Further legal and institutional reforms are required to support the Hydrocarbons Bill, particularly in regard to the rest of the energy system and its role in boosting development.
Venezuela’s Hydrocarbons Bill is heavily geared towards expanding oil production, which is likely due to the latter’s capacity to generate fiscal revenues. But the country has significant opportunities in other energy sectors and needs a comprehensive energy policy to take advantage of them. Further clarity on long-term energy policies will ultimately support plans to attract FDI into the oil and gas industry. Brazil and Mexico demonstrate examples of broad energy reforms, focusing not only on increasing energy production but also on liberalizing domestic markets for fuels and electricity, expanding energy access and mitigating environmental impacts from oil and gas operations. Successful reform in Venezuela should address the following issues.
- Expanding the role of natural gas: Natural gas has traditionally played a limited role in Venezuela’s energy matrix. It has generally been used within the oil industry and as a fuel to generate power. Most discussions on the future role of natural gas focus narrowly on generating export revenues, either directly through exports or indirectly by reducing domestic consumption of liquid fuel that can be exported. Venezuela can leverage its large natural gas resources by expanding its underdeveloped domestic market, with a particular focus on building infrastructure to deliver gas to households and industrial users. Further natural gas supplies can also support the recovery in the country’s electricity industry that will be required to address critical humanitarian issues such as water supply. Potentially, as global energy markets shift towards decarbonization, natural gas could still meet part of the energy demand, given its multiple uses (heating, industry and electricity), but also as a source of hydrogen in the long run.
- Reforming domestic energy markets: Rigid and low energy prices in Venezuela have removed incentives to develop infrastructure for the domestic market, leading to waste, increased flaring of natural gas and fuel scarcity. A clear mandate to reform domestic energy prices and phase out subsidies would support investments in transmission and distribution infrastructure as well as foster competitive markets, raise additional fiscal revenues and reduce greenhouse gas emissions. To be politically sustainable subsidy reforms should protect the poorest in society.
- Clarifying rules for midstream and downstream operations and competition: The oil and gas industry needs more specific rules governing existing, and potentially new, midstream and downstream oil and gas assets. Addressing issues like third-party access, unbundling rules, anti-competitive regulation, tariffs and even PDVSA’s participation can generate confidence in potential investors about the viability of projects relying on such infrastructure.
- Strengthening environmental, social and governance policies: The investors that Venezuela will need to attract pay a lot of attention to environmental, social and governance practices. These go beyond best practices to mitigate the environmental impacts of oil and gas operations, which are frequently referred to in the Hydrocarbons Bill. Venezuela will need to harmonize its current pledges to reduce greenhouse gas emissions under the Paris Agreement with its oil and gas production plans. There is one clear area for improvement: minimizing natural gas flaring and venting. Strong and independent oversight, combined with operational rules on flaring and venting, can mitigate this problem. But the industry will also need economic opportunities to use the additional gas volumes, for which new infrastructure and market-based prices will be critical.
Beyond environmental protection, Venezuela needs to improve transparency and accountability in the oil and gas industry, with a special focus on combatting corruption. The Hydrocarbons Bill indicates that all acts regarding the oil and gas industry would follow the principle of maximum transparency, but there are few specifics on what this would mean in practice. Trust in the system could be enhanced through additional clarity in terms of what type of information would be publicly disclosed or kept classified, in which format, on what time frames, and which organization or persons are responsible for it. The Hydrocarbons Bill could also expand on the role of independent audits, especially for PDVSA or any other state company. Finally, transparency by itself is not enough to improve governance, the country will need to reinforce its accountability and enforcement mechanisms to mitigate the risk of corruption.
- Improving management of oil revenues: The Hydrocarbons Bill largely retains the system in which oil revenues and PDVSA’s dividends are managed at the discretion of the government. Venezuela will need institutionalized mechanisms like a sovereign wealth fund or a stabilization fund to generate long-term savings and reduce vulnerability. These mechanisms require strong enforcement and institutional independence, none of which are present at the moment, and will require political compromises over time. Better revenue management systems can be key elements in approaches to handling volatility in government revenues and to support an economic diversification strategy. They also have implications for exchange rate and fiscal policies affecting the oil and gas sector, as distortions in the exchange rate has affected the cost structure of companies for years.
A comprehensive strategy including these components can support Venezuela’s efforts to attract FDI to its oil and gas industry. As the Hydrocarbons Bill is proposed as a framework law, the elements discussed in this chapter could be addressed by additional legislation. For comparison, Mexico’s energy reform included a constitutional reform, nine new laws and amendments to 12 existing laws that took eight months to be finalized.
Venezuela’s policymakers should keep in mind that successful reform needs to go beyond the proposals included in the Hydrocarbons Bill. On the one hand, the National Assembly has also discussed further electricity, petrochemicals and climate change bills. These legal instruments also have implications for the management of oil and gas operations and deserve discussion within a more general framework for energy policy. The proposed reforms to the electricity sector are the subject of a forthcoming Chatham House paper. On the other hand, even a perfect legal and regulatory framework may not be enough to create trust among investors that may be wary of future political instability.