Government takes decline as nations diversify terms to attract investment

A. Pedro Van Meurs, Andrew Seck
Van Meurs & Associates Ltd. Calgary

An earlier OGJ article2 concluded that government take had declined considerably during the previous decade in response to an increased availability of acreage.

The fiscal system rating is based on eight economic yardsticks. They are:

• Rate of return.

• Net present value per barrel.

• Ability to absorb geological risk.

• Attractiveness of incremental exploration investments.

• Attractiveness of incremental development investments.

• Government take.

• "Bonanza economics."

• The degree of "front-end loading" of the fiscal system.

Based on these criteria the fiscal systems are rated, based on a point system, from the most attractive ("five star") terms to the least attractive ("one star").

Table 1 [64499 bytes] provides an overview of the rating and ranking of 50 of the most interesting fiscal systems. Fig. 1 [62848 bytes] provides the government take and corporate take for the systems listed in Table 1, based on a weighted average of 12 fields.

The level of government take is sometimes higher or lower than the overall relative rating position of the fiscal system. This is caused by the fact that government take is just one of the eight yardsticks used to determine the attractiveness of a fiscal system to investors. In other words, the 50 selected fiscal systems are sorted according to their individual ranking, not solely as a function of government take, and therefore do not produce a straight diagonal line when viewed in Fig. 1.

The general trend towards government terms more attractive to contractors is evidenced by the fact that in 33 countries and regions changes were made to fiscal systems or contracts were signed that were more favorable than the terms of the 1995 survey. Furthermore, eight countries introduced for the first time four or five star terms.

On the other hand, nine countries toughened existing terms while another five countries introduced two or one star terms.

Attractive terms

Some of the sweetening of terms in the 33 countries are general improvements to the general corporate income tax which naturally flows through to the petroleum sector. Examples are Germany, Hungary, Israel, and Turkey.

In most of the other cases the host country has attempted to improve the particular fiscal terms as they relate to the petroleum sector. Some of the highlights:

• The Alberta and Canadian federal governments cooperated in introducing a new package of incentives for oil sands projects. This involved a reduced provincial royalty and accelerated depreciation for federal corporate income tax purposes.

• Bolivia introduced a new Petroleum Law on Apr. 30, 1996. Although the new terms are not as favorable as was expected in 1995, the changes are a considerable improvement over the terms applicable to current contracts. These contracts can be converted to the new system.

• Egypt has been very successful in signing new contracts with foreign operators. Some of the contracts are now two star terms compared to the previous one star terms. Attractive three star deepwater contracts have now also been introduced.

• Pakistan's recent proposals for new offshore terms would rate very favorably. The proposals are under government review.

• Trinidad and Tobago's new offshore PSCs are rated as three star as opposed to the previous general offshore terms which are rated as a one star system. A deepwater bidding round is under way.

• Within the U.S. one of the most dramatic developments has been the introduction of a three zone royalty relief based on cumulative production from the Gulf of Mexico Outer Continental Shelf.

• Yemen, which has had very tough one star terms, has begun to revise some of its existing contracts introducing two star terms.

  Eight countries introduced for the first time new contracts or legislation with four or five star terms. There are the following interesting developments:

• Brazil has included fiscal terms in the draft hydrocarbon law currently being reviewed by congress which are very attractive. At this time only the terms for the small fields are fixed in the draft law. Tougher terms for large fields are still to be determined by regulation.

• The Falkland Islands introduced five star terms. As a result, the Falkland Islands hosted its first offshore bidding round in 1995, which resulted in the successful award of seven licenses in October 1996.

• Newfoundland introduced four star terms in the onshore as well as attractive new offshore terms. As a result Newfoundland has witnessed a flurry of new activity.

• Moldova signed a five star contract with Redeco in 1995.

Tough terms

The nine countries that have toughened existing terms include three European countries which have become tougher because of an increase in their corporate income tax rates. These are Austria, Belgium, and Italy.

However, the most dramatic negative change occurred in Colombia. Colombia is now offering one star terms under its new model contract. This contract includes a substantial new increased participation feature based on a sliding scale for oil fields over 60 million bbl. Also there is an increase in the "war tax." Previously, the war tax was levied on a per barrel basis at the rate of 37¢/bbl (or approximately 1.8% based on $20/bbl), whereas it is now levied on a percentage basis at the rate of 7% fob for light crudes.

Venezuela is the focus of the five countries that introduced one and two star terms. The February 1996 award of eight blocks in Venezuela resulted in tough terms which the industry offered under a competitive bidding system. The toughest contract was the consortium bid by British Petroleum, Amoco, and Maxus for the G'Piche Block under which the companies offered a bonus of $109 million and a special profit share, called "participacion en las ganancias (PEG)," of 50%.

Azerbaijan, Russia, Georgia, and Uzbekistan also introduced new one and two star terms.

Diversifying terms

The general trend towards a diversification of terms noted in the 1995 survey has continued strongly the last 2 years.

In order to provide a better match between fiscal terms and the underlying geological and economic conditions, governments are diversifying their fiscal systems. In this respect the following trends can be noted:

• Attention has increased to the development of special deepwater terms since 1995. The U.S. government introduced a detailed set of incentives directly related to water depth in the Gulf of Mexico. Peru adopted special deepwater terms for the Z-29 Block. Viet Nam introduced legislation with special deepwater terms. Egypt improved the terms of its production sharing contracts for deep water considerably.

• Alberta improved terms for the oil sands, diversifying more strongly between the oil sands economics and the traditional oil production.

• Some nations introduced special tough terms for (semi) proven acreage which are separate and different from the average terms for normal exploration blocks. Special tough terms apply to Block 52 in Peru, the AIOC contract in Azerbaijan, the Tengizchevroil Joint Venture in Kazakstan, Great Bear field terms in Viet Nam, the proved acreage terms in Georgia, and the Sakhalin 2 terms in Russia.

• Special terms were introduced in some cases for arctic regions. Argentina has special tax relief for Tierra del Fuego. Norway applies somewhat softer terms for the Barents Sea.

• Other nations have started to differentiate terms on the basis of geographical and logistical conditions. Bolivia differentiated fiscal terms between "traditional areas," a region that includes the existing oil production, and "nontraditional areas," which are new areas to be explored. Brazil permits under the newly proposed law, special attractive terms for difficult geographical areas. China adopted more lenient terms for frontier areas. Ireland has special terms for the Rockall Trough. Thailand introduced special "k" factors for five regions.

Large spread in terms

As a result of the diversification process some nations have now a considerable "spread" in terms, sometimes from one star terms to five star terms.

For instance, in the case of Kazakstan, the Tengizchevroil JV, initially negotiated by Chevron and later joined by Mobil and Lukoil, is particularly onerous with one star terms. In fact, the Tengizchevroil JV ranked 321st among the 324 fiscal regimes analyzed-the combined bonus of over $400 million is the principal factor. On the other hand, the PSC signed with Oman Oil Co. is a five star contract.

Peru is another country that exhibits a new wide spread of fiscal terms ranging from the one star contract Chevron signed for Block 52 versus Repsol's five star contract for Block Z29 in the deep waters. The offering of more attractive terms for offshore acreage is quite logical; however, the large difference between Chevron's onshore Block 52 and Shell/Mobil's onshore contract for Camisea, rated as a three star system, is quite striking.

Regional competition

In a competitive world, areas with the least favorable geology, the highest costs, and the lowest prices at the wellhead would offer the best fiscal terms, while areas with the best geology, the lowest costs, and the highest prices at the wellhead would offer the toughest fiscal terms.

The 1995 survey proved that this overall competitive framework does indeed exist. However, the correlation between fiscal terms and geological and economic conditions is much stronger at the regional level than at the global level.

Governments compete regionally, while oil companies compete globally. Table 2 [12720 bytes] displays the rating of eight separate regions in the world.

Table 3 [15808 bytes] and Fig. 2 [30504 bytes] provide the weighted average government take of the midpoint fiscal system for each region. Interestingly, governments compete rather fiercely based on the regional "mid point" fiscal system. Since the government take is only one of the eight criteria, this rating does not completely match the rating indicated above.

Relative to the 1995 survey, it can be noted that most improvements in fiscal terms have taken place in North America. In the 1995 survey it was concluded that the region of North America as a whole was relatively "uncompetitive." Interestingly, important changes have been made in fiscal terms in North America that bring the region into a much better competitive balance. Principally, these are the changes witnessed in the Gulf of Mexico, Newfoundland, and the Alberta oilsands as discussed earlier.

Latin America's relative position slipped largely due to the tough terms introduced in Venezuela, the tough new model contract in Colombia, and the tough terms offered in Peru.

Asia (East and Southeast) also slipped backwards in its overall relative position because the region as a whole did not improve its terms to the same extent as did most other regions.

References

1. World Fiscal Systems for Oil-1997, Barrows Inc., New York.

2. Van Meurs, A. Pedro, "Governments cut takes to compete as world acreage demand falls," OGJ, Apr. 24, 1995, pp. 78-82.

The Authors