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Experts agree on the need for the National Assembly to approve a new Organic Law on Hydrocarbons, which is already underway, and which proposes among other things, to open up 100 percent of all activities in the hydrocarbon value chain to private investment and to create the Venezuelan Agency for Hydrocarbons in order to efficiently and modernly articulate the operation and promotion of investment opportunities and the development of upstream activities.
Experts in oil matters and deputies of the National Assembly participated in the discussion on why Venezuela needs a new Organic Hydrocarbons Law organized by the Permanent Commission of Energy and Petroleum of the Parliament, where the benefits of the new legal instrument were presented and proposed with criteria that allows the mass production of oil and gas.
The debate was started by the president of the parliamentary instance, the deputy for Zulia State, Elías Matta, who made a recount of the 100 years of the oil industry, referring that the first Hydrocarbon law enacted in 1920, then in 1943, when there was an important growth in oil production, reaching approximately 3 million 400 thousand barrels per day. It then began to decline when the concessionaires left and the nationalization of oil was announced. “There began a new period of the Industry being directly managed by the state”.
He stated that there was another interesting growth, with the theme of the ‘oil opening’ and the production of 3 million 300 thousand daily barrels, all this was possible under the 1943 law, which was in force until 2001, when Chávez, with his conception of XXI century socialism, approved a new Organic Law of Hydrocarbons by means of an Enabling Law (decree).
“There began part of the drama that the country is living today. It is a very statist law, the intervention of the state was in every facet, a law that was made at their whim, and decisions were made that gave them more and more power. For example, in 2006 they forced all these companies to go through a process to go into ‘mixed company’ model. Then they promulgated the Internal Market Law in 2008, the petrochemicals law… That is to say they were nationalizing more and more the hydrocarbon issue, that is the reason of the abrupt fall of production,” said Matta.
He assured that the two times that Venezuela has had a positive slope of growth in oil production has been fundamentally a product of private investment. “Around 3 million 329 thousand barrels of oil were being produced daily when Mr. Chávez arrived in Miraflores in December 1998.”
“Today, unfortunately, we are producing approximately 397 thousand barrels per day, a drop of approximately 2 million 932 thousand barrels that have been ceased to be produced. That represents a catastrophe, because that represents more than 43 billion dollars (a year) approximately that stopped entering the country.
He recalled that in 1998 Venezuela looked like a giant before its neighbors Brazil that produced approximately 975 thousand B/D and Colombia 747 thousand B/D, while Venezuela was producing 3 million 329 thousand B/D. Today Brazil is a giant that produces 2 million 755 thousand barrels and Colombia 732 thousand, above Venezuela that only ekes out 393 thousand B/D.
He spoke about the fall of well drills that stand at zero, there is only one drill working and that is for gas. “This shows the disastrous state in which the oil industry finds itself. They had the two biggest oil booms in the history of Venezuela”.
He specified that the first oil boom occurred between 2004 and 2008, 290 thousand 968 million dollars (almost 291 billion US $) were generated, then came another oil boom from 2011 to 2014, 339 thousand 034 million dollars ($339 billion) were generated. “That is, between the two booms, Venezuela received around 630 thousand 002 million dollars (630 billion $), and yet the country is in a catastrophic state and they destroyed the Oil Industry”.
He affirmed that Venezuela received 984,9 Billion Dollars for oil exports, of which 474,90 Billion Dollars were received by the Central Bank of Venezuela alone, the rest 510 Million Dollars were directly handled by PDVSA.
He maintained that the oil model implemented by XXI Century Socialism has been a total failure and that, in spite of two bigger oil booms in the last 20 years in Venezuela, the oil industry is “in shambles”.
“It is shameful, a country with more than 100 years of experience and education in oil matters and these are the results we get. That is why we are discussing the need for a new Organic Law of Hydrocarbons, in which a large team of experts in the field have worked and build a law that has the greatest possible consensus and will benefit the country.”
Change the statist model
The president of the Ad Hoc Board of PDVSA, Luis Pacheco, began his intervention affirming that oil in the world and particularly in Venezuela has a very important political, economic and social impact.
The belief that the State should reserve for itself the Hydrocarbon Industry and conduct it as an entrepreneur is a mistake, after 100 years of the bursting of the Barroso number 2 well and 45 years after the nationalization of oil, the idea and concept has demonstrably failed but continues.
Nevertheless, he assured that the country has a new opportunity to correct the errors and build a model that adapts to the Venezuela that we have to build on the ruin that ‘Chavismo’ has created.
“We must have a resource base, a necessary condition. The oil and gas not produced is worth zero. The state as an entrepreneur will always be in conflict between its political agenda and the business decisions that an industry must make, making the system ineffective and inefficient. Hydrocarbon investment is very expensive and of high risk and must be managed by private national and international operators who have the required technical competence”.
He added that it is possible to design a legal and fiscal structure that encourages investment at risk by private operators, but at the same time serves to equitably capture profits and safeguard the sustainability of what has been agreed.
“The sector can be structured in such a way that there is a differentiation between those who generate the policy, those who regulate the industry and those who invest and operate the industry. This scheme with variations has been successful. Having an adequate legal framework is necessary, but it is not enough,” said expert Pacheco.
He argued that for the recovery of the oil industry, 150 billion dollars are needed over the next 10 years. “The model we have where the state reserves the activity through a state company makes that recovery unviable”.
Furthermore, he stressed that it is fundamental to change the current state-owned model for a model open to private capital and that requires substantive changes in the legal and fiscal structure that has brought inefficiency and corruption.
Finally, he said that the legal project on the table today is perfectible, that it has the fundamental concepts to make this law a modern legislation, so it is the responsibility of the professionals to make the corresponding modifications.
“A change of a law that is not associated to a transformation in the way we relate to this industry, migrates us from statism to a wide empowerment and society, would be a pyrrhic approval, short lived, history would not forgive us to lose this last opportunity”, Luis Pacheco said.
The flexibility of the fiscal framework has been one of the historical weaknesses
Francisco Monaldi, oil expert and economist of the Latin American Energy Policy at the Banker Institute, states that we need an institutional framework and long-term vision. Investments must be of a maturity that can make possible 30 years of income generation and what long term political horizons do is destroy the potential for long term development.
“For that we need an institutional framework that is as credible and stable as possible. A law that has some essential elements, there is no perfect law. The central elements, awareness of the fiscal and contractual framework so that the various fields of the country and the various oil provinces can develop and the contractual and fiscal conditions are adapted to the power and development of these fields”.
He added that a central element is the creation of an independent regulatory agency. There must be tools in the transition law so that the existing joint ventures can quickly re-establish production activity and make investments with a clear institutional framework that allows them to control their cash flow and clarity on the profitability of the projects.
Finally, he argued that the flexibility of the fiscal framework has been one of the historical weaknesses of many Latin American countries’ models. Such as the Venezuela of 2001 law that had a fixed royalty that applied to all projects regardless of their profitability and that did not adapt if the price of oil rose or fell.
He qualified this point as very important in the vision of the law, because the main source of flexibility is going to come from the part of special advantages that occur in the bidding and in the contracts. He considers that there must be instruments, especially if the law of special contributions at extraordinary prices is eliminated.
“There have to be tools that allow for that flexibility so that when the price of oil rises, the state’s share increases. We cannot make a mistake and create an institutional framework that does not adapt to these changing circumstances,” said Monaldi.
Aspects of the new Organic Law of Hydrocarbons
Finally, Representative Luis Stefanelli explained and presented the most important aspects of the new bill, which has the fundamental objective of massively producing oil and gas in an economically profitable manner and without public investment. He added that it is essential to approve a new Hydrocarbons Law in Venezuela.
He explained that the new instrument opens the industry 100% to private investment, all activities in the hydrocarbon value chain: exploration, production, refining, transportation, storage and marketing of oil and natural gas, without prejudice to the fact that the State may also carry out such activities with or without private participation.
The hydrocarbon business value chain is segmented into three major phases: upstream activities, intermediate activities and downstream activities. The initial activities (upstream) are called delegated activities in compliance with Article 302 of the National Constitution. The Delegated Activities may be carried out through any contractual modality that maximizes the exploitation of hydrocarbons. The contracts will have a duration of 30 years, with an possible extension of 10 years.
Another aspect highlighted by Deputy Stefanelli was the economic regime of the fiscal framework, which establishes the royalty at 16.2/3 percent calculated based on a formula with variable adjustment which will be incorporated in the terms and conditions to be approved by the NA (National Assembly).
“Not all contracts pass through the National Assembly (for approval), only the references under which they are either going to be tendered or the offers received or even direct assignments that are possible within the framework of the law pass through the National Assembly”.
He pointed out that it also establishes the possibility of reducing the royalty, down to 1%, to guarantee the commercial viability of projects, which can be devolved once the economy of the project allows it, an increase can come as only long as the investment has been amortized.
“The Surface Tax is replaced by the rate for the use of the subsoil, this rate will go in full directly to the Venezuelan Agency of Hydrocarbons, it stopped being a tax and becomes a rate. We want to give some autonomy to the Agency”.
He highlighted, among other aspects, that the Venezuelan Hydrocarbons Agency was created with the purpose of efficiently and modernly articulating, under technical criteria, with meritocratic and absolutely independent personnel, the operation and promotion of investment opportunities and development of upstream activities.
“The municipalities may not tax the Delegated Activities, as well as the activities of transport and storage of hydrocarbons in their natural state, nor affect the financial sustainability of the economic activities of the companies. The “Shadow Tax” will be eliminated and the ISLR (Internal Revenue) is proposing to eliminate the articles that generate exceptions, applying the same taxes to hydrocarbons as a normal activity that would pay a maximum of 34%”.
He announced the creation of the Venezuelan Agency of Hydrocarbons, with the purpose of articulating in an efficient, modern ways, under technical criteria, with meritocratic personnel, with an administrative career with absolute autonomy of operation and the promotion of investment opportunities and development of upstream activities.
“The AVH will regulate and manage, in legal terms, upstream and intermediate activities so that there will be no difficulty in the development of any project in terms of availability, transportation and terminals wherever that product may go.”
Stefanelli explained that the agency will have a 5-member Board of Directors, composed of: a representative of the Ministry with competence in Hydrocarbons; a representative of the Ministry of Planning; and three independents, who will be chosen by the President of the Republic, will last 5 years in their positions, renewable for 1 period. The requirements to be a member of the Board of Directors are established in the Law.
“The AVH will have an Executive Directorate composed of six Vice-Presidents to manage its activities and responsibilities, the Executive President will participate in equal conditions with the other votes in the decisions approved by the Executive Directorate”.
