Fiscal rita jolly (formatted)

Presented by:

Rita Jolly Petroleum Development Consultants, UK

Shangri-La Hotel, Jakarta

21 June 2012

Gas Development Master Plan Regional PSC Competition of Fiscal Terms

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Contents

• Petroleum Fiscal Systems

• Elements of Fiscal Terms

• Indonesia Evolution of Fiscal Terms

• Regional PSC Country Comparison

• Designing Fiscal Terms

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Petroleum Fiscal Systems

Petroleum Fiscal System

Contractual

Service Contracts

Pure Service

Risk Service Contracts

(the service fee is linked to the profit)

Production Sharing

Contracts

Concessionary

Royalty/Tax

4


Concessionary System

• Allows private ownership to mineral resources

• Oil company have exclusive right to explore and produce at its own risk and expense

• Oil company owns production

• Oil Company pays royalty, surface rent and taxes

• Investor typically responsible for abandonment

Contractual System

• The State retains ownership to mineral resources

• Contractor gets share of production

• Contractor does not own the production

• Contractor shares the risk with the Government

• The State/NOC is typically legally responsible for abandonment

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Main Difference Between Concessionary System and PSC System

Ownership of nation’s mineral resources

Title transfer point

Company entitlement

Entitlement percentage

Ownership of facilities

Management and control

Government participation (carried working interest)

Ring fencing

Concessionary Systems

Held by sovereign state

At the wellhead

Gross production less royalty

Typically 90%

Held by company

Typically less government control

Less likely

Less likely

Production Sharing Contracts

Held by sovereign state

At the export point

Cost oil/gas + profit oil/gas

Typically 50–60%

Held by the state

More direct government control and participation

More likely

More likely

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Production Sharing Contracts

• PSC’s are most widely used form of contracts

• Host country grants FOC right to explore and are negotiated per acreage

• Each contract will address how FOC costs will be recovered

• The FOC is considered a Contractor to the Government

• The Contractor takes a % of production to recover costs and a profit split with the government from production of oil

• PSC environment has a tendency for FOC to over explore because in effect the government picks 65% to 85% of the costs

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Tax/Royalty Contracts

• Mostly occur in developing countries and account for about 50% worldwide

• Government imposed royalty and tax

• Alternative taxes may be imposed

• Applicable to all licences with fixed guidelines

Risk Service Contracts

• Most often in Latin America

• FOC explore, develop and produce reserves with no restraints from the Host country

• FOC is reimbursed for its investment and paid for the services only if there is a commercial production.

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Service Contract

PSC Royalty Tax

Simple Flow-chart comparison of Fiscal Terms

Gross Production

Gross Production

Gross Production

Less Costs

Cost Oil

Company’s Production

Royalty

State Production

Cost Oil

Profit Oil

Contractor Profit Oil

Income Tax

State Profit Oil

Income Tax

Contractor Profit After

Tax

Royalty

Income Tax

Contractor Fee

Contractor Profit After

Tax

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Fiscal Terms Around the World Royalty/Tax PSC

EUROPE Bulgaria

Czech Republic

Denmark

France

Greece

Hungary

Ireland

Italy

Netherlands

Norway

Poland

Portugal

Romania

Spain

UK

Albania

Malta

Poland

Turkey

AFRICA Chad

Congo (K)

Madagascar

Malawi

Mali

Morocco

Namibia

Nigeria

Senegal

South Africa

Algeria

Angola

Cameroon

Congo (Br)

Cote D’Ivoire

Egypt

Equatorial Guinea

Gabon

Ghana

Kenya

Libya

Mauritania

Montenegro

Sudan

Tanzania

Tunisia

Uganda

MIDDLE EAST

Abu Dhabi Ajman

Kazakhstan

Turkey Bahrain

Iraq

Jordan

Libya

Qatar

Syria

Turkmenistan

Yemen

FAR EAST/ASIA

Australia

Brunei

Korea

Pakistan (on)

PNG

New Zealand

Thailand

Timor Gap B

Bangladesh

Cambodia

China

India

Indonesia

Laos

Malaysia

Mongolia

Myanmar

Nepal

Pakistan (off)

Sri Lamka

Timor Gap A

Vietnam

AMERICAS Argentina

Bolivia

Brazil

Canada Colombia

Costa Rica

Falklands

Venezuela

USA

Belize

Cuba

Guatemala

Guyana

Jamaica

Ecuador

Peru

Uruguay

Venezuela

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Fiscal Terms Around the World

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Elements of Petroleum Fiscal Systems

PSC Fiscal Terms

• Work Commitment

• Bonus Payments

• Royalties

• Cost Recovery (Cost Oil)

• Profit Oil

• Government Participation

• Domestic Market Obligation

• Indirect Taxes

• Corporation Tax

Royalty/Tax Fiscal Terms

• Work Commitment

• Bonus Payments

• Royalties

• Government Participation

• Domestic Market Obligation

• Indirect Taxes

• Corporation Tax

Indonesia led the world in development of Production Sharing Contracts (1954)

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Gas Fiscal Terms

There are more fiscal systems in the world than there are countries due to:

Negotiation of Terms

Numerous vintages

Trends in Gas Taxation 2003- 2008

Increases in tax percentage for gas have been much less than oil because there are still considerable gas reserves around the World

Government takes for gas in some countries stabilized or continued to decline and governments seek instead greater market access: Qatar, Venezuela, Norway and Egypt

However, government takes for gas have also increased in some jurisdictions: Algeria, Bolivia, UK, Trinidad and Tobago

Trend for gas taxation systems are becoming more different from oil taxation systems.

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Regional PSC Country Comparison

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Indonesia – Evolution of Fiscal Terms

First Generation PSCs 1960 - 1975

Cost Recovery 40%

Profit split post tax:

65% State 35% Contractor

Carry forward of unrecovered costs

Oil price set by State for tax calculations

Signature bonus $1mm to $5mm

Production bonus ranged from $15mm to $50mm

DMO 25% ay 0.2c/bbl

Second Generation PSCs 1976 - 1988

Abolition of Cost Oil

Profit Oil increased to 85%

Profit Gas 70% or 65%

Investment incentives 20% of production subject to a guarantee to the government of 49% of revenue over life of field

Interest recoverable

Cost Recovery period improved from 14 to 7yrs

1978 Pre-Tax PO share of 34.1% subject to CT of 56%

1984 – CT 48%, dividend tax 20%; Profit split reset at 28.86% to contractor; Investment credit reduced to 17% subject to govt guarantee of 25% of gross revenue over life of field

Third Generation PSCs 1988 onwards Fist Tranche Petroleum 15% to 20%

Cost Recovery 80% - 85%

CT rate 48% or 44%

Investment credit 17% to 20%

DMO oil 10% of export price

Progressive sharing split

Deregulation in certain areas

Contractor provide abandonment

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Forth Generation PSCs 1995

FTP 15%

Cost Recovery 85%


Oil 85%/15%

Gas 60%/40%

CT 44%

DMO 25% oil at full first 5yrs, 25% thereafter of export price

Fifth Generation PSCs Post 2001

FTP 10% to BP MIGAS and not shared

Cost Recovery 90%


Oil 75%/25%

Gas 60%/40%

CT 44%

Investment credit:

oil 17%

gas 55%

DMO floor % of total oil production

DMO floor % of total gas production at avg contract price

New PSCs 2008 onwards

Cost Recovery 90%


Oil 80%/20%

Gas 70%/30%

CT 44%

No investment credit

DMO 25% oil at full first 5yrs, 25% thereafter of export price

DMO 25% proven gas reserves

Depreciation 5 to 10 yrs DB

No interest

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Equity Share - Gas

New Contracts *

1995 Eastern

Province PSC 1995 1985 - 1994 Old

Tax Rate 44% 44% 44% 48% 56%

Share of Production after Tax:

Government varies 60 70 70 70

Contractor varies 40 30 30 30

Contractor's Share of Production before Tax

44.64 - 62.5

35/(100-44) 71.43

15/(100-44) 53.57

15/(100-48) 57.69

15/(100-56) 68.18

* General combined "C&D" tax rate fell to 42.4% in 2009 and 40% in 2010. However, gross sharing rates have not been adjusted for

these new PSCs.

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Indonesia – PSC Fourth Generation

Gross Revenue 100

First Tranche Petroleum 20%

Net Revenue 80

Cost Oil 35%

Profit Oil 52

Taxable Income 20.8

Tax 48%

After Tax Cash flow

===Contractor Take State ===

Contractor PO - 28.8462%

Government PO - 71.1538%

5.8 14.2

28

15

-10

10.8

15%

37

10

61.2

85%

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Indonesia – PSC Current gas

Gross Revenue 100

First Tranche Petroleum 10%

Net Revenue 90

Cost Oil 90%

Profit Oil 62

Taxable Income 33.2

Tax 44%

After Tax Cash flow

===Contractor Take State ===

Contractor PO – 53.571%

Government PO – 46.429%

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28

33.2

-14.6

18.6

25.8%

24.8

14.6

49.4

74.2%

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Indonesia Evolution of Fiscal Terms

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Fiscal Systems in Selected Asia/Pacific Countries

Fiscal System Exploration

(yrs)

Development

(yrs) Retention (yrs)

Exploitation

(yrs)

Extension

(yrs) Bonuses

THAILAND II RT 6 + 3 4 20 10 Negotiable

THAILAND III PSC 5 5 5 gas only Oil 25 Gas 20 Negotiable

BRUNEI RT Offshore 17

Onshore 8

30 Onshore 23

Offshore 30 Negotiable

MALAYSIA PSC 5 Oil 15 Gas 20 Negotiable Negotiable

VIETNAM PSC 5 20 - 25 Negotiable Negotiable

PHILIPPINES SC 1 - 10 30 Negotiable Negotiable

CHINA PSC 7 - 8 15 Negotiable

PAKISTAN

(Offshore) PSC Negotiable

MYANMAR PSC 3 - 5 20 Negotiable Negotiable

CAMBODIA PSC 8 4 30 5 Negotiable

INDONESIA PSC 6 - 10 20 - 25 20 - 30 Negotiable

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Fiscal Systems in Selected Asia/Pacific Countries

Royalties Cost Recovery Excess Oil Profit Oil Contractor

Share State Participation DMO

THAILAND II 12.5%

THAILAND III 5% - 15% (deep sea

reduced by 30%) Oil 50% Gas 60% 50%

BRUNEI Oil 8% - 12.5% Gas

8% 80%

Cum prod <

1.5tcf 40% >

1.5tcf 60%

50% will repay past

costs

MALAYSIA 10% + 0.5% Research

levy

20% - 100%

R/C Factor 0-3

Varies with THV Gas

THV 0.75tcf

30% - 80%< THV

10% - 40% >THV 25%

VIETNAM 65% - 70% (V) 15% will repay past

costs

PHILIPPINES 7.50% 60%

CHINA

Oil 0% - 12.5% Gas

0% - 3% (0% post

Nov 2011)

35% - 60%

PAKISTAN

(Offshore) 0% - 12.5%

oil 20% - 80% (V) Gas

20% - 90%

MYANMAR 10% oil 50% - 70% Gas

80% - 90%

Oil 10% - 55% Gas

60% 20% Gas

CAMBODIA 5% - 12.5% 40% - 65% (V)

INDONESIA FTP - 10% 90% oil 80% Gas 70% post

tax

10% will repay past

costs 25%

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VAT Export Duty Resource Rent

Tax Income Tax Witholding Tax Incentives

Avg Government

Take

THAILAND II 50% Yes (A) 59%

THAILAND III 10%

Tax holiday 8yrs,

10% for next 7yrs

thereafter 20%

Yes (D) 31%

BRUNEI 55% 20% Yes (A) 48%

MALAYSIA 10% 70% (Pr) 38% JDA 0% to

20% Yes (H,D) 57%

VIETNAM 10% Oil 7% - 29% Gas

1% - 10% 32% - 50% 15% Yes (T,RD,I) 45%

PHILIPPINES 30% 15% - 32% Yes E 31%

CHINA 5% on oil 17% on

costs ???

20% - 40% above

$40/bbl; CCT 7%

+ ES 3%

25% 10% Yes (I) 26%

PAKISTAN

(Offshore) 40% Yes (D) 32%

MYANMAR 30% Yes (H) 30%

CAMBODIA 30% Yes E 27%

INDONESIA 44% Yes (I,A,Cr,U) 37%

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Notes Key

D Deep water

H Tax holiday

V Sliding Production

E Costs expensed

A Accelerated depreciation

I Investment Incentive

Cr Tax credit

P Profit linked

T Reduced Tax rate

RD R&D fund

U Unconventional Resources

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Regional Fiscal Terms Comparison

Fiscal Terms in selected Asia/Pacific Countries (OIL) Country

• Indonesia

• China

• Brunei

• Vietnam

• Malaysia

• Myanmar

• Indonesia (gas)

• Thailand

• Cambodia

• PNG (gas)

• Philippines

• New Zealand

State Take %

• 86 – 88

• 84 – 88

• 84 – 86

• 82 – 88

• 82 – 85

• 80 – 84

• 66 – 70

• 60 – 74

• 60 – 66

• 52 – 62

• 52 – 58

• 44 - 48

Fiscal System

• PSC

• PSC

• RT

• PSC

• PSC

• PSC

• PSC

• RT

• RT

• RT

• SA

• RT

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Fiscal Comparison by Daniel Johnston

Indonesia

2001 2008

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Indonesia Government take

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NO GAS COMPARISON STUDIES??????

Crude calc use with

caution!!!!

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NO GAS COMPARISON STUDIES??????

Fiscal Comparison

Gas Field Size

Location

Fiscal Systems Commercial Assumptions

Development Scenarios

Economic Analysis

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Designing of Fiscal Terms

Government Objectives

• Impact on oil/gas output

• Encourage Marginal Fields

• Pace of development

• Timing of abandonment

• Sensitive to Price

• Stability / flexibility

• Concessionary/Contractual

• Maximise Revenue

• Social Economic benefits

• Limit undue administration

• Low Risk Takers

FOC Objectives

• Investment Risk

• Minimise front end loading

• High Returns

• Tax stability

• Risk/Reward portfolio

• High Risk Takers

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The following basic questions have to be addressed before a country decides on its gas strategy:

How much gas is available?

What are the types and composition of the gas produced?

What are the potential markets for selling the gas at the highest added value?

How the local gas industry can be organized and what is the impact of the global outlook for gas?

Different cost environments: deep water, onshore, LNG encouraging FOC efficiency

Most recent forecasts estimate that the world gas demand by 2035 may reach 4,250-4,500 Bcm(150 to 160 Tcf), an increase of 40 to 50% relative to 2008, with a share of gas in the primary energy mix of 21%. Around 80% of the increase in gas demand may come from non-OECD countries, namely from developing countries. Reserves and resources are sufficient to support such gas developments if the appropriate country gas policies are decided allowing the required investments to be made in a timely fashion in the entire gas supply chain.

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Designing of Fiscal Terms Egypt represents today one of the most successful gas stories in the world demonstrating the impact of selecting the right country policy. The introduction of a drastically revised gas policy in the 1980s, with amendments to the legal, fiscal and contractual framework designed to encourage gas exploration and to promote gas utilization in the country led to a series of discoveries holding quite large gas reserves. Today they are developed and in production by many operators for supplying mostly the local markets with the balance exported.

Nigeria, on the contrary, ist he example of a country with major gas resources which did not adopted the appropriate gas policy for a long time. The most obvious consequence is that today a large share of the associated gas is still flared while the country is not producing enough electricity, a use where the gas is so valuable. Only quite recently in 2008, a modern gas policy was decided which may change this energy picture when implemented.

Egypt 1980 2000 2010

Proved gas reserves (Bcm)

80 1,400 2,200

Domestic Gas demand (Bcm)

2 20 45

Strategy Gas clause New gas pricing

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Designing of Fiscal Terms Vietnam, where the petroleum law was amended in 2000 to introduce more favourable provisions for gas relative to oil, in terms of extended exploration–including a retention period of up to 7 years–and exploitation duration, royalty reduction along with the right to negotiate specific gas development and exploitation agreements.

Indonesia, where the new Oil and Gas of 2001 covers both upstream and downstream activities–which is not the case in most petroleum laws–and highlights the new priority to be given to domestic gas uses versus gas exports along with the introduction for gas of a new “domestic market supply” obligation

2000 – introduced more favourable provisions for gas

“If discovering gas with commercial value, while lacking the consumption market as well as conditions on pipelines and suitable treatment facilities, contractors may retain the areas where gas is found. The duration of retention of such an area shall not exceed five (5) years and may, in special cases, be extended for two (2) more years. Pending the consumption market and the conditions on pipelines and suitable treatment facilities, the contractors shall have to proceed with the work already committed in the petroleum contracts.”

Article 32 as amended provides that the applicable royalty rate will be fixed in the petroleum agreements within a more attractive range for gas: between 0 and 10% instead of 4 to 25 % for oil. In a similar way the cost recovery gas limit and the profit gas sharing may be more favourable to the PSC-holder.

Australia which was one of the first country to introduce the concept of a retention lease for allowing the exploration permit-holder of an oil or gas discovery to benefit in specific cases of a longer exploration and appraisal phase for discoveries. In addition, the possibility of joint gas development projects combining the resources and infrastructure with third parties is encouraged “to jointly develop or complete an access agreement for use of facilities or technology which provides an acceptable rate of return.”

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State FOC PSA Terms

Exploration Stage

Reserves

Production Stage

Monitor

Participation

Unable to recover

Exploration

If Commercial recover

costs early

Cost Oil

State Participation

High

Price

Low

Give away revenue Trade off upside for

downside

Sliding scale

Costs Depend on participation Flex Recover costs early

Maximum cost oil

Linked to Rate of

Return

DMO Secure revenue Profitability Link to world market

Infrastructure/Transport Costs – cost recovery Maximise Cost Oil for

Early recovery

Sovereign Early payback Maximise Cost Oil

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Fiscal Systems comparison based on Value of Discovery After Tax

A 25mmb field in Ireland gives the same profit after tax for the oil company as a144mmb field in Indonesia

Source: Dr Alfred Kjemperud

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Summary

High

Inte

rest

from

FOC

Less

attr

acti

ve

to F

OC

Govern

ment Take

High

Low

Business

Fiscal rita jolly (formatted)