Venezuelan proposed tax changes called 'major blow' to companies

April 20, 2005
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.

By OGJ editors
HOUSTON, Apr. 20 -- 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. Those projects had been approved during the 1990s.

ExxonMobil affiliate 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 has said oil companies operating in 32 areas have 6 months to convert their operating service agreements into joint ventures with the government so that they comply with a 2002 hydrocarbons law (OGJ Online, Apr. 18, 2005). The OSAs were signed during the 1990s.

Ramirez is also president of state oil company Petroleos de Venezuela SA.

Farruggio said, "The issue of contract conversion has been long running, and the patience of President Chávez is clearly running out. Indeed, by increasing income tax to 50%, he is unilaterally bringing the OSAs closer into line with the hydrocarbon law."

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.

Meanwhile, Ramirez said on Venezuelan television that Venezuela plans to sell at least two of Citgo Petroleum Corp.'s eight refineries in the US. PDVSA owns Citgo.

The Associated Press reported that Ramirez did not say which refineries were for sale, and he added that PDVSA would continue its affiliation with Citgo and keep its presence in the US.