Venezuela’s Congress Approves New Oil Extraction Tax to Foreign Oil Companies

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Researched by Industrialinfo.com (Sugar Land, Texas). On May 10, 2006, Venezuela’s Congress approved the new “oil extraction tax” at an estimated value of 33.33% which was originally proposed by President Hugo Chavez on May 7, 2006. This new tax is to be imposed on all oil operating companies involved in any strategic associations in the Orinoco Belt region, all international joint ventures within the country’s borders, and even to Venezuela’s own state petroleum company known as PDVSA. This decision is included in Chavez’s plan to put pressure on the petroleum industry to receive a greater share of revenue from its influential oil and gas industry since oil already accounts for 80% of Venezuela's export earnings, as well as over half of the overall state revenue.

This new tax is estimated through the same method that allows a regalia to be taxed. Therefore, the tax can only be paid with cash, and no exchange is allowed. Now that Congress approved this new reform to the Law of Hydrocarbons, the state can start collecting 33.33% for the extraction of each barrel of crude oil at its well mouth value.

Venezuela will keep receiving a 30% regalia from PDVSA, while at the same time the oil extraction tax will complete the remaining 3.33%. So far, joint ventures will not be paying this new tax since they are currently paying a 33.33% in regalia. Strategic associations on the Orinoco Belt paid a 16.66% in regalia but now that this new tax has been approved, they will have to start paying the remaining 16.6%. Venezuela expects to collect $800 million in 2006 and $1.3 billion in each following year.

Chavez has accused foreign oil companies of exploiting his country's vast petroleum reserves without paying sufficient taxes. Most of them are operating at the Orinoco Belt region which is located in eastern Venezuela and holds the world’s largest reserve of heavy crude oil. According to Chavez, the oil extraction tax will generate nearly $1 million this year for the government and will reach well above the $1 billion mark during the next year.

Venezuela’s Congress Approves Joint Ventures

Since June 2005, the Venezuelan government has enacted a Law that was original proposed in 2001 to increased the tax rate up to 50% (from the previous 36%) to foreign oil companies working within their borders. Companies operating in Venezuela, which have invested over $10 billion in the country’s 32 field operating contracts and are currently pumping at least 460,000 barrels of oil per day, will have to consider becoming minority partners PDVSA if they are looking to continue operation. The joint venture between PDVSA and foreign oil companies requires handing over a minimum of half of its revenues to the state. For details see related April 21, 2006, news article - Venezuela´s New Strong Negotiating Position Shocks Oil Companies.

On May 4, 2006, the 167 members of Venezuela’s National Assembly, all of whose members are aligned with Chavez’s ruling coalition, approved the new joint ventures to bring the 32 oil fields in the country under state control. The fields under the joint ventures account for about 400,000 barrels a day or one-eighth of Venezuela's official total production of nearly 3.2 million barrels a day.

This new decision to impose oil extraction tax to operating oil companies reinforces the marked tendency of Chavez’s government to control private interests not only on the downstream side of the industry, but also within the upstream activities.

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