Venezuelan oil reform encourages immediate investments, but executives still need to go deeper

Foreign and local executives and attorneys said that a proposed reform to Venezuela's oil laws is sufficient to encourage existing companies to expand, and to start investing. However, deeper reforms are needed to attract the $100 Billion the U.S. estimates is necessary to overhaul the nation's energy industry.

The U.S. now controls Venezuela's oil revenue and exports after a military invasion to capture President Nicolas Maduro in early this month and a naval blockade since December to stop oil shipments from sanctioned ships.

Venezuela's government relies heavily on oil revenue. Washington said that it would continue to control Venezuela's energy and revenue for as long as possible, in order to ensure Caracas is governed in a manner the U.S. deems appropriate.

Donald Trump, the president of the United States, is pressuring U.S. companies to invest heavily in Venezuela's deteriorating oil and gas industry. This will help reverse decades-long mismanagement and underinvestment. One of the biggest obstacles for investors to invest in Venezuela is the long-standing legal framework which gives the state-run PDVSA the monopoly over operating projects in Venezuela's oil and gas industry.

Interim president Delcy Rodriguez suggested a major reform of the hydrocarbon laws last week. Sources close to the discussions said that Venezuelan authorities discussed the issue on Monday with legislators and executives of oil companies including U.S. Chevron and India’s ONGC. After the short consultations, it is expected that it will be approved on Tuesday.

Chevron has not responded to our request for comment. ONGC was not available for comment immediately after 'working hours.

Reform would allow PDVSA joint-venture partners to have more control over their projects, access directly to the proceeds of oil sales, and more flexibility in operating conditions.

Since years, existing partners such as Chevron and European, Chinese and Russian firms have requested these changes. PDVSA currently holds the majority stake in more than 40 joint ventures after the nationalization of many companies two decades ago.

Industry associations and lawyers say that the fast-tracked Reform goes a long way in ending the monopoly. However, some of the vague language and contradictory clauses regarding trading and taxation must be removed. They added that if the proposal was not amended, international energy companies would be less inclined to invest.

Ali Moshiri is the CEO of Amos Global Energy Management. The company has stakes on energy projects in Venezuela. "There's no other option... "If you don't improve the attractiveness of this industry, all progress will be halted, even for current operators."

NEW MODEL TO COME

The reform will formalize the production-sharing model that Maduro has tried to implement with limited success in recent times, which allows about a half dozen companies to work in Venezuelan oilfields.

The model will coexist with the current joint ventures. However, minority partners would be able to manage their own share of output. They could even sell PDVSA shares if they were able to negotiate higher prices than those agreed between PDVSA and its customers.

The government could, at its own discretion, lower the royalty rates from 33% to 15%. This would lower Venezuela's government take, which is among the highest in Latin America. Oil executives from the United States and other countries have called it problematic.

It is not clear if cases can be brought before international courts, but the changes will also allow independent arbitration for disputes to be resolved.

Six lawyers and executives stated that many other reforms would be required to lower taxes and make Venezuela competitive with other oil producing nations. Six lawyers and executives asked to remain anonymous because the subject is sensitive in Venezuela.

They said that these reforms would include a change in Venezuela's income-tax law. They said that other legislation that included a provision for a "shadow tax" on oil that guaranteed the country at least 50% of the value per barrel produced, would have to be removed.

Some executives, including Moshiri, said that this was a positive development because it would accelerate project approvals. Some executives viewed this move with caution because a new government may reject it.

Executives added that giving PDVSA partners financial and operational control over projects is another reform that international companies will find appealing. The executives said that giving PDVSA's partners financial and operational control of projects was another reform international companies would find attractive.

Moshiri stated that "as long as there is a law allowing equity lifting, it would be the same as anywhere else, just like if you were to do a joint venture." He and executives of companies in Venezuela said that the new model of production sharing contracts could be appealing for small and medium-sized companies.

Moshiri stated that "this is enough for the interim period, until there's a permanent government" in Venezuela.

CHALLENGES REMAINS

Some lawyers are concerned about the power that the reform will give the government. Under the reform, there would be no need for the government to consult the Venezuelan National Assembly in order to approve contracts, reduce royalties, or transfer output commercialization from PDVSA to its partners.

Henrique Capriles, a lawmaker, said: "This reform's aim is to continue undermining National Assembly oversight capability."

What's the story behind this hydrocarbons legislation? He said that a new oil law would not change the oil business. "The oil industry's most serious problem, among others, is corruption."

Other experts have said that the reform is unclear about the rights of joint venture partners. This includes important topics such as project ownership and investment, trading. They said that the reforms do not address a structural crisis within PDVSA.

In a report published last week, Boston-based attorney Jose Ignacio Hernandez said that the regulation of new oil contract is confusing and ambiguous. The proposed reforms do not strengthen the fragile regulatory structure in a significant way and, therefore, they don't offer the legal clarity needed to rebuild the oil industry.

Venezuela's Government has stated that the reform will increase output and allow companies to enter unexplored areas.

Analysts and executives of companies expect that the biggest U.S. producers will not participate in the new contract model, until their legal departments have approved a more detailed reform and the National Assembly has a stronger opposition.

Sources in Washington say that the U.S. Oil Industry initially supported the proposed law reform but was sceptical about its durability. Reporting by Marianna Pararaga, Jarrett Renshaw, and staff. Additional reporting by Sheila Dang. Nia Williams edited the story.

(source: Reuters)