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Analysis: Oil tax upped in Venezuela

disclaimer: image is for illustration purposes only
by Carmen Gentile
Miami (UPI) Mar 26, 2008
Venezuela is set to impose a new tax on oil profits on petroleum earnings caused by soaring global oil prices, a move seen by some as an effort to replenish diminished state coffers.

In light of recent oil prices exceeding $100 a barrel, President Hugo Chavez said Venezuela would readjust its tax scale, saying soaring profits were not "a product of any extraordinary effort."

"They're earning money that they haven't accounted for," Chavez said earlier this week when discussing the intended tax increase.

The increase will reportedly go for both foreign oil and state-owned PDVSA, profits from which go to finance the Chavez administration's vast social spending programs. According to local media, PDVSA profits totaling more than $40 billion went toward financing social programs in Venezuela last year.

Chavez's commitment to funding wide-ranging health and educational programs in Venezuela has forced him to implement the latest tax increase, a proposal that has been in discussions for the last two months or so, said Daniel Linsker, an Americas expert at the London-based Control Risks consulting firm.

"Chavez needs to maintain this high level of spending so he needs more money," Linsker told United Press International, adding the new tax would likely be implemented some time ahead of November elections to curry greater favor with the poor who comprise the president's support base.

But the increased tax burden could dissuade foreign oil firms from investing in Venezuela, where companies are already required to accept a minority stake in all projects, he surmised.

It could also further hamstring PDVSA, which according to Linsker and even some Venezuelan officials has suffered considerably from insufficient infrastructure investment, resulting in decreased production in recent years. Leading Venezuelan energy officials estimate the country is producing 3.2 million barrels per day. OPEC estimates place output at somewhere near 2.5 million bpd, however, he noted.

Last year Luis Vierma, exploration and production vice president at PDVSA, said Venezuelan oil faces a "significant operational emergency" if it does not increase the number of rigs operating in the country and that the state firm fell short of its 2007 goal of getting 191 rigs online in 2007 and producing some 3.3 million bpd.

In another troubling sign for the sector, the Venezuelan National Bank announced in January that Venezuela's oil industry shrank by more than 5 percent in 2007. Production was off 5.3 percent in 2007 from the previous year and contributed $3.14 billion to the country's gross domestic product, down from both 2006 and 2005 when the sector accounted for a reported $3.38 billion, the bank reported.

Just days after the bank's report, PDVSA officials announced that the period for which foreign companies can pay for oil was reduced from 30 days to eight.

Venezuelan officials said they decided to reduce the length of its payment period so PDVSA can, in turn, reinvest in its infrastructure sooner.

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