Petroleum Fiscal Regimes

Petroleum Fiscal Regimes Basic Concepts
Dr. Alfred Kjemperud
Opening Statements
The fiscal arrangement is the Governments most important tool for managing petroleum resources It is mandatory for all managers and technical personnel in the Government and industry to understand the basics of fiscal arrangements
CCOP, Pattaya, September 2003
Government Options
Value of National Resources Determining Factors
The resource base The market oil price Terms and regulations
Activities and cash flow

Contract signing
Income
PDO
Government
Time
Costs
Pre-license Exploration Development Production Production Rehab. Abandonment
General Objective
The objective of petroleum resource management is: To maximise the value of the petroleum resource
Company objective
To attain maximum net present value of the petroleum resources Build equity
Government Objectives
Provide a fair return to the state and the industry Avoid undue speculation Limit undue administration Provide flexibility Create healthy competition Create a market efficiency
The role of the authorities

Definition of policy Setting of terms Promotion Licensing Monitoring and supervision Adjustment of terms as required Managing the impact
Petroleum Fiscal Regimes

Covers :
Legislative issues Tax issues Contractual issues
There are more fiscal systems in the world than there are countries due to:
Negotiation of Terms Numerous vintages
Legal/Contractual Framework
The Constitution The fundation which is the basis for all other regulations The Law E.g. tax law Petroleum Law and Legislation Not all countries have a separate petroleum law. If that is the case 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)
10
Economic Rent
The Classic Definition by Economists
The produce of the earth derives from labour and capital The produce is divided between:
Labourers (Wages) Owners of Capital (Profit) Owners of Land (Rent)
Rent = Value - Cost
11
Allocation of revenues from Production

Bonuses Royalties Prod. Sharing Taxes Gov. Participation
Resource Rent
After Johnston (1995)
12
Regressive - Progressive
Before cost recovery
Government Risk
Cost recovery phases
ov e
Pr
Po
st dis c
ed isc
ov ery
ry
Bonuses
Royalties
Production Sharing
Profit Tax
Regressive
Progressive
The non profit based government takes (bonus and royalties) are regressive i.e. the lower profitability the higher effective tax
13
Regressive system
100 % Regressive
Individual taxes
Progressive 85 %
80 %
Cummulative taxation
60 %
40 %
20 %
0%
Ap pl ic at io n Si fe gn e at ur e bo D nu is co s ve Pr ry od bo uc nu t io s n fe e/ R Pr oy od al uc ty t io n Sh ar in g In Sp co m ec e ia Ta lP x et ro le um R Ta ep x at ria tio n Ta x
14
Progressive system
100 % Regressive
Individual taxes
Progressive 85 %
80 %
Cummulative taxation
60 %
40 %
20 %
0%
Ap pl ic at io n Si fe gn e at ur e bo D nu is co s ve Pr ry od bo uc nu t io s n fe e/ R Pr oy od al uc ty t io n Sh ar in g In Sp co m ec e ia Ta lP x et ro le um R Ta ep x at ria tio n Ta x
15
Rent vs. Risk

The Profit Margin for the Oil Companies must be large enough to accommodate failures
Nine out of Ten exploration possibilities are unsuccessful
16
Risk- & Non Risk-Takers

Fiscal Terms must account for the large Risk in the Oil Business
Oil Companies are High Risk Takers Companies can reduce risk by diversification Governments are Low Risk Takers Governments can reduce risk by introducing a Regressive tax system (Bonuses and Royalties)
17
Global Exploration Market

High Low interest from Oil Companies Low potential for any Government take
Government Take
F zed mi pti O
s rm Te l sc a
High interest from Oil Companies Potential for higher Government take Good
Low
Poor
Geological Promise
18
Value of Discovery after Tax

Illustrated as Field Size
144 140 117 120 104 104 99 160
Necessary Field Size to match low est tax regime (Ireland) Reference Field Size (25 MMBBL)
MMBBL
94 100 75
80
63 60 46 40 25 20 45 40 49
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
An go C am la er oo n C hi na G ab on In di In do a ne sia Ire la nd M al ay si a N ig er ia N or w Ph ay ilip pi ne s Vi et na Ba m ng la de sh
The Importance of Fiscal Regimes

Dr. Alfred Kjemperud CCOP, Pattaya, September 2003
19
UK Tax Reform
45 350 40
35
Tax revenue relative to Total revenue (%) Absolute tax revenue (MM) Oil Price (/ton) Production (MM tons o.e.)
300
250 30 200
25
20
150
15
100 10
PRT removed for new fields Royalty removed for new fields
50
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 Years
20
M M to n s /to n
MM
10
Petroleum Fiscal Systems

Two Families
Concessionary system
Allows private ownership to mineral resources
Contractual systems
The State retains ownership to mineral resources
21
Fiscal Systems Classification
Petroleum Fiscal Arrangements Petroleum Fiscal Arrangements Concessionary Systems Concessionary Systems Norway Norway United Kingdom United Kingdom Pakistan Pakistan Tunisia Tunisia New Zealand New Zealand Pure Service Contracts Pure Service Contracts Service Contracts Service Contracts Risk Service Contracts Risk Service Contracts Argentina Argentina Brazil Brazil Venezuela Venezuela The Philippines The Philippines Contractual Systems Contractual Systems Production Sharing Contracts Production Sharing Contracts Indonesian (profit) Peruvian (gross)
Limited usage Limited usage Mexico Mexico
Indonesia
Angola
Yemen
Albania
Nicaragua
22
11
Systems around the World

Concessions (R/T System) Australia Brunei Korea, South New Zealand Pakistan (On) PNG Thailand Timor Gap B Bangladesh Cambodia China India Indonesia Laos Malaysia Azerbaijan Georgia Kazakstan Kyrghystan Belize Cuba Guatemala Guyana Jamaica Bahrain Iraq Joran Libya PSC Mongolia Myanmar Pakistan (Off) Timor Gap A Vietnam Nepal Sri Lanka Russia Turkmenistan Uzbekistan Nicaragua Panama T&T (Off) Uruguay Oman Qatar Syria Yemen SC Philippines Far East
Former Soviet Union Argentina Bolivia Colombia Costa Rica Abu Dhabi Ajman Dubai Fujairah Canada United States Falkland Is. Paraguay T&T (On)
Latin America
Middle East
Neutral Zone Sharjah Turkey
Brazil Honduras Chile Panama Ecuador Peru Haiti Venezuela Iran Kuwait (OSA) Saudi Arabia
North America
23
Systems around the World

R/T System C. Afracan Rep. Chad Congo (K.) Ghana Madagascar Malawi Mali Morocco Namibia Niger Senegal Seychelles Somalia South Africa Tunisia (Old) PSC Algeria Angola Benin Cameroon Congo (Br.) Cote D'Ivoire Egypt Eq. Guinea Ethiopia Gabon Gambia Kenya Albania Malta Poland Turkey Liberia Libya Madagascar Mozambique Nigeria Sudan Tanzania Togo Tunisia (New) Uganda Zambia SC
Africa
Europe
Australia Bulgaria Czech Republic Denmark France Greece Hungary Ireland
Italy Netherlands Norway Poland Portugal Romania Spain UK
24
12
Concessionary System
Oil company have exclusive right to explore and produce at its own risk and expense Oil Company Owns production Oil Company often pays Royalty and Surface rental to Government Oil Company Pays Taxes on profit Oil Company owns equipment Oil company has right to export hydrocarbons
25
Production Sharing Contract

The Contractor gets a share of production usually in kind The Contractor never holds title to oil The Contractor share the risk with the Government
26
13
Risk Service Contracts

The Contractor share the risk with the Government The Contractor gets a share of Profits usually as money The Contractor never holds title to oil
27
Technical Assistant (EOR) Contracts

Joint Venture PSC Oil Company Financing DMO (Domestic Market Obligation) Base Oil or Determined Oil
28
14
JV Burden on Contractor
P A l ure l c JV os t/r isk Ty shar ed Go pic th ver al J ro nm V ug e h nt Ex ca pl rri or ed ati Fu on Go ll C Ex ver ar pl nm ry or ati ent JV on ca an rrie dD d ev thro FS elo ug Go U t pm h ve yp Re en ha rnm e JV un t til b . A e n t ca nd ca sh r flo Dev ried w elo th fro pm rou m g O p e nt h era tio ns
Light
Heavy
Burden on Contractor
29
Direct State Participation

Free Ride
Have access to all information
Can choose the goodies
Does not pay for pre-license exploration Does not pay for R&D
Carried interest
The State can be carried through:
Exploration Exploration +Development
30
15
Elements in a PSC
Work Commitment Bonus Payment Royalties Cost Recovery (Cost Oil) Profit Oil Government participation Domestic Market Obligation Ring fencing
31
Indonesia- PSC
(85/15 Split) Royalty: FTP split Cost Oil : Profit Oil: Tax Rate: 0% 20% 100% 28.8462% 48%
Mother of all PSCs
(4th Gen.)
Government
Gross Revenues
100
Contractor
5.8
First Tranche Petroleum 20 %

14.2 %
14.2
Net Revenues
80
28.0
Cost Oil
35 %
Profit oil
52
Effects The split does not change with the level of cost Effective Gov. take is 85%
15.0
Profit oil to Contr.

28.8462 %
37.0
Taxable
20.8
-10.0
Tax
48 %
10.0
38.8
After tax entitlement Net Cash Flow Take
61.2
10.8 15 %
61.2 85 %
32
16
Work Commitments
Acquisition of Seismic Data
Shooting, where and when Processing Kilometres or Minimum Expenditure
Drilling Obligations
Number of Wells , where and when Stratigraphic interval Minimum Expenditure
33
Bonuses
Signature Bonus Discovery Bonus
Paid upon contract signing Paid upon first discovery
Production Bonus
Paid when production reaches a specified level Bonuses makes a fiscal regime regressive and are unpopular with oil companies
34
17
Royalties
Calculated from Gross Revenue Can cause premature abandonment Ranges from zero to 20% Sliding scale (Example.)
First Step Second Step Third Step Up to 5.000 bopd 5.001-10.000 bopd Above 10.000 bopd
5% 10% 15%
35
Special Royalty Schemes

The Philippines have a negative Royalty up to 7,5% New Zealand have a hybrid system 5% Royalty or 20 % Accounting Profits Royalty Rate Royalty $/bbl (Columbia, Russia)
(Philippine Participation Incentive Allowance - FPIA)
36
18
Negative Royalty Scheme

Philippine RSC Flow Chart
Contractor
Gross Revenues 100 FPIA 7.5 % Net Revenues 92.5 7.5
Government
32.4
Cost Recovery 35 % Revenues for sharing 60.13
24.1
Profit share 40 % Taxable 24.1 Tax paid by Gov.
36.1
0.0 7.5 31.6 32.4 63.9 46.7 %
0% FPIA (% of Gross) Service Fee Cost Recovery Entitlement Take
0.0
36.1 53.3 %
37
Cost Oil (Cost Recovery)

Cost Oil usually has an upper limit Cost oil normally includes:
Unrecovered costs carried over from previous years Operating costs Expensed capital costs Current year DD&A ( Depreciation, Depletion & Interest on Financing Investment Credit (Uplift) Abandonment cost recovery fund
Amortisation)
38
19
Cost Recovery
Range of Cost Recovery Limits (%)
0
Cruel
20
40
60
80 100
Concessions + a few PSCs
Unusual Low End Upper End Rare Typical Typical
39
Profit Oil
Profit oil = Net revenue - Cost recovery
Net revenue = Gross revenue - Royalties
Profit oil is analogue to taxable income in a concessionary system and Service fee in a service agreement Profit oil is split between Government and Contractor Profit oil is usually, but not always taxed
40
20
Ratio-Factor (R-factor)
Objective
Sharing between the Government and the contrator is based on Profitability
Design
Both revenue and cost are included in the calculation Contractors cumulative revenue R= Contractors cumulative cost
41
Different R- Factors
Cumulative revenues/Cumulative cost Cumulative Revenue-Cumulative Opex/cumulative Capex Cumulative Revenue Cumulative Profit Share/Cumulative Investments + Cumulative Opex Cumulative net income/Cumulative Costs
42
21
Peruvian onshore
R-Factor 0.0 < R < 1.0 1.0 R < 1.5 1.5 R < 2.0 2.0 R
************ROYALTY RATE ************* $25/bbl $15/bbl $35/bbl 19% 23% 27% 24% 29% 32% 30% 35% 37% 36% 39% 42%
43
Domestic Market Obligations (DMO)

A certain volume of oil to be sold to the Government Discounted Price Local Currency. Predetermined exchange rate Example - Indonesian DMO
Production: 1 MMBBL Oil price: 20 USD/BBL Discount: 2 USD/BBL Contractors profit oil: 28.8462% of total production DMO: 25% of Contractors profit oil
1MMBBL*(20USD/BBL-2USD/BBL)*25%*28.8462%= 1,298 MMUSD 1,298MMUSD/20USD/BBL=0.0649 MMBBL= 6.49% of total production ( Pure volume calculation: 28.8462%*25%=7.21%)
44
22
The Importance of Tax Holidays

25.0
Production curve (100 %)

20.0
Protected by 5y tax holiday (62 %) MMBBL

15.0
10.0
5.0
0.0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Years
A 5 years tax holiday represents 25% of project time, but 62 % of produced volume (Undiscounted)
Dr. Alfred Kjemperud CCOP, Pattaya, September 2003
45
Global Exploration Market

High Low interest from Oil Companies Low potential for any Government take
Government Take
F zed mi pti O
s rm Te l sc a
High interest from Oil Companies Potential for higher Government take Good
Low
Poor
Geological Promise
46
23

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Petroleum Fiscal Regimes Basic Concepts

Dr. Alfred Kjemperud

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

Activities and cash flow

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

The role of the authorities

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003