US embassy cable - 05CARACAS3558

UNCLAS CARACAS 003558 
 
SIPDIS 
 
ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD 
 
E.O. 12958: N/A 
TAGS: EPET, ENRG, EINV, VE 
SUBJECT: NEW FX REGULATION FOR THE HYDROCARBON SECTOR 
 
 
 1.  SUMMARY: A new foreign exchange regulation states all 
foreign currency derived from oil and gas exports must be 
sold to the Venezuelan Central Bank (BCV).  However, PDVSA 
must only sell to the BCV the amount of foreign currency 
equal to its domestic operating expenses and tax obligations 
in Venezuela.  PDVSA contractors may be paid directly in USD 
but only for the foreign component of goods and services 
provided to PDVSA.  Associations and joint venture companies 
may keep foreign currency required for payments to be made 
outside Venezuela.  END SUMMARY 
 
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PDVSA 
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2.  The GOV published Exchange Agreement Number 9 (Agreement 
9) in the Official Gazette on November 21.  The new 
regulation covers companies carrying out activities under the 
Organic Hydrocarbons Law and the Organic Gas Law.  Although 
the regulation states that all foreign currency derived from 
oil and gas exports must be sold to the BCV, it specifically 
allows PDVSA to maintain offshore any foreign currency that 
it needs to carry out its activities.  PDVSA is obligated to 
sell to the BCV the amount of FX necessary to pay its 
domestic operating expenses and its tax obligations.  Any 
excess foreign currency that PDVSA holds above the amount 
needed to cover its operating expenses denominated in foreign 
currency and the obligatory sales to the BCV must be 
transferred to a special public investment fund.  Article 2 
of Agreement 9 states PDVSA and its affiliates may retain 
their rotating fund to pay obligations denominated in foreign 
currency. 
 
3.  PDVSA and its affiliates are permitted to pay contractors 
directly in USD but only for the foreign component of goods 
and services.  The goods and services can not be produced in 
Venezuela, must be necessary to PDVSA or its affiliates' 
activities, and the property or use must be transferred to 
PDVSA or its affiliates.  Maintenance is also included in 
this exception provided it requires technology or knowledge 
that is not available in Venezuela.  The local component of 
goods and services must be paid for in Bolivars.  The Foreign 
Exchange Adminstration Commission (CADIVI) will issue new 
regulations for the repatriation of the Bolivars received for 
the local component of goods and services. 
 
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ASSOCIATIONS AND JOINT VENTURE COMPANIES 
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4.  Entities operating under association agreements as well 
as joint venture companies may maintain offshore bank 
accounts denominated in foreign currency in order to make 
payments outside of Venezuela.  Any remaining foreign 
currency that is held after the payments are made must be 
sold to the BCV.  Entities operating under association 
agreements and joint ventures will not have access to 
official foreign currency from the BCV. (NOTE: We believe 
they will still have access to currency via CADIVI.  End 
NOTE). 
 
5.  COMMENT:  It is not clear where companies operating under 
Operating Service Agreements fall under Agreement 9.  One 
prominent law firm has argued that they fall under the 
contractor provisions of the new regulation.  Another firm 
did not hazard a guess on whether they would be treated as 
contractors but did note that they clearly did not fall under 
the provisions for association agreements and joint venture 
companies.  END COMMENT. 
Whitaker