US embassy cable - 05CARACAS1230

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