Governments Eye Gas Incentives

Attractive fiscal and contract terms by host governments are creating incentives for natural gas development projects that exploration and production companies might have avoided in the past.

That's a key finding of Geneva-based Petroconsultants SA in its review of petroleum fiscal regimes.

Study results

The study examined the fiscal regimes of 74 countries and found that 20 have different terms for oil vs. gas projects, with many favoring gas. Specifically, about two-thirds of these countries with differing oil/gas terms, provided a lower state take for gas than for oil projects.

By Petroconsultants' definition, a state take is the proportion of undiscounted gross cash flow retained by the host government.

Five governments had takes more than 10% different for oil and gas (see chart, this page).

Examples of countries with favorable fiscal terms for gas include:

Tunisia and Peru apply lower royalty rates to gas production.
Indonesia allows gas developments an after-tax profit share 20% higher than that allowed for oil.
Bangladesh allows contractors to bid a ceiling for recovering gas costs as much as 5% more than provided for oil projects.

Rationale

The favorable terms offset traditionally weaker economics of gas versus oil projects, Petroconsultants noted.

Typically, it has taken longer and cost more to develop gas fields because of transportation requirements and other factors.

The favorable terms are a factor in what Petroconsultants called a "quiet revolution," which has enabled development of smaller gas projects to serve new markets.

Bangladesh, Pakistan, Côte d'Ivoire, Peru, and Tunisia all have started developing individual fields with reserves totaling less than 300 bcf, something usually not tackled outside established gas-producing regions of North America, Europe, and Southeast Asia.

This occurs when wellhead gas prices remain low, something necessary to enable gas to compete with alternate fuels. For example, Côte d'Ivoire's contract with United Meridian Corp. provides for prices of $1.50-1.67/MMBTU, rising to $2 after 3 years. The lower price translates to an oil-equivalent price of $9-10/bbl, about half the level of recent oil prices.

Favorable fiscal terms have "clearly encouraged the development of gas in many new countries to the extent where small but significant markets have been established," Petroconsultants said.

Phenomenon not widespread

However, recognition of the importance of favorable terms in developing gas isn't widespread.

The state takes of many countries are no different for oil and gas, and about 10% have significantly higher takes for gas projects.

"If future exploration investment is to be enticed into gas-prone areas where the market remains underdeveloped, the government clearly has a role to play," Petroconsultants said.

One example is Argentina, a nation with only small gas discoveries far from market and low domestic prices but also one of the 10 most lenient regimes. This was cited as a factor by Argentina's YPF in forecasting that it will double gas sales to 800 bcf by 2004.

Despite generally harsh fiscal terms, the largest gas-producing countries continue to remain attractive. Of the 15 largest-producing regimes, Argentina, the U.K., and the U.S. look particularly attractive from an investors' standpoint, with state takes less than 60%. Of these, the U.K. is the most attractive, with a state take of only 33%.

"How long the newly-elected Labour government will preserve fiscal terms allowing investors to retain such a large slice of the economic rent remains to be seen," Petroconsultants said.