Between World War I and World War II, industry took a remarkable leap forward and the number of technological procedures available would enable the fabrication of new products from petroleum and turned this mineral into the most fundamental and strategic energy source in the world. Within that context, Venezuelan hydrocarbons acquired a special predominance in the process of redefining modern world powers.
In the early years of industrial activity, the legal concept of oil concession was the instrument used by multinational companies to contract with the owner states for the prospecting and exploitation of oil reservoirs discovered in their territories.
In the course of time, obtaining concessions and control of the world oil market became a cause for dispute among not only the transnational oil companies, but also triggered wars between nations.
This clearly explains how Venezuela, stemming from this country’s condition as an important oil producer, became an interesting player on international oil stage from the second half of the 20th century on.
The first concession for oil exploitation in Venezuela was granted to Camilo Ferrand, North American citizen, by Jorge Surtherland, Constitutional President of the Sovereign State of Zulia in August 24th1865 “to drill, extract and export petroleum or naphtha all over the State of Zulia”. The following year the concession expired for breach of contract.
In 1878, a concession was granted to Manuel Antonio Pulido Pulido to exploit the petroleum found in his farm “La Alquitrana”. He created the mining company Petrolia Del Táchira, which started its commercial production in 1883. That same year, another concession was granted, in this case, on the asphalt lake of Guanaco to Horatio Hamilton and Jorge Phillips. It was later on transferred to the New York and Bermudez Company.
Oil activity started in Venezuela with the creation in 1878 of the National Mining Company “Petrolia Del Táchira”, founded by a group of Venezuelans headed by Manuel Antonio Pulido, with a production barely sufficient for providing kerosene to neighbor cities. It is important not only for being the first enterprise, but also for developing all oil industry activities for downstream and upstream sectors on extracting, processing and trading hydrocarbons in our country. This could be considered a vertically integrated company.
The production processes of both La Petrolia and the natural asphalt lake in Guanoco (Sucre State) performed by the New York and Bermúdez Company NY&BC in 1890, took place long before the world realized about the huge commercial and strategic importance hydrocarbons would have in future. Even without envisioning the upcoming magnitude of this industry. World powers made Venezuela the target of their commercial activities through the exploitation of asphalt as early as that time.
In fact, in 1901, the Venezuelan asphalt was the non-declared excuse of the NY&BC to engage in financing the so-called Liberating Revolution against Cipriano Castro’s government. Equally, between December 1902 and February 1903, English, German and Italian warships blockaded the Venezuelan coasts under the argument that President Castro was not respecting his “international compromises”. When facing this aggression to national sovereignty, Cipriano Castro pronounced his celebrated phrase: “Venezuela, the insolent sole of the foreigner has desecrated our sacred homeland.”
On August 14th 1905, Cipriano Castro promulgated a Law of Mines that developed into the legal ground for oil concessions. This Law permitted the transfer of concessions and oil exploitation rights for a 50-year lapse, and tax benefits for the Venezuelan State of 2 Bolivares per hectare of land transferred under concessions.
In spite of this, in December 1909, during Juan Vicente Gomez’s government, concessionary rights were restored to the NY&BC. After this decision, taken by the dictator Gómez, John Allen Tregelles and N.G. Burch, British enterprise agents of the Venezuelan Development Co., received a 27-million hectare concession that included the States of Sucre, Delta Amacuro, Monagas, Anzoátegui, Carabobo, Zulia, Falcón, Táchira, Mérida, Lara, Trujillo and Yaracuy. As the Tregelles-Burch concession was cancelled in 1911, in 1912 Venezuelan Max Valladares was awarded a concession over the same territory, only to transfer it the very next day to the Caribbean Petroleum, a General Asphalt subsidiary.
During these first years, oil exploitation in Venezuela was left in the hands of the Anglo-Dutch Royal Dutch Shell, and the North American Standard Oil.
By the end of 1912, Caribbean Petroleum (then under the control of Royal Dutch Shell), in addition to its asphalt business, began explorations in search of oil. That is how in 1913, the first commercial oil field in Venezuela came to be discovered; with the successful drilling of the Barbabui 1 Well in the Guanoco field.
Caribbean Petroleum, a Royal Dutch Shell subsidiary and majority shareholder in the company NY&BC, intensified the geological studies all through the national territory and in 1914 successfully drilled the Zumaque I well in Maracaibo Lake on Venezuela’s Western coast, with 200 barrels per day (BPD) initial production. This began the process of developing the first Venezuelan oil field of world importance, the Mene Grande oil field.
It was in December 1922 when the oil potential of the country began to be fully realized, with the blowout of Barroso 2 Well, also in the State of Zulia, as the well uncontrollably expelled 100,000 BPD for 9 days. In order to realize the importance of this new finding, it is worth pointing out that up to this moment national production was a little over 6,000 BPD.
By 1928, Venezuela was producing more than 290,000 BPD and exporting about 275,000 BPD, turning the country into the second largest world oil producer and the first exporter. Gradually, its production levels increased and by 1970 production stood at 3,780.000 BPD. From 1928 to 1970 Venezuela was the number one petroleum exporting country in the world.
The first concessions granted in Venezuela were ruled by the mining legislations in force at the time. In the late 19th century and during the first two decades of the 20th century there was no national law specifically governing petroleum. In 1917, during World War I, it was decided to suspend the granting of new concessions and to revise the conditions in which they were being granted. At that time, Venezuelan exports of hydrocarbons had already begun and the newly appointed Gumersindo Torres, headed the Ministry of Development, responsible for the whole mining sector at the time.
Up to then, in Venezuela, oil companies only paid the regular taxes corresponding to any other economic activity, but paid nothing for the right to exploit the resource. Accordingly, taking as an example the concessionary regimes of the USA and Mexico, the main producers in those years, it was concluded that in Venezuela, royalties had to be higher than the average for the United States, as this activity was almost exclusively devoted to export, and Venezuelan reservoirs were producing a higher quality crude.
That is how, the first Regulatory Act of Coal, Petroleum and Similar Substances was issued in October 1918. The act stipulated royalty rates to range from 8% to 15% and established, also for the first time, that once the concession was over, the mines must revert to the State, including all their buildings, machinery and production facilities without any payment by the government.
In July 1920 the first Hydrocarbon Law was enacted. It fixed a minimum royalty of 15% and also established the national legal concept of reserves, according to which, once the initial period for exploration was over, half the explored surface would be restored to the nation, and the government were enforced by law, to renegotiate those reserves under more advantageous conditions for the nation by raising minimum tax and royalty rates. The concession area was reduced and the state ownership of the reservoirs was unmistakably reaffirmed.
Upset by these measures, foreign companies and their allies, the concession dealers, managed to defeat Minister Torres in his incipient nationalist efforts. New laws on hydrocarbons were promulgated in 1921 and 1922, and Torres was demoted from the Ministry of Development. The companies even came to have a direct participation in the designing of these new laws. Besides reducing taxes and royalties, they allowed all those concessions granted since 1918 to be adjusted to the new law and in so doing, lowered their fiscal contributions.
The 1922 Law remained active with just minor amendments in 1925, 1928, 1935 and 1936, until the 1938 Law was enacted with the introduction of some changes in respect to the preceding legislation. The State was, for the first time, authorized to directly develop oil activities by creating enterprises or autonomous institutes. Once more, royalties for new concessions granted on national reserves increased; taxes for exploration and initial exploitation rose; and exonerations of import taxes were limited only to items actually necessary for the specific activities of the concession.
The most transcendental of Hydrocarbon laws, prior to nationalization, was the one enacted by the National Congress, following a national referendum held in March, 1943. It was devised with the precedent of the Mexican nationalization in 1938, in the midst of World War II, and in the environment of President Franklin D. Roosevelt’s Good Neighbor Policy. It only underwent two partial and punctual reforms in 1965 and 1967 from the time of its promulgation until 1975.
This 1943 Law established, for the first time in Venezuelan history, a uniform regime for all hydrocarbon concessions by means of a conversion mechanism for concessions previously granted and those to be approved in the future. It instigated a process by which the old titles could be legally transferred into new contracts, covered by the new law; leaving the former old titles without effect.
With this, concession holders (“concessionaires”) unwillingly accepted the new legislation with stricter regulations and higher tax contributions, the government however, refused to negotiate the terms. New and converted exploitation concessions were granted for a period of 40 years from that date on; that is to say, the expiry date on these contracts was 1983, even though some of the old concessions were close to their expiry date, they were also extended to cover the 40 year period.
Not only did the law standardize taxes and royalties, but it also increased them. Royalties, for example, went from a maximum of 15 % and an average of 9 % to a minimum of 16.66 % of wellhead production which only in exceptional cases, when declining the productive capacity of the reservoirs, could be diminished to preserve the commercial value of exploitation. State taxation sovereignty was established with the recognition of powers to modify taxes by means of tax revenue laws.
This law remained in force until 2001, that is to say, all its articles, with the exception of article 3, derogated in 1991 by a Supreme Court of Justice judgment, which allowed the old PDVSA’s Oil Apertura in the 1990`s, to the detriment of the national collective interest.