New Oil Tax Boosts Venezuelan Coffers a Bit, but Hurts PdVSA

CARACAS, April 18, 2008 (Dow Jones Newswires)

Unlike the previous ones, Venezuela's latest move to tap more money from the oil sector will hit the state oil company harder than it will the private oil producers.

The measure, meant to skim off a portion of the windfall gains that oil companies reap from high oil prices, enables President Hugo Chavez to demonstrate once again his leftist credentials. But with the government now in control of the oil industry, its impact on state-owned Petroleos de Venezuela, or PdVSA, will be far greater than on its minority private sector partners.

Ironically, the increased tax burden on PdVSA also appears to far outweigh the new levy's net contribution to government coffers.

"Windfall Tax or Windmill Tax?" was how Lehman Brothers' analyst Gianfranco Bertozzi put it in his latest research note on the subject. The way Bertozzi and others see it, the tax will basically squeeze more money from an investment-starved Petroleos de Venezuela, PdVSA, to fund Chavez's numerous social programs.

Chavez has long railed against foreign oil companies and his administration has made every effort to sell this decision as another blow against them. In recent years, the government overhauled contract terms on private oil producers and then unilaterally took majority control of upstream projects and multi-billion-dollar heavy oil refining upgraders from foreign oil majors.

This oil nationalism has given state-owned PdVSA full control of the money from oil exports. Its minority partners get their cut when it's due.

With the new tax on oil exports, though, the state now "does nothing more than take money out of one pocket and stick it in another," said Miguel Octavio, an oil analyst for BBO Servicios Financieros in Caracas. Although foreign partners will pocket less as well, their contribution to the new tax's collections will be minimal.

Congress passed the new "special oil contribution" earlier this week. Under the law, the tax would become effective once Brent crude's monthly average price exceeds $70. The levy would charge a 50% rate on the difference between that Brent average and the final sale price of each barrel. The rate jumps to 60% when Brent prices cross the $100 threshold.

The idea is hardly novel. Ecuador, Argentina and Russia have approved similar measures. Decades ago, the U.S. did much the same for a few years.

The tax should generate some $760 million a month, or more than $9 billion this year, according to Oil Minister Rafael Ramirez.

PdVSA can deduct billions of dollars it transfers to the state development fund Fonden from this amount. Including those deductions, the new tax could net Chavez this year anywhere between $1.2 billion and $1.4 billion, based on Ramirez's estimates.

Patrick Esteruelas, an analyst for the Eurasia Group, is less optimistic. In his view, the government's extra take in 2008 would be roughly $1 billion.

Although this new levy may not seem large for an oil-rich nation, the tax represents an additional strain on PdVSA's cash flow and the capital investment budget, which has been severely undercut in recent years to fund social programs, industry experts point out.

It is also a victory for the oil ministry in its long-established rivalry with the Treasury.

The tax funnels more money into the Fonden, Chavez's favored discretionary spending fund, at the expense of the federal on-the-books budget. The Fonden gives Chavez considerable leverage as his coalition heads into state and municipal elections, which could prove challenging given the president's low personal approval ratings.

Polls say Venezuelans are beginning to blame Chavez for increasing shortages of food products, an inflation rate that last year reached 22.5% and for failing to reduce nationwide rampant crime. The extra money could give him slightly more spending margin and an image boost among leftist supporters as the political season gears up again.

CARACAS, April 18, 2008 (Dow Jones Newswires)