Venezuela’s plan to increase the corporate income tax on oil companies to 50% from 34% would slash the values of multinational companies’ assets in the country, Aberdeen consultant Wood Mackenzie Ltd. said.
“President [Hugo] Chávez has dealt a major blow to oil companies in Venezuela by deciding to take a greater share of the profits from oil production,” Gero Farruggio, head of Wood Mackenzie’s Latin American upstream team, said in an Apr. 19 news release.
The proposed increase would bring all oil projects into line with a hydrocarbon law that became effective in 2002.
A ConocoPhillips spokeswoman in Houston declined to comment when contacted by OGJ regarding a series of announcements about changes and proposed changes in the Venezuelan government’s dealings with international oil companies.
A ChevronTexaco Corp. spokeswoman said her company was evaluating the impact of Venezuela’s announcements.
Regarding the proposed corporate income tax changes, an ExxonMobil Corp. spokeswoman said ExxonMobil affiliate Mobil Cerro Negro relies on a stable fiscal regime and sanctity of contract when making investment decisions. “Any significant changes in these areas are cause for concern,” she said.
Wood Mackenzie’s report, “Venezuela: The Pitfalls of Windfalls,” said the tax move, if ratified, would reduce the value of the portfolios of international companies operating in Venezuela by more than $4.3 billion total.
“By far, the worst hit projects are the extra-heavy oil schemes in the Orinoco Belt,” Farruggio said. “These are the biggest (and most profitable) source of foreign-operated production in the country.”
Companies having the highest exposure to Venezuela are ConocoPhillips and Total SA. Farruggio estimates that ConocoPhillips stands to lose $1.2 billion in its upstream Venezuelan portfolio, while Total stands to lose $1 billion.
In absolute terms, other affected companies include ChevronTexaco, which faces a reduced value of $800 million, and ExxonMobil, which faces a reduced value of $400 million, Farruggio said.
Smaller companies with greater shares of their worldwide portfolios concentrated in Venezuela are likely to suffer most, Farruggio said. This group includes Harvest Natural Resources Inc. of Houston. “This announcement is the latest-but biggest-move by the Chávez administration to extract a greater rent from the upstream oil industry in Venezuela,” Farruggio said. “In October 2004, the royalty holiday for the strategic associations in the Orinoco Belt was scrapped, knocking around $800 million off the remaining value of the projects.”
Venezuela unexpectedly announced that royalty rates were raised to 16.6% from 1% on four heavy crude upgrading projects.
Mobil Cerro Negro has been paying the increased royalty rate under protest.
“We are hopeful that an amicable solution can be reached with the Venezuelan government,” an ExxonMobil spokeswoman said.
Operating agreements
Venezuelan Oil Minister Rafael Ramirez, who also is president of state oil company Petroleos de Venezuela SA, separately announced that oil companies operating in 32 areas have 6 months to convert their operating service agreements into joint ventures with the government.
PDVSA was instructed to review the agreements that were signed with oil companies during 1992-97. Ramirez said the ministry has conducted a technical and legal study of the contracts. Chávez took office in 1999. That study concluded that the contracts contain fee clauses based on the volume and price of oil and natural gas, which “contravenes” the nature of a service contract as outlined by Venezuelan law.
“The circumstances already referred lead us to issue specific instructions to PDVSA within the framework of the government’s new strategies aimed at strict compliance with the legislation applicable to the development of the hydrocarbons sector,” Ramirez said.
He called for the alleged defects to be rectified, adding that steps are to be taken to ensure that the total amount of payments accrued to each contractor during the calendar year does not exceed 66.67% of the value of the hydrocarbons produced.
PDVSA will work with Venezuelan customs and tax officials to ensure that income tax is paid in accordance with real net income “so as to put an end to situations existing among contractors in which for many years some of them have obtained substantial profits and not paid any income tax at all,” Ramirez said.
Ampolex Venezuela Inc., an ExxonMobil affiliate with a 25% interest in the Quiamare-La Ceiba Block, is evaluating the Venezuelan government’s decision to modify the original contractual agreement, an ExxonMobil spokesman said. This is the only operating agreement in which ExxonMobil affiliates participate in Venezuela.
Separately, Ramirez said on Venezuelan television that Venezuela plans to sell at least two of Citgo Petroleum Corp.’s eight refineries in the US. The Associated Press reported that Ramirez did not say which refineries were for sale although he did say that PDVSA would continue its affiliation with Citgo and keep its presence in the US. ✦
