The new integrated oil service contracts in a Venezuela in dire straits

Abstract

Despite the high level of political risk, an increasing number of international arbitration disputes and the economic turmoil that Venezuela is going through, Petróleos de Venezuela (PDVSA) agreed with private investors a new model of integrated oil service contracts in September of 2016. The model contract attracted private service companies to develop one of the world's largest drilling projects to increase heavy crude oil production in the Orinoco Belt Basin. The projects come as a plan to stop the decline in Venezuelan oil output, which is now below 2 million barrels of oil per day, 1 million less than ten years ago, before a nationalisation wave transferred the operating control from private operators to PDVSA. Indeed, after years of operating mismanagement by the Venezuelan national oil company, which has provided financial support to the populist governments of Hugo Chavez and Nicolas Maduro, the current government recognises the need to outsource a variety of regular operating activities to private service contractors. The project represents US$3.2bn in investments, and ventures are betting for new opportunities where they can have more operating and financial control to reduce the risk of PDVSA's operating mismanagement and payment delays to service contractors. This article aims to explain how PDVSA managed to attract service contractors to work under integrated oil service contracts in a Venezuela in dire straits, providing an analysis on how oil companies can balance complex risk scenarios under appropriate legal conditions.