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The Marketing of Products

This is one of the most prominent—and, in some ways, controversial—elements in the new LOH, especially because it is subject to biased interpretations. Now, through contracts, private national or foreign companies are authorized to assume, in a shared or total manner, some key processes of the marketing of products outside the country, but “at their exclusive cost, account and risk,” the regulation states verbatim. Here again, is the application of principles into a law built on the objective realities of the moment, and this refers specifically to the regime of illegal coercive sanctions that exists against Venezuela.

The reality is that no sanctions have been lifted against Venezuela. Nor should we confuse the granting of licenses by the U.S. Treasury Department with the lifting of unilateral sanctions. These hostile measures are a reality, they are long-standing, deeply entrenched, and were not foreseen in either 2002 or 2006. It is well known that PDVSA’s marketing of products outside the country has resulted in the freezing of assets and even the seizure of vessels and the theft of products. Now the law protects Venezuela from this risk, creating windows and guidelines for other actors to assume the risk, exposure to hostile financial measures, sanctions and the like.

What does that imply? Some companies that enter into a contract with PDVSA could, in some cases, assume a minority or majority stake in the marketing of hydrocarbons, autonomously carrying out the commercial management process, as indicated in Article 41, as part of the favorable compensation for operators. If a private company can take over the marketing of certain products in specific sectors, how does the nation benefit? Article 42 states that:

… as consideration for the U.S.e of said assets and areas, the operating company will pay the companies wholly owned by the Republic or its subsidiaries a percentage of the volume of controlled hydrocarbons that will be set in the respective contract.

In addition, taxes and royalties would be added to this. Again, with reference to sovereignty and the non-diminution of national heritage, Article 40, in its paragraph 3, states:

The Republic will retain ownership of the hydrocarbon deposits on which the operating companies will develop their activities… .

Whereas Article 68 explicitly states:

The authorized direct marketing will not, under any circumstances, imply the transfer of ownership of the deposits or the authorization for the creation of real guarantees on deposits or on sovereign rights.

The law is absolutely clear on this point. The Venezuelan State externalizes and transfers to others the risks of commercial activity, while directly benefiting from the activities of the operators, fully preserving public ownership of the deposits and resources.

Taxes and Royalties

The 2002 law and its 2006 reform maintained a strict royalty regime, applied to all projects. The 2026 Hydrocarbons Law, on the other hand, establishes a flexible framework. It sets a maximum royalty rate of 30%, while each project will have its own characterization to determine the royalty margin, according to a discretionary policy of the Ministry of Hydrocarbons, based on technical information.

What does this mean? It means that a green field should not pay the same royalties as a mature field, or that a field in the expansion production phase—which has not yet reached its peak of barrels per day—should not pay the same royalties as a field in depletion or outright decline.

The technical parameters will apply to both nascent developments, where there is no infrastructure, and to established fields. Obviously, fields under development are likely to pay lower royalties. The reasons governing this criterion are fundamentally technical, as indicated in the new Article 51:

… taking into account the nature of the project; the capital investment requirements; the cost-effectiveness of the project; and the need to ensure international competitiveness.

Here, the factors of viability prevail to attract new investments and encourage new developments, based on a criterion of “economic equilibrium,” says the law, which can be applied favorably to the nation once the projects are more profitable, or favorably to an operator if the technical and commercial environment conditions make them less profitable.

This criterion is clearly designed to ensure the operational continuity of projects. Even if environmental conditions change—as has happened in recent years with sanctions and licensing changes—royalties can be adjusted to preserve the “economic equilibrium” in each field, avoid paralysis and disinvestment, and mitigate risks.

Article 51 states:

The National Executive, through the Ministry with competence in hydrocarbon matters, is empowered to modify the royalty percentage within the limit provided for in this article, when it is demonstrated that it is necessary to guarantee the economic balance of the project, under the terms provided for in this Law.

What was previously known as the Extraction Tax is now referred to as the Integrated Hydrocarbons Tax, which reaches up to 15%, but is subject to modification depending on the same technical factors that govern the amount of royalties.

Dispute Resolution

The reform of the LOH contemplates the resolution of disputes in three stages or levels: first, by promoting amicable settlement and agreement between the parties; second, through independent international arbitrations; and, third, through courts established in the Republic.

Nowhere does the reform of the Hydrocarbons Law establish the jurisdiction of foreign courts over matters related to hydrocarbons owned by the nation. There is no mention of this, and any assertion to that effect is completely false. Regarding independent international arbitration, Article 8 refers to it as “alternative dispute resolution mechanisms.” This needs further explanation. Independent arbitrations are activities carried out by law firms or firms specializing in specific areas, agreed upon by both parties. They are contracted to facilitate negotiations, discuss disputes, reach decisions, and arrange settlements privately and promptly.

This should not be confused with placing Venezuelan issues on the desk of a Democratic or Republican judge in New York, as was customary before the 2002 law. In the event that PDVSA resorts to independent arbitration, the LOH establishes that the criteria for such a case will be governed in accordance with the provisions of the Organic Law Decree of the Attorney General’s Office and the Commercial Arbitration Law, according to the new Article 8. That is, there is no separation of the State bodies from these matters.

It is worth mentioning that, in practice, many companies would prefer to reach amicable settlements or arbitration in cases of disputes with PDVSA, rather than resorting to Venezuelan courts. The Hydrocarbons Law (LOH) provides incentives to build trust—legal certainty—aimed at companies investing in Venezuela, but emphasizes the need to operate transparently and avoid friction and disputes, since, according to the LOH, the final decision still rests with Venezuelan courts.

See also Dimitri Lascaris’s reporting on Reason2Resist, He was recently in Caracas and interviewed both a supporter and an opponent of the amendment:

Alejandro Teran supports the amendment. He is both Venezuelan and American and invests in the oil sector in Texas. He is sympathetic to Nicolas Maduro and Delcy Rodriguez. He is president of an organization of Latin American oil producers in the U.S..

His core argument is that the amendment will attract the necessary private financing, while retaining the risk for the private financier. At the same time, Venezuela will receive 30% in royalties during the term, including all the facilities provided by the private investor to drill for oil, without incurring any risk itself. This is very advantageous for Venezuela. In Texas, he himself pays 42% in royalties.

During the term, PDVSA will maintain effective oversight, even though operational activities are outsourced. He does not see international arbitration as a problem, as Venezuela has won several such cases in the past. He also says that CITGO in the U.S.—which is no longer controlled by Venezuela—has a special oil refinery to process heavy oil from the Orinoco Belt. Heavy oil is said to account for 60% of the world’s oil. Its advantage is its versatility: it can be processed into numerous products.

When asked if the U.S.’s management of Venezuelan oil revenues in a foreign account isn’t reminiscent of Iraq—where oil revenues have been managed in a similar way since the war—he replies that Trump likely did so to give the Venezuelan opposition the feeling that the U.S. is in control, despite Rodriguez still being in office.

Carlos Mendoza Potella opposes the amendment to the law. He is a Venezuelan professor of economics specializing in the oil sector. He cites four arguments against the amendment:

The Venezuelan parliament is sidelining itself. In the new situation, it is solely up to the government to conclude a deal with a foreign oil company. Parliament will only be informed but can no longer approve or reject an oil deal. According to Mendoza, Venezuela is giving up part of its sovereignty because, if Trump dictates his own terms to the Venezuelan government, parliament is effectively ruled out.

Foreign oil companies are in charge of their own operational activities. There is no meaningful Venezuelan oversight. This means that foreign oil companies can manipulate their figures and thus their financial obligations to Venezuela. Moreover, the portion of the revenues accruing to Venezuela will be held by the U.S. in a foreign account.