VENEZUELA: GOV PARTIALLY WALKS BACK ON OIL TAX

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001230

SIPDIS

NSC FOR CBARTON
ENERGY FOR DPUMPHREY AND ALOCKWOOD
TOKYO FOR SFLATT

E.O. 12958: DECL: 04/20/2015
TAGS: EPET EINV PGOV VE
SUBJECT: VENEZUELA: GOV PARTIALLY WALKS BACK ON OIL TAX
ANNOUNCEMENT

REF: CARACAS 1139

Classified By: Economic Counselor Richard Sanders; for reasons 1.4 (d)

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SUMMARY
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1. (C) GOV officials carefully walked back from President
Chavez's April 15 announcement that a 50 percent tax would be
levied on the four projects that upgrade extra-heavy crude.
In fact, the tax increase will apply to the companies that
operate in Venezuela under 32 Operating Service Agreements
(OSAs). The first statement by Venezuela's tax authority,
however, indicates that it intends to qualify the companies
as entities carrying out hydrocarbons activities on their
own, not as contractors to PDVSA. This could have further
serious implications for the companies because it could lead
to a requirement that they themselves pay the royalty on
their production, not PDVSA. Local oil experts believe the
incident was intended to put more pressure on the OSA
companies to migrate their contracts to mixed companies under
the 2001 Hydrocarbons Law. They also believe the GOV's
announcements were carefully timed to occur before the April
22 event in which the would-be bidders in the off-shore
"Rafael Urdaneta" project purchased the technical data packs.
Ultimately, the GOV has sent a clear message to the
companies already on the ground in Venezuela or those seeking
to do business in Venezuela - if you don't want to do
business on our terms, get out. End Summary.

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PRESIDENT CHAVEZ MIS-SPOKE
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2. (C) On April 20, Minister of Energy and Petroleum/PDVSA
President Rafael Ramirez partially walked back from the April
15 announcement that the GOV would increase the tax rate on
oil projects from 34 to 50 percent (reftel). According to
Ramirez's latest statement, the increased tax rate would only
apply to the 32 Operating Service Agreements (OSAs) under
which international oil companies operate fields on behalf of
PDVSA. Ramirez specifically retracted President Chavez's
April 15 statement that the tax increase would apply to the
four projects that upgrade Venezuela's extra-heavy crude, the
so-called "Strategic Associations."


3. (C) In a televised cabinet meeting on April 15, President
Chavez was the first to unveil the proposed tax increase.
Chavez specifically said the increase would apply to the four
Strategic Associations and did not mention the OSAs. Local
energy experts believe that Chavez either mis-spoke or went
overboard in his April 15 statement. They feel that the
announcement of the change in the tax regime was intended to
put more pressure on the companies with OSAs to line up to
migrate their contracts to mixed companies under the auspices
of the 2001 Hydrocarbons Law. They also believe that the
GOV's announcements (with the possible exception of President
Chavez's slip) were carefully timed to occur before the next
step in the "Rafael Urdaneta" off-shore bid round, to make it
clear to potential participants what the ground rules now are
for their relations with the GOV.

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RAFAEL URDANETA PROJECT
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4. (U) Venezuela's latest off-shore bid round, the so-called
Rafael Urdaneta project, was launched on April 4. The
companies that wish to bid on the six blocks offered in the
round were invited to attend an April 22 meeting in which
they were accredited and received the data pack and technical
information. In the April 4 ceremony, however, Minister
Ramirez specifically said that no company would be allowed to
participate in the round that had any claims outstanding
against the GOV. Twenty-nine companies acquired the data
packs on April 22, including a number of companies new to the
Venezuelan scene, i.e., players such as Russia's Gazprom and
Lukoil, and India's ONGC.

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COMPANY REACTIONS
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5. (U) So far, company reactions have been muted. A manager
of Japan's Teikoku Oil Company has been quoted in the press
as saying that the planned tax hike "will make it
unprofitable ... to continue pumping here, unless the
government offers new incentives." We understand that the
Executive President of AVHI, the association representing the
international oil companies, met with the Venezuelan tax
authorities on April 20 to discuss the tax increase. One
U.S. company complained to econoff April 21 that AVHI had not
yet held a meeting of its members to discuss the situation.


6. (C) Leading energy consulting firm Wood MacKenzie has
calculated the overall loss in value of the tax increase on
the OSAs at $850 million. It calculated that a handful of
the more successful fields, including ChevronTexaco's Boscan
field, will suffer the biggest loss in value. Caracas-based
ChevronTexaco President for Latin America Upstream Ali
Moshiri was out of Venezuela at the time of the April 14 and
15 announcements. We do not believe that Moshiri knew in
advance that the GOV would take these actions. However,
Moshiri's assistant informed econoff April 21 that
ChevronTexaco will meet with PDVSA the week of April 25 to
discuss the issue.

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TAX AUTHORITIES SPEAK
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7. (C) Following some further confusion in which competing
government spokesmen said that the 50 percent tax on the OSAs
would be put into effect on either April 18 or April 25, the
Venezuelan tax authorities have issued a statement saying
that the tax increase would become payable as of April 18.
The statement also, however, indicates that the tax
authorities intend to qualify the companies as entities
carrying out hydrocarbons activities on their own, not as
contractors to PDVSA. This would have further serious
implications for the companies because it could lead to a
requirement that they themselves pay the royalty on their
production, not PDVSA.

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COMMENT
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8. (C) The GOV has handled this issue very clumsily. The
episode demonstrates, however, the deeply held feeling on the
part of the GOV that it should be the one to capture most of
the windfall profits now accruing to the oil sector. It
provides further proof that this government will not be bound
by contractual provisions and serves to underline the GOV's
message to the companies already on the ground in Venezuela
or those seeking to do business in Venezuela - if you don't
want to do business on our terms, get out.
Brownfield