Fiscal terms for gas need improvement in many countries

A. Pedro H. van Meurs
Andrew Seck
Van Meurs & Associates Ltd.
Calgary

How 32 fiscal systems treat gas, oil [51,481 bytes]

It would be logical to assume that many governments in the world would have more favorable fiscal terms for gas than for oil in order to stimulate gas development.

The economics of gas is often less attractive than oil. In many countries gas markets are limited, often causing delays in gas development or restricting the level of production. Expensive gas pipeline and distribution systems need to be installed in order to deliver gas from the fields to markets. Prices for gas at the wellhead are usually lower than for oil on an energy equivalent basis.

Gas is a desirable fuel for environmental reasons. Domestic gas development could result in a lower level of oil imports or increased oil exports. Low cost gas could be used in many ways to stimulate the development of certain industries. Finally, improved terms for gas could result in better overall petroleum exploration economics which often results in the discovery of more oil as well as gas.

However, a comparative analysis of the government take for oil and for gas for the same concessions and contracts indicates that most governments still require identical fiscal terms for gas and oil. Only a few governments are stimulating gas development with more attractive fiscal terms.

Government take

The study "World Fiscal Systems for Gas" prepared by Van Meurs & Associates, Calgary,1 reviews 258 fiscal systems for gas in 133 countries. For 246 fiscal systems, oil terms as well as gas terms were available for the same concession or contract areas. The study was a follow-up on a similar study on oil.2

There are more fiscal systems than countries because many countries have contracts or areas with different terms.

For all these fiscal systems the government take was determined for oil as well as gas. Oil fields ranged from 3 million bbl to 1 billion bbl. Dry gas fields ranged from 36 bcf to 12 tcf. Economics was based on relatively attractive onshore as well as offshore fields.

The results were weighted in order to obtain a single weighted government take for oil as well as for gas. The economics of the oil fields was different from the gas fields. Oil fields were based on price scenarios ranging from $15-25/bbl, while gas fields were based on a range of $1.75-3.25/Mcf. The field life of the gas fields was assumed to be longer, resulting in a slower recovery of the investments.

In view of the fact that the basic economics of the oil and gas fields was different, small variations occurred in the government take even if fiscal terms were the same. This is because the various components of the fiscal systems affect the cash flows differently.

The government take for the 246 fiscal systems compared as follows:

19 fiscal systems that strongly stimulate gas development with a government take 10-30% lower for gas.
12 fiscal systems that modestly stimulate gas development with a government take 5-10% lower for gas.
200 fiscal systems that have essentially the same government take for gas and for oil within a range of plus or minus 5%.
15 fiscal systems that discourage gas development with gas terms that result in a government take 5-12% higher than for oil.

It can be easily concluded from the above statistics that there are only a few governments that seem to promote gas development with attractive fiscal terms. This seems detrimental from the point of view of overall world gas development and the economic development of many developing nations.

Stimulating gas

The graph shows a number of jurisdictions that have oil as well as gas terms. The graph rates a selection of 32 fiscal systems from the highest government take for gas to the lowest.

At the same time the government take for oil is also indicated. Interesting observations can be made.

Indonesia is a country that strongly stimulates gas development through favorable production sharing splits in its contracts. The government take is typically 18-30% less for gas than oil. This is a strong stimulus to develop gas resources for Indonesian domestic use or for LNG exports. The strong position of Indonesia in LNG exports can be attributed in part to this policy oriented towards gas development.

Jordan has a government take differential of about 16% for gas in its production sharing contract.

Manitoba offers a strong incentives based on much lower royalties for gas. The government take differential is 15%.

Australia's various states feature a government take differential of 14% for gas. This is because the commonwealth excise tax that applies to oil does not apply to gas.

Trinidad and Tobago strongly promotes gas development through an attractive fiscal system for gas. In the new offshore production sharing contracts, the gas scales can be bid separately from the oil scales. Government take differentials of as much as 14% are being obtained in this way. Under the traditional concession system, the government take advantage is about 7% because the Supplemental Petroleum Tax and the Petroleum Levy do not apply to gas.

Trinidad and Tobago has seen a strong development of its gas sector despite the limited local market. Gas is being used for a multitude of industrial applications. Recently also the first LNG project is under way.

Guatemala also promotes gas with a government take differential of 13% due to the low fixed 5% royalties for gas and the more attractive production sharing split.

Jurisdictions that stimulate gas development in the 5-10% differential range are Oman, Bangladesh, Lebanon, British Columbia, some contracts in Egypt, Barbados, North Dakota, Louisiana, and Niger.

Stimulating LNG

Apart from the 31 fiscal systems that directly stimulate gas developments relative to oil in the same concessions or contracts, some nations have favorable terms specifically for the purpose of stimulating LNG exports.

The terms for gas for LNG exports in Qatar, Oman, and Yemen are very favorable compared to the very tough oil terms. Qatar has started LNG exports, and Oman will also soon be an LNG exporter.

Papua New Guinea has recently announced favorable terms for LNG development, compared to the relatively tough oil terms. Also Australia Offshore maintains for LNG a more advantageous fiscal regime than for conventional gas. The LNG terms are based on modest ad-valorem royalties instead of the Petroleum Resource Rent Tax system.

Contract differentiation

In addition to the above cases, some countries are differentiating their fiscal terms among the various contracts for oil as well as for gas.

In some cases specific contracts such as the Camisea Contract in Peru receive somewhat more favorable terms than the general terms for oil. The Camisea contract has both for oil and gas a government take differential of about 4% relative to some of the oil oriented contracts.

Egypt is another country that is strongly differentiating its contracts and has recently introduced more favorable terms for gas for some contracts.

Aiding gas economics

Some nations do not specifically provide for fiscal terms that are more favorable for gas, but have fiscal structures that favor gas to a modest degree.

It should be noted, however, that the support for gas in most cases is less than 5% government take relative to oil and therefore the support for gas is not very important and does not have significant economic development effects.

ROR based sliding scales. Several fiscal systems include rate of return based sliding scales for purposes of defining production sharing or taxes. Typically the same ROR based scales apply to both oil and gas. Yet, the affect of the scales on oil or gas development is rather different.

Since most gas projects will typically have a relatively low rate of return compared with oil, ROR based scales typically favor gas development. The higher the ROR benchmarks, the more gas is being favored.

For instance, in Equatorial Guinea, the production sharing contracts feature high ROR benchmarks. These may click in for oil development but are unlikely to apply to gas.

However, in general ROR based sliding scales help gas development. The government take for gas is a few percentage points less than for oil in practically all jurisdictions that use such scales, such as Australia Offshore, Newfoundland, Northwest Territories, Namibia, Russia, and Tanzania.

R factor sliding scales. The same applies to contracts that have R-factor sliding scales being used in production sharing, royalties, or taxes. Again these scales typically apply to both oil and gas.

R-factor scales help gas economics because gas requires more investment and results often in lower prices at the wellhead on an energy basis. This means lower R-factors. Therefore jurisdictions with R-factors typically have government takes for gas that are slightly less than for oil, such as in the Central African Republic, India, Peru, and Tunisia.

Uplifts and depletion allowances. Jurisdictions that make use of uplifts or depletion allowances in calculations that apply to oil and gas usually also favor gas with a few percentage points government take. Examples are Denmark with uplifts in the hydrocarbon tax calculation and Mali, Niger, and Paraguay with depletion allowances for corporate income tax.

No gas stimulation

Many nations that face difficult gas marketing situations or have relatively small internal markets could use special fiscal support for gas.

Examples of such nations are Chile, Colombia, Ecuador, Gabon, Kazakstan, Laos, Madagascar, Mongolia, Myanmar, Sudan, Syria, and Viet Nam.

The graph shows how several nations that have local gas markets feature sometimes very high government takes, such as Syria or Colombia. It does not seem appropriate to discourage gas development in these countries with such tough terms.

Therefore many nations still need to improve their fiscal terms for gas.

Interestingly, there are even nations that have specific tougher terms for gas than for oil. This is the case in Lower Saxony (Germany), where the gas royalty is higher than the oil royalty for regular production. Also in Malaysia the deepwater splits for gas are tougher than for oil. Ethiopia in the Afar contract has a higher royalty scale for gas than for oil.

Overall conclusions

Only a few nations specifically support gas development through the fiscal system. However, most nations that provide such support have seen a strong development of the natural gas sector.

Good examples of successful nations are Australia, Indonesia, Trinidad and Tobago, Oman, Bangladesh, Qatar, Egypt, and Peru.

Many nations do not specifically support gas developments with more attractive fiscal terms. Also some nations that could develop local gas markets seem to adopt very tough fiscal terms. These nations could benefit from a change in policies.

One such jurisdiction that is currently considering a special new regime for gas is Alaska. The government is evaluating new terms in order to make the North Slope gas reserves economically viable for LNG exports.

References

World Fiscal Systems for Gas, Barrows Inc., New York.

OGJ, May 26, 1997, pp. 35-40.

The Authors

Pedro van Meurs has been president of his own consulting firm in Calgary the last 22 years. He has consulted on petroleum economic and fiscal issues in more than 60 countries for many clients. He has a PhD in economic geology from State University of Utrecht, Netherlands.

Andrew Seck has joined Shell International as a business analyst in Moscow. He was a consultant to Van Meurs & Associates Ltd., Oxford Analytica, and Barrows Inc., New York. He has submitted a PhD thesis, "Financing Upstream Oil and Gas Ventures in the Transitional Economies of the Former Soviet Union: A Study of Foreign Investment and Associated Risks," at the Center for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Scotland.