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Oil Firms Under The Gun In Revenue-Hungry Venezuela

THE WALL STREET JOURNAL: Oil Firms Under The Gun In Revenue-Hungry Venezuela

Posted 13 May 05

By PETER MILLARD Of DOW JONES NEWSWIRES

CARACAS — Venezuelan President Hugo Chavez, intent on getting more money from the oil industry to finance state programs, has sent private firms scrambling to get a grip on tax policy changes.

Venezuela has been changing the rules on oil taxes since last October, when it abruptly scrapped a royalty tax holiday on four heavy crude projects.

That was just the start. Early this year state-run Petroleos de Venezuela (PVZ.YY) bullied ConocoPhillips (COP) into a royalty rate hike on an eastern oil field, Corocoro. Then the Seniat national tax office reclassified the tax rate for 32 oil service contracts in April, hiking the rate to 50% from the 34% rate in the original contracts.

In the latest blow to foreign companies, this week a tax official said the 50% rate would be charged retroactively for up to four years.

“I think many things can change in the coming weeks,” said a financial manager at a foreign firm.

“The process we have in Venezuela is very complex,” said the executive, whose firm operates one of the 32 service contracts.

The executive, who asked not to be named, said the Seniat has yet to provide solid legal grounds for adjusting the tax bracket. The income tax rate for oil operations is 50% in Venezuela, but private companies signed the 32 contracts as service companies operating PdVSA assets, allowing for a 34% industrial rate.

“According to the law, operating agreements pay 34%,” said the executive.

Officials at the Seniat, however, say these firms should have paid the 50% rate from the start. Chavez has accused oil firms of “robbing” the country for years, and has said the firms need to pay old debts or leave.

Oil firms, looking to maintain good relations with the Chavez administration, may go along with the changes even if they violate the original contracts, which were signed in the 1990s under the previous administration.

Companies with operating contracts include ChevronTexaco (CVX), BP PLC (BP), Repsol YPF SA (REP), Total (TOT), Petrobras (PBR), Royal Dutch Shell (RD, SC), and China National Petroleum Corp., or CNPC, among others.

“Whether someone will challenge this or not, I don’t know,” said an executive at a firm operating two of the contracts. “I suspect most of the companies are not in the mood for arguing.”

ExxonMobil (XOM), the only firm out of five to challenge last year’s heavy crude tax hike, is still “evaluating” changes to the one operating contract it has a stake in, according to a company statement.

Other companies are waiting for the dust to settle.

“We are still not for or against this tax increase,” said a different source at a foreign firm.

“We are discussing this within the company,” added the source, whose firm also operates two of the 32 contracts.

Apart from the hike in the tax rate, the Seniat is also clamping down on tax exemptions. Only about 10% of the companies operating the 32 contracts pay taxes at all, thanks to a long list of deductions in their tax filings, Seniat Chief Jose Vielma Mora has said.

PdVSA President Rafael Ramirez has threatened to weed out the operating contracts that declare losses. The contracts, which accumulatively pump about 500,000 barrels a day, were awarded for fields previously exploited by PdVSA and required heavy investments to get the oil out of the ground.

Tax officials have said they will remove many deductions, such as training courses and foreign currency losses, that have appeared on tax filings.

Chavez’s focus on raising taxes comes as the ruling party prepares for congressional and municipal elections later this year and the 2006 presidential campaign. The government has spent billions of dollars on social programs for the country’s poor majority, which have lifted the leftist president’s popularity to record levels this year.

Critics say Chavez is squandering oil revenue on graft-ridden programs that will not be sustainable if oil prices fall.

Venezuela is the world’s fifth largest oil exporter and a major supplier of crude to the U.S. Private firms pump about 40% of Venezuela’s oil.

By Peter Millard, Dow Jones Newswires; 58-212-564-1339; [email protected];

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