Lawmakers Recommend Hiking Royalty for Orinoco Projects to 30%

Map of Venezuela - Orinoco Belt
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A special committee of lawmakers from Venezuela's national assembly will recommend the executive power increase the royalty rate on four extra-heavy upgrading projects in the Orinoco oil belt to 30% from 16.7%, Caracas daily El Universal reported.

Energy and oil minister and state oil firm PDVSA president Rafael Ramirez said late last year that pushing such a royalty hike was going to be one of this year's priorities for his office.

PDVSA has also proposed to the national assembly increasing the tax rate for the projects to 50% from the current 34%, Ramirez has said.

The four such projects currently operating in the Orinoco produce 660,000 barrels a day (b/d) of extra-heavy crude that is upgraded into some 600,000b/d of synthetic crude. PDVSA is partners in all four projects with such high-profile oil majors as US oil firms ExxonMobil (NYSE: XOM), ConocoPhillips (NYSE: COP) and Chevron (NYSE: CVX), France's Total (NYSE: TOT), UK firm BP (NYSE: BP) and Norway's Statoil (NYSE: STO).

In 2004 the royalty rate was increased dramatically to 16.66% from 1%, eliminating what was envisaged in the 1990s during the administrations of Carlos Andres Perez and Rafael Caldera as the key fiscal incentive to attract investment in the then-untried Orinoco projects.

The incentive was considered necessary because such projects are traditionally more expensive than standard E&P projects since the extra-heavy crude needs to be upgraded before it can be refined.

However, the Chavez administration argues companies can still make a profit with higher royalties today given current high oil prices in the international market.

The committee is headed by leading pro-government lawmaker Rodrigo Cabeza, who says the proposal for a higher royalty rate stands a good chance of passing because the national assembly is mostly composed of pro-government lawmakers.

Opposition political parties refused to take part in the December 4, 2005, legislative elections and have denounced the assembly as "illegitimate" since the abstention rate in the vote neared 80%.

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