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Editor's Mail

Reply to Mr George Philip

----- Original Message -----

From: Oliver L. Campbell

To: Elio Ohep

Sent: Friday, May 26, 2006 12:23 PM

Subject: Philip's article

Reply to Mr George Philip

I enjoyed reading the article by Mr George Philip on oil politics in Venezuela and agree with most of what he says. However, there are three points on which I would like to comment:

1) Tax avoidance. It is a mistake to say PDVSA “engaged in tax avoidance as ruthlessly as any private oil company.” In fact, PDVSA has nothing to gain from reducing the tax bill as this only increases the net profit which the government can then take as dividends. That is why, after increasing royalties to 33.33 percent and income tax to 50 percent, Dr Mommer recently informed us the government take, composed of royalties, income tax and net profit, would rise to 87 percent. An article I wrote in April 2004 entitled “Why national taxes are irrelevant in a State oil company” explains the situation: http://www.vheadline.com/readnews.asp?id=17584

2) Planning privatisation. It is not true to say PDVSA was “actively planning its own gradual privatisation.” The “apertura,” or invitation to foreign investors, in the 1990s only occurred because oil prices were low, the government took most of the cash, and PDVSA had insufficient funds for investment. The fact these companies raised production to some 500.000 b/d is a great success story. Maybe the “Old PDVSA” was more friendly to the multinationals than the “New PDVSA” but only because they were needed to increase production quickly.

Under the 32 Operating Agreements, the companies were just service contractors and owned no part of the production. Under the change to mixed companies, the private partners are entitled to their share of the oil. So this is more of a “privatisation” than the previous system since the companies are now partners with PDVSA.

The reason this privatisation continues is basically the same--PDVSA does not have sufficient funds to undertake all the investment on its own. Much the same as in the marginal fields, they also need the know-how the private and other State companies can provide.

3) Increased production. The “reputation for high-handedness” admittedly does not help, but there is no lack of interest in investing in the Orinoco Oil Belt. Oil companies are hard headed and thick skinned and they will look at the opportunity rather than any slight suffered. The financial conditions are tough but, even so, the companies can still make a reasonable return.

Venezuela has a good track record with the multinational oil companies. The current rhetoric tends to be strong but there is a mutual interest—to increase production and make more money.

Oliver L Campbell

26.05.06

Petroleumworld 05 29 06

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