Venezuela Approves Windfall Profit Tax

National Assembly Approves New Oil Tax

The National Assembly yesterday approved a bill to create a windfall oil-profit tax that is expected to take effect this week, subject to its publication in the Official Gazette. The bill calls for a special tax levied at a rate equivalent to 50% of the increased profits, when the monthly oil price average exceeds US$70 per barrel and 70% when it exceeds US$100 per barrel. The oil price will be based on the benchmark Brent crude. Venezuela's Minister of Energy and Petroleum Rafael Ramirez said that at current prices the new tax could generate an additional US$9 billion in revenue each year, or around US$760 million a month. Revenue from the new tax will be paid into the National Development Fund (Fonden). The new tax is in line with a policy of maximising oil revenue that has already seen the implementation of several tax hikes in recent years.

The move will not have come as a surprise as President Hugo Chávez called for a windfall profit tax on oil companies operating in Venezuela in February and since then his oil minister, Rafael Ramirez, has echoed this call. The National Assembly is dominated by President Chávez's supporters and as soon as the president made his announcement the new tax was essentially a done deal. What was perhaps surprising was the speed with which the bill was drawn up and approved.

Outlook and Implications

The new tax will add to existing concerns about PDVSA's cash flow and its ability to reinvest in the oil sector. Contributions by the state oil company to government-sponsored social projects have increased significantly in recent years, with the company's annual reports showing that its spending on social development rose in 2007 to US$14.102 billion from US$13.784 billion in 2006 and US$6.909 billion in 2005.

The tax could also have a negative impact on future investments by foreign oil companies as it follows an earlier series of tax adjustments that have already significantly increased the costs of operating in the country. Higher international oil prices have partly offset these costs and made the contract and fiscal changes introduced by the Chávez government more palatable. News of a further tax increase will therefore create further anxiety for those companies that unlike ExxonMobil have decided to remain in the country. This will be particularly worrying for those IOCs that remain involved in extra-heavy oil projects in the Orinoco Belt as the costs of extracting and upgrading this oil is more expensive.

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