Venezuela Pitches Oil Contract to Kick Off Talks With Drillers

A Petroleos de Venezuela SA (PDVSA) oil pumpjack on Lake Maracaibo in Cabimas, Zulia state, Venezuela, on Friday, Nov. 17, 2023. A decision by the US on Oct. 18 to ease sanctions in exchange for greater political freedom in Venezuela, has opened the doors for dealmaking and increased production that will enable the Latin American country's crude to reach global markets. Photographer: Bloomberg/Bloomberg Photo by Bloomberg /Photographer: Bloomberg/Bloomber

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(Bloomberg) — Venezuela’s national oil company has begun circulating a long-awaited proposed contract to energy companies interested in working in the Latin American nation, a key step toward reviving its crude production.

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The document reviewed by Bloomberg lays out conditions for Petróleos de Venezuela SA, or PDVSA, to work with companies to restart oil wells, drill new ones and market production. The state-owned company began sharing the model contract late last week with oil executives, advisers and others in the industry.

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The model contract likely represents a maximalist opening posture for PDVSA, say people in the industry familiar with the document, who asked not to be identified discussing the confidential terms.

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Oil companies that already have preliminary production agreements with PDVSA have been waiting for the framework for weeks as a starting point for negotiations. But as lawyers and advisers pore over the 90-page document, industry reaction suggests that turning agreements into operating contracts may take longer than expected.

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An investor-friendly joint venture blueprint forged by a landmark 2022 deal between PDVSA and Chevron Corp. raised oil industry hopes that Venezuela would leave behind a legacy of resource nationalism and embrace more foreign investment after years of punishing sanctions. Instead, this new operating contract tilts in favor of the Venezuelan state, especially on matters of arbitration, taxes and termination of deals, while skirting around US sanctions rules, according to people familiar with the document.

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In the event of a contract dispute, the document specifies mediation by the Hong Kong-based International Organization for Mediation. If this doesn’t settle the matter, the dispute goes to an arbitration panel in Paris that would be administered by the International Bureau of the Permanent Court of Arbitration.

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The arbitration clause contradicts US Treasury Department licenses that have governed the Trump administration’s sanctions relief on Venezuela since the start of the year, because the US rules require agreements to be governed by US law and arbitration.

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The contract also said Venezuela could unilaterally terminate a contract if anyone associated with the operating company engages in “acts of political destabilization” with limited indemnity if the contract is unilaterally rescinded for “reasons of public interest” in the first six years.

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Another clause gives the state broad discretion on taxes and royalties. While it wouldn’t be surprising for oil companies to complain about tax conditions, in Venezuela’s case the commercial stakes are compounded by wider political and economic considerations as the Trump administration pushes to accelerate investment in a country with some of the world’s largest oil and gas reserves.

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The blueprint is peppered with language against sanctions, referring to them as “unilateral coercive measures”. The document is signed by PDVSA President Hector Obregón, a holdover figure from the Nicolás Maduro regime who is the target of international sanctions.

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Neither PDVSA nor Venezuela’s Information Ministry responded to requests for comment. The Treasury Department didn’t reply to a request for comment.

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PDVSA’s framework agreement comes at a time of elevated oil prices and growing domestic pressure on the US-supported Venezuelan government from nationalist remnants of the previous regime of Maduro, who was captured by US forces in January.

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—With assistance from Fabiola Zerpa and Eric Martin.

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