The title we chose for this Special (Venezuela: The battle of Contract Sanctity vs. Resource Sovereignty) is meant to suggest that there is in fact a tension between two opposite ends: Contract Sanctity, on the one hand, and Resource Sovereignty, on the other. It is not to say that one necessarily and obviously prevails over the other. A more precise comment is that resource sovereignty finds its limits in the binding commitments that State's make toward an investor on or before the investment is made, and thereafter. The key is, then, for the investor to ensure that there are such prior (preferably international) commitments put in place in advance of its investment. A mere contractual commitment may not in fact be enough deterrent nowadays to find a State reluctant to attach those windfall profits as a result of high oil prices or to change the structure of the project pretty dramatically.

In this editorial, we begin with a quick update on the new Windfall Profits Law and then comment on the potential strategies that investors have available to protect their investments in the oil and gas industry. We end with some comments on the Special itself.

Quick Update on Venezuela's Latest Fiscal Change: The Windfall Profits Law

As we move toward publication of this unique Special of the oil and gas industry, and in particular, of the Venezuelan situation over the past three years, we receive in our hands a copy of the Law on the Special Contributions for Windfall Prices in the International Market(the "Law"). This "Windfall Profits Tax", as it is commonly referred to, is very recent, and therefore some of the details on its calculation are not entirely clear. Overall, the Law creates a special contribution payable by those who export or transport abroad natural or upgraded liquid hydrocarbons and derivatives. It remains unclear at this time if the contribution applies to those companies who only transport the product abroad, even if they do not actually market it.

Based on a logical reading of the Law, it appears that the contribution does not apply to those companies who must sell all their production to Petróleos de Venezuela, S.A. ("PDVSA") locally (such as the "Mixed Companies" that resulted from the conversion of the Operating Services Agreements and the Profit Sharing Agreements) and therefore do not export the crude. The impact of the Law on these mixed companies, however, should be analyzed on a case-by-case basis because their corresponding marketing agreements might include language allowing PDVSA to discount the amount paid as contribution under the Law from the price to be paid to the Mixed Companies for production.

The contribution is due when the monthly average price of Brent crude exceeds US$70 per barrel. According to the Law, the technical methodology to determine the average Brent price will be established by the Ministry of Energy and Petroleum ("MENPET") in a special Resolution.

The amount of the contribution per barrel is 50% of the excess of the average Brent price on a given month over US$70. If the average Brent price exceeds US$100, such excess will instead be subject to a 60% rate.

The total amount of the monthly contribution is calculated by multiplying the per barrel amount by the result of deducting from the volumes of natural or upgraded liquid hydrocarbons and derivatives, exported or transported outside the country, the volumes of natural or upgraded liquid hydrocarbons and derivatives imported into the country for their blending or transformation. For these purposes, the volumes will be those indicated in the corresponding loading and unloading cargo certifications.

How can oil and gas investors protect themselves?

Looking back at the recent years we notice a major transformation in the form of investing in the oil business in Venezuela. From structure and control issues, to the approach the State takes on arbitration, we have seen a 180 degree turn over the past few years. Venezuela has gone from allowing direct private participation in all major oil activities to restricting those activities to "mixed companies" where the foreign company becomes a minority shareholder.

Venezuela is not the only country that has taken measures to increase the government take and the role of the national oil company as a whole, especially in Latin America. In fact, the government goals per se appear legitimate as a matter of policy. The key question for readers is to understand whether the process occurred legally or whether the rule of law was somewhat put into question. The development of international law in the area of protection of investments is still evolving and investors learn from every situation, from one country to the next, to become wiser in protecting their investments from the start.

Many times, during the initial stages of what looks like a tremendous geological opportunity, the business development team may underestimate that getting some assurances and protections early on are fundamental to the long term success of the project. However, as some of the countries in Latin America have begun to turn the other way in terms of hydrocarbon investments, investors are becoming more savvy and aware of the protections that need to be obtained in advance. As an example of what is meant, one can point to some obvious options like Stabilization Agreements, if available.

There are also more subtle protections such as incorporating the investment vehicle in the right jurisdiction from inception and providing for contractual indemnities or force majeure when certain circumstances occur. In the case of the bilateral investment treaties, however, the risk is that the government later on may decide to denounce the treaty in question. As we publish this Special, the Government of Venezuela has expressed its decision to denounce the Dutch Bilateral Investment Treaty, only to suggest that one is never completely "safe" (although under the terms of the treaty the prior investments are protected for a period of fifteen years).

In addition, it is fair to clarify that political risk insurance is rarely available for projects of the size of some of the major crude projects and has become more limited for countries like Venezuela. Other less obvious strategies may include partnering with local investors and/or the government NOC (national oil company).

Protection can take many different shapes and the key is to cover the risks in the most effective way for the relevant country. What works in one place may not necessarily work somewhere else. When it comes to natural resources, States have traditionally taken different directions in their policy decisions. While Venezuela takes steps toward nationalization, Mexico, for the first time in 70 years is announcing a major energy reform (probably, although not yet clearly, somewhere toward the other direction). Regardless of oil prices, each country has its own needs and priorities.

Comments on the Special

In this Special, we have attempted to provide articles on a wide array of topics in the oil and gas as well as the arbitration areas. We have also evenly distributed the articles between international authors and Venezuela authors, in order to cover both the domestic rules as well as the international rules that have begun to evolve around this recent trend of nationalizations. Also, because Venezuela is in fact not alone in this road, we have also included a comparative analysis of the recent actions in Argentina, Bolivia and Ecuador, as a reference to other practices.

We trust that the readers will enjoy reviewing these articles and appreciate that some of the novel suggestions on compensation, anticipatory breach, restructuring of investments and exhaustion of local remedies, to name only a few, are indeed interesting developments that arise from situations like that of Venezuela. The local articles also provide a detailed analysis on the Venezuelan BIT situation, the nature of the recent Migration Laws, the current state of the gas projects as well as arbitration and nationalization trends in Venezuela.

Lastly, I wish to thank Thomas Wälde and the OGEL/TDM team for the opportunity to publish this Special, and of course the authors for their excellent contributions.