President Trump announced that Venezuela will send 30-50 million barrels of oil to the United States, the proceeds of which are to be held in U.S.-controlled accounts and protected from adverse third-party claims. He stated that the U.S. will oversee Venezuela’s oil and gas sector for an indeterminate amount of time, and met with several oil and gas executives encouraging them to make meaningful investment into Venezuela’s energy sector. The existing sanctions regime remains largely intact, currently making it difficult if not impossible for U.S. companies to do business with Venezuelan companies.
These extraordinary recent developments have created both legal and operational challenges and opportunities for companies that are looking to invest in Venezuela’s energy sector. We are fielding inquiries from a wide variety of clients concerning impacts on their present activities and impacts on their future prospects. While the nation remains home to the world’s largest proven crude reserves, the investment environment continues to be shaped by political instability, U.S. sanctions enforcement, constrained oil exports, outdated infrastructure and currency volatility. Energy investors will need to carefully consider compliance frameworks, counterparty risk and transaction structures before moving forward in this unstable environment.
U.S. Sanctions
The U.S. Office of Foreign Assets Control (OFAC) currently has extensive sanctions directed at the Government of Venezuela, the state-owned Petróleos de Venezuela, S.A. (PDVSA) and designated individuals and organizations with connections to the nation’s energy, shipping, financial and defense sectors. OFAC has issued narrow general licenses and case-specific authorizations in recent years, primarily tied to oil trading, debt restructuring and limited upstream activity. These authorizations remain both conditional and revocable. A comprehensive list of the general licenses, as well as a FAQ and other information can be found on the OFAC website.
Unless and until the sanctions regime is modified by OFAC, any company seeking to do business in Venezuela will require a general or specific license to enable them to begin negotiations with PDVSA and other Venezuelan entities involved in the energy sector. In addition, there is continued scrutiny of non-U.S. persons under secondary sanctions authorities and heightened exposure for insurers, traders, lenders and service providers supporting Venezuelan crude movements.
Political Risk Can Begin at Home
Our long experience with investments in rapidly changing circumstances abroad is that political risks can arise not only as a result of the actions of a foreign government but also as a result of the actions of the investor’s home country. These can arise either generally or relative to the particular country, industry or specific investment. In addition to the U.S. sanctions described above, political risk from the U.S. could arise in the form of prohibition of transfers of sensitive technology into Venezuela. In the future, both the United States or Venezuela could enact and enforce boycotts of trade, and in response, the other could enact anti-boycott legislation. Companies will need to assess their own countries’ current laws and policies affecting Venezuelan opportunities, as well as the broader relationship between their home country and Venezuela, when evaluating a long-term investment decision.
Venezuelan Legal and Regulatory Framework
The Venezuelan legal and regulatory framework applicable to the oil and gas industry was heavily informed by the 1976 and 2007 nationalizations. Several international oil and gas companies exited the country after the second round of nationalization decreed by Hugo Chavez, pursuant to which all foreign investors had to convert their projects into joint venture entities in which PDVSA owned a 60% share. Several of these companies continue to assert billions of dollars of claims against the Venezuelan government. The Organic Hydrocarbons Law, which governs the exploration, production, refining, transportation and storage of hydrocarbons, requires that any foreign investment be in the form of joint venture companies in which PDVSA owns majority share, requires that PDVSA act as the operator, and mandates that all natural crude be sold solely to PDVSA affiliates. A more recent law, enacted in 2020, provides an alternative investment pathway in the form of production-sharing contracts, but provides the Venezuelan government with broad powers to modify those contracts and adjust state participation. Moreover, the royalty and tax rates in Venezuela are also significant and there is a longstanding practice of PDVSA and its affiliates insisting upon Venezuelan law and dispute resolution provisions. Together, this legal and regulatory framework constitutes a significant barrier to the establishment of a stable investment environment in which companies can make multiyear, multibillion-dollar investment decisions.
Oil Sector Operations and Export Constraints
Venezuela has some of the world’s largest proven oil reserves, but this oil is extremely heavy, sour and difficult to extract, transport and refine, requiring the blending of diluents (which have to be imported) and specifically upgraded refining capacity. In addition, PVDSA’s oil production is long removed from its peak output after decades of underinvestment, neglect, lack of maintenance and lack of engineering and technological knowhow, compounded by mass emigration of professionals from Venezuela over the past 20 years. The hurdles to improve production and export are numerous and expensive, ranging from outdated infrastructure and sanction-related limits on equipment to financing, technical services, cybersecurity risks, health, safety and environmental concerns, and a dependence on complex trading and shipping arrangements. Furthermore, even if production is increased, Venezuela’s refining capacity is in a similar state of disarray, requiring that the crude be held in limited storage facilities or exported to the relatively small handful of refineries capable of handling such crude.
Complicating the picture even further is the fact that Venezuela’s currency (the bolívar) is highly volatile and pressured by inflation. The nation has limited access to international financial services, and it still relies heavily on oil revenues under constrained export conditions. The foreign exchange regime is also challenged, with both an official and a black market for United States dollars (USD) offering significantly different exchange rates, and the creation of the Petro as a tool to avoid USD transactions. This in turn complicates attempts at repatriation of funds, payment mechanics and the long-term valuation of the country’s energy assets.
Political and Security Conditions
Following the extraction of Maduro and the evolving nature of his succession, the nation continues to experience acute political uncertainty and societal unrest, with ongoing tensions between government authorities, opposition groups and international stakeholders. The U.S. Department of State has issued a level 4 “do not travel” warning for Venezuela, advising U.S. citizens not to travel to Venezuela and to return to the U.S., citing, among other things, wrongful detention, torture and kidnapping concerns, and asserting that armed militias are setting up roadblocks and searching for U.S. citizens. Security remains uneven, particularly around strategic infrastructure and ports, all of which has been amplified by continued U.S. enforcement actions targeting shipping boats, oil cargoes and intermediaries.
Potential investors and counterparties face elevated force majeure and security risks at upstream, midstream and export facilities, as well as an increased risk of asset interference or contract instability. Possible exposure to human rights-related diligence concerns, particularly for companies subject to environmental, social and governance disclosure obligations, will also be a factor.
Key Considerations
Companies evaluating or maintaining exposure to Venezuela have an extensive list of factors to consider, particularly those considering making long term investment decisions, that will likely include (i) legal and contractual certainty (including the removal of or major adjustments to existing U.S. sanctions), (ii) stable prospects for a return on investment in both the short and long term driven by modifications to Venezuelan’s legal and regulatory framework applicable to the oil and gas sector, (iii) clear recourse to legitimate dispute resolution forums, and (iv) limited legal liability for legacy claims, whether related to prior nationalization or arising as a result of PDVSA’s intervening ownership and operations.
The landscape with respect to Venezuela is changing on a daily basis and is likely to continue to be highly dynamic in the coming months. This makes publicly available or general advice of limited value. We are actively monitoring and engaging with clients and other stakeholders as they grapple with these issues. For more information or to have a discussion with our team members focused on these issues, please contact Alicia M. McKnight or Pillsbury’s Venezuela Task Force leader Willie Wood.