Rosneft pressing Caracas for tax cuts: officials

Russian state-controlled Rosneft is seeking significant royalty and tax breaks from Venezuela's government as a condition for raising its upstream investments in the Orinoco heavy oil belt, Venezuelan energy ministry and state-owned PdV officials with direct knowledge of ongoing negotiations said.

Other issues on the table are corporate governance of the joint ventures in which the two companies are partnered, procurement transparency, exchange rate stability and operational security, the officials said.

Rosneft declined to comment on the details of the talks. "We stay in working contact with our [Venezuelan] partners, seeking efficient projects. We don't need inefficient ones. But we do not disclose the details of our talks with the partners," Rosneft spokesman Mikhail Leontyev told Argus today. Asked whether Rosneft considers its current projects in Venezuela efficient, Leontyev said: "It surely does."

The Venezuelan government has so far balked at Rosneft's demand for royalty and tax cuts, but has pledged to address the other concerns raised by the Russian officials. PdV's other foreign partners, such as China's state-owned CNPC and US major Chevron, have raised the same issues.

President Nicolas Maduro and senior energy officials are worried that accepting Rosneft's demands would lead to across-the-board tax cuts for all of PdV's joint venture partners, a ministry official said.

"Reducing oil royalties and taxes implies a reduction in the treasury's fiscal revenue that the government cannot afford. The revenue impact would be immediate, but the additional oil export revenue from higher crude production at PdV's joint ventures with Rosneft would take several years to materialize," the ministry official explained.

Rosneft's stance in talks with the energy ministry and PdV is that fiscal concessions are critical to ensuring the profitability of its upstream joint ventures in Venezuela, the ministry official added.

Rosneft has made it clear in talks with energy ministry officials that the government's refusal to grant the royalty and tax cuts could determine whether the company steps up the pace of investment in existing joint ventures and acquires new assets proffered last year by Caracas.

The Russian company currently holds minority stakes in three Orinoco joint ventures, including 40pc of the 140,000 b/d PetroMonagas upgrader built in the late 1990s by ExxonMobil and subsequently nationalized in 2007 by late president Hugo Chavez.

Rosneft also has 40pc in the planned 400,000 b/d PetroVictoria joint venture launched in 2013 in the Orinoco oil belt's Carabobo section and 32pc of the 400,000 b/d PetroMiranda venture launched in 2010 in the oil belt's Junin section. PdV holds controlling stakes in the ventures.

Outside of the Orinoco oil belt, PdV and Rosneft are 60:40 partners in Petroperija and Boqueron, two joint ventures that produce a combined 20,000 b/d from marginal oil fields in Zulia and Monagas states.

PdV was authorized by Maduro last year to offer Rosneft ownership stakes and operational control of the Rosa Mediano, Tia Juana Lago and Lagunillas Lago oil fields on Lake Maracaibo's eastern coast in Zulia state.

PdV also offered Rosneft a 10pc stake in its 210,000 b/d PetroPiar upgrader in which Chevron holds a 30pc stake. PetroPiar currently produces less than 120,000 b/d.

Since fourth quarter 2017 the attorney general has ordered the arrest of six senior managers and procurement executives at PetroPiar on corruption charges that include alleged bid rigging and falsifying production figures. Two Chevron employees working at PetroPiar were recently arrested.

PdV and Rosneft also have an agreement to develop a shallow-water gas project to produce, process and sell gas from the Patao, Mejillones and potentially the Rio Caribe fields near Venezuela's Paria Peninsula. These undeveloped gas fields comprise the second stage of PdV's 1.2bn cf/d Mariscal Sucre gas production project.

Venezuela's government enforces a combined oil royalty and tax rate that averages out to over 93pc, a local accountant and tax attorney tells Argus.

PdV and its joint venture partners are subject to an oil royalty of 30pc to 33.3pc at the government's discretion, as well as a 50pc income tax.

In addition, Venezuela's oil industry is subject to a range of other taxes including an oil extraction tax, export registration tax, municipal business tax, social tax, value added tax, stamp tax, and up to a 50pc tax on dividends before repatriation.