Venezuela's Amended Hydrocarbon Fiscal Framework: A Straitjacket on Heavy Oil Developments?

Recent amendments to Venezuela's hydrocarbon and income tax laws have taken three additional steps toward consolidating government control and value participation in Venezuela's hydrocarbon industry. The main objective of the amendments appears to be securing higher state participation in the stream of profits generated by the extra-heavy oil (EHO) businesses operating in the Orinoco Oil Belt, where Venezuela's largest hydrocarbon potential resides. Implications of the new fiscal framework include

* Dramatically increased breakeven prices for EHO developments. Breakeven prices are likely to be above US$30 per barrel, levels that could prove unsustainable and would discourage new grassroots developments.
* The industrial nature of EHO upgrading is implicitly ignored. Requiring the migration of vertically integrated businesses into nonintegrated structures and dismembering the value chain, in addition to defeating the original purpose of the law, will pose a number of challenges for EHO operations.
* The new fiscal framework is largely regressive and inflexible. There are very few provisions for incentives or reduced tax burdens, and those that are included are entirely discretional and can only be granted if hydrocarbon authorities deem it necessary. This lack of flexibility is a significant disincentive to new investments and future sector growth.

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