Chavez Sees a Gusher in Windfall Tax

Venezuela's President keeps demanding more from foreign oil companies. Now he's considering a tax on anything above $80 a barrel

by Peter Wilson

Venezuelan President Hugo Chávez is exploring a new tool to extract money from foreign oil companies: a windfall profits tax. If implemented, the tax would mark the fifth time since October, 2004, that Chávez has increased his portion of oil earnings.

Few details were given about the proposal during Chávez's Sunday TV show, Alo Presidente, although he said the tax may be levied against oil revenues above $80 a barrel. (Venezuela's relatively "heavy" crude sells for about $90 a barrel now.) "It might be convenient to adopt this tax," Chávez said during his show, adding that it would let the government boost revenues when crude prices rise for reasons not related to production costs.

The threat comes as Venezuela is asking the companies to pony up about a third of the $77 billion it is trying to raise to more than double the country's crude output, to 5.8 million barrels a day, by 2012. "It's difficult to say if this will be implemented," says a Western oil executive in Caracas. "Trial balloons are often floated on Alo Presidente, but when the President speaks about taxes, the changes often come to pass." Argentina and Ecuador have similar taxes, with the latter taking up to 99% of revenue above a certain price.

One of the Most Aggressive Tax Systems

Chávez has repeatedly stunned oil companies with demands for a higher share of their profits and for majority control of their local operations. In October, 2004, he unilaterally raised royalties on four heavy-oil ventures operated by ExxonMobil (XON), ConocoPhillips (COP), and Total, to 16.6%, up from 1%. In doing so, Chávez ignored contracts that had been approved by the country's National Assembly. He subsequently raised income tax rates and royalty rates again, and created an extraction tax.

As a result, Venezuela has one of the most aggressive tax systems in the world. "Venezuela's fiscal take is already among the highest in the world, at 85%," said a Western oil executive in Caracas. "This is at the top end of other major producing countries, similar to Norway and higher than most, such as Nigeria or Angola." Venezuela's fiscal share is also higher than regional rivals such as Mexico, where the take is about 70%, or Brazil, which uses a sliding scale.

That has reduced Venezuela's attractiveness as a investment destination, even though it has some of the world's largest oil reserves. Critics charge the country has missed out on developing those fields because it is constantly changing contract terms and taxes, which leads to repeated delays. Since Chávez took office in 1999, Venezuela's oil production has fallen by a quarter, to about 2.4 million barrels a day. By contrast, other oil producers have rushed to boost output to take advantage of rising prices and demand.

Wants to Show He's in Control

Venezuela is embroiled in a fight with ExxonMobil over compensation for two projects that were nationalized by Chávez last year. ExxonMobil won court orders freezing more than $12 billion in assets owned by Venezuela's state oil company, Petroleos de Venezuela (PDVSA). That provoked a bitter war of words with Chávez, who cut off oil sales to the U.S. giant. Venezuela's state-owned TV station has subsequently run commercials saying Exxon is a tool of the U.S. government. The government has also sponsored protest marches against the company. An arbitration panel may issue a ruling within three years.

"Chávez wants to show oil companies that he is in control," said Pietro Pitts, a Caracas oil analyst who publishes the magazine Latin Petroleum. "But he may want to think twice about this."

Most oil companies thought Chávez was finished raising taxes on the industry after he wrested control of all oil operations from private companies last year. Chávez forced all private companies to cede majority control to PDVSA as part of his re-nationalization process. "The most worrisome aspect of this change—if it occurs—is that it's another change," said the Western oil executive. "The government had been assuring the industry that after forced conversion of old contracts to joint ventures, the Venezuela fiscal regime would be stable."

"They Really Need the Money Now"

Oil taxes and royalties make up about half of the government's overall revenues. Oil sales account for 70% of the South American country's exports. "A windfall profits tax has been considered several times by various governments here," said Alberto Quiroz, an oil analyst who formerly headed Shell's (RDSA) Venezuelan operations. "The difference this time is that they really need the money now. PDVSA seems to have cash-flow problems, and the only place where they can get funds quickly and easily is by taxing oil again."

Although it is profiting from higher oil prices, PDVSA is sending more and more money to the government to fund Chávez's social programs. In 2006 that support totaled at least $13.3 billion, or more than double what it spent on oil and natural gas projects. No figures for 2007 are available.

With reporting by Joshua Schneyer in Rio de Janiero.