Venezuela: Hydrocarbons and Mining Arbitration in the Aftermath of January 3

The events that occurred in Venezuela on January 3rd this year (“J3”), in which Nicolás Maduro, who was unlawfully holding the office of President of Venezuela, was removed by US forces and brought to trial in New York on charges of narco-terrorism and other offenses, may prove consequential not only for Venezuela’s political and economic landscape, but also for dispute resolution in strategic sectors. Relevant new legislation for the hydrocarbons sector and the mining sector has been approved by the Venezuelan National Assembly, changing recent approaches to commercial arbitration in the hydrocarbons and mining sectors. Likewise, the United States (“U.S.”) Office of Foreign Assets Control (“OFAC”) has issued new licenses that also reopen the possibility of arbitration and foreign fora. These new measures aim to provide legal support and protection for new investments, making a significant shift from previous legislation in these areas.

As explained below, arbitration lies at the heart of this new legal approach and, even though it is too early to make definitive statements, the references to arbitration appear not to be an isolated change, but part of a systemic shift in Venezuela’s legislation toward permitting international arbitration as a method to resolve disputes in strategic sectors. This post examines three developments: the Organic Hydrocarbons Law, the relevant OFAC licenses, and the Organic Mining Law.

The Organic Hydrocarbons Law (“OHL”)

The OHL marked a return to a dispute resolution scheme widely accepted in this area worldwide. Whereas in recent years Venezuela was generally reluctant to embrace commercial arbitration, Article 8 of the OHL allows parties conducting activities regulated by it to resolve their disputes through “Alternative Dispute Resolution mechanisms, including mediation and arbitration.”

Nevertheless, under the OHL, both the Ministry responsible for hydrocarbons and the Attorney General must first establish the general guidelines for drafting those dispute resolution clauses. Even though this requirement is unusual and maintains State control over dispute resolution, it creates an exception to the cumbersome controls established in Venezuelan law. According to article 4 of the Venezuelan Commercial Arbitration Act, the approval of the competent statutory body and the written authorisation of the relevant Minister are normally required for “a company in which the Republic, the States, Municipalities and Autonomous Institutes hold a stake of fifty per cent (50%) or more of the share capital, or a company in which the aforementioned entities hold a stake of fifty per cent (50%) or more of the share capital to agree to arbitration …” Furthermore, the arbitration clause must also be approved by the Attorney General. These authorisations are not required under the new OHL, which makes the inclusion of arbitration clauses in contracts more feasible.

At the time of this post, the guidelines have not been published, so one can only speculate as to their content. However, some factors may provide hints as to the direction they may take, which we outline below.

Institutional or Ad Hoc Arbitration. The first draft of the OHL stated that arbitration had to be “independent,” which in Spanish may refer either to ad hoc arbitration or impartiality. This generated controversy because it was read by some as excluding institutional arbitration and favouring ad hoc proceedings. The word was ultimately removed from the approved version. Hence, it may be expected that the guidelines will allow either institutional or ad hoc arbitration.

Seat of Arbitration. Even though the law says nothing on this point, the practice in contracts between Petróleos de Venezuela (“PDVSA”) -the State-owned oil and gas company- and other oil and gas companies was to seat the arbitration outside Venezuela. Recently, some Productive Participation Contracts (Contratos de Participación Productiva), the contractual form for oil operations before the recent OHL, also established the seat of arbitration outside Venezuela. If these precedents are any guide, the guidelines may also permit a foreign seat.

Governing Law. The OHL establishes that the activities within its scope are subject not only to the OHL but also to rules contained in other applicable laws, decrees, or government resolutions. Thus, the OHL provides that the governing law for hydrocarbon activities is Venezuelan law (Article 7 of the OHL). However, disputes are likely to arise over this issue, as explained below.

The OFAC Licenses Related to Hydrocarbons

Alongside the aforementioned OHL provision, OFAC has issued several new licenses. Most of the post-J3 licenses are related to the hydrocarbons sector. General Licenses 46B, 47, 48A, 50A, and 52 establish that, within the scope of those licenses, any established U.S. entity is authorized to enter into transactions under the relevant license, provided that any contract for such transactions “with the Government of Venezuela, PDVSA, or PDVSA Entities specify that the laws of the United States or any jurisdiction within the United States govern the contract and that any dispute resolution under the contract occur in the United States.”

Regarding jurisdiction, in our view, the wording of the OFAC Licenses permits the use of arbitration seated in the U.S. In relation to the OHL's guidelines, if they allow the arbitral tribunal to be seated outside Venezuela, as was the case with Venezuelan State-owned companies several years ago, at least in relation to U.S. entities there should be no obstacle to seating the arbitration in the U.S.

However, disputes will surely arise regarding the governing law, since the OFAC Licenses, which are not legally binding under the Venezuelan legal system, stipulate that the governing law for activities within the scope of the respective license is U.S. law, or the law of any jurisdiction within the U.S., whereas the OHL establishes that the governing law for the sector is Venezuelan law. This raises several complex issues of international law which exceed the scope of this introductory note.

One obvious, though not simple, proposal to address this issue before disputes arise is to agree on a bilateral energy treaty, with this issue being one of the topics to be addressed. The OHL establishes that “any decisions taken by the Republic pursuant to international agreements or treaties relating to hydrocarbons, entered into by it, shall apply to those carrying out the activities referred to in this Act” (Article 6 of the OHL). This provision would certainly support the implementation of any treaty in this area.

The Organic Mining Law (“OML”)

A third pillar of the new approach to arbitration in the post-J3 era is the OML. The OML derogates the previous 2015 Decree Law reserving the Exploration and Exploitation of Gold and other Strategic Minerals to the Venezuelan Government, which excluded private participation in primary activities. Under the OML, private companies are able to directly perform primary and auxiliary activities in the mining sector, alongside traditional methods of participation in the Venezuelan industry such as joint ventures.

Article 9 of the OML, reproduces the text of Article 8 of the OHL, the dispute resolution provision, and applies it to mining. Hence, all the considerations relating to the OHL are applicable to the OML in this regard.

This modification is important because, alongside the Venezuelan Commercial Arbitration Act, which is inspired by the UNCITRAL Model Law, it suggests that Venezuelan legislation is reopening sectors to arbitration after a decade of reluctance, thereby creating better conditions for foreign investment in these areas.

The OFAC Licenses Related to Mining

As with the hydrocarbons sector, the US OFAC has issued several new licenses relevant for the mining sector after J3. General Licenses 51A and 54 authorise certain transactions in the Venezuelan mining industry provided that any contract for such transactions “…specify that the laws of the United States or any jurisdiction within the United States govern the contract and that any dispute resolution under the contract occur in the United States…”.

License 55 which authorises “…the negotiation of and entry into contingent contracts for new investment in the minerals sector of Venezuela, including the gold sector…” does not include the aforementioned clause of jurisdiction. Since the performance of any such contract is made expressly contingent upon separate authorization from the OFAC, one can expect the clause of jurisdiction to be included in the specific authorizations.

Conclusion

In summary, while the arbitration framework following J3 is still evolving, the OHL and the OML, together with the OFAC Licenses, suggest a clear shift in Venezuela's recent posture toward arbitration in the hydrocarbons and mining sectors. Far from being cosmetic or isolated reforms, the fact that the law now makes explicit references to arbitration across strategic sectors suggests a deliberate attempt to reintroduce this mechanism into the country's investment framework in activities that had been reserved to State entities in recent years.

If coherently implemented, these norms could gradually restore arbitration as a reliable means of resolving complex disputes in the hydrocarbons and mining sectors, thus aligning Venezuelan practice with international standards, and signalling a significant commitment to legal certainty and the protection of foreign investment in the post-J3 era.