Venezuela’s heavy oil ventures may face more taxes

Heavy oil projects in Venezuela may face another round of tax hikes as the government carries out a review of the contracts, said a source close to state oil company Petroleos de Venezuela. PdVSA, who teamed up with oil majors in the 1990s to upgrade extra heavy crude in the Orinoco tar belt, eliminated a royalty tax holiday on the projects last year. The company is now studying whether it can legally raise the income tax rate, which was set at a preferential 34 % in the original contracts.
"They want to raise the income tax to 50 %, and maybe higher," said the source.

The original contracts, drafted during a period of low oil prices, included preferential tax rates to guarantee profitability. But with world oil prices at record levels, the state is looking for more revenue from heavy oil as well as other private oil operations in the country, which pump 40 % of the country's oil.
Jose Vielma Mora, the head of the Seniat tax office, said the agency may push Congress to change oil taxes amid a wide-ranging reform to the tax code. He said the reforms could include adjusting the taxes on the four heavy oil upgrading projects.

Five major oil firms -- ExxonMobil, Total, Chevron, Statoil and BP -- operate joint venture agreements with PdVSA in the region. The tax chief said he is working with Deputy Oil Minister Bernard Mommer, a long-time critic of the original contracts, to put together the oil chapter of the tax reform.
President Hugo Chavez, a firm nationalist, has vowed to alleviate poverty with oil-financed social programs. He has already ordered a series of tax hikes. Venezuela's 32 private operating agreements now pay a 50 % tax, up from a 34 % preferential rate, after Chavez ordered the hike earlier this year.

Last year, Chavez increased the royalties on Orinoco projects to 16.6 % from 1 %. The moves have unnerved some oil executives, who say it sets a bad precedent for future investments.
"Even if you sign a contract, you don't know if you can have legal stability in the future," said one oil executive, who's company bought the data package for a natural gas licensing round scheduled for later this year.

Analysts say Venezuela won't be able to nearly double oil output by 2010, as outlined in PdVSA's business plan, unless it attracts private investment.
Venezuela is the world's fifth largest oil exporter.