Reforms are just one part of rebuilding the hydrocarbons sector and Venezuela itself. While initial efforts have concentrated on private investment, much remains to be seen regarding the scope of wider reforms.
Reforming the oil and gas sector in Venezuela is a contentious issue, given the country’s fiscal dependence on hydrocarbon revenues. Policymakers will not only have to balance the long-term competitiveness of the sector with short-term financing needs, but the framework must be stable enough to reduce the risks for investors and overcome the country’s very poor reputation as a destination for FDI.
The proposed reforms in the oil and gas sector have the potential to improve Venezuela’s competitiveness against other large oil-producing countries. The focus on a stronger institutional framework with an independent sector regulator, flexible legal and fiscal regimes, and opening the entire hydrocarbons value chain to private companies could attract investors. These proposals address some of the root causes that led to the oil and gas industry’s collapse over the last decade. Additionally, giving current investors the option – rather than forcing them – to adapt their existing contracts to the future framework may mitigate some of the concerns around new and evolving legal changes.
Despite these advances, a comprehensive sector overhaul will require wider reaching changes beyond those included in the proposed reforms. Investors may want to see further signals of a strong political consensus that minimizes risks as well as future opportunistic behaviour by the government. So far, key issues like the respective governance roles of the Ministry of Petroleum, the proposed AVH, the National Assembly and PDVSA have shifted with each iteration of the Hydrocarbons Bill, indicating a lack of agreement among the proponents of the bill. Additionally, investors will need further clarity on issues like energy pricing reforms, sustainability policies and PDVSA’s future role before committing to large investment projects in the country. Not all of these issues must be detailed in a specific law, but they must be considered within a comprehensive energy policy.
Finally, the implementation process will be key for the success of the proposed reforms. This may be the most difficult issue for potential investors due to the uncertainty around Venezuela’s political crisis. Legal reforms may help shape policy outcomes depending on how or when a political transition occurs. It is reasonable to expect that comprehensive sectoral reforms will only occur in the case of such a political transition, as the burden of current sanctions prevents any meaningful outreach for FDI. Open competitive bidding processes are a way to test the appetite of different investors, and they are less prone to potential corruption than deals negotiated in private. Policymakers and members of the National Assembly can reduce uncertainty by openly exchanging information about their policies and goals, making it easier and less risky for potential investors to enter Venezuela again. However, ultimately the questions surrounding any reform effort will depend on whether the country can move from a situation typical of a failed state, without rule of law, strong institutions or political stability towards a comprehensive recovery effort.
