Venezuela’s congress considers new, scaled-back oil reform

Venezuela’s opposition-controlled congress is considering reforms to the country’s oil law that would open up the sector to private investment but are scaled back from the sweeping changes outlined in a past proposal, according to a draft of the bill seen by Reuters.

The proposal would allow private companies to hold majority stakes in upstream joint ventures with state oil company Petroleos de Venezuela SA (PDVSA) – and give them the ability to directly export crude. The changes address issues that have limited companies’ profitability since late President Hugo Chavez created the joint-venture model in 2007.

Even if the proposal were approved by congress, it would have little immediate impact, given that President Nicolas Maduro considers its rulings null and void and has created a parallel legislative body that is friendly to his government. He retains control of state functions, including PDVSA.

The proposal nonetheless provides a glimpse at the policies opposition leader Juan Guaido might pursue to lure back foreign companies and raise Venezuela‘s flagging oil production should he succeed in his months-long quest to oust Maduro.

Elias Matta, an opposition lawmaker who chairs energy and oil commission in the Venezuelan congress, called the proposal a “working paper” of “quick reforms” during a meeting of the commission last week.
The draft lacks several elements of a prior reform that Guaido’s representatives presented to industry executives in Houston this year.

Unlike that older version, the new proposal does not create an independent regulator to oversee auctions for concessions. It also keeps current royalty levels for crude oil and creates a minimum local content requirement of 25 percent by 2028 – a big win for Venezuelan engineering and contracting companies.

The previous proposal had been presented to the energy and oil commission in early June. But Luis Stefanelli, a member of the commission from Guaido’s Popular Will party, said in a telephone interview that legislators decided to introduce a limited reform that would be easy to pass quickly rather than try to pass a new law that would have generated debate and taken time to build consensus.

The changes suggest the opposition would not open the sector as widely as has happened with major reforms in the past decade in other countries in the region such as Mexico and Brazil. Even so, lawmakers said the draft was subject to change and a further-reaching reform could be introduced in the future.

“Due to the disastrous collapse in the oil industry, we think we need to flexibilize the law to allow for greater participation from the private sector,” Matta said at last week’s meeting.

Spare tire

Venezuela’s crude production, which was close to three million barrels per day (bpd) 20 years ago, steadily declined during Chavez’s 1999-2013 rule.

Chavez fired thousands of experienced PDVSA workers and forced private companies into PDVSA-controlled joint ventures, prompting firms like ExxonMobil and ConocoPhillips to leave the country.

Maduro’s administration saw crude production decline further – a drop that critics attribute to an exodus of workers fleeing Venezuela’s economic crisis in search of higher salaries abroad, and the appointment of military officials with no oil experience to top posts.

More recently, US sanctions on PDVSA as part of Washington’s efforts to remove Maduro have pushed crude output below one million bpd – one-third of its former level.

While there is wide consensus in the opposition coalition about the need to open the sector to private investment, a whole new law would have nonetheless taken more time for congress to pass.

The new proposal, by contrast, uses the current 68-article hydrocarbons law as a base, and makes changes to eight articles.

Maduro, who calls Guaido a US-backed puppet seeking to oust him in a coup, has accused the opposition of selling out the oil reserves of Venezuela – which is an Organization of the Petroleum Exporting Countries (OPEC) nation, and has the largest oil reserves in the world – to foreign interests.

Neither PDVSA nor Venezuela’s oil ministry responded to requests for comment.

Two Venezuelan oil industry sources, speaking on the condition of anonymity, told Reuters that private companies preferred a shorter process without sweeping changes to a full reform that took months to approve.

Stefanelli said the simpler proposal did not rule out a farther-reaching reform later on – but that a long congressional debate would be more appropriate once Maduro is out of office.

“It’s a spare tire. It’s a Plan B,” Stefanelli said. “One thing does not rule out the other.”

The law currently on the books prevents foreign companies from owning a majority stake in their joint ventures with PDVSA and requires PDVSA to operate the projects. The requirement that joint ventures sell their crude to cash-strapped PDVSA has led to payment delays.

The new proposal would also allow PDVSA to sell its refineries to private companies. It eliminates a requirement that companies request a licence to sell natural gas extracted in conjunction with crude, and lowers royalties on gas production. Both measures are designed to boost gas output and reduce flaring – the process of releasing gas produced as a byproduct of crude output into the atmosphere, which is considered wasteful.