Venezuela’s Oil Re-opening Unlikely Before 2024

(Argus, 14.Mar.2019) — Venezuela’s political opposition is proposing a comprehensive oil reform that would allow foreign investors to own up to 100pc of oil assets from the wellhead to the retail level, but a historic re-opening of the Opec country´s oil industry is unlikely before 2024-25.

Borrowing a page from Mexico’s sweeping 2014 oil reform, proposed legislation would establish an independent hydrocarbons regulator that would conduct a Round Zero for state-owned PdV to select which upstream assets it would retain. The remaining assets would be designated for licensing rounds in which state-owned PdV would compete with other companies.

A 60-page draft of the proposed legislation obtained by Argus would apply fiscal terms that are “flexible, progressive and non-discriminatory” to ensure that ventures remain competitive and commercially viable.

The Venezuelan state would retain 100pc ownership of PdV, which would be subject to the same rules and standards applied to other oil operators in Venezuela. The opposition has said that most incumbent oil companies, such as Chevron, Repsol, Eni, Shell, Rosneft and CNPC, would be allowed to stay.

The ambitious reform is aimed at rebuilding the gutted oil industry with broad opportunities for private-sector investment. But approval and implementation of the new legal framework could take between three to five years, after the current government of President Nicolas Maduro leaves power, according to opposition oil experts.

The process of approving and enacting the oil reform will be “lengthy and politically difficult,” said one of the advisers to opposition-controlled National Assembly president Juan Guaidó, whom most Western countries recognize as Venezuela´s interim president.

“Expectations that a new oil law could be approved and implemented quickly are unrealistic,” the adviser told Argus. “It will not happen overnight.”

Maduro first must be compelled to resign or forced out by Venezuelan military leaders who so far remain loyal to him, the adviser acknowledged. “We can’t predict when that will happen, but hope it will be soon.”

After Maduro leaves, a Guaidó-led transition government would take immediate steps to stabilize the economy, rebuild government institutions, and organize presidential elections. A new democratically elected government would then propose the oil legislation, which would include a constitutional reform.

Guaidó’s ambassador to Colombia Humberto Calderón Berti, a former oil minister and PdV chief executive, said last week that a political transition could take up to two years. This timeframe would bring implementation of an oil reform to 2024-25, assuming Maduro departs immediately.

The longer the timeframe, the greater the potential risk of a breakdown in the political consensus. If Calderón´s prediction is accurate, new presidential elections would coincide with elections for the assembly, whose current five-year term ends in January 2021. After Maduro’s departure, many of the political parties now allied with Guaidó and his Popular Will Party could split off and adopt alternative proposals that respond to nationalist sentiment.

The transition government would have to advance cautiously to avoid fracturing the opposition, an assembly deputy said. “Guaidó can never admit that Venezuela will be transitioning toward a new ‘apertura’ in which from the outset foreign oil companies would assume operational control of existing ventures, and after a new oil law is approved, PdV would compete against new joint ventures in which it would not have equity,” the deputy said, referring to Venezuela´s ill-fated industry opening of the early 1990s.

During a transition period, Venezuela’s caretaker government would seek to implement some preliminary reforms based on the existing 2001 oil law that was amended in 2006 during the government of late president Hugo Chavez. But a transition government would have no mandate to advance a comprehensive oil reform that would position Venezuela to compete with Brazil, Mexico and Colombia in capturing foreign capital.

“The oil laws and policies of these countries are the reference for our planned oil reforms in Venezuela, but they are also our regional competitors for foreign oil capital and they are now years ahead of Venezuela in terms of creating the legal and regulatory conditions needed to capture foreign oil investment,” the adviser added.

Beyond the oil sector, the transition government would implement emergency macroeconomic reforms to stabilize the economy, contain runaway inflation and restructure debt with the backing of a multilateral financial bailout package totaling at least $50bn.

“The investment climate must have iron-clad legal guarantees before foreign oil companies will risk their capital in a country where their property rights have been violated for the past 20 years,” a former Central Bank senior economist and current national assembly deputy said.

An oil ministry official who privately supports Guaidó warns that if the oil reform is not enacted, Venezuela risks becoming “irrelevant” in the oil market.

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