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Venezuela Institutes Windfall Oil Tax to Support Social Programs, Education

by Fabiola Sanchez

CARACAS, Venezuela - Venezuela is imposing a windfall profits tax on royalties from oil projects when crude prices are above $40 a barrel, seeking to squeeze as much as $16 billion mostly out of foreign oil companies, the government said Tuesday.

Venezuelan President Hugo Chavez (C) attends to a ceremony with representatives of various industrial sectors of the country at Teresa Carreno theatre in Caracas April 26, 2011. Revenue from the oil tax will not used for investment in the oil industry, but rather will be funneled into the government's social programs and projects aimed at improving health care, education, housing, agriculture and infrastructure. (Credit: Reuters/Miraflores Palace/Handout) Energy Minister Rafael Ramirez said the tax, which was decreed by President Hugo Chavez last week, will allow the government to collect between $9 billion and $16.3 billion this year.

A 20 per cent tax will be in effect when the price of a barrel of Venezuelan oil is between $40 and $70 a barrel, Ramirez said. When the price is between $70 and $90, the tax rises to 80 per cent. Between $90 and $100, the tax reaches 90 per cent, and if the price tops $100 a barrel, a 95 per cent tax will be imposed.

The price of Venezuela's heavy, sulfur-laden crude reached $94.60 a barrel Tuesday, Ramirez said.

The tax will be imposed on Venezuela's state-run oil company as well as foreign oil firms operating in Venezuela's crude-rich Orinoco Belt, Ramirez said.

If Venezuelan crude remains above $90 throughout 2011, an estimated $9 billion will be funneled into a development fund, Ramirez said. If Venezuela's oil prices top $110, an estimated $16.3 billion could be collected.

Ramirez said revenue from the tax will not used for investment in the oil industry, but rather will be funneled into the government's social programs and projects aimed at improving health care, education, housing, agriculture and infrastructure.

"It's a powerful tool the state has designed to acquire windfall income," Ramirez said.

He denied the fund would exclude projects launched by state governors and mayors as some government critics have alleged.

Ramirez told journalists that the tax won't be imposed on "the development of new oil fields," projects aimed at boosting oil production and agreements such as Petrocaribe program, which provides oil and natural gas to some Latin American and Caribbean nations at preferential prices.

It also will not apply to a deal signed last year between Venezuela and China, under which Venezuela ships oil to the Asian giant in exchange for goods and services, Ramirez said. Under that agreement, China lent $20 billion to Venezuela in exchange for shipments of 100,000 barrels a day over a 10-year period.

Ramirez, who is also president of Venezuela's state-run oil company, known as PDVSA, said the company has a $4 billion debt owed to contractors.

PDVSA is negotiating with the owners of 74 oil service firms for compensation after the government expropriated the companies in 2009. Ramirez said negotiations have been slow because authorities believe some of the companies failed to pay taxes. If talks break down, the disputes will be settled in Venezuelan courts, he said.

PDVSA is awaiting a ruling from the World Bank's International Center for Settlement of Investment Disputes in a dispute with Exxon Mobil Corp. The case was brought by the Irving, Texas-based company in 2007 over the government's nationalization of the Cerro Negro heavy oil project.

Exxon Mobil has also sought to recoup increased royalties and taxes imposed by the government starting in 2004. Exxon Mobil's oil project was one of four taken over by Chavez's government in May 2007 as he brought the oil industry under majority state control.

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