By Marianna Parraga and Jarrett Renshaw
HOUSTON/WASHINGTON, Jan 26 (Reuters) – A proposed reform of Venezuela’s oil law is enough to encourage companies working in the country to expand and for some new entrants to begin investing, but deeper reforms would be necessary to attract the $100 billion the U.S. says is required to revamp the nation’s energy sector, foreign and local executives and lawyers said.
The U.S. has taken control of Venezuela’s oil exports and revenue following a military incursion to capture President Nicolas Maduro earlier this month, and a naval blockade to stop oil shipments on sanctioned vessels since December.
Oil is the Venezuelan government’s main source of revenue. Washington has said it plans to control the country’s energy resources and revenue indefinitely to ensure Caracas governs in a way that the U.S. considers is in line with its foreign policy targets.
U.S. President Donald Trump is pushing U.S. oil companies to invest massively in the country’s dilapidated industry to reverse decades of mismanagement and underinvestment. For many investors, one of the biggest obstacles to secure capital for Venezuela is a long-standing legal framework that gives state-run oil company PDVSA a monopoly on operating projects in the oil and gas sector.
Interim President Delcy Rodriguez proposed a sweeping reform to the hydrocarbon law last week. Venezuela’s authorities discussed it on Monday with lawmakers and oil executives from firms including U.S. producer Chevron and India’s ONGC, sources close to the talks said. It is expected to be approved on Tuesday after the brief consultations.
Chevron did not reply to a request for comment. ONGC could not immediately be reached for comment after working hours.
The reform would give PDVSA’s joint-venture partners more control over projects, direct access to proceeds from oil sales and more flexible operating conditions.
Existing partners – which include Chevron along with European, Chinese and Russian companies – have been requesting those changes for years. PDVSA is currently the majority stakeholder in over 40 joint ventures, after a nationalization two decades ago saw many companies leave the country.
The fast-tracked reform goes some way to ending the monopoly, but some vague language in the proposal, as well as some contradictory clauses on trading and taxation need to be ironed out, industry associations and lawyers said. Otherwise, large international energy companies would have little appetite for investment, they added.
“You got to deal with what you have,” said Ali Moshiri, CEO of Amos Global Energy Management, which has stakes in energy projects in Venezuela. “There is no option other than this… If you don’t make this (industry) more attractive, the entire progress we want to make is going to come to a halt, including current operators.”
NEW MODEL TO COME
The reform is expected to formalize a production-sharing contract model that Maduro pushed with little success in recent years, allowing about half a dozen companies to operate in some Venezuelan oilfields.
The loosely regulated model would coexist with current joint ventures, but minority partners in those would gain autonomy to handle their share of output and even sell PDVSA’s share if sale prices negotiated by them exceed those agreed by the state company and its customers.
The reform would allow the government, at its discretion, to lower royalty rates to as low as 15% from the current 33%. That would reduce Venezuela’s government take – among the highest in Latin America – which oil executives in the United States and elsewhere have flagged as problematic.
The changes would also facilitate independent arbitration to resolve disputes, although it is unclear whether cases could go before international courts.
Many other reforms, however, would be needed to reduce taxes and make the country competitive with other oil-producing nations, six lawyers and executives said. They asked for anonymity because of the topic’s sensitivity in Venezuela.
Those would need to include a reform of Venezuela’s income tax law, they said. Other legislation that includes a provision for an oil “shadow tax” that secures the country no less than 50% of the value of each barrel produced would need to be removed, they said.
Venezuela’s oil ministry would gain precedence over Congress and other ministries on tax and ownership changes for projects, which some executives including Moshiri said was positive because it would speed up project approvals. Others viewed the move cautiously because an incoming government could reject it.
Giving PDVSA’s partners financial and operational control of projects was another reform international companies would find attractive, the executives added. That would include loading and exporting oil that corresponds to them and selling it where they want, known as equity lifting, which is common in other countries where international oil companies operate.
“As long as the law allows equity lifting, that would be as good as for any place else, like a typical joint venture,” Moshiri said. The new model of production-sharing contracts could be attractive for small and midsize companies, he and executives from companies in Venezuela have said.
“This is sufficient enough for the transition, until there is a permanent government in Venezuela,” Moshiri said.
CHALLENGES REMAIN
Some lawyers have raised a red flag, however, over the discretionary power the reform gives the government. Under the reform, the government would have no need to consult with Venezuela’s National Assembly to approve contracts, lower royalties or transfer output commercialization to PDVSA’s partners.
“(This reform’s) aim is to keep undermining the National Assembly’s oversight capacity,” said lawmaker Henrique Capriles.
“What’s behind this hydrocarbons law? The oil business won’t change with a new law,” he said. “The most serious problem the oil industry has faced, among many others, has been corruption.”
The reform is unclear on the rights of joint-venture partners, other experts said. That includes on important issues such as project ownership, investment and trading. There is also nothing in the reforms to tackle a structural crisis at PDVSA, they said.
“The regulation of new oil contracts is confusing and ambiguous,” said Boston-based lawyer Jose Ignacio Hernandez in a report last week. “The proposed reforms fail to strengthen the fragile regulatory framework significantly and, consequently, do not offer the legal certainty needed for rebuilding the oil industry.”
Venezuela’s government has said the reform will boost output and give entry to companies interested in unexplored fields.
Some analysts and company executives expect the largest U.S. producers to stay out of the new contract model until a clearer reform that can be greenlit by their legal departments is drafted and a National Assembly with more robust opposition takes office.
The U.S. oil industry was initially supportive of the proposed law reform, but remained skeptical about its long-term durability, sources in Washington said.
(Reporting by Marianna Parraga, Jarrett Renshaw and Reuters staff; Additional reporting by Sheila Dang. Editing by Nia Williams)
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