In a country like Venezuela, the Hydrocarbons Law is the legal instrument that defines the rights and obligations of the State and the private parties, pursuant to the constitutional principles. There are two things to have in mind on the Venezuelan Constitution of 1999: oil reservoirs are the sole property of Venezuela and Petróleos de Venezuela, S.A. (PDVSA) cannot be transferred or sold to private parties.
The Hydrocarbons Law of 2001 (amended in 2006) allows private participation in exploration and production activities through joint ventures (empresas mixtas). These joint ventures are under the operational control of the Venezuelan State (i.e. PDVSA) and are considered state-owned entities in accordance with the Public Administration Law of 2014. The Hydrocarbons Law limits private participation in exploration, production, and commercialization activities of liquid hydrocarbons and associated natural gas. Other regulations enacted sometime after restrict private participation in a number of other issues, such as the performance of certain services agreements.
Right at this moment there seems to be an initial consensus among the political and economic actors on the need to have a renovated legal framework for the oil industry, for the purpose of enabling new investments and boosting oil production. Because when things are not working well in a strategic and major industry, some legislative action is desired.
Delcy Rodríguez, who took over after the extraction of Nicolás Maduro, mentioned the matter in her address to the National Assembly on January 15th, announcing partial reforms in the oil sector. At the time of writing, we’ve not had the possibility to review the draft bill. As a result, we haven’t figured out yet where this reform is heading. But we do know what Rodríguez said in her speech, calling for the incorporation of the productive models outlined in the Anti-Blockade Law of 2020, thus, allowing investment flows into new fields. The reform of the Hydrocarbons Law is now considered a priority in the extensive 2026 legislative agenda of the National Assembly, and no one is talking about the National Assembly giving an enabling law to the acting President to grant her the legal power to pass legislation.
In the event that private investors own a majority of the stake in the joint ventures under the new Hydrocarbons Law, the end-result would be that they will no longer be considered Venezuelan state-owned entities.
The Anti-Blockade Law was conceived as a response to international economic sanctions against Venezuela. Without a doubt it has promoted private investments in the country. But for various reasons, this statute has not attracted enough interest from investors. Some argue that its provisions are in collision with the ones set forth under the Hydrocarbons Law. It is also feasible that if the economic sanctions are lifted in the future, the Anti-Blockade Law will lose significance.
Key questions
So, in our view, there are key questions for the new hydrocarbons legislation. First, what will happen to existing joint ventures between PDVSA and Eni, Chevron, CNPC, Repsol, Maurel & Prom, and Roszarubezhneft—among other current players? We don’t know for sure if private investors will be allowed to become majority shareholders in these existing joint ventures or whether there will be a different contractual scheme.
We also ignore what will happen to new joint ventures in terms of private investors’ participation, or about the existing contracts on production, signed in recent years between PDVSA and private investors in accordance with the Anti-Blockade Law. Such contracts might be converted to production sharing contracts, services at risk contracts or other types of contracts. Private investors or joint ventures might be entitled to commercialize liquid hydrocarbons, associated natural gas, and/or by-products.
Another aspect to consider in new legislation is oil royalties, how flexible they will become, with distinctions between greenfield and brownfield projects. Will the government’s take be reduced, and the income tax lowered with the amendment of the Income Tax Law as well? Will there be any tax breaks for new investments?
In the event that private investors own a majority of the stake in the joint ventures under the new Hydrocarbons Law, the end-result would be that they will no longer be considered Venezuelan state-owned entities, as such entities are defined under the Venezuelan legal framework. Furthermore, in this case such joint ventures will not be subject to the 50% OFAC rule, which predicates that any entity directly or indirectly owned 50% or more by PDVSA is automatically deemed sanctioned and blocked, even if not explicitly listed by OFAC, prohibiting US persons from any transactions with that entity.
The weight of experience
The truth is that Venezuela has an extensive, complex, and valuable experience in dealing with oil projects and private investments for more than a century. We have to learn from past lessons, if history has any relevance at all.
Three milestones should be mentioned in Venezuelan oil history: the Hydrocarbons Law of 1943; the Oil Nationalization Law of 1975; and the migration process to mixed joint ventures of 2006-2007, supported by the Hydrocarbons Law still in force.
In 1943 occurred the convalidation of concessions defects and the conversion of all existing concessions to new ones under a new single legal framework. In 1975 the foreign oil companies were given the opportunity to sign technical assistance agreements and commercialization contracts with the recently created PDVSA, following their compensation. In 2006-2007 the private companies with operating services agreements, strategic associations, and profit sharing agreements were given the chance to migrate to joint ventures as minority shareholders.
There will be better chances to attract these investments if the reform provides fiscal benefits, regulatory advantages, and favorable contractual schemes.
In all those processes, with greater or lesser success, the intended purpose of Venezuela was focused on keeping the relationships with the oil companies, with all the pros and cons that those decisions entail.
Today there is little certainty about which legal instrument will be sanctioned by the National Assembly, and which private companies will decide to invest in the country. The only certainty is that the reform will not hinder private investments, it will promote them. In this sense, the companies already in the country have an advantage over those that are beginning to put their technical and legal teams together to make their first evaluations and studies.
In order to have massive investments in the oil sector, an important reform of the Hydrocarbons Law is definitely the first step going forward. There will be better chances to attract these investments if the reform provides fiscal benefits, regulatory advantages, and favorable contractual schemes. Nonetheless, any reduction of the government stake to attract investments will require the modification of the Income Tax Law as well.
The technological, human, and financial resources for the industry will hopefully come in great numbers and capabilities to Venezuela following the enactment of new legislation. The economic and legal challenges for the Venezuelan oil industry are huge and must be treated with a sense of urgency for the benefit of the country and its people.