How to eliminate the risk of the “expropriation clause” in the new Venezuelan oil contract model

According to a news report, the draft oil contract prepared following the organic hydrocarbons law reform is under review amid increased investor concerns. A U.S. government delegation is set to travel to Caracas. 

The concerns are well-founded. The core of the reform approved in January 2026 is to transfer the operation of oil activities from PDVSA’s affiliates and joint ventures to private investors. That regulatory change allows private investors to assume the tasks, costs, and risks associated with exploration, production, and commercialization. Hence, the initial recovery of oil production should be undertaken by private investors. 

This reform paved the way for private investment in the Venezuelan oil sector. Nevertheless, the reform leaves significant regulatory gaps, particularly regarding the content and scope of contractual rights, the dispute resolution mechanism, and the government take. Many of these gaps could be addressed through an improved regulatory and contractual framework. 

However, the draft productive participatory contract (CPP) to be signed with PDVSA Petróleo, S.A. (PPSA), circulated in May 2026, does not address these gaps and, in fact, worsens them. Specifically, the draft contract narrows the scope of contractual rights, particularly regarding commercialization. The oil ministry—though not a party to the contract—has extensive discretionary powers that diminish the investor’s rights.

Perhaps the most striking example of this framework, which weakens investors’ rights, is what we call the “expropriation clause” (Clause 47.5.2). PPSA has the right to terminate the contract “for reasons of national public interest duly justified and notified to the Company Operator by PPSA, by means of a reasoned act”. Although Clause 47.6 regulates compensation rights, its practical effects are very limited because termination can be executed immediately, regardless of the compensation that PPSA could owe to the private investors.

Notably, the nationalization policy implemented in 2006 was carried out by unilaterally terminating oil contracts. Therefore, Clause 47.5.2 lays the legal foundation to once again “nationalize” the oil industry. 

The first measure to eliminate the expropriation risk is to delete Clause 47.5.2 and, more broadly, to narrow the conditions under which PPSA could terminate the contract. The ultimate objective is to deprive PPSA of the right to terminate the contract based on open-ended provisions.  However, this reform may be insufficient. 

One lesson from the 2006 nationalization is that the Government of Venezuela considers oil contracts to be “administrative contracts,” governed by administrative law rather than private law. As a result, PDVSA retains powers to oversee and control the execution of the contract, regardless of its content. Under this theory, PDVSA retains the power to terminate the contract for public-interest reasons, even if the CPP does not provide for such termination. 

As I have explained elsewhere, the “administrative contract” institution weakens protections for private investors, especially in the oil sector. Under this system, contractual rights are treated as mere expectations rather than as vested rights that PDVSA may terminate at any time. Although, in theory, private contracts should provide compensation rights, in practice, this is not a reliable guarantee, as evidenced by the 2006 nationalization policy.  

Therefore, simply removing this provision from the contract model is not enough. It is also essential to explicitly state that PDVSA, whether directly or through PPSA, cannot exercise any privileges not outlined in the contract. The most effective way to achieve this is through legislative action, reforming the organic hydrocarbons law once again. If such reform is not feasible, then it would be necessary to abolish the “administrative contract” institution through regulations (reglamento) adopted to implement the reform.