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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

Government Options
Value of National Resources Determining Factors
The resource base The market oil price Terms and regulations

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

Activities and cash flow


Contract signing

Income

PDO

Government

Time

Costs
Pre-license Exploration Development Production Production Rehab. Abandonment

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

General Objective

The objective of petroleum resource management is: To maximise the value of the petroleum resource

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

Company objective
To attain maximum net present value of the petroleum resources Build equity

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

The role of the authorities


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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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)

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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Allocation of revenues from Production


Bonuses Royalties Prod. Sharing Taxes Gov. Participation

Resource Rent

After Johnston (1995)

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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)

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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Technical Assistant (EOR) Contracts


Joint Venture PSC Oil Company Financing DMO (Domestic Market Obligation) Base Oil or Determined Oil

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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Elements in a PSC
Work Commitment Bonus Payment Royalties Cost Recovery (Cost Oil) Profit Oil Government participation Domestic Market Obligation Ring fencing

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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 %

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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%

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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)

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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 %

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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)

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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%

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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%)

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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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

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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

Dr. Alfred Kjemperud

CCOP, Pattaya, September 2003

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