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Political Risk Management in Light of Venezuela's (Partial) Nationalization of the Oilfield Services Sector

During the 1990s, the Venezuelan government introduced a policy known as the apertura petrolera (oil opening) and invited foreign private companies to invest and enhance Venezuela’s oil production infrastructure. Following the recent rise of resource nationalism and the dismantlement of the apertura petrolera policies, Venezuela has nationalized the assets and operations of many oilfield service companies providing critical oil services to Petroleos de Venezuela, S.A. or its affiliates. This move begs the question: to what extent, if at all, do risk management tools actually measure political risk and control it once the oil service contract comes under pressure? Although risk management may not be sufficient to thwart state interference, this article seeks to provide contractual and non-contractual risk assessment and risk management tools available to minimize such risk when entering into oil service contracts with states, state agencies, or state-owned entities. Following a brief introduction, this article highlights the main risks that oil service companies may face as a result of deliberate state action, with particular attention to the case of Venezuela. This article next provides contractual and non-contractual risk management tools available to mitigate or transfer such risks, and then recounts the road to (partial) nationalization of Venezuela’s oilfield services sector. This article concludes that the complex interaction between state sovereignty and investors’ property and contractual rights demands careful investment planning and skilful contract drafting to maximize investment protection in the host country.