Watching The World: Chavez vies with Cameron

May 9, 2011
Who in the oil and gas industry ever thought that Venezeula's President Hugo Chavez would be beaten to the punch by anyone when it comes to taxes, least of all by the UK's David Cameron?

Eric Watkins
Oil Diplomacy Editor

Who in the oil and gas industry ever thought that Venezeula's President Hugo Chavez would be beaten to the punch by anyone when it comes to taxes, least of all by the UK's David Cameron?

Well, not to be outdone by the recent UK tax hike, the leader of the Bolivarian revolution has imposed a new one of his own—a windfall profits tax on royalties when oil prices rise above $40/bbl.

Venezuela's affable Energy Minister Rafael Ramirez, who also doubles as chief executive of state-owned Petroleos de Venezuela SA, said the tax would enable Caracas to collect $9-16.3 billion this year, depending on the global price of oil.

Ramirez also spelled out the exact details of the plan, saying that a 20% hike will take effect when the price of Venezuelan oil is between $40-70/bbl.

A whopping 95%

When the price falls to $70-90/bbl, the tax rises to 80%. It jumps another 10% when oil is priced at $90-100/bbl, and reaches a whopping 95% if the price of oil tops $100/bbl.

Just so that the foreigners don't feel picked on, Senor Ramirez said PDVSA would also feel the taxman's squeeze, though not of course in exactly those words.

"It's a powerful tool the state has designed to acquire windfall income," Ramirez said, noting that revenue from the tax will not used for investment in the oil industry, but will be spent on government social programs.

Not that the industry has been altogether neglected. Oh no, perish the thought. And to make sure that's understood, Ramirez clarified that any companies investing in new developments would only pay the higher tax rates after they had recouped their original expenditure.

"Until they've recovered their investments, they will be exempt from the tax," he said. And then, after they have recovered their investments, what will happen? They'll be taxed, of course.

Great incentive

That's a great incentive to invest, don't you think? Indeed, one can hardly imagine a better incentive to remain in Venezuela than this new tax of the government—a point underlined by analysts.

"This tax change is likely to have a chilling effect on private sector investment," said a note from Nomura Securities. "This new tax regime borders on confiscation whenever oil prices surpass $70[/bbl]."

Never mind that, though. There are higher principles at stake.

"What defines our government's political position is who captures the oil revenue and how is it used," said Ramirez, adding, "The oil revenue should be captured by the Venezuelan state as the representative of the collective interest…and distributed in a revolutionary way for our people's benefit."

Tell that to David Cameron.

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