Venezuela Increases Taxes on Oil Companies in Orinoco Oil Belt

Minister of Energy and Petroleum, Rafael Ramirez, confirmed President Chavez's announcement that Venezuela would introduce a new tax increase for oil companies in Venezuela's Orinoco Oil Belt, so that at least one third of their production there goes to the state.

Caracas, Venezuela, May 9, 2006—On his weekly television show Alo Presidente, on Sunday, VenezuelanPresident Hugo Chavez announced a new "extraction" tax of at least33% for all oil companies operating in Venezuela. Chavez said the taxcould create over $1 billion in new revenue.

According to the Venezuelan daily El Universal, the Ministry of Energy andPetroleum will introduce a reform to the hydrocarbons law to the NationalAssembly today. The change will ensurethat at least one-third the value of every barrel stays in the hands of theVenezuelan state. As such, the tax is nearly identical to a royalty.

For some companies, the changewill be minimal. El Universal reportedthat for PDVSA’s own production, they will continue to charge the royalty of30%, plus the extraction tax, will make the total tax 33%. For now, the newly formed joint ventureoperations with Venezuela’sPDVSA will be exempt from the new tax, as they are already paying 33% in royalties. While, the associations in the Orinoco belt will have to pay 16% in the new tax, on topof the 17% royalty they currently pay, to equal 33%. It was reported that the additional revenuefrom this extraction tax could equal $1.34 billion in its first year alone- ifpetroleum prices remain at their present value.

Other tax hikes are in theplanning stages for natural gas companies and for the oil companies operatingalong the Orinoco River, which is believedto have extra-heavy crude reserves of up to 235 billion barrels. Among the companies that operate along the Orinoco belt are the North American ExxonMobil andChevron, which currently pay 34% in income taxes. Chavez announced that they are going toincrease that “to 50%, but in order to do so we need to modify the HydrocarbonLaw.”

“In the Hydrocarbon Law, that weapproved, one has to remember that we were infiltrated, there still was the oldPDVSA when we approved it. They wereable to get in to the law and that’s how it was approved that the companies ofthe Orinoco belt pay income taxes not at 50%,but at 30% or 34%, we are going to modify this law.” Chavez said on Sunday.

Although the timeline for thismodification appears to be still undefined, it was reported that such a taxincrease could generate additional revenue of $785 million annually.

Chavez first raised the royaltytwo years ago on the Orinoco beltcompanies. The royalty increase from 1%to 16% led to $1.28 billion in revenue last year.

Chavez said on Sunday that newtaxes are a result of the fact that with oil prices at record highs, oilcompanies operating in Venezuelaare making "a lot of money."

The large revenues that Venezuelais receiving from its petroleum reserves have helped it to fund various socialprograms both in Venezuela and abroad, such as the popular social programsknown as “missions,” and the discounted heating oil program for North Americansin situations of poverty. So far,180,000 North Americans have benefited from the low-priced heating oil supported byCITGO subsidiary of PDVSA.

These new taxes come just daysafter the latest South-American energy summit and almost a week after Bolivianationalized its oil and gas reserves, a move which Chavez has applauded.

Further details regarding thetaxes are expected in the following days.

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