Venezuela's oil reform addresses key issues, but investment outlook remains uncertain, says Wood Mackenzie

In response to Venezuela's National Assembly approval of the Partial Reform Law of the Organic Hydrocarbons Law (Reform Law), Graham Kellas, SVP Global Fiscal Research for Wood Mackenzie, said, "This reform is an important first step, but there is a long way to go before we will see the large-scale private company investment that is desired."

The reform law was approved by the National Assembly but has yet to be formally published.

Key changes in the law include:

· Private operators will be allowed to operate Venezuelan projects and commercialise their share of produced hydrocarbons, although JVs with PDVSA still require a majority state-owned stake.

· The reform establishes a 30% royalty baseline rate with discretionary reductions to ensure "economic viability” and introduces an integrated hydrocarbons tax (IHT) of up to 15% of gross revenue.

· The reform provides access to arbitration.

Potential Impact

"The promise of fiscal and contractual stability is positive, but investors will seek watertight legal provisions and appropriate fiscal terms to ensure that past disruptions are not repeated," said Kellas. "Clarity on the degree of executive discretion (e.g. for royalty reductions) is also needed – companies will want to know how and when fiscal parameters might be adjusted."

Wood Mackenzie analysis notes that the effective royalty rate (ERR) created by the maximum royalty and IHT rates represent 45% of gross revenue for the state, which is a high ERR relative to key competing markets.

“Overhauling fiscal terms represents a critical step toward unlocking Venezuela's production potential. While improved terms are one condition to allow output to recover to pre-2019 levels, sustained growth will require addressing several structural challenges, including supply chain constraints and workforce development,” said Adrian Lara, Principal Analyst Upstream Research for Wood Mackenzie.

Effective royalty rate: peer group comparison

The key questions discussed in Wood Mackenzie’s published research following the news, and the first questions likely on operators’ minds are: Is it legal? Will it be stable? Is it an improvement? How would PSCs incorporate the new Reform Law tax regime? What are the next steps?