Chavez Announces that Venezuela will Raise Oil Production Royalties

President Chavez announced yesterday that his government would raise the royalties from 1% to 16.6% that oil companies pay for extracting extra-heavy crude in the Orinoco Oil Belt.

Caracas, October 11, 2004—During his weekly television program Alô Presidente, President Chavez announced that oil companies that were paying royalties of between 0% and 1% in the Orinoco Oil Belt for extracting extra heavy crude, would be raised to 16.6%, in accordance with Venezuela’s Hydrocarbons Law of 2001.

Chavez made this announcement from an oil refinery in Puerto La Cruz, on the Venezuelan coast, where his television program was being broadcast this week.

Chavez said, “there will no longer be free petroleum … There is no reason that they should continue to enjoy” this clause for exceptions in the oil law. The oil law allowed exceptions for extraordinary circumstances that “no longer exist, if they ever existed,” added Chavez.

Venezuela’s Minister of Energy and Mines, Rafael Ramirez pointed out that the synthetic crude that is produced from the extra-heavy crude is selling much better than anticipated, at about $10 above price that was estimated when Venezuela entered into the contracts that limited royalties to 1%.

Chavez referred to the implementation of the full oil royalties provided for by the law as the “second phase” of the nationalization of Venezuela’s oil, saying it was the establishment of “full sovereignty.”

When the production associations were first negotiated for the extraction of extra-heavy crude in the Orinoco Oil Belt, the Venezuelan government agreed to 1% and even 0% royalties in order to attract foreign oil companies to the relatively expensive process of extracting this type of crude. Venezuela is said to have one of the largest extra-heavy or non-conventional crude reserves in the world.

According to Chavez and to the Rafael Ramirez, Venezuela has been loosing $1.2 billion dollars of revenue per year due to the low level of royalties for oil production in the Orinoco Oil Belt. The new income due to the increase in royalties would go straight towards social programs. “This is going straight to the state because this is the money of the people and it is to be distributed among the neediest,” said Chavez.

Venezuela’s Hydrocarbons law, was passed in November 2001 as one of the 49 “enabling laws” that the legislature allowed the president to implement by decree. The law raised the royalties that oil companies had to pay to the Venezuelan state from 16.6% to 30% for heavy and for light crude. Also, it established that extra-heavy crude, which is very costly and difficult to extract and which sells for a much lower price than the higher quality crudes, would be raised from 1% to 16.6%. Royalties are a fixed percentage of oil production that oil companies are supposed to provide to the state for the right to extract oil.

At the same time, the 2001 Hydrocarbons law lowered the taxes that oil companies pay on oil extraction. According to oil industry analysts, it is much easier to collect royalties, which are measured simply by counting the number of barrels extracted, than it is to collect taxes, where oil companies first deduct their production costs, which are not easily verifiable. The change in emphasis from taxes to royalties was supposed to be more or less “revenue neutral.”