Petroleum Fiscal Regimes

8/3/2019 Petroleum Fiscal Regimes

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Pet ro leum Fiscal Regim esBasic Concept sDr. Al f red Kjem perud

Dr. Alfred Kjemperud 2CCOP, Pattaya, September 2003

Opening St a t ement s The f isca l ar rangement is t he

Government s most im por tant t oo l for managing pet ro leum resources

I t is m andatory for a l l managers andtec hnica l personnel in the Government and indust ry to understand the bas icsof fisca l ar rangement s


2/232


Governm ent Opt ions Value of Nat ional Resources -

Determ in ing Fact ors

The resource base

The marke t o i l p r ice

Terms and regu la t ions


Costs

Income

Time

Pre-license Exploration Development Production AbandonmentProduction

Rehab.

Government

Act iv i t ies and c ash f low

Contractsigning

PDO


3/233


General Objec t ive

The ob jec t ive o f pe t ro leumresource m anagement is :

To m a x im ise t he va lue o f t h e p et r ol eu m r es ou rc e


Company ob ject iveTo at t a in max imum ne t

p resen t va lue o f the pe t ro leum resources

Bui ld equ i t y


4/234


Government Object ives Prov ide a fa i r re t urn to t he

s ta t e and the indus t ry

Avoid undue specu la t ion

L imi t undue admin is t ra t ion

Prov ide f lex ib i l i ty

Crea te hea lthy com pet i t ion

Crea te a marke t e f f i c iency


The role o f the author i t iesDef in i t ion of po l icy

Set t ing of te rms

Promot ion

Licens ingMoni tor ing and superv is ion

Adjustm ent o f t e rms as requ i red

Manag ing the im pac t


5/235


Pet ro leum Fiscal Regim es Covers : Legis la t ive issues

Tax issues

Contrac tual issues

There are more f i sca l sys tem sin the w or ld than there a re coun t r ies due to : Negot ia t ion o f Terms

Numerous v in tages


Legal /Cont rac t ua l Framew orkThe Constitution

The fundation which is the basis for all other regulationsThe Law

E.g. tax law

Petroleum Law and Legislation

Not all countries have a separate petroleum law. If that is thecase the contract has to cover all aspects

Production sharing Contract

Concessionary agreement in countries using that system

Joint Operating Agreements

Between partners in a field (can also be the state company)


6/236


Ec onomic Rent The Class ic Def in i t ion by

Economis ts The produce of the ear th der ives

f rom labour and capi t a l

The produce is d iv ided betw een: Labourers (Wages)

Owners of Capi ta l (Prof i t )

Ow n ers of Land (Rent )

Rent = Va lue - Cos t


Resourc e RentAl locat ion of revenues from Product ion

After Johnston (1995)

Bonuses

Royalties

Prod. Sharing

Taxes

Gov. Participation


7/237


Regress ive - Progress ive

Regressive Progressive

Bonuses Royalties Profit TaxProduction Sharing

Gove

rnm

entR

isk

The non profit based government takes (bonus and royalties) are regressive i.e. the lower

profitability the higher effective tax

Before cost recovery Cost recovery phases

Pre

dis

cove

ry

Postdi

scov

ery


Regressive syst em85 %

0 %

20 %

40 %

60 %

80 %

100 %

Appl

icatio

nfee

Sign

ature

bon

us

Disc

over

ybon

us

Prod

uctio

nfee

/Roy

alty

Prod

uctio

nSh

aring

Inco

meT

ax

Spec

ialPet

roleu

mTax

Repa

triatio

nTa

x

Individual taxes

Cummulative taxation



8/238


Progressive syst em85 %

0 %

20 %

40 %

60 %

80 %

100 %

Appli

cationf

ee

Sign

atureb

onus

Disc

overybo

nus

Prod

uctio

nfee

/Roya

lty

Prod

uctio

nShar

ing

Income

Tax

Spec

ialPet

roleum

Tax

Repa

triation

Tax

Individual taxes

Cummulative taxation



Rent vs. Risk The Prof i t Margin for t he Oi l

Companies m ust be la rgeenough to acc omm odate

fa i lures Nine out o f Ten explorat ion possib i l i t ies

a re unsuccessfu l


9/239


Risk- & Non Risk-Takers Fisca l Terms must acc ount

for t he large Risk in t he Oi l Business

Oi l Compan ies are High Risk Takers Companies c an reduce r isk by

d ivers i f icat ion

Go ve rn m en t s a re L ow Ri sk T ak e rs Governments c an reduce r i sk by in t roduc ing a Regress ive tax system(Bonuses and Royalt ie s)


Poor GoodGeological Promise

GovernmentTake

Low

High

High interest from

Oil Companies

Potential for higher

Government take

Low interest from

Oil Companies

Low potential for any

Government take

Optim

izedF

iscalTerm

s

Global Ex plorat ion Market


10/2310


Value of Discovery a f t er TaxI l lus t r a ted as F ie ld Size

A 25 million bbl field in Ireland gives the same profit after tax for the oil company as a 144 million bbl field in Indonesia

The Importance of Fiscal Regimes

117

46

75

45

144

25

99104 104

40

63

49

94

0

20

40

60

80

100

120

140

160

Ang

ola

Camer

oon

Chin

a

G

abon

India

Indone

sia

Ire

land

Malay

sia

Nige

ria

Norwa

y

Philippi

nes

Viet

nam

Bangla

desh

MMBBL

Necessary Field Size to match low est

tax regime (Ireland)Reference Field Size (25 MMBBL)


UK Tax Reform

0

5

10

15

20

25

30

35

40

45

77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

Years

MM

%

0

50

100

150

200

250

300

350

MMtons/ton

Tax revenue relative to Total revenue (%)

Absolute tax revenue (MM)

Oil Price (/ton)

Production (MM tons o.e.)

PRT removed

for new fields

Royalty

removed for

new fields


11/2311


Petro leum Fisc a l Syst ems

Tw o Fami l ies

Concess ionary syst em

Al lows pr iva te ow nersh ip to minera l resources

Cont rac t ua l sys tems

The Sta t e re ta ins ow nersh ip to minera l resources


Fisca l Sys tem s Class i f i cat ion

Petroleum Fiscal ArrangementsPetroleum Fiscal Arrangements

Concessionary SystemsConcessionary Systems

Contractual SystemsContractual Systems

NorwayNorway

United KingdomUnited Kingdom

PakistanPakistan

TunisiaTunisia

New ZealandNew Zealand

Service ContractsService Contracts

Production Sharing ContractsProduction Sharing Contracts

Pure Service ContractsPure Service Contracts

Risk Service ContractsRisk Service Contracts

Limited usageLimited usage

MexicoMexico

ArgentinaArgentina

BrazilBrazil

VenezuelaVenezuela

The PhilippinesThe Philippines

I nd on es ia n ( pr of it ) P er uv ia n ( gr os s)

Indonesia

Angola

Yemen

Albania

Nicaragua


12/2312


Sy st e m s ar ou nd t h e Wo rl dAustralia Pakistan (On) Bangladesh Mongolia Philippines

Brunei PNG Cambodia Myanmar

Korea, South Thailand China Pakistan (Off)

New Zealand Timor Gap B India Timor Gap A

Indonesia Vietnam

Laos Nepal

Malaysia Sri Lanka

Azerbai jan Russia

Georgia Turkmenistan

Kazakstan Uzbekistan

Kyrghystan

Argentina Falkland Is. Belize Nicaragua Brazil Honduras

Bolivia Paraguay Cuba Panama Chile Panama

Colombia T&T (On) Guatemala T&T (Off) Ecuador Peru

Costa Rica Guyana Uruguay Haiti

Jamaica Venezuela

Abu Dhabi Neutral Zone Bahrain Oman IranAjman Sharjah Iraq Qatar Kuwait (OSA)

Dubai Turkey Joran Syria Saudi Arabia

Fujairah Libya Yemen

Canada

United States

Concessions (R/T System) PSC SC

North America

Far East

Former Soviet

Union

Latin America

Middle East


Sy st e m s ar ou nd t h e Wo rl dC. Afracan Rep. Namibia Algeria Liberia

Chad Niger Angola Libya

Congo (K.) Senegal Benin Madagascar

Ghana Seychelles Cameroon Mozambique

Madagascar Somalia Congo (Br.) Nigeria

Malawi South Afr ica Cote D'Ivoire SudanMali Tunisia (Old) Egypt Tanzania

Morocco Eq. Guinea Togo

Ethiopia Tunisia (New)

Gabon Uganda

Gambia Zambi a

Kenya

Australia Italy Albania

Bulgaria Netherlands Ma lta

Czech Republic Norway Poland

Denmark Poland Turkey

France Portugal

Greece Romania

Hungary Spain

Ireland UK

Africa

Europe

R/T System PSC SC


13/2313


Conc essionary Syst em Oi l com pany have exc lus ive r igh t t o

exp lo re and produce a t i t s ow n r isk and expense

Oil Company Ow ns product ion

Oil Company of ten pays Royal ty andSur face rent a l to Government

Oil Com pany Pays Taxes on prof i t

Oil Company ow ns equipment

Oil com pany has r ight t o expor t hydrocarbons


Produc t ion Shar ingCont ract The Cont rac t or gets a

share o f p roduct ion usua l ly in k ind

The Cont rac t or never ho lds t i t l e to oi l

The Cont rac t or share t her i sk w i th t he Government


14/2314


Risk Serv ice Cont rac t s The Cont rac t or share t he

r i sk w i th t he Government

The Cont rac t or gets a share of Prof i t s usual ly asmoney

The Cont rac t or never ho lds t i t l e to oi l


Tec hnic a l Assis t ant (EOR)Cont rac ts Jo in t Ven tu re

PSC

Oil Company Financ ing DMO (Domest ic Market Obl igat ion)

Base Oi l or Det erm ined Oi l


15/2315


J V Burden on Cont rac t or

Pure

JV

All

cost/

risk

shar

ed

TypicalJ

V

Gov

ernm

entc

arrie

d

through

Exploratio

n

Full

CarryJV

Gov

ernm

entc

arrie

dth

roug

h

Expl

oratio

nan

dD

evel

opm

ent

FSU

type

JV

Gov

ernm

entc

arrie

dth

roug

h

Reha

b.And

Dev

elop

men

t

until

cas

hflo

wfrom

Ope

ratio

ns

Light Heavy

Burden on Contractor


Direct St a t e Par t ic ipa t ion Free Ride

Have access to a l l in fo rmat ion Can choose the goodies

Does not pay for pre-l icense ex plorat ionDoes not pay for R& D

Carr ied in t erest

The Stat e can be car r ied t hrough: Explorat ion

Explorat ion +Development


16/2316


Elem ent s in a PSC Work Comm i tm ent

Bonus Paym ent

Royal t ies

Cost Recov ery (Cost Oi l )

Prof i t Oi l

Government par t i c ipa t ion

Domest ic Marke t Ob l igat ion Ring fenc ing


Indonesia- PSC (4 t h Gen.)M ot h e r o f a ll PSCs

(85/15 Spl i t )

Royal t y: 0%

FTP spl i t 20%

Cost Oi l : 100%

Prof i t Oi l : 28.8462%

Tax Rat e: 48%

Ef fects

The sp l i t does no t changew i th the leve l of cost

Effect ive Gov. take is 85%

Contractor GovernmenGross

Revenues100

5.8

First Tranche

Petroleum 14.2

20 %14.2 %

Net Revenues80

28.0 Cost Oil35 %

Profit oil52

15.0Profit oil to

Contr. 37.028.8462 %

Taxable20.8

-10.0 Tax 10.048 %

38.8After tax

entitlement 61.2

10.8

Net Cash

Flow 61.2

15 % Take 85 %


17/2317


Work Comm i tm ents Acqu is i t ion o f Seismic Data Shoot ing, where and w hen

Processing

Ki lomet res or M in imumExpendi ture

Dri l l ing Obl igat ionsNumber of Wel ls , w here and when

Strat igraphic in terva l

Minimum Expendi ture


Bonuses Signature BonusPaid upon cont rac t s ign ing

Disc overy BonusPaid upon f i rst d iscovery

Product ion BonusPaid w hen product ion reaches a

speci f ied level

Bonuses makes a f isca l reg imeregress ive and are unpopular w i th o i l com pan ies


18/2318


Royal t ies Calc u la t ed f rom Gross Revenue

Can cause p remature abandonment

Ranges f rom zero t o 20%

Sl id ing sc a le (Example.) Fi rs t St ep Up t o 5 .000 bopd 5%

Sec ond St ep 5.001-10 .000 bopd 10%

Third St ep Above 10 .000 bopd 15%


Specia l Roya l ty Sc hemes The Phi l ipp ines have a

negat ive Roya l ty up t o 7 ,5%(Ph i l ipp ine Par t ic ipa t ion Incent ive Al low ance - FPIA)

New Zealand have a hybr id system 5% Royal ty or 20 %Acc ount ing Pro f i t s Royal ty

Rate Royal t y $/bbl (Colum bia,Russia)


19/2319


Negat ive Roya l ty Schem ePhilippine RSC Flow Chart

Contractor Government

Gross Revenues

100

FPIA 7.5

7.5 %

Net Revenues

92.5

32.4 Cost Recovery

35 %

Revenues for sharing

60.13

24.1 Profit share 36.1

40 %

Taxable

24.1

Tax paid by Gov.

0.0 0 % 0.0

7.5 FPIA (% of Gross)

31.6 Service Fee

32.4 Cost Recovery

63.9 Entitlement 36.1

46.7 % Take 53.3 %


Cost Oi l (Cost Rec overy) Cost Oi l usua l ly has an upper l im i t

Cost o i l normal ly inc ludes: Unrecovered cos ts car r ied over f rom

prev ious years

Operat ing cost s Expensed cap i ta l cos t s

Current year DD& A ( Deprec ia t ion , Dep le t ion &Amor t i sa t ion )

In terest on Financing

Investm ent Credi t (Upl i f t )

Abandonment c os t recovery fund


20/2320


Cost Rec overy

Cruel Unusual Low End

TypicalUpper End

TypicalRare Concessions

+ a few

PSCs

0 20 40 60 80 100

Range of Cost Recovery Limits (%)


Prof i t Oi l Prof i t o i l = Net revenue - Cost rec overy

Net revenue = Gross revenue - Royal t ies

Prof i t o i l is analogue to tax able incom e in

a conc essionary system and Serv ice feein a serv ice agreement

Prof i t o i l is sp l i t betw een Government and Cont rac tor

Prof i t o i l is usual ly , but not a lw ays tax ed


21/2321


Rat io-Fac t or (R-fac t or ) Objec t ive

Sh ar in g b et w e en t h e Go ve rn m en t a nd t h e c o nt r at o r i s b as ed o n Prof i tab i l i ty

Design

B ot h re ven ue an d c os t are i nc l ud ed i n t h e c a lc u la t io n

R =Contractors cumulative revenue

Contractors cumulative cost


Di ff er en t R- Fac to r s Cumulat ive revenues/Cumulat ive c ost

Cumulat ive Revenue-Cumulat ive Opex/cumulat iveCapex

Cumulat ive Revenue Cumulat ive Prof i t Share/Cumulat ive Invest ment s + Cumulat ive Opex

Cumulat ive net incom e/Cumulat ive Costs


22/2322


Peruvian onshore

R-Factor ************ROYALTY RATE *************

$15/bbl $25/bbl $35/bbl

0.0 < R < 1.0 19% 23% 27%

1.0 R < 1.5 24% 29% 32%

1.5 R < 2.0 30% 35% 37%

2.0 R 36% 39% 42%


Domest ic Market Obl igat ions (DMO) A ce r ta in vo lume o f o i l t o be sold to the Government

Di sc ou nt e d Pr ic e

Loca l Cu r rency . Prede te rm ined exchange rate

Example - Indones ian DMO Product ion: 1 MMBBL

Oi l pr ic e: 20 USD/BBL

Disc ount : 2 USD/BBL

Cont rac tor s pro f i t o i l : 28 .8462% of to t a l p roduct ion

DMO: 25% of Cont rac t ors prof i t o i l

1MMBBL*(20USD/BBL-2USD/BBL)*25%* 28.8462%= 1,298 MMUSD

1,298MMUSD/20USD/BBL=0.0649 MMBBL=6.49%of to ta l p roduct ion ( Pure vo lume ca lcu la t ion : 28 .8462%*25%=7.21%)


23/23


The Impor tance o f Tax Ho l idays

0.0

5.0

10.0

15.0

20.0

25.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Years

MMBBL

Production curve (100 %)

Protected by 5y tax holiday (62 %)

A 5 years tax holiday represents 25% of project time,

but 62 % of produced volume (Undiscounted)


Poor GoodGeological Promise

GovernmentTake

Low

High

High interest from

Oil Companies

Potential for higher

Government take

Low interest from

Oil Companies

Low potential for any

Government take

Optim

izedF

iscalTerm

s

Global Ex plorat ion Market

Documents

Petroleum Fiscal Regimes