US Oil Majors Want Changes in Venezuelan Energy Laws Before Jumping In
Through a negotiated agreement between the White House and the newly-reformed government of Venezuela, the country's oil resources are now available to American companies for development and exploitation. But to get to actual investments in production, oil companies are going to need to see real changes on the ground before they start putting down money and shipping more barrels, according to supermajor ExxonMobil and many others.
Exxon has been producing oil in Venezuela since the 1940s, and it has gone through two rounds of asset appropriation - first in the 1970s, and again under former Venezuelan president Hugo Chavez in the 2000s. Caracas owes the company billions of dollars for nationalized infrastructure investments, Exxon believes, and repayment is nowhere in sight.
In this context, the company is reluctant to put in more money without better guarantees of a stable business climate. The firm tries to expand in countries where it is welcomed by society and can build a long-term relationship with its neighbors, over the decadal time horizons needed for profitable oil and gas extraction. These factors are not assured in Venezuela.
"If we look at the legal and commercial constructs—frameworks—in place today in Venezuela, today it’s uninvestable. And so significant changes have to be made to those commercial frameworks, the legal system, there has to be durable investment protections, and there has to be a change to the hydrocarbon laws in the country," said ExxonMobil CEO Darren Woods in comments at the White House on Friday. "We haven’t talked to the Venezuelan government, and obviously we have yet to assess the people’s perspective with respect to ExxonMobil entering the country."
Among other hurdles, current Venezuelan law requires state oil company PDVSA to take a majority stake in any private development. This would preclude control over a project for international investors. In addition, PDVSA is not in a financial position to take a majority stake in multi-billion-dollar projects.
Beyond legal questions, analysts warn that Venezuela's political and security future is far from certain. There are multiple power centers inside the regime and the rest of the country - smuggling gangs in rural areas and borderlands, members of the military hierarchy, and armed militia groups - which could begin to pull the country apart in the event of a leadership breakdown or financial collapse.
"The entrenched challenges of migration, drug and other illicit trafficking, intensified substate violence, and perhaps de facto Balkanization of the country by various strongmen (and their domestic or foreign backers) remain palpable risks," wrote David L. Goldwyn and Andrea Clabough in a commentary for the Atlantic Council. "The Trump administration, focused on resource management in Venezuela, has so far shown little interest in resolving these issues. But they will not go away, and they could derail the administration’s vision for a more stable energy industry and country."
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To provide an extra inducement to American oil companies to spend in Venezuela, the Trump administration may also look at making direct federal investments in Venezuelan oil production ventures. Asked whether the White House would support taking federal stakes in oil companies to stimulate business activity in Venezuela, U.S. Energy Secretary Chris Wright said that "that's certainly a very real possibility," speaking to Face the Nation. The acknowledgement is a departure from past policy: the administration has not previously proposed investing federal dollars directly in oil and gas production, within America or abroad.
Top image: Hugo Londono / CC BY-NC-SA 2.0
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