The proposal of a Hydrocarbons Bill is a vital step in efforts to reform Venezuela’s oil and gas sector and mobilize investments.
Despite its enormous hydrocarbons resource base, Venezuela’s oil and gas industry has experienced a dramatic decline since 2013. The main causes include the country’s legal and institutional framework for the sector that discourages international investors; government pressure to extract revenues from Petróleos de Venezuela, S.A. (PDVSA) that ruined the national oil company’s (NOC) operational capacity; and the mismanagement of the overall industry and oil revenues. Recent US economic sanctions targeting PDVSA also constrained the company’s operations and financing, further accelerating the decline of the sector.
The recovery of Venezuela’s oil and gas industry has the potential to bolster economic growth and diversification. Rising oil exports could provide the fiscal revenue needed to rebuild the country’s economy, infrastructure and state institutions. At the same time, an increased supply of natural gas can complement the country’s electricity sector and unlock additional industrial and economic opportunities. Furthermore, new oil and gas projects can attract foreign direct investment (FDI) flows and boost the wider economy.
Despite these opportunities, Venezuela faces many challenges in bringing FDI into the sector given its recent history. The existing laws that govern oil and gas developments expose potential investors to constraints affecting operational autonomy, security and financing, all of which increase the risk profile of projects. The country remains a precarious destination for investment, especially after the wave of expropriations that started in 2006; international oil companies (IOCs) are very sensitive to political risks involved in FDI and Venezuela has tarnished its reputation. Deteriorating infrastructure, depleted human capital, and an ongoing political and economic crisis have all increased the cost of the sector’s recovery. Additionally, environmental concerns and the global energy transition may reduce the appetite of international investors for large and costly projects, like the development of heavy oil resources that make up most of the country’s reserves.
Reversing the fortunes of Venezuela’s oil and gas industry will require a complete overhaul of the sector’s legal and institutional framework. Attracting international investments will be key to achieving this as the state lacks the financial resources to invest in the industry. But the country’s protracted political conflict makes reform much harder. The political opposition to President Nicolás Maduro’s government, which coalesced in the National Assembly elected in 2015, has discussed several reforms to the existing 2001 Hydrocarbons Law and proposed a new Organic Hydrocarbons Law (Hydrocarbons Bill) in October 2020 (revised in December 2020) that aims to rebuild the sector.
This paper studies the reforms contained in the bill and how they could support a recovery in oil production, as well as development of the gas sector, which is often overshadowed by oil in terms of domestic production and world markets. The focus here is on several aspects both within the current reform discussions and beyond, including:
- proposed institutional arrangements;
- proposed changes to the fiscal and contractual framework; and
- some of the main internal and external implementation challenges of a broader reform.
The paper examines the experiences of five countries that are either potential competitors to Venezuela in this sector or that possess a high resource endowment and depend on hydrocarbons revenue. It presents some of the current legal constraints viewed by analysts and companies as deterrents for investment that the proposed reforms seek to address. These include the government’s high share of the sector’s profits (government take), regulatory uncertainty, and lack of institutional independence.
The concerns and reform priorities of stakeholders in the oil and gas sector in Venezuela vary dramatically. Those already established in the country wish to promote changes that would increase their operational autonomy and the profitability of their projects. On the other hand, potential new investors may require an overhaul of the regulatory framework that focuses on transparency and, crucially, on investor protections that reduce overall risk. At the same time, the government must deal with dramatic financial constraints and debt commitments that generate pressure to obtain revenues in the short term.
For some stakeholders in the countries examined in this paper, reforms focussed on the degree of independence of institutions governing the sector, how flexible they are in allowing different types of contracts, how they allocate leases for oil and gas projects, as well as tax systems that effectively adapt to market conditions. The analysis also considered the inclusion of economic and environmental elements in proposed hydrocarbon laws.
The paper then assesses the current reform efforts in Venezuela, mostly in relation to the proposed Hydrocarbons Bill, the experiences of other countries undergoing similar changes and the concerns of various stakeholders. The paper also highlights areas that deserve additional attention and raises questions regarding an overall national energy policy and the implementation of the new law, if it is adopted.
Although Venezuela has a de facto president in Maduro, his administration’s legitimacy has been challenged by the opposition and several countries do not recognize Maduro as president. Despite these circumstances, new elections were held in December 2020 for the National Assembly – though these were also broadly dismissed as fraudulent.
Although Venezuela has a de facto president in Maduro, his administration’s legitimacy has been challenged by the opposition and several countries do not recognize Maduro as president.
The analysis in this paper focuses on the Hydrocarbons Bill discussed by the 2015 elected National Assembly as part of other reform efforts in the energy sector, including frameworks such as Plan País, and refrains from an extended discussion of the Maduro administration’s efforts to incentivize investments in Venezuela’s oil and gas sector, as there is little publicly available information on this. Regardless of the authority in charge of leading these reforms, this paper aims to present the massive challenges the country will have to overcome. The international comparisons provide a baseline that deserves an extended analysis once more concrete information about reform projects and initiatives in Venezuela are available.
Without denying the importance of a holistic perspective and of analysing reforms in the context of a national energy system, this paper does not engage in a detailed discussion of other legal instruments currently in place that deserve attention when thinking about reforms of the sector. These existing laws affect pricing policies for fuels, environmental impacts of operations, procurement processes and access to infrastructure, all of which also require changes to revamp the sector. While the issues explored here are specific, they encompass most of the current debate regarding reforms in oil and gas sectors. Nevertheless, due to the complexity of the legal system, the use of legal instruments and their impact on sector reforms deserves a more comprehensive analysis.
Finally, while legal and institutional reforms are necessary in any industrial restructuring effort, in isolation they are not sufficient to promote investments in the sector. Venezuela currently faces the colossal prospect of rebuilding its state institutions after multiple crises while attempting to project stability and boost investor confidence. The global transition to renewable energy sources, growing concerns about climate change, the social impact of projects, and governance conditions will continue to hamper Venezuela’s ability to attract investments. These issues will determine the relative success or failure of any reform effort, and they deserve a separate and more extensive analysis. The focus here on evaluating the strengths and weaknesses of the Hydrocarbons Bill reflects the fact that we do not know the timing, the actors or conditions of a political transition that might allow the implementation of such reforms.
While acknowledging all these limitations, the Hydrocarbons Bill represents a step in the right direction. However, several important issues remain unclear, including whether new institutional structures will effectively separate the roles of policymaking, regulation and operations in the oil and gas sector. Furthermore, recent reform processes in other countries highlight the value of including hydrocarbons sector reform within broader clean energy and climate policy objectives, aimed not only at increasing hydrocarbons production and government revenues but also at developing an energy market, promoting industrialization and increasing access to energy while reducing emissions.