Many governments around the world still find it hard to come to terms with the fact that the level of exploration and production activity is closely related to attractiveness of fiscal terms under which oil companies operate.
Oil ministers and officials wondering why industry enthusiasm for their prospects are on the wane might study a paper by P.J. Hoenmans, president of Mobil Oil Corp.'s exploration and production division, given at the Offshore Northern Seas conference late last month in Stavanger.
ASSESSING GOVERNMENT TAKE
Hoenmans said Mobil computed government take from a sample of 25 countries using 1989 published terms. Working from the base of a relatively small, 50 million bbl field, it found a wide range of government takes from a low of 35% to a high of 90%.
Development economics were acceptable in only six of the 25 because of the level of government take, figures that would surprise few people in exploration and production departments. More surprising to Hoenmans was the discovery that in four of the countries government take relegated a 200 million bbl field to the submarginal class.
Government take was a constant percentage, or nearly so, in 17 of the 25 countries even though it clearly is in the best interest of operator and host government to develop a progressive fiscal system that promotes exploration and development of all fields.
As Hoenmans pointed out, it is extremely short sighted to establish or perpetuate a regime that promotes one big discovery only to have industry depart when that possibility diminishes.
Hoenmans also used a study by Amoco Corp. to back up the seemingly obvious correlation between progressive fiscal terms and drilling activity. Amoco examined fiscal terms for 198389 in 37 nations outside the Organization of Petroleum Exporting Countries, excluding the U.S. and Canada. It found 14 had significantly improved fiscal terms since 1986 through reduced taxes and royalties, accelerated writeoffs, and other incentives.
Of the other 23 countries, more than half had not changed their fiscal regimes significantly. The effect of these incentives was assessed by tracking Baker Hughes Inc.'s monthly active rig counts.
As might be expected, drilling activity in the 14 incentive countries dropped sharply after the 1986 oil price collapse but has since recovered to the level of a 1983-85 base period. Activity levels in the rest of the group had not recovered and were running about 30% lower than the base period.
Although the U.S. was not included in the study, Hoenmans described it as a nonincentive country in which activity is down about 60% from 1983-85 levels.
Factors other than fiscal terms come into play in deciding where to put exploration capital. But, said Hoenmans, the study is important because it isolates the key fiscal incentive and demonstrates its direct influence.
PRICES, FREE MARKET
Looking to the future, Hoenmans expects that despite current oil price volatility, prices will remain on the low side for the rest of the decade.
That suggests free market forces will call for much greater fiscal sensitivity by governments.
Nations with fiscal regimes that are flexible and responsive to the market will see most of the action.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.
