Thursday, May 11, 2006

Chavez Doubles Royalty On Oil

Big producers who now pay a 16.67 percent royalty on oil will see their tax obligation rise to 33 percent under a new law there, and that may be yet another reason the nine blocks of the Nigeria-Sao Tome and Principe Joint Development Zone look attractive to the majors.

According to a Dow Jones report, the hike in royalties comes with a stiff jump in income taxes, too, from 34 percent to 50 percent. The latter is the same rate such companies now pay in the JDZ - minus the political uncertainty.

Here is an excerpt from this morning's report:

CARACAS (Dow Jones)--Venezuela's Council of Ministers formally approved a 33.3% royalty for domestic oil production, doubling the rate at four large
projects with multinational oil companies, reported the ABN state news agency late Monday.

President Hugo Chavez announced the new royalty, or "extraction tax", over the weekend. The tax is applied to volumes of oil production at the well-head, not profits. Earlier on Monday, Oil Minister Rafael Ramirez said the tax will come into effect after approval by the National Assembly, which is 100% controlled by Chavez supporters.

Venezuela already hiked the royalty rate for one fifth of the nation's oil production to 33.3% earlier this year as part of a contract overhaul where state firm Petroleos de Venezuela S.A. (PVZ.YY) took majority control of 32 oil fields that were previously operated independently under contract.

PdVSA, as the state firm is known, currently pays a 30% royalty on oil production, which it will have to raise by 3.3 percentage points when the new law comes into effect. Four heavy oil projects where multinational firms like Conoco (COP) and Chevron Corp. (CVX) pump 600,000 barrels a day will have to double their current royalty payments of 16.67%. According to Ramirez, the royalty hike and an income tax hike to 50% from 34% for these heavy oil projects will generate an additional $2 billion a year in revenue for the state.

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