Trends in petroleum fiscal systems A host government perspective

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Trends in petroleum fiscal systemsA host
government perspective
Pedro van Meurs October 20, 2009 AIPN Bangkok
- Thailand Van Meurs Corporation Nassau,
Bahamas Tel [phone] e-mail
info_at_vanmeurs.org
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Oil and Gas Resource Ownership

• In most countries in the world the State is the
  owner of the oil and gas in the subsoil.
• Governments have therefore the right to maximize
  the benefits from petroleum production for their
  citizens.
• Important benefits are the government revenues to
  be derived from oil and gas.
• The word fiscal is used in this presentation in
  a general sense and includes all government
  revenues
• The government revenues as a percentage of the
  total divisible income (revenues less costs) is
  defined as government take

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Mega Trends of Government Take

• Phases since 1974
• 1974 1984 strong increases in government
  take
• -- Increase in oil prices
• -- Reduction in acreage through
  nationalizations
• 1984 2003 decreases in government take
• -- Decrease in oil prices
• -- Expansion of acreage (political,
  technological)
• 2003 2008 increases in government take
• -- Increase in oil prices and also greater
  volatility of oil and gas prices
• -- No more new acreage
• 2009 - ? uncertainty

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Trends in Government Take2003 2008

• During the 2003 2008 period the government take
  has increased in many countries.
• This has been due to two factors
• The increases in oil prices, which increased
  demand for new investment opportunities
• The shortage of available areas for exploration
  and production, because most of the world
  petroleum basins are now under licenses or
  contracts.

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Trends in Government Take2003 2008

• The methods for increases in government take were
  different in the various countries.
• A number of countries had already created fiscal
  systems that automatically resulted in a higher
  government take under higher oil prices.
  Examples
• Angola
• Malaysia
• Trinidad and Tobago
• India,
• Libya, and
• Russia

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Trends in Oil Taxation2003 2008

• Other countries used other methods to increase
  the government take, such as
• Changing the fiscal terms UK, Alaska,
  Alberta, Algeria, Bolivia and Kazakhstan.
• Using the bid system for new acreage to
  increase terms Libya, India
• Creating higher levels of state participation
  Venezuela, Algeria, or
• New legislation and renegotiations Nigeria

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Trends in Government Take for Gas2003 2008

• Increases in government take for gas have been
  much less because there are still considerable
  gas reserves around the world.
• Therefore government takes for gas in some
  countries stabilized or continued to decline and
  governments seek instead greater market access
  Qatar, Venezuela, Norway and Egypt.
• However, government takes for gas have also
  increased in some jurisdictions Algeria,
  Bolivia, UK, Trinidad Tobago
• An important international trend is that
  government revenue systems for oil and for gas
  are becoming more different, in particular in
  those countries where gas has to be transported
  over large distances to market, either as LNG or
  by pipeline.

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Future trends in Government Take2009 - 2010
Short term

• In the short term there is a downward pressure on
  government take due to the financial crisis.
• Russia reduced its Mineral Extraction Tax and
  more importantly, exempted Eastern Siberian oil
  fields from export tax.
• Trinidad and Tobago may offer more attractive
  terms in its upcoming bidding rounds.

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Future trends in Government Take2010 - 2050
Very Long term

• The very long term future of the oil industry is
  more uncertain than ever. The IEA predicts that
  oil demand in 2009 will be about 84 million
  barrels per day.
• Broadly three rather different scenarios of
  future oil demand are possible for 2050
• Continued increases in oil demand resulting in a
  demand of about 130 million barrel per day, which
  is predicted by some oil companies.
• The so-called peak oil concept whereby oil
  demand is constrained by production and will
  reach a peak of about 100 million barrels per day
  over the next two decades and will decline
  thereafter, which is predicted by the company
  TOTAL and others.
• A climate change driven scenario whereby oil
  demand has to be gradually reduced to maybe as
  low as 50 million barrels per day in order to
  meet the objective of reducing CO2 emissions by
  50 on a world wide basis as currently advocated
  by the G8 nations.

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Future trends in Government Take2010 - 2050
Very Long term

• I agree with TOTAL that the peak oil scenario is
  a probable scenario.
• Oil will not reach a peak because oil runs out,
  but because political and government take
  conditions simply will not make it possible to
  produce more.
• There are many examples of such restrictions
• Venezuela - Slow development of Orinoco heavy
  oil belt
• Kuwait - No service contract on North Kuwait
• Iraq - A largely failed bidding round
• Brazil - Increased Brazilian (state) ownership
  of new deep water developments
• Mexico - Strong political opposition to large
  scale foreign investment despite Reform
  package
• Iran - Continued political problems and
  unattractive service contracts
• Russia - Only modest foreign investment
• World wide - Continued emphasis on royalties and
  cost limits in PSCs, which impede development
  of marginal fields

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Future trends in Government Take2010 - 2050
Very Long term

• The upcoming conference in Copenhagen regarding
  climate change will largely determine the long
  term trend in the use of fossil fuels and a
  declining oil consumption scenario may become
  more likely if this conference is successful.
• The oil era may not come to an end due to lack
  of oil, but simply because it becomes
  unacceptable to burn it.
• The governments of the world are still largely
  schizophrenic with respect to climate policies
  and energy consumption/taxation policies.
• Electricity prices and petroleum products are
  still subsidized in many nations (Russia, China,
  India, most OPEC countries, including Nigeria).
• I agree with ExxonMobil that it is necessary to
  introduce carbon taxes in order to promote an
  orderly transition from coal and oil to natural
  gas in the medium term and to renewable resources
  in the long term. Carbon credit markets are too
  volatile and implementation is too weak to rely
  upon it as the main instrument for reducing CO2
  emissions.

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Future trends in Government Take2010 - 2020
Medium term

• Against the back ground of a highly uncertain
  long term future, governments are now faced with
  the task to maximize the benefits from oil and
  gas production in the next decades.
• If the peak oil scenario unfolds in the medium
  term, oil prices may increase and government
  takes may go up in various countries.
• Governments of oil and gas exporting countries
  face a difficult task, due to the fact that
  government budgets are too dependent on oil and
  gas revenues.
• The process of maximizing benefits from oil and
  gas, has to proceed while diversifying their
  economies.

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Future trends in government take structure 2010
2020 Medium term

• The main trends in the structure of the oil and
  gas government take are the following
• Reduction of corporate income tax rates
• Globalization of VAT
• Possible wider introduction of carbon taxes
• Reduction of import duties and cost base taxes
• More emphasis on price sensitive fiscal features
• Less emphasis on taxation structures that
  over-encourage capital investment
• Transition to fiscal structures designed for
  expensive oil and gas resources.

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Reduction of Corporate Income Tax rates

• An important international trend is that
  corporate income tax rates are declining.
• 15 years ago profit tax rates were in the range
  from 25 55.
• Today, most countries are in the 15 40 range.
  
• Several petroleum producing nations maintained or
  established a higher rate for the petroleum
  industry or introduced hydrocarbon taxes.

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More emphasis on price based petroleum
government revenues

• The high oil prices of the last few years have
  made governments aware of the fact that oil and
  gas government revenues have to be designed to
  increase government take under higher prices. As
  mentioned before, a number of nations had
  already price sensitive government take.
• Other jurisdictions have now also established or
  strengthened such mechanisms, including
• Alberta (royalties)
• Alaska (profit tax)
• China (windfall profit tax)
• Algeria (windfall profit tax)
• Nigeria has introduced a new bill (Petroleum
  Industry Bill) which contemplates price sensitive
  royalties as well as hydrocarbon taxes

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Transition to more expensive resources

• Due to the high price levels of US 60 or
  higher, many countries are now in a transition
  to make more expensive resources attractive for
  investment with more diverse or flexible fiscal
  terms.
• Examples of such new resources are
• heavy oils, oil sands, oil shales
• coal bed methane, shale gas, gas hydrates
• Frontier areas, deep water
• Gas to Liquids (GTL) and LNG
• Enhanced oil recovery in existing fields
• In order to maintain revenues governments from
  oil exporting countries may increasingly apply
  (old oil versus new oil concepts.

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Changes in the nature of petroleum arrangements

• The new trends will also bring changes in the
  nature of petroleum arrangements
• smaller blocks more competition
• more legislation/bidding,
• less negotiation for new blocks
• fiscal stability provisions will be reduced.
  Where fiscal stability provisions continue to
  exist they will be restricted in terms of
• time,
• volume, and/or
• economic indicators

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Conclusion

• It can be expected that in the medium term the
  world will continue to experience significant
  changes in the level of government take and the
  structure of oil and gas fiscal systems.
• Much of these changes will apply to existing
  operations.

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