THE NEW YORK TIMES: More Tax on Venezuela Oil Projects: “President Hugo Chávez announced on his weekly TV and radio broadcast that he would immediately raise royalties on the projects to 16.6 percent from 1 percent.” (ShellNews.net)
By BRIAN ELLSWORTH
Published: October 12, 2004
CARACAS, Venezuela, Oct. 11 - Venezuela's energy minister said on Monday that the country's decision to end a tax holiday on the four heavy-crude upgrading projects in the country's vast Orinoco Belt would not drive those companies away. On Sunday, President Hugo Chávez announced on his weekly TV and radio broadcast that he would immediately raise royalties on the projects to 16.6 percent from 1 percent.
Rafael Ramírez, the energy minister, defended that decision at a press gathering on Monday, saying that it was justified by record-high oil prices and that the companies involved would understand.
"It's absurd that with oil prices at $53 per barrel anyone is paying royalties of just 1 percent," he said. The oil market has changed fundamentally, he said, adding, "We believe the era of cheap oil is over."
The Orinoco Belt projects produce 500,000 barrels a day of what the government says is the country's total output of 3.1 million barrels a day. Independent analysts, however, as well as OPEC, say production is closer to 2.5 million barrels a day. The new royalty rate is expected to raise $766 million a year, up from $46 million.
The projects in question were put together in the late 1990's, when Venezuelan oil was fetching around $10 a barrel, considerably below last week's average price of $42.67 for the Venezuelan basket. Mr. Ramírez said the 1943 Hydrocarbons Law allowed the government to raise royalties based on market conditions.
The projects, which turn the heavy tar-like Orinoco crude into synthetic oil that sells for $24 to $32 a barrel, include investments from ChevronTexaco, Exxon Mobil, ConocoPhillips, as well as BP, Total of France and Statoil of Norway. Venezuela's state oil company, Petróleos de Venezuela S.A. (Pdvsa), is a minority partner in two of the projects.
The companies declined comment on the royalty increase.
The announcement comes as the left-wing government of President Chávez is riding a wave of high oil prices and still savoring its victory in a recall referendum on his rule in August. Mr. Chávez, who first announced the change on his weekly radio broadcast Sunday, said the decision was part of a plan for "a true nationalization" of Venezuela's oil industry that would increase the government take on Pdvsa's revenue of $42.6 billion.
Mr. Chávez has already set aside $3.7 billion of the company's revenues this year to finance the social programs that bolstered his standing in the polls in August.
"When oil prices are high, it's natural for countries to try to bring in more tax revenue from their oil industries," said Michelle Billig, director of political risk at PIRA Energy, a consulting group in New York.
"We are seeing similar things happen in other countries, like Kazakhstan, Chad and Bolivia," she said. "This is part of the investment risk for oil companies that invest in developing countries."
In 2001, Venezuela issued a decree raising royalty rates to as much as 20 percent to 30 percent and requiring a state majority in all new upstream oil ventures. Foreign investors have criticized the law as excessively restrictive, but investor interest has not faded. Even so, the government has not acted on any major proposals to invest under the new law.
Soaring prices have nonetheless drawn investor interest in the Orinoco Belt projects, which Venezuelan authorities say contains as much as 235 billion barrels of heavy crude oil. Both Shell and ChevronTexaco this year have proposed new upgrading projects that would comply with the new terms and conditions.
Many say the country's oil production has never recovered from a devastating two-month strike at Pdvsa, begun in December 2002, to force Mr. Chávez from office. He subsequently dismissed 19,000 of the company's employees, more than half its work force.
Analysts were mixed on whether investors would veer away from Venezuela after yet another display of Mr. Chávez's unpredictability. But some believed that they would not, given the need for new exploration.
Jay Saunders, an energy analyst at Deutsche Bank in New York, said the companies involved "were getting such great terms in the first place that there's room for Chavez to tighten the terms without getting overly onerous."
Roger Tissot, director of markets and countries at PFC Energy in Washington, says that given the combination of high prices and Venezuela's location and reserves, companies are not likely to leave the country because of the royalty adjustment.
"But one fundamental truth is that Venezuela needs foreign investment to increase oil production," Mr. Tissot said. "I don't think they can afford to ignore the views of private companies."