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Same-Day Analysis

New Law Paves Way for State Control over Venezuela's Petrochemicals Sector  

Published: 17 June 2009
The Venezuelan National Assembly yesterday approved new legislation in a final reading, paving the way for the nationalisation of the petrochemicals sector.

IHS Global Insight Perspective

 

Significance

Legislators have approved a law allowing the state to take a minimum 50% stake in all petrochemical ventures.

Implications

In practice this might not make a big difference as the sector is already dominated by a state-owned firm, Pequiven, which often partners private companies. Nevertheless, the proposed nationalisation of the sector does represent a further weakening of juridical stability for investors in the country.

Outlook

The petrochemical law is the latest in a series of measures bringing the state back into a number of sectors, and operational and legal risks remain high for the few remaining activities that have not already been nationalised.

Takeover Law Approved

The Venezuelan National Assembly has approved new legislation paving the way for the nationalisation of the petrochemicals sector in a final reading. The new Organic Law for the Development of Petrochemical Activities provides for the creation of state-dominated joint ventures for basic and intermediate petrochemical production. The law will allow the state to enjoy a minimum 50% controlling stake in firms operating in the sector. In those mixed companies where the state and private partner have equal stakes, however, the state will have control over decision-making and the right to nominate the president of the board. At present there are no restrictions on domestic and foreign private participation in the petrochemicals industry, and private companies are allowed up to 100% stakes in petrochemical projects—although in practice the sector is dominated by the state petrochemical firm Pequiven, which many private investors already partner. Foreign companies that will be affected by the new law include Japan's Mitsubishi Corp.

The proposed nationalisation of the petrochemicals sector comes hot on the heels of new legislation allowing the seizure of oil service companies and earlier contract changes that gave the state oil company PDVSA a controlling stake in mixed companies in the oil sector. As such, it is in line with the government's strategy of recovering "full petroleum sovereignty".

There was, however, some positive news for investors. The head of the Mines and Energy Commission in the parliament, Ángel Rodríguez, indicated that the law also contemplates the creation of "special zones" where the government can offer incentives in order to attract private investors, reports the state news agency ABN. Possible incentives could include temporary exemptions or reductions in taxes and custom duties and the offer of credit lines. According to the report, a capital injection of up to US$20 billion is expected in the sector up to 2013, with conversations already under way with potential investors from Brazil, Japan, India, and Saudi Arabia. Further legislation will be required to establish precise details regarding the administration of the proposed zones. Another positive development is a proposal to create a National Register of Petrochemical Firms listing all projects in the sector with the aim of supporting long-term planning.

Outlook and Implications

President Hugo Chávez had announced in September 2007 that Venezuela planned to expand petrochemical production and increase revenue from the sector to US$100 billion a year in five years, and that the "petrochemical revolution" would convert Venezuela into a world petrochemical power. Nonetheless, it is hard to see how increasing state control over the sector will help the government achieve this objective. Difficulties in securing financing for capital-intensive petrochemical projects have been the main reason for the cancellation and/or delay of key projects in recent years, including a major olefins complex at the José industrial complex, and having Pequiven as the controlling shareholder will not make it any easier to secure financing for new projects. Nonetheless the creation of tax-free zones may help to encourage new investments from companies prepared to invest in a country with higher legal and operational risks.

The petrochemical sector is the latest victim to date of the government's publicly declared intent to regain control over "strategic" sectors, though the definition of these has rapidly widened amid a succession of nationalisation waves that have affected the oil, power, telecom, steel, cement, and agro-industrial industries, while the fight against latifundios, or large estates, continues in the countryside where the expropriation of land has been a feature under the incumbent regime.

The aftermath of a referendum in February this year, won by the incumbent, has seen the radicalisation of policies. The business environment has significantly deteriorated in the midst of renewed company seizures. While the government seeks to maintain private-sector investment capacity and expertise in the most affected sectors, this drive for government control is heightening investors' fears. At a time of global economic downturn, when investment prospects are low, conveying an image of markedly poor operational and juridical stability is a dangerous tactic. Constraining further foreign direct investment (FDI) inflows is likely to have an adverse impact on the performance of the economy and prolong the crisis. There are still ongoing questions over the capacity of the government to compensate the affected firms. While fair compensation has generally been the rule, the prospects for this line to be maintained are more doubtful in the context of lower oil prices.

General business concerns have been compounded by more political developments, certainly casting President Hugo Chávez's rule as one of a tightening grip over opposition voices. The recent attacks and threats to opposition television channel Globovisión, which is facing legal proceedings, have only added to general concerns over the president's treatment of the opposition's right to be heard. The reduction in the authority of elected opposition governors and mayor of Caracas over seaport and airport facilities has largely undermined their political standing within their districts, while trials against opposition leaders have been loudly criticised as politically motivated.
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