Venezuela's Orinoco Majority Stake Seen by December

CARACAS Aug 29, 2006 (Dow Jones Newswires)

Petroleos de Venezuela, or PDVSA, plans to secure majority stakes in four heavy oil projects located along the Orinoco River by December, the oil vice minister said Tuesday.

"We hope to have it ready by Christmas," Vice Minister Bernard Mommer said after meeting with finance commission lawmakers.

Mommer discussed a new fiscal reform for the oil industry with members of Congress that involves increasing taxes on oil production and curbing tax avoidance by oil companies.

The government of President Hugo Chavez has decided to increase taxes on oil activity to 50%, up from 34%, as part of a new income tax law.

Members of Congress are expected to approve the income tax increase Tuesday so it can become effective in January.

On the matter of majority stakes in the four heavy oil projects, Mommer made clear PDVSA has informed all the companies involved that Venezuela is seeking a majority stake in those deals, part of Chavez's nationalistic approach to the oil industry.

Each project will be split to separate the oil pumping from the process of upgrading the heavy crude to make it more marketable.

Mommer explained that the 50% income tax will apply to the production side only. The upgrading process is considered a refining procedure and will therefore continue to pay a 34% income tax, he said.

The same will apply to the PDVSA majority stake. The state oil company will seek majority control in the production side only by creating joint venture agreements with foreign partners.

Under these joint venture agreements, according to Mommer, the companies will have to pay the government at least 50% of the market price for every barrel produced through royalties and taxes.

If for whatever reason the income tax and the royalties add up to less than 50% of the market price per barrel in one year, these ventures will have to cover the difference.

"The idea is that Venezuela will receive at least 50% of the price obtained per barrel," Mommer said.

Venezuela already uses the same method - known in the oil industry as the 50-50 principle - in the joint ventures recently signed for 33 mature oil fields.

The four projects in the Orinoco area are jointly run by PDVSA, along with ExxonMobil Corp. (XOM), Total SA (TOT), ConocoPhillips (COP), Chevron Corp. (CVX), Statoil ASA (STO) and BP PLC (BP).

Venezuela is conducting a nationalist oil policy that includes seeking new markets for oil to lessen dependence on the U.S., its main trading partner.

Copyright (c) 2006 Dow Jones & Company, Inc.

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