the interests of our people, our government, and of the courage of President Chávez.

We have denounced that to the world: This is an assault by the most powerful oil company in the world. The actions they have introduced count on the complicity by anti-national sectors that in spite of being Venezuelan, of having been born in our soil, still defend the interests of transnational companies. These are the same sectors that were involved in the coup d’état, the oil sabotage, the closings of the streets: Globovisión and the printed media.

Exxon introduced a complaint to freeze PDVSA’s assets in the United Kingdom. We do not have any assets in the UK. The old PDVSA had there a very luxurious office in one of the most expensive neighborhoods, but we closed it down. ExxonMobil introduced a complaint to freeze our assets in the Netherlands and the Antilles. The Isla Refinery is not property of PDVSA; the refinery is rented by our company. ExxonMobil knows that.

What are they seeking with their actions? The media began to raise alarm with the ensuing economic damage to our country – bonds, sovereign debt – and the anguish and unease all that brought about in our country. This was an unexpected and cunning action that cannot be justified because there is no reason to demand PDVSA, the hostage, to maintain frozen assets for 12 billion dollars, when our assets exceed 109 billion dollars all over the world. This is the same old conspiracy and we believe that it is important that all the State institutions take part in this discussion; that all the State branches of power, according to their competences, react to this situation.

This is why I took this time to thoroughly describe the whole picture, because anyone could assume that we crashed an Exxon’s oil tanker. This is a trade controversy. This aggression against our country is the death throes of the oil opening process.

They are trying to make people believe that we are isolated. I must say that at the last OPEC meeting we reported this situation, because we already knew about the arbitration. Therefore we informed the OPEC’s legal team about the actions that were being brought against our country, because we understand that all this is part of the world confrontation between oil producing countries and the large oil consuming countries and their transnational companies. In fact, Citgo has been subject to multiple lawsuits in the US for more than a year, just like Saudi Aramco, from Saudi Arabia. We are working at a common front because we have common interests: the defense of our sovereignty and our oil.

Finally, I must thank our National Assembly for their attention, their disposition, their fighting spirit. I must thank the representatives of the Energy Committee and its board, and the other representatives for their expressions of solidarity for what is happening to us. This support transcends personal opinions and stances that a determined group may have with regard to our government. These are national issues that presage an escalation of the attacks against our country. These are issues that unify and strengthen the unity of our people, our government, our institutions, our armed forces, our workers.

There is no place for traitors because part of this process entails unmasking those who are politically responsible for the agreements that were signed in the context of the oil opening process. Furthermore, we are of the opinion that beyond political responsibilities, there are direct, criminal responsibilities for having jeopardized the Nation’s interests.

Fellow representatives, I must say that our President Chávez is leading this defense effort of our sovereignty, as he always has done when it comes to oil matters. We are calling upon our workers at the new PDVSA, our managers, engineers, community councils, and the organized people, to mobilize in defense of the interests of our Nation.

Thank you, fellow representatives. We are calling upon our united, strong, conscious people. Our people and our country are not the same as those that were caught by surprise by the coup d’état or that were cunningly attacked by the oil sabotage. The conditions are different and we have grown stronger.

The new PDVSA is under the control of the Venezuelan State; it belongs to its workers. Our armed forces are made up by patriot officers, loyal to our Constitution, our Government, our institutions, our illustrious, combative President, who leads all battles no matter the terrain where our enemies want to take us on. But above all, our people are well conscious of our institutions; they cannot be deceived again. The enemy is repeating the same strategies, but this time on the international arena; the enemy is trying to intimidate us, harass us, and frighten us. 

We have to say that nobody can be afraid now, that our government is strong, that our people are mobilized, and we are going to engage this battle with consciousness and patriotic sentiments. Truth and reason are on our side and we are fighting for the supreme interests of the people, our sovereignty and our homeland.

I’m going to present now the president of the Assembly with all the information that will be useful for the discussions on this subject. Now is the time to discuss all these issues with the people; now is the time to raise consciousness, to strengthen our revolutionary unity and our will to move forward.

Thank you very much!