Venezuelan President Considers Windfall Oil Profits Tax, But Reassures U.S.

Venezuelan President Rails Against ExxonMobil

Venezuela's dispute with the U.S. supermajor ExxonMobil featured prominently in President Hugo Chávez's weekly programme Aló Presidente, which was broadcast yesterday from the company's former Cerro Negro extra-heavy oil project, now called Petromonagas. Venezuela's President accused the U.S. oil firm of producing and exporting over 400,000 barrels of crude oil without paying taxes over an eight-month period between late 1999 and June 2000. President Chávez also warned that if the allegations are proved then the government could present a lawsuit against the company. In another attack against ExxonMobil, President Chávez accused the company of implementing a strategy to minimise the volume of reserves in situ in an attempt to acquire new areas as well as failing to make necessary investments in technology to increase oil recovery rates. President Chávez claimed that the recovery rate under PDVSA is 12%, compared with the 6% estimated by ExxonMobil.

Relations with ExxonMobil hit a new low last week following news that the company had secured court orders freezing US$12 billion in international assets held by the Venezuelan state oil company PDVSA. The action was intended to prevent PDVSA from selling holdings that might otherwise be used to compensate the major for the loss of its Venezuelan project, even though ExxonMobil's compensation claim was for less than one-half the value of assets frozen (see Venezuela: 15 February 2008: ExxonMobil and Venezuela Diverge on Compensation as War of Words Continues and 11 February 2008: Venezuelan President Weighs In On ExxonMobil Court Orders; Threatens Supplies to U.S.).

No Immediate Plans to Halt Oil Exports to U.S.

Venezuela retaliated against the asset freeze with the suspension of commercial relations with the U.S. major including halting the supply of 600,000 barrels a month. However, in a more conciliatory tone, President Chávez said yesterday that Venezuela does not have any plans to stop oil exports to the United States, unless it attacks Venezuela.

The potential impact of the asset freeze is still being assessed, but the international credit rating agency Fitch warned on 15 February that it could weaken the credit quality and financial flexibility of two PDVSA-partnered refineries in the United States, HOVENSA and the Merey Sweeny Ltd Partnership (MSLP) between PDVSA and ConocoPhillips. Its concerns were related to the risk of crude-supply disruptions, although the agency affirmed that it continues to regard U.S. refineries as “the natural and economic home” for Venezuelan crude.

President Calls for Oil Profit Tax

Speaking yesterday, President Chávez also called for a windfall profit tax on oil companies operating in Venezuela. The President said that such a tax was necessary if the international oil price remained at between US$80 and US$100 per barrel and called on his cabinet to prepare a recommendation.

Outlook and Implications

The suspension of commercial relations with ExxonMobil and the heightened tone of the verbal attacks against the U.S. government by the Venezuelan government last week created added uncertainty in global oil markets. However, Venezuela's continued dependence on the U.S. market meant that most industry observers did not seriously believe that the ExxonMobil spat would result in an immediate suspension of all oil exports to the United States. This was confirmed by President Chávez's comments yesterday although he repeated his frequently expressed warning that in the event of U.S. aggression the taps would be turned off. Further assurances for the markets came from the International Energy Agency (IEA)’s oil market report released last week showing a recovery in Venezuelan oil production. The IEA's February report put Venezuelan production at 2.4 million barrels per day, slightly higher than the previous month although still well below official figures.

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