Venezuela Increases Taxes on Oil Companies in Orinoco Oil Belt By: Michael Fox

Caracas, Venezuela, May 9, 2006--On his weekly television show Alo Presidente, on Sunday, Venezuelan President Hugo Chavez announced a new "extraction" tax of at least 33% for all oil companies operating in Venezuela. Chavez said the tax could create over $1 billion in new revenue.

According to the Venezuelan daily El Universal, the Ministry of Energy and Petroleum will introduce a reform to the hydrocarbons law to the National Assembly today. The change will ensure that at least one-third the value of every barrel stays in the hands of the Venezuelan state. As such, the tax is nearly identical to a royalty.

For some companies, the change will be minimal. El Universal reported that for PDVSA's own production, they will continue to charge the royalty of 30%, plus the extraction tax, will make the total tax 33%. For now, the newly formed joint venture operations with Venezuela's PDVSA will be exempt from the new tax, as they are already paying 33% in royalties. While, the associations in the Orinoco belt will have to pay 16% in the new tax, on top of the 17% royalty they currently pay, to equal 33%. It was reported that the additional revenue from this extraction tax could equal $1.34 billion in its first year alone - if petroleum prices remain at their present value.

Other tax hikes are in the planning stages for natural gas companies and for the oil companies operating along the Orinoco River, which is believed to have extra-heavy crude reserves of up to 235 billion barrels. Among the companies that operate along the Orinoco belt are the North American ExxonMobil and Chevron, which currently pay 34% in income taxes. Chavez announced that they are going to increase that "to 50%, but in order to do so we need to modify the Hydrocarbon Law."

"In the Hydrocarbon Law, that we approved, one has to remember that we were infiltrated, there still was the old PDVSA when we approved it. They were able to get in to the law and that's how it was approved that the companies of the Orinoco belt pay income taxes not at 50%, but at 30% or 34%, we are going to modify this law." Chavez said on Sunday.

Although the timeline for this modification appears to be still undefined, it was reported that such a tax increase could generate additional revenue of $785 million annually.

Chavez first raised the royalty two years ago on the Orinoco belt companies. The royalty increase from 1% to 16% led to $1.28 billion in revenue last year.

Chavez said on Sunday that new taxes are a result of the fact that with oil prices at record highs, oil companies operating in Venezuela are making "a lot of money."

The large revenues that Venezuela is receiving from its petroleum reserves have helped it to fund various social programs both in Venezuela and abroad, such as the popular social programs known as "missions," and the discounted heating oil program for North Americans in situations of poverty. So far, 180,000 North Americans have benefited from the low-priced heating oil supported by CITGO subsidiary of PDVSA.

These new taxes come just days after the latest South-American energy summit and almost a week after Bolivia nationalized its oil and gas reserves, a move which Chavez has applauded.

Further details regarding the taxes are expected in the following days.