How do Caracas, Washington and other countries structure a huge oil production deal?

Venezuela and the U.S. announced a large-scale oil-production agreement last week. To develop even a small portion of the 64 billion?proven reserves in the 17 oilfields that are included in the agreement, a complex three-layer structure is required.

The pact, if completed in the form it has been negotiated so far, will provide a 'base volume of exportable Venezuelan crude oil from mature fields that are already operating, and total production is expected to increase to as much as 1.5 million barrels a day (bpd), according to authorities.

Many questions remain unanswered about the legality of this unprecedented deal and its operational feasibility.

GOVERNMENT-TO-GOVERNMENT

The first layer is the government-to-government pact announced on Friday, whose terms Caracas and Washington negotiated for months to reach several goals:

1. According to U.S. president Donald Trump, the U.S. can gain access to oilfields by partnering with private businesses.

2. Due to energy security, the majority of production will be shipped into the U.S.

3. Develop a relationship of trust with the operator.

The full contents of the agreement are not yet known and may not be soon, as a recent revision of Venezuela's "main oil law" removed the National Assembly’s mandatory oversight of energy contracts marked in the national interest.

Experts and lawyers have warned that this pact could end up in court, citing the long duration of the agreement, the lack of approval from other institutions in Venezuela or the U.S., and the absence of a competitive selection process for?partners.

Partnership in VENEZUELA

The Venezuelan hydrocarbons legislation only allows two types of oil production in the OPEC nation: joint ventures or production-sharing agreements. Joint venture partners are able to secure equity in a producing company, and reserve reserves for a period of 25 years plus an additional 15-year extension. Production-sharing agreements allow output to be produced for an undetermined period of time, but without equity rights.

Sources say that it is still unclear which model North American Blue Energy Partners, the U.S. firm Washington chose to partner with for this deal, will choose. Analysts said that any structure must include a partnership with Venezuela’s state-run PDVSA.

PDVSA has been a partner with NABEP for years. Previously owned by U.S. businessman Harry Sargeant, NABEP is now controlled by Venezuelan Alejandro Betancourt. Sources said that a new joint venture would absorb and expand NABEP’s existing projects to provide a base for exportable oil production.

EQUITY TRANSACTIONS? IN U.S.

The most complex part of this deal may be the transaction that the U.S. made to ensure its participation in NABEP operations in Venezuela.

According to Trump the umbrella deal was negotiated by Venezuelan interim president Delcy Rodriquez, U.S. secretary of state Marco Rubio, and U.S. secretary of defense Pete Hegseth. The U.S. Department of Energy was excluded from this phase.

The Wall Street Journal reported last week that the Pentagon intends to take a?passive 35% stake in the company that will own?the rights? in Venezuela. The Office of Strategic Capital at the Defense Department structured the investment through "penny-warrants", which would give U.S. equity without requiring significant up-front capital.

Sources said that the U.S. has also negotiated the right to receive an additional 20% of the total oil production from these fields, which would help replenish the U.S. Strategic Petroleum Reserve.

(source: Reuters)