THE WALL STREET JOURNAL/DOW JONES NEWSWIRES: Venezuela Oil Minister Defends Orinoco Oil Tax Hike: “Royal/Dutch Shell and Chevron Texaco have expressed interested in new heavy crude upgrading projects in the Orinoco, and companies such as Total and Statoil have said they are willing to expand existing projects there. But analysts have warned the tax hike will send these firms back to the drawing board.” (ShellNews.net)
DOW JONES NEWSWIRES
October 11, 2004 3:45 p.m.
CARACAS -- Venezuelan Oil Minister Rafael Ramirez defended a surprise tax hike for oil companies operating in the Orinoco tar belt, saying it was "absurd" to charge 1% royalty rates amid record high oil prices.
The projects were based on an average oil price of around $13 a barrel for heavy crude produced in the tar belt, "but reality has shown that prices are at least $10 higher than that," said Ramirez.
"These price changes are not temporary," added the minister.
He said Venezuela only earned $46 million a year in Orinoco royalties under the previous tax scheme, which will increase to nearly $800 million a year under the new 16.6% tax rate. Companies operating in the area will begin paying the new tax rate as of Monday.
"It was a tremendous fiscal sacrifice," the minister said at a Monday press conference.
Ramirez, however, ruled out further increases to the 16.6% tax rate for the original Orinoco projects, but said any new projects as well as additional production at existing projects will pay the 30% royalty rate stipulated under the 2001 Hydrocarbons Law.
The four heavy crude projects in the Orinoco area: Petrozuata, Sincor, Hamaca and Cerro Negro, must seek authorization from the ministry to increase production levels. The four projects currently produce around 500,000 barrels a day, according to state oil company Petroleos de Venezuela (PVZ.YY).
Ramirez said the Hamaca and Cerro Negro projects will pay the 30% rate on new output.
The initial projects were drafted in the mid 1990s, and included the low taxes as an investment incentive. Ramirez said private operators expected to produce 1,000 barrels a day at each well in the Orinoco, but improved technology has allowed them to triple their output per well, removing one of the reasons for the tax break.
Ramirez said he "hoped" the tax hike would not discourage future private investment in the country. The ministry did not consult with the operators before hiking the tax rate, he said.
"The head of the Federal Reserve does not consult with anyone before raising or lowering interest rates," said Ramirez. "We don't have to consult with anyone (either)."
Royal/Dutch Shell (RD, SC) and Chevron Texaco (CVX) have expressed interested in new heavy crude upgrading projects in the Orinoco, and companies such as Total (TOT) and Statoil (STO) have said they are willing to expand existing projects there. But analysts have warned the tax hike will send these firms back to the drawing board.
"We are evaluating this recent announcement and its impact on our projects," said a spokeswoman for Chevron Texaco, a partner in the Hamaca project.
Earlier this year Chevron said it was interested in investing up to $6 billion in a new Orinoco upgrading project. The existing projects refine the heavy tar in upgrading facilities and then blend it with lighter crudes to make it marketable.
According to PdVSA, the Orinoco area has 30.7 billion barrels of oil reserves.
Venezuela, the world's fifth-largest oil exporter, says it produces more than 3 million bbl of oil a day. Analysts say it is closer to 2.5 million.
-By Peter Millard, Dow Jones Newswires; 58-212-564-1339; firstname.lastname@example.org;