Saturday, May 13, 2006

The windfall profits belong to Venezuela, not Exxon-Mobil 

Last week I posted on the new extraction tax that Venezuela is imposing on oil companies. However, at the time I was confused and thought this was an across the board tax that applied to all oil operations. Apparently it is meant to only apply to the oil companies operating in the heavy oil projects of the Faja del Orinoco.

Yesterday in Vheadline Oliver Campbell, a former PDVSA finance director, published an excellent analysis of the new tax and how it would effect the profits of the oil companies in those projects. I highly recommend that everyone take some time and read it. But this is the bottom line. These projects were making profit of about $10 per barrel when oil prices were at the more "normal" level of $25 per barrel from 99 to 2002. And given that prices were even lower when these projects were initiated and were generating losses the oil companies were probably quite happy with the $10 per barrel profit these projects were getting.

Fast foward to the last couple of years and oil has gone through the roof. So these companies started making much higher profits - in fact even after the government increased taxes and royalties last year these projects were still making $20 per barrel profit. And remember, that isn't reveneue - that is pure profit.

Now once this new extraction tax is put into place Mr. Campbell caclulates that the profits will be back down to $10 per barrel. Certainly that is a very reasonable rate of return - after all several years ago the companies were more than happy with it. So all this new tax structure has done is make sure that the windfall profits from the recent run-up in oil prices go to Venezuela and not to companies like Exxon-Mobil. Given that Exxon-Mobil had profits of $36 billion last year I'm not going to lose to much sleep over this.


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