Venezuela Proposes Major Amendment to Organic Law on Hydrocarbons

Overview

Venezuela’s National Assembly is considering a proposed Partial Amendment to the Organic Law on Hydrocarbons (the “Hydrocarbons Law Amendment”), which would introduce sweeping changes to the regulatory framework governing the exploration, extraction, transportation, refining, and marketing of hydrocarbons in the country. The Hydrocarbons Law Amendment has passed its first discussion in the National Assembly and is subject to further modifications and a second, final vote, with enactment expected in the coming days. Mayer Brown is closely monitoring the developments in Venezuela, and future Legal Updates will continue to analyze the provisions of the Hydrocarbons Law Amendment once it becomes legally effective. If enacted, the Hydrocarbons Law Amendment would aim to strengthen state control while simultaneously opening new pathways for private sector participation, reflecting a recalibration of Venezuela’s approach to its oil and gas sector.

Key Features

• Framework for Primary Activities: The proposed Hydrocarbons Law Amendment would establish three permissible structures for conducting primary activities (hydrocarbon exploration, extraction, and related operations): (1) directly by the Executive or through companies exclusively owned by the Bolivarian Republic of Venezuela (the “Republic”), (2) by joint ventures in which the Republic holds a majority stake conferring shareholder control, and (3) by private companies domiciled in Venezuela which would operate within the framework of contracts signed with state-owned companies or their subsidiaries. The Executive would retain broad authority to transfer to operating companies the right to exercise primary activities, as well as ownership or other rights over property required for such activities. Notably, the Executive may revoke these rights if operators fail to comply with their obligations in a manner that prevents achievement of the intended purpose. This is in stark contrast to the current regime, which does not allow primary activities to be conducted by private companies.
• Joint Venture Requirements: Joint ventures conducting primary activities would be subject to specific requirements and conditions. As currently drafted, the proposed Hydrocarbons Law Amendment provides that such arrangements have a maximum term of 25 years, extendable for a period not exceeding 15 years. The formation of joint ventures and conditions governing primary activities must be notified to the National Assembly, rather than approved by it as required by the current legal framework. All lands and permanent works, including installations and equipment, must be maintained in good condition and, upon the extinguishment of the granted rights for any reason, delivered to the Republic free of encumbrances and without compensation.
• Enhanced Rights for Minority Shareholders: A significant innovation in the proposed reform is the framework that would permit minority shareholders in joint ventures to obtain certain operational and commercial rights. Under the proposed Hydrocarbons Law Amendment, the competent Ministry for hydrocarbon matters (the “Ministry”) may authorize minority shareholders to directly market all or a portion of the joint venture’s production, provided the sale price exceeds prices achieved by state-owned companies, with corresponding income declarations filed with the Central Bank of Venezuela, the Ministry, and the oil tax system. Minority shareholders may exercise technical and operational management directly or through a specialized petroleum service provider, under the supervision of the governing hydrocarbon authority. The cost of these services must be reasonable, and the joint venture must be efficient enough that the cost of production per-barrel equals or is less than that of state-owned companies.
• New Contractual Framework for Primary Activities: The proposed Hydrocarbons Law Amendment would introduce a new contractual mechanism whereby state-owned companies, or their subsidiaries, may enter into contracts with private companies domiciled in Venezuela for the execution of primary activities. Under these arrangements, the operating company assumes integral management at its exclusive cost, account, and risk, and must demonstrate financial and technical capacity through a business plan approved by the Ministry. State-owned companies shall not assume financial commitments or debts arising from these operations, and the Republic retains ownership over hydrocarbon reservoirs. The remuneration for operating companies under these contracts would consist of a percentage share of the volumes of controlled hydrocarbons, which may be marketed directly by the operating company once government obligations have been fulfilled. State-owned companies may also lease assets and materials to the operating company, and cede use of operational areas for the term of the contract in exchange for a fee. Upon contract termination, the operating company must return leased assets and transfer ownership of all goods incorporated, built, or acquired during the contract term to the state-owned company, free of encumbrances and without generating any payment or indemnity obligation. Contracts may include a clause for restoration of economic-financial balance until return on investment is achieved.
• Royalty and Tax Framework: The proposed Hydrocarbons Law Amendment would maintain the baseline 30% royalty on extracted hydrocarbons, but would introduce flexibility to ensure economic viability. Under the proposed Hydrocarbons Law Amendment, the Executive may reduce the royalty to 20% for primary activities carried out by private companies under contracts with state-owned entities, and to 15% for joint ventures, where it is demonstrated that a project is not economically exploitable at the standard rate. The Ministry may restore the royalty to 30% when conditions permit. The extraction tax would be set at one-third of the value of all liquid hydrocarbons extracted, payable monthly alongside the royalty. Taxpayers may deduct royalty payments (including additional royalties paid as special advantages) from the extraction tax calculation. The Executive may reduce the extraction tax to a minimum of 20% for contracts with private operators, or 15% for joint ventures, based on market conditions, specific investment projects, secondary recovery projects, or economic viability considerations.
• Direct Marketing Authorization: As a general rule, marketing of natural hydrocarbons shall be carried out by state-owned companies. However, in another significant shift, the proposed Hydrocarbons Law Amendment would empower the Executive to exceptionally authorize joint ventures and private operators to directly market natural hydrocarbons produced in assigned areas, provided that sale prices are in line with those achieved by state-owned companies and the State maintains effective control over strategic marketing decisions. The Ministry may suspend or revoke authorization for non-compliance with marketing plans, significant price deviations from market prices, interference with priority domestic supply, or serious infringement of fiscal or environmental obligations.
• Dispute Resolution Mechanisms: The proposed Hydrocarbons Law Amendment would introduce express provisions permitting alternative dispute resolution mechanisms for disputes arising from hydrocarbon activities. Under the proposed reform, doubts and controversies that cannot be resolved amicably may be decided by the competent courts of Venezuela or through alternative dispute resolution mechanisms, including mediation and independent arbitration. This would mark a notable shift, as it expressly contemplates arbitration as a recognized avenue for resolving hydrocarbon-related disputes. By contrast, the current framework requires that the terms and conditions of mixed companies include a mandatory clause stipulating that all disagreements must be resolved exclusively by the competent courts of Venezuela, under Venezuelan law, and may not give rise to “foreign claims.”
• Transitional Provisions: The proposed Hydrocarbons Law Amendment provides that sub-legal provisions issued before the law’s entry into force shall continue to apply in matters not in conflict with the amendment until new regulations are issued. The Ministry shall evaluate existing joint ventures and may make adjustments to align them with the new law. Importantly, Hydrocarbon Productive Participation Contracts and other contractual models signed prior to the Hydrocarbons Law Amendment under the Constitutional Anti-Blockade Law for National Development and the Guarantee of Human Rights (the “Anti-Blockade Law”) maintain their full validity and legal effectiveness under their original terms and conditions.

Conclusion

If enacted, the proposed Hydrocarbons Law Amendment would represent a significant evolution in Venezuela’s hydrocarbon regulatory framework, balancing enhanced state control with meaningful opportunities for private participation and investment. Key takeaways include expanded dispute resolution options through arbitration, new contractual structures enabling private operators to assume operational risk while retaining a share of production, enhanced minority shareholder rights in joint ventures, flexible royalty and tax structures for economically challenged projects, and grandfathering of existing contracts under the Anti-Blockade Law.