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Venezuela report proposes extensive privatization of oil industry


Changes unlikely to be rolled out due to sanctions

PDVSA Russia, a new subsidiary, would manage participation in Europe

Reduction of royalties, taxes proposed

A Venezuelan commission set up to study the restructuring of state PDVSA had recommended lifting state control over all its operations and is calling for private national and international capital to open up the country's oil business, according to an internal document seen Tuesday by S&P Global Platts.

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The 64-page proposal, which recognizes that Venezuela is no longer a strategic player in the oil market, aims to bring oil production to 2 million b/d from the current 618,000 b/d "in the shortest possible time." In a 180-degree turnaround, Venezuela, in addition to massive privatization in oil and gas production, refineries and the domestic market, would allow the private sector to directly market hydrocarbons and derivatives without state control.

"Eliminating the nationalization of all processes is a drastic change in the orientation of the economic model advocated by the government of Nicolas Maduro, says Dolores Dobarro, an attorney and Venezuelan university professor specializing in oil law. "Even the possibility of opening up completely to private capital is more aggressive that the proposals of the political opposition that is fighting to remove [President Nicholas] Maduro from power."

The proposal was dated March, but released Monday in parallel with the appointment of commission head Tareck El Aissami as oil minister, replacing Manuel Quevedo, in office since November 2017. El Aissami was vice president-economy when he was named to head he commission. Monday's Venezuelan official gazette also reported on the appointment of Asdrubal Chavez as president of PDVSA and the restructuring of the oil ministry. Chavez had been president of PDVSA's US refining and marketing arm Citgo and vice president of refining at PDVSA.


It is unlikely, however, that the proposals in the report will be rolled out with current internationals sanctions against the government, including US sanctions on El Aissami and Chavez. The US is offering a $10 million reward for information that helps locate El Aissami, who has been accused of drug trafficking.

"With the US sanctions, this document is just a set of good, but late, intentions," Dobarro said. "After the Covid-19 pandemic, financing and investment will move differently based on the security offered to capital."

Einstein Millan Arcia, a senior oil and natural gas consultant, said that "the proposal is correct. The only handicap is that it relies on the people who have been appointed to make an opening call, in their negotiating skills and experiences," he said. "Investors will go to Venezuela, with clear rules and less state control, but not with these actors: El Aissami and Chavez," Millan added.

According to sources aware of the proposal, the offer to privatize PDVSA by a government that has been following a socialist model for two decades did not surprise the oil sector.


The report also proposes the elimination of PDVSA's participation in non-oil businesses, the sale of PDVSA's share in companies in Latin America, the modification of joint ventures and service contracts, as well as the reduction of royalties and and the lessening and elimination of some taxes. Additionally, it proposes a reform of the current hydrocarbons law to allow private participation.

Venezuelan oil production sank to 650,000 b/d in March, down from 840,000 b/d in March 2019 and 1.56 million b/d in March 2018, according to the US Energy Information Administration.

The document proposes the creation of PDVSA Russia, a new subsidiary that would manage PDVSA's participation in the European companies AB Nynäs and APS.

In the same document, PDVSA recognized an annual loss of $11 billion due to subsidies in the sale of fuel to the local market, which since the beginning of March has been heavily rationed due to the lack of imports and depleted stocks.

"The State must dismantle the subsidy on fuel in the local market by setting an international price," the document says.

Dobarro, however, said she does not believe this is possible in the short term, citing the extreme poverty in Venezuela.