The future of government petroleum regimes

Transcription

1 The future of government petroleum regimes Presentation to Iraq Iraq Energy Forum Workshop April 4, 2017, Baghdad Pedro van Meurs

2 Future trends in government petroleum regimes During this presentation the following topics will be discussed: upstream petroleum regimes trends in government take trends in structure of petroleum regimes trends in fiscal stability trends in petroleum regimes 2

3 Future trends in government petroleum regimes upstream petroleum regimes trends in government take trends in structure of petroleum regimes trends in fiscal stability trends in petroleum regimes 3

4 Petroleum Arrangements: Classification There are 6 Style Petroleum Arrangements: Concessions ( incl. Licenses, Leases, License Contracts) Petroleum to Concessionaire royalty to State Production Sharing Contracts Petroleum is shared based on formula in contract Joint Venture Contracts Petroleum is shared based on working interest Risk Service Contracts Petroleum to State Fees in kind or cash to Contractor Profit Sharing Contracts Petroleum to State Profit Share in cash to Contractor Other Contracts Petroleum sharing defined in contract 4

5 Petroleum Arrangements Fiscal Aspects From a financial perspective following are the most important concepts between governments and companies in petroleum arrangements: 1. Royalties 2. Corporate Income Tax 3. Production Sharing 4. Joint Ventures with Government 5. Gross Revenue Taxes 6. Windfall Profit Taxes 7. Resource taxes, Profit shares to Government 8. Export Duties 9. Service Fees to Contractors 10. Profit Shares to Contractors 5

6 Petroleum Arrangements Fiscal Aspects: Fixed Royalties Fixed percentage royalties are widely used: 1.25% Papua/New Guinea, recently 2% 5% Timor Leste 9% Falkland Islands 10% Australia onshore, Gabon, Malaysia, Yemen, Brazil above Salt, India, JDA 12% Argentina 12.5% Benin, Cambodia, Ghana, Syria, Tanzania Namibia, US Federal onshore areas, Turkey 15% Congo (Brazzaville), Brazil Pre-Salt 16.67% Many states of the US 18% Bolivia 18.75% Oklahoma, US Gulf of Mexico 20% Neutral Zone 25% Offshore Texas in state waters 30% Venezuela 2002 oil royalties 6

7 Petroleum Arrangements Fiscal Aspects: Sliding Royalties 1. LEVEL OF FIELD PRODUCTION 2. LEVEL OF WELL PRODUCTION 3. CUMULATIVE PRODUCTION 4. LEVEL OF WELL PRODUCTION AND PRICE 5. BASED ON PAYOUT 6. BASED ON AN "R" FACTOR 7. BASED ON IRR 8. BASED ON ELAPSED TIME 9. BASED ON GRAVITY OF THE OIL 10.BASED ON PRICE 7

8 Petroleum Arrangements Fiscal Aspects: Corporate Income Tax Corporate Income Tax is levied on Taxable Income, which is typically calculated as follows: GROSS REVENUES 100 LESS: PAYMENTS TO GOVERNMENT 20 OPERATING COSTS 15 DEPRECIATION 20 INTEREST ON LOANS 5 PRIOR LOSSES TAXABLE INCOME 30 TAX RATE, SAY 40% AFTER TAX INCOME 18 8

9 Petroleum Arrangements Fiscal Aspects: Production Sharing FIRST INDONESIAN MODEL IN 1967 PERTAMINA % PROFIT OIL - MIN 60% CONTRACTOR % COST OIL MAX 40% ** ALL COSTS, INVESTMENTS AND OPERATING COSTS, CAN BE RECOVERED UP TO A MAXIMUM OF 40% OF THE VALUE OF THE PRODUCTION ** ANY COSTS IN EXCESS OF THE COST LIMIT CAN BE RECOVERED IN THE FOLLOWING YEAR ** COST OIL IS THE LOWER AMOUNT OF: % LIMIT, AND --- ACTUAL COSTS 9

10 Petroleum Arrangements Fiscal Aspects: Joint Ventures (Carried Interest) -- 5% in Belize -- 10% in Indonesia (for Indonesian participant) -- 15% in Gabon, Greenland, Myanmar, Sudan -- 20% in Zaire, Malaysia % in Papua/New Guinea -- 25% in Ghana -- 35% in Morocco -- 50% in Brunei, South Korea, Tunisia, JV s in Nigeria -- 51% in Ajman, China and Fujairah -- 51% introduced in 2006 in Algeria (increased from 25%) -- 60% in Abu Dhabi 10

11 UNITED STATES Petroleum Arrangements Fiscal Aspects: Severance Taxes SEVERANCE TAXES ARE BASED ON GROSS REVENUES AFTER THE DEDUCTION OF THE ROYALTY Applicable in most States of the USA. Rates are usually between 2% and 15%. Some states provide lower rate for wells with low productivities. Also initial low rates for 1 4 years are provided in some states to stimulate discoveries, horizontal wells, etc. 11

12 Petroleum Arrangements Fiscal Aspects: Windfall Profits Tax The WPT was introduced in 1980 in the United States as a result of the strong price increases during the 1970 s. WPT = Rate * (MP - BP) * (Prod - Roy) in which MP = market price BP = base price Prod = production Roy = royalty Rate = the applicable tax rate EXAMPLE: $ 3600 = 0.4 * ( $ 30 - $ 20) * ( ) The WPT rate was 40%. The Base Price is adjusted for inflation. The United States used to have three different WPT's, applicable to different types of oil. The WPT has been abolished in the United States 12

13 NORWAY Petroleum Arrangements Fiscal Aspects: Surtaxes/Resource Taxes The Hydrocarbon Tax is calculated in exactly the same way as corporate income tax. However, special features apply. In Norway, the tax rate is 51%, and an uplift of 5.5% is allowed for 4 years for a total of 22% on all capital expenditures. The losses and uplift is subject to loss carry forward. Interest is a deductible expense. The HT can be consolidated. The CIT is not deductible for HT. The HT is not deductible for CIT GHANA Has an Additional Profits Tax based on an IRR scale 13

14 RUSSIA Petroleum Arrangements Fiscal Aspects: Export Duties Russia has very significant export customs duties for oil and gas, except LNG. The export duty is determined from time to time by Government based on the following maximum rates: For oil: Urals price (US $/tonne) Export tax rate % %* (P ) US$ per tonne + 45%* (P ) > US$ per tonne + 42%* (P ) (to be reduced to 36% in 2016 and 30% in 2017) For gas: 30% For LNG: 0% 14

15 Petroleum Arrangements Fiscal Aspects: Service Fees 1. FEES IN CASH Iraq 2009 Technical Services Contract Ecuador 2. LOAN ARRANGEMENTS Iran 1974 and Buy Back Contracts 3. MULTIPLE SERVICES CONTRACTS Mexico 15

16 BOLIVIA Petroleum Arrangements Fiscal Aspects: Profit Shares to Contractor Bolivia has a profit sharing contract. In this contract all the oil and gas is delivered to YPFB and in this sense it resembles a service contract. However, the profits are shared. The profit sharing (participation) is calculated on the basis of a volume scale and R-factor, called B-factor in Bolivia. 16

17 52 Fiscal Systems TYPES OF FISCAL SYSTEMS -COUNTRIES Roy CIT PSC JV SevTax WPT ResTax ExpDt RSC ProfshCtr MRET Part HT,PRT Pdisc Exc Tax ProfSh DMO 1 Bahamas El Salvador Japan Spain USA-GOM Colombia UK France Australia-Off Thailand Argentina Russia-Shale Oil Russia-Onsh Iceland Australia-NWS/On Norway Uruguay-Onsh Nigeria-Onshore Greenland Trinidad&Tobago-Cons Netherlands Venezuela Argentina-JV PNG-Gas Terms PNG-Incentive Terms Pakistan (onshore) Egypt Syria Bangladesh Pakistan (offshore) Trinidad&Tobago-DW India Timor Leste Libya Gabon Angola Indonesia Indonesia-CBM Malaysia-Rfac Malaysia-DW-Marg Kenya Uganda China Belize Somalia Timor Leste-Part Mexico Iraq Iran Angola-RSC Chile-RSC Bolivia

18 CONCESSIONS CONCESSIONS - NO JVs Roy CIT PSC JV SevTax WPT ResTax ExpDt RSC ProfshCtr MRET Part HT,PRT Pdisc Exc Tax ProfSh DMO 1 Bahamas El Salvador Japan Spain USA-GOM Colombia UK France Australia-Off Thailand Argentina Russia-Shale Oil Russia-Onsh Iceland Australia-NWS/On

19 CONCESSIONS CONCESSIONS - JVs Roy CIT PSC JV SevTax WPT ResTax ExpDt RSC ProfshCtr MRET Part HT,PRT Pdisc Exc Tax ProfSh DMO 16 Norway Uruguay-Onsh Nigeria-Onshore Greenland Trinidad&Tobago-Cons Netherlands Venezuela Argentina-JV PNG-Gas Terms PNG-Incentive Terms Pakistan (onshore)

20 PRODUCTION SHARING CONTRACTS PSCs - No JVs Roy CIT PSC JV SevTax WPT ResTax ExpDt RSC ProfshCtr MRET Part HT,PRT Pdisc Exc Tax ProfSh DMO 27 Egypt Syria Bangladesh Pakistan (offshore) Trinidad&Tobago-DW India Timor Leste

21 PRODUCTION SHARING CONTRACTS PSCs - JVs Roy CIT PSC JV SevTax WPT ResTax ExpDt RSC ProfshCtr MRET Part HT,PRT Pdisc Exc Tax ProfSh DMO 34 Libya Gabon Angola Indonesia Indonesia-CBM Malaysia-Rfac Malaysia-DW-Marg Kenya Uganda China Belize Somalia Timor Leste-Part

22 RISK SERVICE AND PROFIT SHARING CONTRACTS RSCs and PROFIT SHARING Roy CIT PSC JV SevTax WPT ResTax ExpDt RSC ProfshCtr MRET Part HT,PRT Pdisc Exc Tax ProfSh DMO 47 Mexico Iraq Iran Angola-RSC Chile-RSC Bolivia

23 Petroleum Arrangements: Conclusion There is an enormous variety in the way governments and companies share the benefits of oil and gas production. Each of these arrangements has its benefits and problems. There is no international trend towards specific fiscal systems with particular features. There is a trend towards more diversity. New fiscal systems will evolve in some countries. 23

24 Future trends in government petroleum regimes upstream petroleum regimes trends in government take trends in structure of petroleum regimes trends in fiscal stability trends in petroleum regimes 24

25 Trends in Government Take Divisible Income For a particular oil or gas field the divisible income can be determined as per the following example: Gross revenues: $ 60 per bbl for 10 million barrels: $ 600 million Less: Exploration expenditures: $ 20 million Development expenditures: $ 80 million Operating expenditures: $ 100 million Equals: Divisible Income: $ 400 million. 25

26 Trends in Government Take Government Take Governments and companies divide the divisible income through the fiscal system that applies. The fiscal terms could include a wide variety of fiscal elements, such as royalties, corporate income tax, production sharing, special taxes, participation, etc. Divisible Income: Government revenues: Net Cash for investor: $ 400 million. $ 280 million $ 120 million Government Take: 70% Corporate Take: 30% 26

27 Trends in Government Take The government take consists of: Direct government income: bonuses royalties corporate income tax production sharing special taxes and profit shares, import duties, property taxes, Or: Remaining government income: remaining income after deduction of service fees or profit shares to contractor And Participation through National Oil Companies or directly by the State 27

28 Level of Government Take LEVEL OF GOVERNMENT TAKE IS DETERMINED BY COMPETITION AMONG GOVERNMENTS: FREE MARKET FORCES: -- BIDDING -- NEGOTIATION LEGISLATION: -- USUALLY BASED ON SOME COMPARATIVE ANALYSIS 28

29 Level of Government Take Competition among governments ***** IRELAND, UK, SPAIN, ARGENTINA, GERMANY, FRANCE **** US GOM-DEEP, ITALY, PHILIPPINES, AUSTRALIA - ONSHORE, PERU (MODEL) *** KAZAKHSTAN (ELF), CHINA, BOLIVIA, EGYPT (DEEP), OKLAHOMA ** PNG, TEXAS-OFFSHORE, TRINIDAD, NORWAY NETHERLANDS * EGYPT, GABON, MALAYSIA, NIGERIA, YEMEN, COLOMBIA (1995 MODEL), VENEZUELA, KAZAKSTAN (TENGIZ), AZERBAIJAN Conclusion: The more attractive the resource base, the tougher the fiscal terms. This is typical for a competitive framework 29

30 Government Take Trends The level of government take is determined by the market for petroleum acreage (leases, licenses, contract areas): The supply of acreage is determined by government policies and technological progress The demand for acreage is determined by the oil and gas prices and new companies entering the market 30

31 Government Take Trends Four phases since 1974: : strong increases in government take: -- Increase in oil prices -- Reduction in acreage through nationalizations : decreases in government take: -- Decrease in oil prices -- Expansion of acreage (political, technological) : increases in government take: -- Increase in oil prices -- No more new conventional acreage : decreases in government take: -- unconventional era begins, causes lower prices 31

32 Government Take Decline The increase in acreage availability was: Political, through a process where nations opened up for private investment. Technical, through entering into deeper waters and inland basins further from the coasts 32

33 Government Take Increase The conventional acreage expansion came to a halt. Strong growth in world oil demand. Increased government take 33

34 : The Unconventional Era begins During the the Unconventional Era begins. Unconventional developments The development of shale oil and shale gas which started in North America is now spreading internationally based on more favorable terms, creating downward pressure on government take. 34

35 : New Unconventional Terms Examples of fiscal terms for unconventional Oil Shale Shale CBM Tight Tight Horiz High Sands Oil Gas Gas Oil Wells Cost Alberta X X X X British Columbia X X Arkansas X Louisiana X Montana X North Dakota X X Utah X Algeria X X X Argentina X China X X Colombia X X X X X Indonesia X X Pakistan X X Poland X X X Russia X X X United Kingdom X X X 35

36 Government take trends Gas Government take trend for gas is less clear. Gas prices separated from oil prices in the period. Still considerable stranded gas reserves exist around the world. Government take for gas is also under downward pressure. 36

37 : Government Take trends: Gas Jurisdictions with Gas-Favourable Fiscal Terms Argentina Egypt Mali Sierra Leone Australia Ethiopia Morocco South Sudan Belize France Nicaragua Sudan Benin Ghana Niger Tanzania Brunei Guatemala Nigeria Thailand Cambodia India Oman Trinidad & Tobago Cameroon Indonesia Pakistan Tunisia Canada - Alberta Iraq - Kurdistan Papua New Guinea Ukraine Canada - British Columbia Kazakhstan Paraguay United Kingdom Canada - Nfld. & Lab. (Proposed) Kyrgyzstan Poland USA-Arkansas Canada - Nova Scotia Laos Portugal USA-Louisiana Central African Republic Latvia Qatar USA-Michigan Chad Liberia Russia USA-North Dakota China Libya Sao Tome & Principe Venezuela Colombia Madagascar Saudi Arabia Vietnam Cote de I'voire Malaysia Senegal Zambia Explanation: Gas-Favourable means that the fiscal systems include fiscal features which are lower for gas than for oil, such as lower royalties for gas than for oil. In case of sliding scales sometimes the system includes an attractive energy conversion factor for gas. Production sharing contracts could have lower profit gas and higher cost gas. Windfall profit features, excise taxes or other taxes may apply to oil but not to gas. Some favorable features apply to shale gas or CBM. 37

38 Oil Price (US $/bbl) ?: Future of Oil Prices 120 Chart 6. Policy framework for WTI oil prices Yearly Oil Price Average Policy Level Low Policy Level High Policy Level 20 0 Years Based on latest price trends, a conservative concept from a fiscal policy point of view is that the oil price would continue to move between $ 25 and $ 100 per barrel around an average pivot point price of $ 60 per barrel, escalated with inflation. 38

39 Government take trends Future I believe downward pressure on government take will continue during the coming decade because: 1. I do not see major improvements in the oil price over US $ 60 ($ 2017) in the next decade. 2. World oil demand will slow down because of general decline in the world economic growth rate 3. Movement towards renewables will become more pronounced. 4. Shale oil and gas and in general advances in technology in the upstream petroleum industry will continue to bring new supplies on stream. 39

40 Future trends in government petroleum regimes upstream petroleum regimes trends in government take trends in structure of petroleum regimes trends in fiscal stability trends in petroleum regimes 40

41 Structure of government petroleum regimes For many fiscal systems the government take varies considerably with price and costs. For instance, if prices go up the government take could also go up. This is called a progressive government take with respect to price: Price: $ 40 $ 60 $ 80 Divisible Income: $ 200 $ 400 $ 600 Government revenues: $ 100 $ 280 $ 450 Government take: 50% 70% 75% 41

42 Structure of government petroleum regimes Under other fiscal systems, the government take goes down with higher prices. This is called a regressive government take with respect to price: Price: $ 40 $ 60 $ 80 Divisible Income: $ 200 $ 400 $ 600 Government revenues: $ 160 $ 280 $ 360 Government take: 80% 70% 60% 42

43 Trends in the structure of petroleum regimes Structure of fiscal elements REGRESSIVE -- Royalties (Fixed %), Severance Taxes, Export Duties NEUTRAL -- Corporate Income Tax -- Carried Interest PROGRESSIVE WITH PRODUCTION -- Royalty sliding scales based on production -- Profit oil/gas sliding scales based on production PROGRESSIVE WITH OIL AND GAS PRICES -- Wind fall profit taxes, price sensitive royalties -- Price sensitive taxes or profit oil/gas shares PROGRESSIVE WITH PROFITABILITY -- IRR sliding scales applied to taxes or profit oil/gas -- R-factor sliding scales applied to taxes or profit oil/gas 43

44 IRR Additional Profits Tax ( APT ) -- Ghana: APT is based on the real after tax IRR as follows: APT is 0% up to 12.5% IRR, 12% up to 17.5% IRR, 18% up to 22.5% IRR, 24% up to 27.5% IRR and 28% after 27.5% IRR. Percentage APT rates are incremental. -- Namibia: based on real IRR before tax: 0% up to 15% IRR, 33.07% up to 20% IRR, 40% up to 25% IRR and 50% over 25% IRR (Average rates). -- Timor Leste: 0% up to 16.5% after tax IRR, thereafter 22.5% 44

45 R-FACTORS R-factor sliding scales for profit oil Azerbaijan R-factor Contract (Shah Deniz): Cost limit: 50% based on capex, opex unlimited Corporate Income Tax included in profit oil R = Contractor s Cumulative (Recovered Investment + Profit Oil) /Cumulative Investment R-Factor: Profit oil to government: 0 < R < % 1.0 < R < % 2.0 < R < % 3.0 < R < % >4.0 90% 45

46 Nature of Government Take Sharing of resource wealth Deep water: price - $ 80 per barrel Costs $ 20 per barrel 46

47 Nature of Government Take Sharing of Resource Wealth Deep water: field size 300 million barrels Costs $ 20 per barrel 47

48 Nature of Government Take Sharing of Resource Wealth Deep water: field size 300 million barrels Price $ 80 per barrel 48

49 Trends in the structure of petroleum regimes Oil and Gas Price Progressivity Irrespective of the type of government petroleum regime, there is now an increased trend towards price progressivity: price progressive royalties price progressive profit oil windfall profits taxes price progressive profit shares increased use of R-factors 49

50 Trends in the structure of petroleum regimes Oil and Gas Price Progressivity Traditional features are loosing effectiveness. R-factors only operate in a relatively narrow range and cannot capture effectively a higher level of government take above such range Fixed cost oil/gas limits no longer protect governments effectively 50

51 Trends in the structure of petroleum regimes Global tax developments More homogeneous corporate income tax and continued decline of the corporate income tax rate. Greater use of Value Added Taxes Reduction of import duties and other cost based taxes 51

52 Trends in the structure of petroleum regimes Increased diversity of government take Government take will become more diverse with respect to the new difficult resources for which many governments are willing to offer a lower government take: LNG and long distance pipeline gas heavy oils, oil sands, shale oil, oil shale, coal bed methane, gas hydrates Frontier areas, ultra deep water Enhanced oil recovery 52

53 Trends in the Structure of Petroleum Regimes Fiscal Health Deep water: 300 million barrel field - Price $ 80 per barrel 53

54 Trends in the Structure of Petroleum Regimes Fiscal Health Deep water: 300 million barrel field Costs $ 20 per barrel 54

55 Trends in the structure of petroleum regimes Fiscal Health As governments seek to increasingly maximize government take under highly profitable conditions, gold plating issues become increasingly a problem in terms of poor design of fiscal terms. It is counter-productive to be too progressive. 55

56 Future trends in government petroleum regimes upstream petroleum regimes trends in government tak trends in structure of petroleum regimes trends in fiscal stability trends in petroleum regimes 56

57 Fiscal Stability OPEN ENDED SYSTEMS: FIXED SYSTEMS: CANADA EGYPT Many countries have a system that is open ended for some fiscal features (usually taxation) and are fixed for other items such as production sharing or royalties fixed in the lease. 57

58 Fiscal Stability Typical stability of fiscal components: Stable Exceptions Royalties Yes Canada CIT No PSC s with CIT in profit oil PSC s Yes PSC s directly with State Carried Interest Yes Special Taxes No PSC s with stability 58

59 Fiscal Stability * STABILITY OF THE GOVERNMENT TAKE ** ALIGNMENT OF GOVERNMENT AND INVESTOR S INTEREST ** CREATE PROGRESSIVE FISCAL SYSTEMS ** LEGAL/CONTRACTUAL FISCAL STABILITY 59

60 Fiscal Stability Contractual fiscal stability: -- Pay on behalf system -- Exemption system -- Guarantee system -- Offset system 60

61 Trends in fiscal stability There has been a trend towards less fiscal stability. The rapidly changing economic and technological circumstances make application of fiscal stability increasingly an unattractive feature for governments. A trend towards more general legislation and less specifically negotiated contracts also creates less fiscal stability. Increased trend in PSC s to break out corporate income taxes and other taxes, which are not subject to fiscal stability. The current rapid price increases have accelerated the trend towards less fiscal stability. If fiscal stability is applied, it may become only applicable within a certain commercial framework. Outside this framework no stability. 61

62 Future trends in government petroleum regimes upstream petroleum regimes trends in government take trends in fiscal stability trends in structure of petroleum regimes trends in petroleum regimes 62

63 Trends in petroleum regimes Concessions Over the last 20 years there has been a trend towards concessions. Nations that adopted concession systems include: Brazil Peru Argentina Russia (changed from PSC s) Saudi Arabia Kazakhstan Concession systems provide for an easier administration for large areas with many (small) blocks for exploration and production. Concession systems also provide for more transparency and less secrecy. 63

64 Trends in petroleum regimes PSC s PSC s will continue to play a major role. PSC s are favored by investors in environments of high political risk through the option to provide (partial) fiscal stability. PSC s also permit adjustment of terms from block to block. There is a trend to enhance PSC s with concession components (royalties, corporate income tax, windfall profits taxes). 64

65 Trends in petroleum regimes Participation Agreements Over the last 25 years there has been a decline in Participation Agreements. Several nations eliminated carried interest provisions (Canada, Netherlands, Colombia). Due to recent oil and gas price increases, there is a reversal of this trend in some countries, since it is an easy way to increase government take. 65

66 Trends in petroleum regimes Risk service contracts Risk service contracts were phased out in Latin America The service contracts that have been introduced so far in Mexico and Iran provide a poor alignment of government objectives and investor profit incentives. The same is true for the Iraq Technical Services Agreement. I believe Risk Service Contracts will be phased out. 66

67 Conclusions The main new trends are: lower government takes for oil and to a lesser degree also for gas more diversified government takes increased introduction of price progressive features lower corporate income taxes less fiscal stability increased use of concessions or concession-style features. 67

68 Thank You My regular 4-day course World Fiscal Systems for Oil and Gas will be held in London, UK, July 3-6, Please leave name cards if you want information. 68