Oil Companies Oppose Venezuelan Tax Law

by Mike Godfrey, Tax-News.com, Washington

11 September 2001

Multinational oil companies based in Venezuela, the world's third largest oil exporter, have expressed reservations over a proposed law which they say will damage investment in the region and result in a 'renationalisation' of the industry.

Known as the 'Hydrocarbons Law,' the aim behind the bill is to protect the country's natural oil resource and raise state revenue. But the oil companies argue that the bill will see a dramatic jump in royalty tax payments from 16.6% to 30%. Currently, investments in the country are valued at around US$20 billion but the multinationals say this figure will be significantly reduced as a result. In addition the bill specifies that future participation in the industry will be conducted via joint ventures in which the State-owned oil company, Petroleos de Venezuela (PDVSA) would automatically claim a 51% stake. Observers believe PDVSA would struggle to afford such a high stake.

The draft bill has been drawn up by a team headed by energy minister, Alvaro Silva. In response to his critics, Snr. Silva described the bill as 'historic' and argued that its transparency and clarity will help to secure a sound future for Venezuela's oil industry. 'This law is establishing clear rules ... in place of obscure regulations subject to interpretation. We're not thinking of de-nationalizing,' he said.

To ease the pain of the royalty tax, Snr. Silva also pledged that he would offset the tax by introducing a lower corporate tax rate from 67% to somewhere between 30-40%, but oil industry representatives have contended that with most of their present joint venture projects in the Orinoco belt (an extensive deposit of heavy and extra-heavy crude in southern Venezuela), they already pay the lower rate of tax.

Oil companies opposing the bill include Exxon Mobil, Phillips Petroleum, Texaco, Conoco, Statoil and British Petroleum. At a news conference held by Exxon Mobil to inaugurate a $2 billion project to upgrade its operations in eastern Venezuela, president Mark Ward said that the company's plans to expand on the 120,000 barrels per day at the Cerro Negro site would be hindered by the new law. 'Looking at the investment levels in the current structure of Cerro Negro, it would be very difficult to make a project go with a 30% royalty,' he lamented.

And Humberto Calderon, former oil minister and ex-chief of PDVSA, told reporters: 'This is swimming against the current ... If the proposed law is approved as is, the development of heavy crudes in the Orinoco belt would be off limits.'

Venezuela's president, Hugo Chavez, is expected to approve the bill in November but so far neither the oil companies nor the National Assembly legislators have had a say in the draft law. Chavez has said that it is vital that the government focuses on ways of diversifying Venezuela's economy, rather than being largely dependent on the oil sector. He argues that the country should concentrate on more 'value added' industrial operations such as chemicals and petrochemicals. 'Of course there is resistance from sectors which don't want to change the model because they've lived off it for many years,' he said.

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