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Gas Development Master PlanRegional PSC Competition of Fiscal TermsPresented by:Rita JollyPetroleum Development Consultant...
Contents• Petroleum Fiscal Systems• Elements of Fiscal Terms• Indonesia Evolution of Fiscal Terms• Regional PSC Country Co...
Petroleum Fiscal Systems                               Petroleum Fiscal System            Contractual                     ...
Petroleum Fiscal SystemsConcessionary System• Allows private ownership to mineral resources• Oil company have exclusive ri...
Main Difference Between Concessionary System   and PSC System                             Concessionary                   ...
Petroleum Fiscal SystemsProduction Sharing Contracts• PSC’s are most widely used form of contracts• Host country grants FO...
Petroleum Fiscal SystemsTax/Royalty Contracts• Mostly occur in developing countries and account for about  50% worldwide• ...
Simple Flow-chart comparison of Fiscal Terms  Royalty Tax                           PSC                         Service   ...
Fiscal Terms Around the World                             Royalty/Tax                              PSCEUROPE      Bulgaria...
Fiscal Terms Around the World                                10
Elements of Petroleum Fiscal Systems      PSC Fiscal Terms                     Royalty/Tax Fiscal Terms• Work Commitment  ...
Gas Fiscal TermsThere are more fiscal systems in the world than there are countries  due to: Negotiation of Terms Numero...
Regional PSC Country Comparison                                  13
Indonesia – Evolution of Fiscal TermsFirst Generation PSCs 1960 - 1975Cost Recovery 40%                             Second...
Indonesia – Evolution of Fiscal TermsForth Generation PSCs 1995FTP 15%                            Fifth Generation PSCs Po...
Indonesia – Evolution of Fiscal Terms                                                       Equity Share - Gas            ...
Indonesia – PSC Fourth Generation Contractor                                                      GovernmentPO - 28.8462% ...
Indonesia – PSC Current gas Contractor                                                      Government PO – 53.571%       ...
Indonesia Evolution of Fiscal Terms                                      19
Regional PSC Country Comparison                 Fiscal Systems in Selected Asia/Pacific Countries                         ...
Regional PSC Country Comparison                       Fiscal Systems in Selected Asia/Pacific Countries                   ...
Regional PSC Country Comparison                                                Resource Rent                              ...
Notes                       Key  D    Deep water  H    Tax holiday  V    Sliding Production  E    Costs expensed  A    Acc...
Regional Fiscal Terms Comparison   Fiscal Terms in selected  Asia/Pacific Countries (OIL)   Country          State Take % ...
Fiscal Comparison by Daniel Johnston            Indonesia     2008                2001                                    ...
Indonesia Government take                            26
NO GAS COMPARISON STUDIES??????     Crude calc use          with       caution!!!!                                  27
NO GAS COMPARISON STUDIES??????                                       Commercial                     Fiscal Systems       ...
Designing of Fiscal Terms        Government                                       FOC Objectives         Objectives•   Imp...
Designing of Fiscal TermsThe following basic questions have to be addressed before a countrydecides on its gas strategy: ...
Designing of Fiscal TermsEgypt represents today one of the most successful gas stories in the world demonstrating the impa...
Designing of Fiscal TermsVietnam, where the petroleum law was amended in 2000 to introduce more favourable provisionsfor g...
Designing of Fiscal Terms                                          State                     FOC                PSA Terms ...
Fiscal Systems comparison based on Value of              Discovery After TaxSource: Dr Alfred Kjemperud                   ...
Low                   Government Take                                          High                                Less   ...
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Fiscal rita jolly (formatted)

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  1. 1. Gas Development Master PlanRegional PSC Competition of Fiscal TermsPresented by:Rita JollyPetroleum Development Consultants, UKShangri-La Hotel, Jakarta21 June 2012
  2. 2. Contents• Petroleum Fiscal Systems• Elements of Fiscal Terms• Indonesia Evolution of Fiscal Terms• Regional PSC Country Comparison• Designing Fiscal Terms 2
  3. 3. Petroleum Fiscal Systems Petroleum Fiscal System Contractual Concessionary Production Service Royalty/Tax Sharing Contracts Contracts Risk Service Contracts Pure Service (the service fee is linked to the profit) 3
  4. 4. Petroleum Fiscal SystemsConcessionary 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 abandonmentContractual 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 4
  5. 5. Main Difference Between Concessionary System and PSC System Concessionary Production Systems Sharing Contracts Ownership of nation’s Held by sovereign state Held by sovereign state mineral resources Title transfer point At the wellhead At the export point Company entitlement Gross production less royalty Cost oil/gas + profit oil/gas Entitlement percentage Typically 90% Typically 50–60% Ownership of facilities Held by company Held by the state Typically less government More direct governmentManagement and control control control and participationGovernment participation Less likely More likely(carried working interest) Ring fencing Less likely More likely 5
  6. 6. Petroleum Fiscal SystemsProduction 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 6
  7. 7. Petroleum Fiscal SystemsTax/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 guidelinesRisk 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. 7
  8. 8. Simple Flow-chart comparison of Fiscal Terms Royalty Tax PSC Service Gross Gross Production Contract Production Gross Production RoyaltyRoyalty Cost Oil Cost Oil Less Costs Profit Oil State ProductionIncome Tax Contractor State Contractor Fee Profit Oil Profit Oil Company’s Production Income Income Tax Tax Contractor Contractor Profit After Profit After Tax Tax 8
  9. 9. Fiscal Terms Around the World Royalty/Tax PSCEUROPE Bulgaria Italy Albania Czech Republic Netherlands Malta Denmark Norway Poland France Poland Turkey Greece Portugal Hungary Romania Ireland Spain UKAFRICA Chad Namibia Algeria Kenya Congo (K) Nigeria Angola Libya Madagascar Senegal Cameroon Mauritania Malawi South Africa Congo (Br) Montenegro Mali Cote D’Ivoire Sudan Morocco Egypt Tanzania Equatorial Guinea Tunisia Gabon Uganda GhanaMIDDLE Abu Dhabi Ajman Turkey Bahrain Qatar Kazakhstan Iraq SyriaEAST Jordan Turkmenistan Libya YemenFAR Australia Thailand Bangladesh Mongolia Brunei Timor Gap B Cambodia MyanmarEAST/ASIA Korea China Nepal Pakistan (on) India Pakistan (off) PNG Indonesia Sri Lamka New Zealand Laos Timor Gap A Malaysia VietnamAMERICAS Argentina Costa Rica Belize Ecuador Bolivia Falklands Cuba Peru Brazil Venezuela Guatemala Uruguay Canada Colombia USA Guyana Venezuela Jamaica 9
  10. 10. Fiscal Terms Around the World 10
  11. 11. Elements of Petroleum Fiscal Systems PSC Fiscal Terms Royalty/Tax Fiscal Terms• Work Commitment • Work Commitment• Bonus Payments • Bonus Payments• Royalties • Royalties• Cost Recovery (Cost Oil) • Government• Profit Oil Participation• Government • Domestic Market Participation Obligation• Domestic Market • Indirect Taxes Obligation • Corporation Tax• Indirect Taxes• Corporation Tax Indonesia led the world in development of Production Sharing Contracts (1954) 11
  12. 12. Gas Fiscal TermsThere are more fiscal systems in the world than there are countries due to: Negotiation of Terms Numerous vintagesTrends 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 TobagoTrend for gas taxation systems are becoming more different from oil taxation systems. 12
  13. 13. Regional PSC Country Comparison 13
  14. 14. Indonesia – Evolution of Fiscal TermsFirst Generation PSCs 1960 - 1975Cost Recovery 40% Second Generation PSCs 1976 - 1988Profit split post tax: Abolition of Cost Oil Third Generation PSCs65% State35% Contractor Profit Oil increased to 85% 1988 onwards Profit Gas 70% or 65% Fist Tranche Petroleum 15% to Investment incentives 20% of 20%Carry forward ofunrecovered costs production subject to a guarantee Cost Recovery 80% - 85% to the government of 49% of revenue over life of field CT rate 48% or 44%Oil price set by State for Interest recoverable Investment credit 17% to 20%tax calculations DMO oil 10% of export price Cost Recovery period improved from 14 to 7yrsSignature bonus $1mm to 1978 Pre-Tax PO share of 34.1% Progressive sharing split$5mm subject to CT of 56% 1984 – CT 48%, dividend tax 20%; Deregulation in certain areasProduction bonus ranged Profit split reset at 28.86% tofrom $15mm to $50mm contractor; Investment credit reduced to 17% subject to govt Contractor provide guarantee of 25% of gross revenue abandonmentDMO 25% ay 0.2c/bbl over life of field 14
  15. 15. Indonesia – Evolution of Fiscal TermsForth Generation PSCs 1995FTP 15% Fifth Generation PSCs Post 2001Cost Recovery 85% FTP 10% to BP MIGAS and notProfit split post tax: shared New PSCs 2008 onwardsOil 85%/15% Cost Recovery 90% Cost Recovery 90%Gas 60%/40% Profit split post tax: Profit split post tax:CT 44% Oil 75%/25% Oil 80%/20%DMO 25% oil at full first Gas 60%/40%5yrs, 25% thereafter of Gas 70%/30%export price CT 44% CT 44% Investment credit: oil 17% No investment credit gas 55% DMO 25% oil at full first 5yrs, 25% thereafter of export price DMO floor % of total oil production DMO 25% proven gas reserves DMO floor % of total gas Depreciation 5 to 10 yrs DB production at avg contract price No interest 15
  16. 16. Indonesia – Evolution of Fiscal Terms Equity Share - Gas 1995 Eastern New Contracts * Province PSC 1995 1985 - 1994 OldTax Rate 44% 44% 44% 48% 56%Share of Production after Tax:Government varies 60 70 70 70Contractor varies 40 30 30 30Contractors Share of Production before Tax 44.64 - 62.535/(100-44) 71.4315/(100-44) 53.5715/(100-48) 57.6915/(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. 16
  17. 17. Indonesia – PSC Fourth Generation Contractor GovernmentPO - 28.8462% PO - 71.1538% Gross Revenue 100 5.8 14.2 First Tranche Petroleum 20% Net Revenue 80 28 Cost Oil 35% 15 37 Profit Oil 52 Taxable Income 20.8 -10 Tax 48% 1010.8 After Tax Cash flow 61.215% ===Contractor Take State === 85% 17
  18. 18. Indonesia – PSC Current gas Contractor Government PO – 53.571% PO – 46.429% Gross Revenue 100 First Tranche Petroleum 10% 10 Net Revenue 90 28 Cost Oil 90% 33.2 Profit Oil 62 24.8 Taxable Income 33.2 Tax 44% 14.6 -14.6 18.6 After Tax Cash flow 49.425.8% ===Contractor Take State === 74.2% 18
  19. 19. Indonesia Evolution of Fiscal Terms 19
  20. 20. Regional PSC Country Comparison Fiscal Systems in Selected Asia/Pacific Countries Exploration Development Exploitation Extension Fiscal System Retention (yrs) Bonuses (yrs) (yrs) (yrs) (yrs)THAILAND II RT 6+3 4 20 10 NegotiableTHAILAND III PSC 5 5 5 gas only Oil 25 Gas 20 Negotiable Offshore 17 30 Onshore 23 BRUNEI RT 30 Negotiable Onshore 8 Offshore MALAYSIA PSC 5 Oil 15 Gas 20 Negotiable Negotiable VIETNAM PSC 5 20 - 25 Negotiable NegotiablePHILIPPINES SC 1 - 10 30 Negotiable Negotiable CHINA PSC 7-8 15 Negotiable PAKISTAN PSC Negotiable (Offshore) MYANMAR PSC 3-5 20 Negotiable NegotiableCAMBODIA PSC 8 4 30 5 NegotiableINDONESIA PSC 6 - 10 20 - 25 20 - 30 Negotiable 20
  21. 21. Regional PSC Country Comparison Fiscal Systems in Selected Asia/Pacific Countries Profit Oil Contractor Royalties Cost Recovery Excess Oil State Participation DMO ShareTHAILAND II 12.5% 5% - 15% (deep seaTHAILAND III Oil 50% Gas 60% 50% reduced by 30%) Cum prod < Oil 8% - 12.5% Gas 50% will repay past BRUNEI 80% 1.5tcf 40% > 8% costs 1.5tcf 60% 10% + 0.5% Research 20% - 100% Varies with THV Gas 30% - 80%< THV MALAYSIA 25% levy R/C Factor 0-3 THV 0.75tcf 10% - 40% >THV 15% will repay past VIETNAM 65% - 70% (V) costsPHILIPPINES 7.50% 60% Oil 0% - 12.5% Gas CHINA 0% - 3% (0% post 35% - 60% Nov 2011) PAKISTAN oil 20% - 80% (V) Gas 0% - 12.5% (Offshore) 20% - 90% oil 50% - 70% Gas Oil 10% - 55% Gas MYANMAR 10% 20% Gas 80% - 90% 60%CAMBODIA 5% - 12.5% 40% - 65% (V) oil 80% Gas 70% post 10% will repay pastINDONESIA FTP - 10% 90% 25% tax costs 21
  22. 22. Regional PSC Country Comparison Resource Rent Avg Government VAT Export Duty Income Tax Witholding Tax Incentives Tax TakeTHAILAND II 50% Yes (A) 59% Tax holiday 8yrs,THAILAND III 10% 10% for next 7yrs Yes (D) 31% thereafter 20% BRUNEI 55% 20% Yes (A) 48% 38% JDA 0% to MALAYSIA 10% 70% (Pr) Yes (H,D) 57% 20% Oil 7% - 29% Gas VIETNAM 10% 32% - 50% 15% Yes (T,RD,I) 45% 1% - 10%PHILIPPINES 30% 15% - 32% Yes E 31% 20% - 40% above 5% on oil 17% on CHINA $40/bbl; CCT 7% 25% 10% Yes (I) 26% costs ??? + ES 3% PAKISTAN 40% Yes (D) 32% (Offshore)MYANMAR 30% Yes (H) 30%CAMBODIA 30% Yes E 27%INDONESIA 44% Yes (I,A,Cr,U) 37% 22
  23. 23. 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 23
  24. 24. Regional Fiscal Terms Comparison Fiscal Terms in selected Asia/Pacific Countries (OIL) Country State Take % Fiscal System • Indonesia • 86 – 88 • PSC • China • 84 – 88 • PSC • Brunei • 84 – 86 • RT • Vietnam • 82 – 88 • PSC • Malaysia • 82 – 85 • PSC • Myanmar • 80 – 84 • PSC• Indonesia (gas) • 66 – 70 • PSC • Thailand • 60 – 74 • RT • Cambodia • 60 – 66 • RT • PNG (gas) • 52 – 62 • RT • Philippines • 52 – 58 • SA • New Zealand • 44 - 48 • RT 24
  25. 25. Fiscal Comparison by Daniel Johnston Indonesia 2008 2001 25
  26. 26. Indonesia Government take 26
  27. 27. NO GAS COMPARISON STUDIES?????? Crude calc use with caution!!!! 27
  28. 28. NO GAS COMPARISON STUDIES?????? Commercial Fiscal Systems Assumptions Location Development Scenarios Fiscal Economic Gas Field Size Comparison Analysis 28
  29. 29. Designing of Fiscal Terms Government FOC Objectives Objectives• Impact on oil/gas output • Investment Risk• Encourage Marginal Fields • Minimise front end loading• Pace of development • High Returns• Timing of abandonment • Tax stability• Sensitive to Price • Risk/Reward portfolio• Stability / flexibility • High Risk Takers• Concessionary/Contractual• Maximise Revenue• Social Economic benefits• Limit undue administration• Low Risk Takers 29
  30. 30. Designing of Fiscal TermsThe following basic questions have to be addressed before a countrydecides 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 efficiencyMost 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 ofgas in the primary energy mix of 21%. Around 80% of the increase in gas demand maycome from non-OECD countries, namely from developing countries. Reserves andresources are sufficient to support such gas developments if the appropriate countrygas policies are decided allowing the required investments to be made in a timelyfashion in the entire gas supply chain. 30
  31. 31. Designing of Fiscal TermsEgypt represents today one of the most successful gas stories in the world demonstrating the impactof 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 gasexploration and to promote gas utilization in the country led to a series of discoveries holding quitelarge gas reserves. Today they are developed and in production by many operators for supplyingmostly the local markets with the balance exported. Egypt 1980 2000 2010 Proved gas 80 1,400 2,200 reserves (Bcm) Domestic Gas 2 20 45 demand (Bcm) Strategy Gas clause New gas pricingNigeria, on the contrary, ist he example of a country with major gas resources which did not adoptedthe appropriate gas policy for a long time. The most obvious consequence is that today a large shareof the associated gas is still flared while the country is not producing enough electricity, a use wherethe gas is so valuable. Only quite recently in 2008, a modern gas policy was decided which maychange this energy picture when implemented. 31
  32. 32. Designing of Fiscal TermsVietnam, where the petroleum law was amended in 2000 to introduce more favourable provisionsfor 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 gasdevelopment 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 todomestic gas uses versus gas exports along with the introduction for gas of a new “domestic marketsupply” obligation2000 – introduced more favourable provisions for gas“If discovering gas with commercial value, while lacking the consumption market as well asconditions on pipelines and suitable treatment facilities, contractors may retain the areas where gasis found. The duration of retention of such an area shall not exceed five (5) years and may, in specialcases, be extended for two (2) more years. Pending the consumption market and the conditions onpipelines and suitable treatment facilities, the contractors shall have to proceed with the workalready committed in the petroleum contracts.”Article 32 as amended provides that the applicable royalty rate will be fixed in the petroleumagreements within a more attractive range for gas: between 0 and 10% instead of 4 to 25 % for oil. Ina similar way the cost recovery gas limit and the profit gas sharing may be more favourable to thePSC-holder.Australia which was one of the first country to introduce the concept of a retention lease forallowing the exploration permit-holder of an oil or gas discovery to benefit in specific cases of alonger exploration and appraisal phase for discoveries. In addition, the possibility of joint gasdevelopment 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 whichprovides an acceptable rate of return.” 32
  33. 33. Designing of Fiscal Terms State FOC PSA Terms Exploration Stage Monitor Unable to recover Cost Oil ExplorationReserves If Commercial recover Production Stage Participation costs early State Participation High Give away revenue Trade off upside for Sliding scalePrice downside LowCosts Depend on participation Flex Recover costs early Maximum cost oil Linked to Rate of ReturnDMO Secure revenue Profitability Link to world marketInfrastructure/Transport Costs – cost recovery Maximise Cost Oil for Early recoverySovereign Early payback Maximise Cost Oil 33
  34. 34. Fiscal Systems comparison based on Value of Discovery After TaxSource: Dr Alfred Kjemperud A 25mmb field in Ireland gives the same profit after tax for the oil company as a144mmb field in Indonesia 34
  35. 35. Low Government Take High Less attractive to FOC Summary from FOC High Interest35
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