Legal Diagnosis On The Current

Venezuelan Oil and Gas Industry

Cesar R. Mata-Garcia, PhD

Legal Consultant in Oil & Gas projects / Regulatory Compliance / Business

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By César R. Mata García, PhD

cmatagarcia@gmail.com

In the last 19 years, the Venezuelan oil production has declined from 3.1MBD to
1.4MBD, according to the official numbers that of the Venezuelan Government
reported to the OPEC during the last month of July 2018. This declination of
almost 1.7MBD over the average volume of oil production, combined with the
lack of development of the Oil and Gas industry in Venezuela, is due to various
political, economic, working, management and legal aspects.

The current situation has generated multiple –internal and external– concerns
between the different disciplines that make up the commercial activity of the
industry. Many of the recent analysis elaborated to find solutions to the
increasing decline of crude oil production and to the reactivation of the
Venezuelan Oil and Gas industry are mainly political, economic and financial
analyses due to the impact that the lack of foreign currency income (derived from
oil trade on the international market) has for Venezuela.

In legal terms, it has been asked whether this decline and lack of promotion of
the Oil and Gas industry are consequences of the current regulatory framework,
since it is argued that the latter limits, and does not promote effectively, more
participation of private investments within the hydrocarbons sector in Venezuela.

 Nonetheless, there are few existing technical-legal analyses on the implied

incidence of the current Oil and Gas regulatory framework on the low levels of
crude production and on the development of this industrial sector. It should be
admitted, however, that there have been some attempts of a purely legal nature
destined to try solving the multiple consequences derived from the declination of
crude oil as well as from the lack of development of the Venezuelan Oil and Gas
industry. 

For example, amongst the indicated legal initiatives there can be principally
found: the proposal of a constitutional reform of article 302 (legal reserve of the
oil industry) and 303 (reserve of PDVSA’s shares – the parent company); the
creation of a special commission by the National Assembly to reform the current
Organic Law of Hydrocarbons of 2001 (partially amended in 2006), the
promotion of a resolution from the Petroleum Ministry to review and validate
national and international contracts where PDVSA holds interests or actions in,
and the partial modification of the fiscal and tax regime applicable to the
hydrocarbon industry. All of these have been conceived with the principal
intention of promoting more private investments in the Venezuelan Oil and Gas
sector, and therefore, increase oil production.  

Now, amongst all efforts that have been made to identify, in detail, from the legal
and/or contractual point of view, the main problems that are affecting the
development of the Venezuelan Oil and Gas industry and, in consequence, the
indicated levels of production, there should also be the task of auditing: What is
really happening in the Venezuelan Oil and Gas industry? As well along this
same line: “What do private investors think of the current regulatory framework
applicable to the hydrocarbons sector in Venezuela?”.

The best way to answer the above formulated questions is through the elaboration
of a legal diagnosis that allows us to identify the existing Oil and Gas industry’s
difficulties as well as identifying similarly which are those problems that have
affected the industry significantly in these last 19 years. Throughout this exercise,
some conclusions can be made, in consequence, on the eventual actions that need
to be taken, including the necessary regulatory reforms to promote and guarantee
the private participation in the hydrocarbons business in Venezuela, and
therefore, increase the oil production. Hence, the elaboration of the
aforementioned legal diagnosis is the main objective of the present paper.

Preliminarily, it is important to clarify that:

(1) When it is referred to the recovery of the Venezuelan Oil and Gas industry, it
should not only be referred to the Exploration and Production activities
(i.e., increasing oil production), but also to the other activities that conform the
value chain of hydrocarbons such as refining, external/internal commercialization
and industrialization. As has been indicated in various opportunities, the
industrialization of hydrocarbons in Venezuela is a task that has been pending for
a long time.

(2) Another point to be taken into consideration is the differential of 1.7MBD

between the original target of the oil production basement of 3.1MBD and the
current production of 1.4MDB, since this differential has had serious economic
and financial connotations on the country’s cash flow. In other words, the
mentioned oil production basement was used by the State and PDVSA to assume,
at the time, multiple financial commitments at the international level by selling
oil for future delivery. This practice has not only affected the current projection
of the state company PDVSA’s cash flow, but also has affected its capacity of
indebtedness as well as the possibility of materializing financial mechanisms for
new projects.     

Obviously, despite that the level of oil production in Venezuela is accounted for
in a consolidated manner, an explanation needs to be done in terms of oil
production efforts. One thing is the oil production on part of PDVSA known
as its own effort (i.e., 740.000BD, approximately), and another is the oil
production together with private investors through mixed companies (joint
ventures), known as efforts with third parties (i.e., 660.000BD, approximately).
This latter explanation is formulated with the intention of highlighting that the
current crisis is more significative in PDVSA’s oil production by its own effort,
than from the PDVSA oil production with efforts with third parties through the
respective joint ventures.

(3) Lastly it should be understood that, despite that PDVSA is an important part

of the Venezuelan petroleum industry, it is not the petroleum industry in its
entirety. During the last 19 years, the presence of PDVSA in the Venezuelan oil
business has been converted into an impulsive intervention of the greater part of
the activities that conform the value chain of hydrocarbons such as the connected
services, the industrialization and the internal commercialization. It is opportune
to highlight that this exclusive presence of PDVSA in the national Oil and Gas
industry is not stipulated as such in the current Organic Law of Hydrocarbons,
which, on the contrary, allows, amongst other things, the private participation up
to 100% in many activities that are part of the value chain of hydrocarbons in
Venezuela, as will be demonstrated further in this paper.

In the same line of thinking, it is of utmost importance to point out that PDVSA
used to be an exemplary company, becoming a quasi-familiar company in recent
years, and ending up –actually– as a noncompetitive company in the industry.
For this reason, to the effects of this paper, one thing is the recovery of the
Venezuelan Oil and Gas industry (the objective of this diagnosis) and another is
the recovery of PDVSA as an exemplary corporation or commercial entity (the
objective of a separated analysis).

Now, in regulatory terms it should be indicated that, in Venezuela, there are two
separate legal regimes applicable to hydrocarbons. It is to say, the liquid
hydrocarbons are regulated by the Organic Law of Hydrocarbons (2001,
amended in 2006) (hereinafter the Oil Law) and the gaseous hydrocarbons are
ruled by the Organic Law of Gaseous Hydrocarbons (1999) (from now on
the Gas Law).

This differentiation is formulated with the intention of highlighting that, different

from the Nationalization Law of 1975 (where all activities that conformed the
value chain of liquid hydrocarbons were reserved to the Venezuelan State), the
current Oil Law allows the private participation –in said value chain– as follows:
(i) Exploration and Exploitation activities are open up to 49% in society with the
Venezuelan State (this latter reserves the majority of the company’s shares as
well as the control of all decisions in said society) (Article 22), (ii) Refining and
External Commercialization are open up to 100% (except the commercialization
of crude oil that has to be sold to a state company) (Articles 10 and 57), (iii)
Industrialization is open up to 100% (Article 50), and (iv) Internal
Commercialization is open up to 100% (Article 58). On the other hand, the
Gaseous Hydrocarbons, different from the previous Gas Law of 1971 (that also
reserved to the Venezuelan State the totality of the natural gas industry), the
current Gas Law allows private investment up to 100% in all activities that
conform the value chain, i.e., those activities from Exploration and Production of
natural gas until the Final Retail (Article 22).

In this context, the question commonly asked is: “What is actually happening
with the hydrocarbons industry in Venezuela if the laws that rule the sector allow
the private investment up to 100%?”.

The answer to this latter question is where a great legal confusion has been
generated in the hydrocarbons industry in Venezuela. In fact, many answers are
legal positions that have been produced in this respect, some of them pretty
theoretical but accurate and others unfortunately misguided and
decontextualized. In this regard, as a starting point, before moving forward on
some technical points, the following points should be clarified:  

(1) Regarding the trinity of roles of the Venezuelan State within the Oil and Gas
industry: State / Owner-Lawmaker, State / Regulator-Administrator and State /
Investor-Partner, there actually exists a legal confusion and a constant
overlapping of interpretations amongst its functions, therefore, there exists a
large list of juridical and contractual consequences, and confusion regarding
business in general.

For example, one of the main problems between the State/Regulator-

Administrator and the State/Investor-Partner is not only found on (i) the duality
of roles that the same Government Entity (i.e., managed by the same natural
person) plays in the industry by being the Petroleum Minister and the President
of the state company PDVSA, at the same time, but also in (ii) the need of
locating PDVSA within the Venezuelan public administration as a State
company, which represents a challenge at the moment of interpreting complex
principles of public law in conjunction with principles of private law.

These two latter practices have generated (i) some failures on part of the State at
the moment of fulfilling its obligations and (ii) a notorious conflict of interests
between the regulatory entity (i.e., Petroleum Ministry) and the regulated entity
(i.e., PDVSA). In this case the question of rigor should be: “Does there existed
enough transparency between the supervisory-sanctioning entity and supervised-
infringing entity, at the moment of effectively applying a sanction or fine, being
both institutions managed by the same Government Entity?”

Based on this last reflection, it is recommendable to clearly delimit the State’s

functions and their execution within its trinity of roles with respect to the current
needs of the Venezuelan Oil and Gas industry.

(2) Regarding the liquid hydrocarbons: in comparison with the Nationalization

Law of 1975, the current Oil Law of 2001 opens the industry to private
investments. However, this opening has been affected by various legal and
regulatory subterfuges that lack an integral and long-term vision, and, therefore,
have diminished, in the last 19 years, the private participation in many activities
of the value chain of hydrocarbons. For example:

a.    Organic Law that Reserves to the State the Related Activities to the Primary
Activities of Hydrocarbons of 2009 (hereinafter the Law of Reserve). This Law
eliminates the possibility of contracting directly with the private investor in
activities such as injection of water, vapor or gas, gas compression and those
related to the activities in the Lake Maracaibo, those being reserved activities
exclusively for the State. Said activities can be performed only by the State
directly or companies of its proprietorship. This prior disposition contradicts the
guiding legal principle established in Article 25 of the current Oil Law which
does allow the hiring of petroleum services with private parties to complete those
activities of Exploration and Production performed by either PDVSA or the
operating mixed companies (i.e., joint ventures).  
Additionally, this Law of Reserve gave a legal foundation to expropriate the great
majority of the assets of those companies that performed the above-indicated
activities in Lake Maracaibo. The economic and technical impact of the Law of
Reserve (of purely political motivation) has been converted into one of the main
reasons that has influenced the increasing decline of crude oil production in the
Lake Maracaibo. 

The Law of Reserve must be immediately derogated or amended, since its

objective and scope are more harmful than beneficial for the Venezuelan
petroleum industry.

b.    Presidential Decree Number 1,648 dated January 15th, 2002, through the
Venezuelan State reserved for itself the External Commercialization of derived
hydrocarbons products. In this context, it is important to point out that, whether it
is true that the Oil Law states, in its Article 57, the possibility that the State
reserves for itself, through a decree, the (external and internal) commercialization
of derived products, it is also true that the same Law, in its Article 58, does allow
private investment, up to 100%, in the external and internal commercialization of
derived hydrocarbons products.

The opening to the private sector promoted by said Oil Law of 2001 was
seriously affected by the above-indicated Presidential Decree, which, far from
being an adequate tool to promote petroleum geopolitics in benefit of Venezuela,
limits the possibility of promoting competition between the companies of the
State and private companies in terms of industrializing and commercializing
derived products in the country and abroad. In practice, the promotion of said
competence over these activities of industrialization and commercialization will
allow, apart from mainly exporting crude oil, to promote the local processing and
exportation of national derived products that can, at the same time, create local
employment and foreign exchange earnings for the country.

This Presidential Decree should be modified or derogated to promote a national

petroleum industry more adjusted to the current times where the competition for
derived products is generating economic impacts in producing and consuming
countries.

c.    Organic Law for the Development of Petrochemical Activities of 2015. This

Petrochemical Law reserves to the Venezuelan State the basic and intermediate
petrochemical activities, which were not previously reserved by any law; as well
as the unnecessary transplantation, from the Oil Law, of the business scheme of
the operating mixed companies which are adequate for Exploration and
Production activities in Venezuela (i.e., primary activities) to the exercise but not
for the above-indicated petrochemical activities. In other words, it is copied from
the Oil Law –in a decontextualized manner– the scheme of having the majority of
the company’s social capital (i.e., more than 50% of the shares), control of
decisions and the prior authorization of the National Assembly, to the basic and
intermediate petrochemical activities creating, in consequence, the petrochemical
mixed companies. These two new requirements contradict the guiding legal
principle consecrated by Article 50 of the Oil Law of 2001, which does allow
private investment up to 100% in all activities of industrializing the refined
hydrocarbons in the country. It is opportune to highlight that even though it is
true that these petrochemical activities have been centralized in the state
company PEQUIVEN, it is also true that said area has been open to private
investors in downstream related activities.

This business scheme of petrochemical mixed companies, unnecessarily copied

from the Oil Law of 2001, should be amended or eliminated for inconvenient,
since the Venezuelan State will always have the possibility of creating its own
petrochemical companies, with or without private participation, but it will not
always have the possibility of developing industrial complexes with the financial
support of private investors. Moreover, this business scheme proposed for the
performance of the above-mentioned petrochemical activities is also completely
unnecessary, due to the fact that imposing a business scheme that implies the
majority of shares and the control of decisions on part of the State is an absurd
point to begin negotiations, in particular when this petrochemical sector is
seriously affected in Venezuela.  

d.    Organic Law for Reorganizing the Internal Market of Liquid Fuels of 2008.
This Law, as another example of those legal and regulatory subterfuges created
by the government to diminish the private participation in the internal
commercialization of derived products, reserves to the Venezuelan State the
activities of intermediation to supply liquid fuels as well as their ground, aquatic
and cabotage transportation. This law contradicts the guiding legal principle
established by Article 58 of the Oil Law that paradoxically promotes private
investment in these types of activities.

One of the main reasons to enforce this Law for Reorganizing the Internal
Market was (apart from supposedly mitigating the contraband of fuels and
expropriating some service stations at the national level) the exclusion –from the
liquid fuels value chain– of certain intermediary players such as distributors for a
simple reason: to exclude them from the mathematical formula before the
impossibility of increasing the gasoline price, which has been –for a long time–
subsidized in Venezuela. At that time, it seemed to be politically easier to enact a
new law rather than seek effective business options to guarantee the continuity
and functioning of said productive chain of hydrocarbons.  

This Law should be derogated to eliminate this unnecessary legal and

limiting subterfuge to the private participation (promoted by the Oil Law) in the
activities of internal commercialization of derived products and allows –in
consequence– that the State compete together with private players in the
provision of public services such as the activities of transportation, storage,
supply, distribution and retail of liquid fuels in Venezuela. The best evidence of
these Law’s effects can be seen in the actual physical state of many service
stations in Venezuela.

(3) Regarding the gaseous hydrocarbons, as was previously commented, the

value chain of this hydrocarbon is completely open to private investment i.e., up
to 100% from Exploration and Exploitation until their Final Retail.

Nonetheless, apart from the lack –of a long history– of planning, investment, and
infrastructure for the use and management of the natural gas in Venezuela (which
has been principally dominated by the state’s company PDVSA GAS), there is
the medullar problem that this sector needs to face with the subsidized gas price
in the national market. It is to say, while the price of gas for millions of BTU at
the international market is US$ 2,92 abroad, in Venezuela it is US$ 0,034 (BsS.
3,46789) (applicable rate of BsS. 100,50 per Bitcoin/Dollar). This latter
explanation is translated into the main investment disincentive for private
investors that currently wish to inject fresh capital into gas projects in Venezuela.
This disincentive is mainly promoted by Article 3 of the Gas Law of 1999, that
obligates gas producers to primordially allocate their gas production in the
Venezuelan market, establishing –by way of exception– its eventual exportation
in any stage of its processing phases.  

The gas (natural and associated) industry in Venezuela is completely left behind
in comparison with the petroleum sector. In fact, in Venezuela, the gas
production rather than being used for domestic, industrial and vehicular ends,
including the generation of electricity and its exportation, is mainly used for the
reinjection of oil fields and/or for venting/burning.
The above-explained ideas summarize –in a general manner– the main
regulatory problems that are affecting the hydrocarbons industry in
Venezuela. Despite this summary, as part of the present legal diagnosis,
it should also be highlighted that the Venezuelan Oil and Gas industry
has been facing a series of technical inconveniences that have been
ineludibly causing legal problems. Obviously, these problems are
affecting the development of said industry, and therefore, the levels of
crude oil production. In general, such inconveniences can be grouped in
the following manner:

(1)    Infrastructure and logistics. The physical status of many equipment and

facilities used during the day-to-day operations of the Oil and Gas industry,
mainly the PDVSA’s ones, require immediate maintenance, overhaul or
replacement.

Additionally, the Venezuelan Oil and Gas industry should, amongst other
actions, develop and maintain its refineries as well as to develop the respective
industrial complexes, which is translated into the industrialization of
hydrocarbons in the country. In addition, the physical status of all service stations
should be improved, including the provision of those public services related to
them such as water, air for tires, public toilets and convenience stores.

In the same line of thinking, it is necessary to develop the infrastructure to supply

LNG for cars, natural gas to houses and industrial companies, including the use
of gas as a source of electrical power generation. All of these actions should be
taken with the idea of eliminating the burning of diesel or other contaminating
which fuels which also have a major commercial value downstream.       

(2)    Finance and business. The main problem that is affecting the hydrocarbons
industry is the level of indebtedness of PDVSA, so it is not only affecting the
cash flow of the company itself, but also the cash flow of its associated
companies and/or contractors. This problem has forced, mainly the private
investors, to look for financing schemes to have sufficient cash flow to guarantee
the continuity of their operations with PDVSA. The materialization of these
financial schemes by the private sector has been affected by the application of the
internal rules of PDVSA in terms of the rate of exchange applicable to the
projects (i.e., the use of the official exchange rates of the local currency versus
the real value of the same in dollars on the international market).  

Additionally, there are also the pending payments of invoices by PDVSA, as both
the contracting party and the unique entity entitle to buy the crude oil produced
by the operating mixed companies (joint ventures). Undoubtedly, this lack of
opportune payments is affecting the reinvestment of said funds in favor of the
Venezuelan Oil and Gas industry. All of this without taking into consideration
the approval of insufficient budgets or funds to cover new investments and
expenses of the operating mixed companies and those of the respective
contractors.
On the other side, there are some issues related to the retention of dollars by
PDVSA to services contractors for the concept of the Corporative Social
Responsibility Fund (mainly, companies in the west of the country), as well as (i)
the intention of double charging municipal taxes, (ii) the unnecessary
transplantation of the business scheme of the operating mixed companies to other
commercials activities (i.e., more than 50% of the social capital and control of
decisions), and (iii) the financial schemes to buy the raw material required by the
private sector to replenish their inventories, in particular if the disparity between
exchange rates existing in Venezuela is taken into consideration.  

(3)    Contractual. The contracting processes in the Venezuelan Oil and Gas

sector (in particular with PDVSA) is a medullar problem that seriously affects the
hiring, acquisition and performance of goods and services. The process of
procurement and hiring used by the State need to be simplified. This argued
necessity arises, amongst other reasons, as an effective measure before the
hyperinflationary process that Venezuela is facing. For example, in practice,
there arises financial problems due to the difference (losses) in bolivars that can
be generated from the date that an economic offer is presented, the date that the
contract is effectively signed and the date when the work officially begins. In
other words, due to multiple reasons, between one date and the other can passed
months or even years.

Contracting with PDVSA has become a bureaucratic topic at the moment of

contracting for goods and services, in particular with one of its affiliates PDVSA
Engineering and Construction, due to the delays between the processes of hiring
and the time of the final performance of the work. On the other part, there is the
need to accelerate the acknowledgment, on part of PDVSA (as the contracting
party), of those works performed by the contractors to proceed, in consequence,
with the respective invoicing and payment. 

In this regard, there is also the problem that the private investor has to face at the
moment of acquiring guaranties from insurance companies or banks
(i.e., performance bonds, advanced payment bonds, etc.) to begin executing their
projects, including guaranties in bolivars and in dollars as well as the exchange
rate applicable to them from the accountable view point.  

Additionally, there exists the need of simplifying and accelerating all procedures
to obtain certificates of production, registers, solvencies, certificates of
importation and exportation, customs managements, environmental permits,
amongst others.
Other problems that arise at the moment of negotiating and contracting for goods
and services in the Venezuelan Oil and Gas industry (in particular, when topics
related to the protection of technology and financing are involved thereto), are (i)
the determination of the applicable law in force for the contract as well as (ii) the
definition of mechanisms to settle disputes such as the commercial arbitrage.
These latter two problems acquire more importance for the private investors,
when in practice, there are considerable delays in negotiating processes due to the
deficient application of the pertinent legal framework to the Oil and Gas industry.

(4)    Protection of technology. In Venezuela, after her withdrawal from the

Andean Community of Nations (ACN) in 2006, all topics related to the
protection of author rights and intellectual and/or industrial property rights,
including licenses of authors, patents, licenses of patents, brands, licenses over
brands, technology, know-how, software, proceedings and other intellectual
property rights used in the Venezuelan Oil and Gas industry, are deficiently
regulated by the old Industrial Property Law of 1955. 

Because of the above-mentioned decline in legal recourses, private investors in

the Venezuelan Oil and Gas sector have had to design and use contractual
mechanisms to protect their rights and interests. Within said mechanisms, there
can mainly be found the evidence of rigid agreements of confidentiality that are
ruled by foreign law (especially, by the English Law) and solved by alternative
mechanisms of solving disputes such as arbitrage, mediation, conciliation,
amongst others.

(5)    Business management. The managerial decision-making has been the key

factor that has seriously influenced the development of the national Oil and Gas
industry. In the last 19 years, managerial decisions have been made in
a circumstantial or capricious manner, similar to those taken during emergency
management crisis situations. It is to say, taking decisions from one day to
another without any plan, but –in this case– without considering the legal or
contractual consequences. In fact, many of the decision makings that were
previously delegated to the oil areas or districts were centralized and
concentrated in the parent PDVSA in Caracas. For example, the hiring of a
worker (of the daily payroll) must be approved in Caracas.   

Another example of this lack of managerial decision-making is found in the

governmental and business policies that should: (i) promote more the exportation
of national manufactured products instead of mainly exporting crude oil, (ii)
improve the physical status of all service stations, (iii) guarantee the
administration and optimal management of all contracts; and (iv) deconcentrate
to other players the corporative social responsibility that was intentionally
concentrated by PDVSA, including those budgets and amounts for the
endogenous development of those areas affected by the Oil and Gas industry.

On the other side, there is the deficient management of the operating mixed
companies in hands of PDVSA. The requirement of a change in management has
been requested to PDVSA by the private party as a manner to optimize the
management of said companies and, therefore, increase the level of oil
production in Venezuela. Besides this latter problem, there are also those matters
derived from the lack of management autonomy and the lack of integral business
planning that needs to be real and believable.   

Because of the above-indicated issues, a culture of fear to make decisions has

been created, and, therefore, a lack of communication and opportune answers. It
is opportune to point out that when an answer is given to a negotiating
requirement, the same is, in many occasions, a rigid answer without presenting
legal or contractual alternatives to materialize the commercial agreement. This
latter practice is inexpertly made in detriment of the continuous productivity of
the national Oil and Gas industry. All this lack of managerial decision-making is
affecting considerably the relationship of trust between the State, through any of
its entity or organisms, and the private sector (national and international).

(6)    Labor force. This is the most sensitive matter that is considerably affecting
the Venezuelan Oil and Gas industry. Currently, the main reason that it is
exacerbating is the monetary compensation, working benefits and lack of
stimulus. The low salaries in the country, and in particular those in the Oil and
Gas industry (i.e., in average less than US$ 50 per month), have promoted an
increasing exodus of talent from Venezuela to other countries around the world.

This latter scenario has provoked a lack of qualified personnel in the national
industry of hydrocarbons that has also diminished, in consequence, the
professional experience of the industry at all of its levels. Additionally, from
those workers that currently work in the national Oil and Gas industry, many of
them do not count with career plans, including a competitive and serious
education.

(7)    Security and physical protection of the personnel and installations. This is

another problem that the Oil and Gas industry must deal with due to the high
incidents of labor accidents and material robbery in Venezuela, which require
protection with systems of high technology.

(8)    National Participation and Capital. Regarding this topic, it is better to ask:

“What is needed in Venezuela to guarantee and maintain a public policy to
promote the participation of national private investments in the hydrocarbons
activities in an effective and planned manner?”. If (i) the legal bases are
established by law and (ii) there exists the required capacity, experience,
resources and national supplies.

Perhaps, there may exist a tacit satisfaction on part of the government’s operators
in terms of their interpretation about enough participation of the
State-Investor/Partner in the national hydrocarbons activities through PDVSA
and the role of the Venezuelan private sector (as a third party) that has to
inevitably adhere to PDVSA’s activities. In this respect, it is important to clarify,
once again, that PDVSA is a significative part of the Venezuelan Oil and Gas
industry, but it does not constitute said industry as a whole.

(9)    International presence. This latter point, no less important, represents the

loss of Venezuela’s place, at the international level, as a referential country on
petroleum matters. In fact, the participation of Venezuela abroad, before
international organisms and forums, has been limited to the punctual presence,
without plans nor specific strategies, except the use of oil production as a
geopolitical (regional) tool to support partisan conveniences instead of
supporting –as should be– the welfare and sustainable development of
Venezuela.

With the previous analysis, some of the points that are considerably affecting the
development of the Venezuelan Oil and Gas industry, and, therefore, the levels of
oil production, have been explained in a general manner. However, it is
opportune to invite all actors of said industry to reflect on these above-explained
points, since the history and the process of learning can provide invaluable ideas
on how to conceive new public policies, regulations and projects in the future.  

In this line of thinking, in practice, when there are abusive processes of

regulation on part of a given State to take control over its market or industry, the
immediate and long-term effect is the inevitable deregulation of the sector to
allow the income of capitals, it is to say, private investments. The historic
moment that the current Venezuelan Oil and Gas industry is living is obliged to
move on to another level that should emphasis not only the active and
decentralized participation of the public sector, but also the private (national and
international) sector in terms of financing and relying on specialized
professionals, amongst others aspects.

Finally, it must be highlighted as a manner of final reflection that the main

problem of the Venezuelan Oil and Gas industry rests on the lack of (timely and
correct) managerial decision-making and on the cultural and working aspects that
have derived from the lack of clear hydrocarbons public policies. These latter
points have been inevitably causing legal and contractual problems that can be
preventatively avoided. In this regard, many of the above-indicated regulatory
and technical problems are aspects that can be solved by taking opportune,
intelligent and responsible decisions. In other words, more than a true regulatory
and/or technical problem, we are facing a question of having more willingness in
the Venezuelan hydrocarbons industry.

Evidences of the prior affirmation can be found in:

(i)            The importance of distinguishing that the Venezuelan Oil and Gas

industry is not only conformed by the Exploration and Production activities, but
also by other activities such as Refining, Industrialization and External/Internal
commercialization,

(ii)          The constant argument that supports the idea that the Oil and Gas law
and industry are strategic matters is at odds with reality, forgetting that a given
strategy is never definitive, in particular when the market is continuously
changing. In fact, strategic matters should not contradict judicial principles and
institutions that were solidly drawn by key laws as the Oil Law and Gas Law,
since said judicial principles and institutions must be in line with determined
public policies that were conceived in advance by policymakers to provide legal
certainty to all players of the Venezuelan hydrocarbons industry,

(iii)        The necessity of providing legal certainty, but also the need to clarify
the true scope of this legal certainty, is not only provided by law, but also by
taking the opportune and intelligent decisions on part of all players in charge of
the hydrocarbons industry in Venezuela, as well as respecting and fulfilling them
(or deviating in an opportune and motivated manner),

(iv)         The urgent revision of those legal and regulatory subterfuges that were

elaborated to curtail the private participation in Venezuela are in contradiction of
the judicial principles and institutions created by the Oil Law and Gas Law, as
well as clarifying which are those public policies to be followed in order to
promote the Venezuelan Oil and Gas industry, to proceed, in consequence, to
amend the necessary regulations. It is clear that the law must obey public
policies, so it is the only manner to provide the legal certainty required by all
players of the Venezuelan hydrocarbons industry, and,

(v)          The ineludible necessity of the Venezuelan State to allow more private

participation in downstream activities to create the required competition between
the State’s entities and the private investors for the worthy delivery of public
services to the community, as is established by the law.

Caracas, August 2018

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