9 QUESTIONS AND ANSWERS REGARDING OFAC GENERAL LICENSE NO. 44 IN VENEZUELA’S OIL AND GAS SECTORS
This LEĜA Perspectives aims to explain the content and context of General License No. 44 issued by the U.S. Office of Foreign Assets Control (OFAC) in connection with Venezuela’s oil and gas sectors.
I. WHAT IS THE U.S. GOVERNMENT SANCTIONS POLICY TOWARDS VENEZUELA?
The U.S. sanctions policy towards Venezuela, or the sanctions program, began in 2014 after the enactment of the Law for the Defense of Human Rights and Civil Society in Venezuela.
In 2015, Executive Order No. 13,692 of March 8, 2015 was issued, which aimed to establish the legal framework for the punishment of those responsible for human rights violations in Venezuela.
In 2017 the sanctions policy was expanded to include the prohibition of economic operations with the Venezuelan Government. Between 2017 and 2019, 5 Executive Orders were issued: (i) EO No. 13,808, of August 24, 2017; (ii) EO No. 13,827 of March 19, 2018; (iii) EO No. 13,835 of May 21, 2018; (iv) EO No. 13,850 of November 1, 2018, and (v) EO No. 13,857 of January 25, 2019. The various rules contained in these Executive Orders were later summarized in EO No. 13,884 of August 5, 2019. Notably, EO No. 13,857 restricted the possibility of economic operations with PDVSA[1].
II. HOW HAS THE SANCTIONS POLICY IMPACTED THE VENEZUELAN ENERGY SECTOR?
This policy of the United States Government towards Venezuela has impacted the energy sector in two essential ways:
- Through what are commonly known as “primary sanctions”. EO No. 13857 of January 25, 2019, ratified by EO No. 13884 of August 5, 2019, define the Government of Venezuela, and expressly includes PDVSA and its subsidiaries as blocked persons for US Persons. As a result, US Persons could not interact with PDVSA and its subsidiaries (including mixed joint ventures).
- Through “secondary sanctions”. Under EO No. 13884, any person who materially assists, sponsors, or provides financial, material, or technological support, or goods or services to, or supports any person on the OFAC List or persons blocked by EO No. 13884, such as the Government of Venezuela, may be included in the OFAC List, even if they are non-US Persons, in other words, foreigners who are not U.S. persons. Until now, under the OFAC sanctions regime applicable to Venezuela, three sectors of the Venezuelan economy had been identified as risky for the United States, including the oil sector. It is based on these decisions that a non-US Person could be sanctioned for participating in the oil sector.
OFAC General License No. 44 temporarily modifies this policy.
III. WHAT DID OFAC DECIDE?
On October 18, OFAC issued six (6) General Licenses within the framework of the sanctions program on Venezuela: General Licenses 31 (on public debt bonds); 5M (on a particular PDVSA bond); 9H (on some securities); 43 (authorizing transactions with CVG Minerven); 44 (authorizing transactions related to the oil and gas sectors) and 45 (on certain Conviasa transactions).
In addition, OFAC issued two new sets of questions and answers on the Venezuela sanctions program.
Finally, OFAC published on its website a document summarizing the decisions made with the 6 aforementioned General Licenses.
In this LEĜA Perspectives, we will focus on General License No. 44, relating to the oil and gas sectors.
IV. WHAT DOES GENERAL LICENSE NO. 44 AUTHORIZE?
This License authorizes all transactions prohibited by the “Venezuela Sanctions Regulations”. In particular, General License 44 allows transactions involving PDVSA and/or any entity in which PDVSA owns 50% or more of the shares in the oil and gas sectors, hence, oil mixed joint ventures are covered.
Specifically, this General License provides that the following activities are permitted:
(i) Production, extraction, sales and export of oil or gas from Venezuela, and supply of related goods and services;
(ii) Payment of invoices for goods or services related to oil or gas operations in Venezuela;
(iii) New investments in oil and gas operations in Venezuela, and
(iv) Delivery of oil and gas from Venezuela to creditors of the Government of Venezuela, including creditors of PDVSA entities, for the purposes of debt payment.
This list is illustrative, so it could include other activities, as noted in the document published by OFAC Frequently Asked Questions Related to the Suspension of Certain U.S. Sanctions with Respect to Venezuela on October 18, 2023. At first, it does not authorize new financings.
With this General License, (i) the prohibition on US Persons from participating in the Venezuelan oil sector and interacting with PDVSA, and (ii) the risk of non-US Persons being included in the OFAC List for participating in the Venezuelan oil sector and interacting with PDVSA are temporarily suspended.
The License, moreover, indirectly (section (b)(1)) allows transactions in this sector involving the Central Bank of Venezuela and the Bank of Venezuela. A close follow-up on this matter is required as it is not entirely clear what the License states and what OFAC will interpret on it. The absence of prohibitions on the Central Bank of Venezuela will certainly be a key factor to assess the feasibility of financial flows in oil and gas projects.
It should be noted that this General License only pertains to matters related to oil and gas. Therefore, restrictions on interacting with entities of the Government of Venezuela other than PDVSA and its related entities are maintained, as expressly stated in the document published by OFAC Frequently Asked Questions Related to the Suspension of Certain U.S. Sanctions with Respect to Venezuela on October 18, 2023.
It should also be noted that the General License expressly states that it does not authorize transactions involving a person located in the Russian Federation, or any entity that is owned or controlled by an entity located in the Russian Federation.
V. WHY WAS GENERAL LICENSE NO. 44 ISSUED?
The License was issued as a response to the political agreement reached on October 17, 2023 between representatives of the Government of Venezuela and representatives of the Unitary Platform. According to OFAC, this agreement is in line with the restoration of democracy in Venezuela.
VI. HOW LONG WILL GENERAL LICENSE NO. 44 BE IN FORCE AND EFFECT?
According to the document published by OFAC Frequently Asked Questions Related to the Suspension of Certain U.S. Sanctions with Respect to Venezuela on October 18, 2023, the License will be in force and valid until April 18, 2024, and it may be extended before its expiration date, provided that the Government of Venezuela fulfills its commitments and takes the necessary steps for a democratic presidential election to be held by the end of 2024.
VII. WHAT CONDITIONS APPLY TO GENERAL LICENSE NO. 44?
Although General License No. 44 does not specify any conditions, OFAC’s document Frequently Asked Questions Related to the Suspension of Certain U.S. Sanctions with Respect to Venezuela on October 18, 2023, states that the U.S. Government retains the right to revoke this General License if the Government of Venezuela does not comply with the commitments agreed to with the Unitary Platform and does not take the necessary steps for a democratic presidential election to be held by the end of 2024.
In particular, the U.S. Secretary of State noted in a press release that before the end of November of this year, the Government of Venezuela must comply with these two steps: (i) a specific timeline and process for the accelerated reinstatement of all candidates, and (ii) begin the release of all unjustly detained U.S. citizens and Venezuelan political prisoners.
VIII. COULD GENERAL LICENSE NO. 44 BE REVOKED OR MODIFIED?
General License No. 44 may (i) be revoked, or even modified, or (ii) not renewed before April 18, 2024. The U.S. Government could make one of these decisions if it believes that the Venezuelan Government has not fulfilled its commitments with the Unitary Platform, and/or has not taken the necessary steps for a democratic presidential election to be held by the end of 2024.
In any case, this decision may be influenced by other factors, such as the energy security of the United States, or the participation of American companies in the Venezuelan gas and oil business following the enactment of General License No. 44. Likewise, in view of the armed conflicts in Europe and the Middle East, the United States could consider that the need of a reliable hydrocarbons resources in the Western Hemisphere, and that could be the case of Venezuela.
IX. WHAT OPPORTUNITIES DOES GENERAL LICENSE NO. 44 OPEN FOR NATIONAL AND FOREIGN INVESTMENT?
General License No. 44 represents a window of opportunities for domestic and foreign investment in the oil and gas sectors. In short, this license restores – initially for six (6) months – the pre-sanctions conditions allowing private participation under the Venezuelan oil and gas legislation.
This legislation provides that oil exploration, production, initial transportation and storage activities may only be carried out (i) by the Venezuelan State, (ii) by the State through its wholly-owned oil companies (PDVSA or its subsidiaries), or (iii) through Joint Ventures, which are companies specially designed to carry out these activities and involve a majority participation of the Venezuelan State (usually through the Corporación Venezuela del Petróleo, S.A. ) with at least 50% of the equity.
Exploration and exploitation activities, including the production, gathering, separation, compression and treatment of non-associated gaseous hydrocarbons (gas) require a license from the State. These licenses confer the right to carry out exploration and exploitation activities, as well as the activities inherent to the project for which such hydrocarbons are intended.
Naturally, these forms of participation involve long-term projects, which must be carefully assessed, especially in view of the temporary nature of General License N° 44.
In both cases, oil and gas, there is also ample scope for domestic and foreign investment by contractors who can provide a variety of specialized services for the above-mentioned activities.
The provision of these services can be attractive while defining the probabilities of renewal of General License No. 44, because they can be designed and executed in shorter terms. It is therefore clear that this License can benefit a number of goods and services providers, and not only hydrocarbon corporations.
Consequently, it is key that investors, in their risk analyses, weigh the timing of their investments against the expectation of extension of the General License. This issue should be monitored together with the evolution of the political, economic and specially energy conditions in the coming months, both in Venezuela and abroad.
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In summary, this General License No. 44 represents a change in the U.S. sanctions policy towards Venezuela, at least in the energy sector. However, only in the coming weeks – and months – will it be possible to really know the scope and impact of this General License, and the willingness of American and non-American players to evaluate participating in the Venezuelan energy market, as well as the position of the Venezuelan Government and PDVSA.
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