MercoPress. South Atlantic News Agency

Venezuela's council of ministers reportedly approves 33.3% oil royalty

The new levy, which President Hugo Chavez' s cabinet passed on Monday, will be imposed to all oil businesses operating in Venezuela. Revenues of USD 1.34 billion a year are expected.

Based on the reform of the organic law on hydrocarbons the National Assembly already okayed to facilitate the organization of oil joint ventures, the Energy and Petroleum Ministry Tuesday is filing with the Venezuelan Congress an additional modification to the regulation in order to levy the so-called oil extraction tax President Hugo Chavez announced on Sunday and his cabinet approved on Monday.

Through this tax -which will be estimated and collected in the same way as royalties but cannot be paid in kind- the Venezuelan State will be paid 33.33 percent of the price at wellhead of each oil barrel produced domestically. The tax is to enter into effect as early as this month, following publication of the reform of the organic law on hydrocarbons in the Official Gazette.

Ramirez explained that the oil extraction tax would be levied on all oil businesses in Venezuela, namely, the production of the Venezuelan state oil giant Pdvsa, the production of the strategic partnerships operating along the Orinoco Oil Belt, southeast Venezuela, the production of recently organized joint ventures, and the production of shared risk and earnings exploration agreements. He added, however, that the tax would be charged differently in each case.

Royalties on Pdvsa production will remain at 30 percent, but they will increase by 3.33 percent to 33.33 percent. Joint ventures will not pay the new tax for now, as they are already paying taxes of 33.33 percent -comprising the traditional royalty and extraordinary royalties. The strategic partnerships operating along the Orinoco Oil Belt will continue to pay royalties of 16.66 percent and an additional 16.66 percent under the new tax, while shared risk and earnings exploration agreements will pay what is needed to achieve 33.33 percent, after paying the royalty and the special share in earnings under the agreements.

Ramirez endorsed his office move to levy a new tax on oil extraction by claiming that oil prices have reached extraordinarily high levels, thus increasing profit margins on exploitation, particularly at heavy oil Orinoco Belt. He conceded that the agreements governing the strategic partnerships provide for a series of conditions -including royalty rates- that cannot be changed, unless imposed by the National Assembly.

Further, Ramirez confirmed President Chavez announcement on Sunday that oil income tax would be raised from 34 percent to 50 percent, once the relevant regulation is modified. The Executive Power has yet to send this proposal to the parliament for approval.

This move is expected to generate additional revenues of USD 785 million as of 2007, the first year the new rate will be applied. Similarly, the new oil extraction tax is to generate extraordinary revenues of USD 1.34 billion yearly at the current oil prices. Since the tax is expected to enter into effect as of next June, revenues would amount to USD 800 million this year.

Ramirez was not very explicit when asked about the destination of the revenues the Government expects to collect from the new oil extraction tax. He indicated revenues this year will be considered as extraordinary revenues, and they are likely to become ordinary revenues as of 2007. He added that the tax would be collected by the Energy and Petroleum Ministry rather than the Integrated National Customs and Tax Administration Service.