Tax & licensing regimes in the UK,
   Norway, Newfoundland, and
         Falkland Islands
       Lionel Wandfluh – OGEM – ...
TAX & LICENSING REGIMES IN THE UK, NORWAY,
                                                                               ...
Executive Summary
    -    reviews of 4 oil provinces’ tax and licensing regimes were undertaken in order to find the most...
Licensing
                                                                                             The Petroleum Act 1...
Background
Even though UK and Norway share the same oil region the North Sea, they have pretty much follow (at least from
...
petroleum tax. Discussion has been undertaken to replace it with tradable “Emissions Quotas” (Norwegian
                  ...
normally used for areas of proven oil and gas reserves. Work expenditure bid is expressed in the amount of
money a bidder ...
Even though oil was discovered in the Falkland Islands a long time ago, the instability due to political tension
         ...
development promotion with very low cumulative taxes (the oil production in the Falkland Islands on paper is the
most attr...
Bibliography
                                                                                             CERA. (2007, Oct...
Upcoming SlideShare
Loading in …5
×

Assignement Fiscla Regime Comparison

1,871 views
1,785 views

Published on

Comparison of Crude oil fiscal regimes in the UK, Norway, Newfoundland, and Falkland Islands

Published in: Travel, Business
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
1,871
On SlideShare
0
From Embeds
0
Number of Embeds
11
Actions
Shares
0
Downloads
0
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Assignement Fiscla Regime Comparison

  1. 1. Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands Lionel Wandfluh – OGEM – 18/04/2010 MICROSOFT 18 avril 2010 Créé par : Lionel Wandfluh
  2. 2. TAX & LICENSING REGIMES IN THE UK, NORWAY, NEWFOUNDLAND, AND FALKLAND ISLANDS Lionel Wandfluh – OGEM – 18/04/2010 Table of Contents EXECUTIVE SUMMARY .................................................................................................... 2 INTRODUCTION ............................................................................................................ 2 UNITED KINGDOM ........................................................................................................ 2 BACKGROUND .......................................................................................................... 2 TAXATION OF UK’S OIL DEVELOPMENT ............................................................................ 2 ANALYSIS ................................................................................................................ 3 NORWAY.................................................................................................................... 3 BACKGROUND .......................................................................................................... 4 TAXATION OF NORWAY’S OIL DEVELOPMENT ..................................................................... 4 ANALYSIS ................................................................................................................ 5 NEWFOUNDLAND ......................................................................................................... 5 BACKGROUND .......................................................................................................... 5 Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010 TAXATION OF CANADA NEWFOUNDLAND’S OIL DEVELOPMENT ............................................... 5 ANALYSIS ................................................................................................................ 6 FALKLAND ISLANDS ........................................................................................................ 6 BACKGROUND .......................................................................................................... 6 TAXATION OF FALKLAND ISLANDS’ OIL DEVELOPMENT .......................................................... 7 ANALYSIS ................................................................................................................ 7 CONCLUSION............................................................................................................... 8 RECOMMENDATION ....................................................................................................... 8 BIBLIOGRAPHIE ................................................................................................................ 9 1
  3. 3. Executive Summary - reviews of 4 oil provinces’ tax and licensing regimes were undertaken in order to find the most appealing investment: United Kingdom, Norway, Newfoundland, and Falkland Islands - United Kingdom: Work program licenses – Income tax focus (pretty low: 50%) - Norway: Work program licenses – Income tax focus ( pretty high: 78%) + C02 tax + State’s participation - Newfoundland: Bidding & work program licenses – Royalties (up to 7.5% on GRP and 30% on income) + 33% Income Tax - Falkland Islands: Mainly work program licenses (negotiated individually) – Royalties 9% + Income tax 25% + acreage rentals - 2 trends: early revenue promotion for undeveloped oil provinces and latter revenues for mature ones, and less cumulative taxes for politically unstable province (Falkland Islands) and depleted resource one (UK) - The most attractive one on a purely fiscal aspect is UK Introduction Our company is considering acquiring acreage in one of these following provinces: United Kingdom, Norway, Newfoundland, and Falkland Islands. In order to choose the most profitable solution, I was mandated to study the different fiscal and licensing regimes Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010 of each province, analyze their advantages and disadvantages, and come up with a recommendation on which country, at least fiscally, is the most appealing to invest in. United Kingdom Background The UK petroleum tax system’s development has always been strongly influenced by the political context of the period. Therefore, it went through three major development phases. During the 60’s and 70’s, UK’s political view was strongly influence by socialism. The discovery of the North Sea’s reserves allowed UK to secure its national energy supplies. The job-creating potential was also of major importance especially in Scotland where a big part of its workforce tended to be persistently unemployed. During that time, taxation tried to secure a large part of the profit and assert major public control. A royalty of 12.5%, a high specific petroleum tax in addition with a high corporate tax, achieved that. Unfortunately, such a heavy taxation system tended to encourage companies to achieve big production with as little development as possible, depleting oil reserves fast. As we all know during the ear of Margaret Thatcher, UK went through major privatizations. Because of that, and industry pressure, the lack of investment in development, and the reduction of oil price, the government started to loosen its pressure until the end of the 90’s where even the royalty tax was abolished. The only remaining taxes were UK’s normal corporate tax adapted for the oil industry and a small supplementary tax. After the oil price started to rise sharply and until it peaked in 2008, the government increased its participation again, increasing the supplementary tax and refusing to decrease the corporate tax of 30% for the oil industry even though it did for other industries. Since the oil price collapsed and because of the continuous lack of investment in the UKCS (after all no major oil discoveries were made since the end of the 90’s), the government has started to inverse again its policy and is likely to soon decrease taxes or increase allowances (Nakhle, 2008). Taxation of UK’s oil development This is a summary of the main features of the tax and licensing regime for the oil industry in the UK and on the UK Continental Shelf (UKCS) Lionel Wandfluh © 2
  4. 4. Licensing The Petroleum Act 1998, the latest instalment of the Petroleum Act 1993 & the Continental Shelf Act 1964, gives the rights to all oil & gas in Great Britain and its territorial sea to the Crown, and gave the UK Government the exclusive right to grant licences to explore and exploit these resources. Effectively, the Department of Energy and Climate Change (DECC - formerly the Department of Trade and Industry) issues the terms of licenses in which exploration and production can be undertaken. The information to be included for the application, the fee to be paid, the size and shape of the area, the regulations, and so on can vary for each licence (OPSI, 1998). Generally, licensing blocks in the UKCS measure 10 minutes of latitude and 12 minutes of longitude. Some blocks are divided further into part blocks where some areas are relinquished by previous licensees. During the now annual licensing round, companies or consortium of companies apply for the licenses on offer. Blocks are awarded on the basis of the work programme bid by the participants. After the licenses have been awarded, the detailed program also has to be approved by the DBERR (Department for Business, Enterprise and Regulatory Reform) (HM Revenue & Custom, 2008). Fiscal Regime (HM Revenue & Custom, 2008) Royalty None- abolished from 1st January 2003, used to be 12.5% Petroleum Revenue Tax The PRT was a field-based tax (50%) that was abolished for all new fields’ development consents after the 16th Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010 March 1993. Ring Fence Corporation Tax RFCT is the standard Corporation Tax of 30% that applies to all companies with the addition of a “ring fence”. This ring fence imposes restrictions to companies when trying to dilute their profit from oil exploration with losses from any other business activities. As Corporation Tax, RFCT is taxable on income which is defined as gross revenues less all capex and opex in the year they are spent. Losses can be carried forward indefinitely and earn interest at the rate of 6% per year for the first 6 years of carry-forward. Reduction of the Corporate Tax introduced in FA 2007 and effective from 1st April 2008 does not apply to the RFCT. Supplementary Charge The tax rate is a 20% supplementary charge on the income from a ring fence trade as defined above. Losses can also be carry-forward and earn interest as above, except for financing costs. Analysis UK has a concessionary tax system. This means that it allows private ownership of the petroleum resources. This system is favored by IOCs because it gives credit to their shares valuation. Indeed with this system we own the reserves. The main disadvantage is that the full risk of the exploration/production has to be sustained by us. UK licensing system is based on a work program; the advantage of this method is that exploration of an area tends to be extensively undertaken because companies have to stick to their program even if primary results are disappointing. The disadvantage of this method is often the lack of competitiveness; licenses are mainly attributed to major companies even though the level of exploration proposed by them is far from being optimal. Concerning the fiscal regime, UK now mainly focuses on taxing income revenues. The advantage of such a regime is that it is less likely to cause disincentives to field development. A disadvantage is the lack of encouragement to show high profits to shareholders because they will be highly taxed, encouraging less control in expenses, and other sectors losses transfer. Although the later cannot be achieved here because of UK’s ring fence policy. Norway 3
  5. 5. Background Even though UK and Norway share the same oil region the North Sea, they have pretty much follow (at least from the 80’s) a diametrically opposed fiscal regime history. When during the 80’s, the UK’s government decreased its participation in the industry, the Norway tended to increase it. However, when UK’s government decided to again tighten its grip on the industry at the end of the 90’s, Norway was seeking to loosen its system. Nowadays this trend tends to continue, even though the State participation in the industry is still far greater than in UK, especially considering that the Norwegian government still participates as an active shareholder in every petroleum project (Nakhle, 2008). Taxation of Norway’s oil development This is a summary of the main features of the tax and licensing regime for the oil industry in the Norway. Licensing Licences are administered by the Norwegian Petroleum Directorate (NPD). Norwegian licence blocks are larger than British blocks. They measure 15 minutes of latitude and 20 minutes of longitude. Like UK, some blocks are divided further into part blocks where some areas are relinquished by previous licensees. There are two types of licensing rounds: the ordinary licensing round (every other year) and the APA awards. The Awards in Predefined Areas (APA) scheme has been created to promote an efficient usage of infrastructures already in place or planned by licensing blocks adjacent to mature areas. The ordinary licensing round starts by allowing companies to nominate blocks that they want to be included in the Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010 round. The Ministry of Petroleum then decides, with the help the NPD, which ones will be included, and specifies any special environmental and/or fishery conditions that apply to such blocks. Companies can apply to the licensing round on their own, or as part of a group. Based on the applications received, the Norwegian Government awards production licences. The Government awards the licence to the most promising project based on the company’s/ companies’ technical expertise, understanding of geology, financial strength, and so on, and can consider creating or modifying a group. The production licence governs the company’s rights and obligations towards the Norwegian State and follows the directive of the Norwegian Petroleum activities act of November 1996 (NPD, 2010). Fiscal Regime Licensing Fees For each exploration licences, a fee amounting to NOK 60 000 per calendar year shall be paid. An extra fee of NOK 30.000 will also be paid for each seismic survey. A fee based on the amount of barrels produced has also to be paid for development project approved before the 1 January 1986 (Norwegian Petroleum Directorate, 2009). State Participation The Norwegian State takes a direct financial interest (SDFI) in any projects. As the State participates as a normal shareholder, paying its share of investments and costs from day one, and receiving a corresponding share of the income from the production licence, it cannot really be considered as fiscal impost. Each government take is decided when production licences are awarded and the size varies from field to field, generally around 20% (Norwegian Petroleum Directorate, 2009). Carbon Dioxide Tax (Act 20 December 1996) This tax is levied on the volume of petroleum flared and natural gas vented on platform or other installations used for production and transportation of petroleum products. The CO2 tax is deductible for income tax and other Lionel Wandfluh © 4
  6. 6. petroleum tax. Discussion has been undertaken to replace it with tradable “Emissions Quotas” (Norwegian Petroleum Dictorate, 1996) (Norwegian Petroleum Dictorate, 1996). Income Tax This is the normal Norwegian corporation tax. Its rate is 28% based on gross revenue less exploration costs, opex, capex (deprecated on a 6 years straight-line), and the CO2 tax. Losses can be carried forward with interest (Norwegian Petroleum Directorate, 2009). Spec ial Petroleum Tax Due to the high profitability of petroleum revenue, the Norwegian government had also add for petroleum activities a special petroleum tax (SPT) of 50%. Its taxable base is the same as for the normal Norwegian corporation tax apart from an extra deduction in the form of an uplift. This uplift amounts to 30% of the capital investment (excluding exploration costs) (Norwegian Petroleum Directorate, 2009). Analysis Norway has also a concessionary tax system. However as explained above the State tends to participate as an active shareholder in every oil & gas project. The advantage of this participation is that Norway shares some of the risks associated with exploration and production. The disadvantage is that it allows less flexibility for the company to manage the oil reserves. A disadvantage very often enhanced by the fact that Norway, during licensing ground, generally favors consortium of companies instead of individuals, putting itself as the dominant shareholder. One of the main advantages of its licenses’ allocation is the possibility for companies to nominate blocks they are Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010 interested in. The fiscal regime is, as UK, profit based. However, unlike UK, the Norway’s petroleum industry is more specifically tax compare to other industries. Generally speaking the tax system is less attractive. Newfoundland Background It is less relevant to discuss about the historic development of the oil industry in the Newfoundland because offshore oil industry in Newfoundland is relatively new. Indeed, a significant oil discovery was only found there in 1979, and oil production only started in 1997 due to major technical obstacles. Thus the fiscal regime has yet to be properly assessed (Fusco, 2006). Taxation of Canada Newfoundland’s oil development This is a summary of the main features of the tax and licensing regime for the oil industry in Newfoundland. Licensing “The Canada-Newfoundland and Labrador Offshore Petroleum Board (Board) is responsible, on behalf of the Government of Canada and the Government of Newfoundland and Labrador, for petroleum resource management in the Newfoundland and Labrador Offshore Area.” Thus, the Board is responsible to issue and administrate all exploration & development licenses in the region (C-NLOPB) The size of licensing parcels depends on the area. 3 types of licenses exist: exploration license, significant discovery licence, and the production licence. Each fall, the Board issues an official call for nominations. As for Norway, this call allows interested parties with the opportunity to nominate lands of interest to be included in the future bid. After deliberation and upon receipt of Ministerial approval, the Board will come up with a list of areas offered for bidding including or not including the one nominated. A call for bids must address the sole criterion that the Board will apply in assessing bids that are submitted. This sole criterion is expressed in terms of a cash bonus bid or work expenditure bid. Cash bid are 5
  7. 7. normally used for areas of proven oil and gas reserves. Work expenditure bid is expressed in the amount of money a bidder is willing to invest in the exploration of the bidding area. The bidding package must include a $10,000 bidding deposit for the work expenditure bid, or a certified cheque with the full amount for the cash bid. Both include an issuance fee of $250 per grid. Unsuccessful bidder will be refunded their full bidding or deposited amount. If the bidder is successful for a work expenditure bid, he is required to pay a security deposit of 25% of the amount announced in the next 15 days (C-NLOPB). Fiscal Regime Basic Royalty The 2003 Royalty Regulations arranges for royalty rates withdrawn from gross revenue and depending upon production for leases after November 30, 2001. The royalty rate starts at 1% until production reaches 50mm barrels, then rises to 2.5% until 100mm barrels is reached, then 5% until 200mm barrels, and finally 7.5% (Petroleum and Natural Gas Act, 2003). Incremental Royalties Tier I Incremental Royalty is an extra royalty of 20% imposed on net revenue after Tier I payout is reached. The payout is reached when the project reaches a 5% rate of return plus a long-term government bond rate (assumed to be 6%). As the basic Royalty is deducted in order to calculate the net revenue, effective royalty will be equal or Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010 greater than basic royalty. Tier II Incremental Royalty is a 10% addition on Tier I Incremental Royalty when the project reaches a rate of return of 15% plus a long-term government rate (assumed to be 16%). Costs deduction can be slightly uplifted for the purpose of royalty calculations: 1% for capex, 10% for opex, 5% for exploration costs, and 1% for decommissioning costs (Petroleum and Natural Gas Act, 2003). Provincial Income Tax A tax rate of 14% is imposed on gross revenue less opex, E&A costs, and depreciation of capex at a 30% per year on a declining balance basis. Losses can be carried forward up to 7 years (CERA, 2007). Federal Income Tax Federal income tax rate is 19% since January 2008. This tax is imposed on gross revenue minus opex, E&A costs, royalty, and depreciation of capex also at a 30% per year on a declining balance basis. Capex losses can be carried indefinitely, but non-capex can only be carried forward for a 7 years period (CERA, 2007). Analysis Newfoundland has also a concessionary tax system. Three main points distinguish Newfoundland regime from the previous ones. First, its licensing system is probably the most attractive and efficient so far because it is assembles the advantages of both licensing systems, that are the extensive exploration of new areas that offers the work program licensing system, and the early revenues that offers the bonus bidding. Secondly, the fiscal regime also follows this middle path promoting early revenues with royalties and later revenues with income taxes, however fails this time because of its lack of clarity. It is by far the most complicate tax regime that of the different oil province we asked to analyze. Finally, it is the only fiscal regime of our paper that worked on two levels both provincial and federal level. Falkland Islands Background Lionel Wandfluh © 6
  8. 8. Even though oil was discovered in the Falkland Islands a long time ago, the instability due to political tension between Argentina and UK has severely delayed any major oil development there until the end of the 90’s. Nowadays the situation is still very tense, hostilities between Argentina and UK are easily keen to resurface and make the headlines as could recently been seen with the Desire Petroleum’s drilling platform Ocean Guardian story. Taxation of Falkland Islands’ oil development This is a summary of the main features of the tax and licensing regime for the oil industry in the Falkland Islands. Licensing The licensing system of the Falkland is discretionary and is divided between two types of licenses: exploration licences and production licenses. Exploration licences allow companies to acquire proprietary seismic, gravity, magnetic, geochemical and sea-bed data. They are not area specific and can be made at any time for a £1000 application fee. However, explorations licenses can only be converted into production licenses with the consent of the production licence holder or after a negotiation with the government. Exploration licences are normally issued for one year, renewable for up to three years. The holder of a production license does not need any exploration licenses for its production license area. Production licenses allow the search for and extraction of petroleum. Historically, they have been issued two different ways: through a competitive round (only happened in 1996), through open-door on a Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010 company/government negotiation basis. Even though the open-door production license is discretionary, a work programme will be accepted only if it contains a few essential elements. Both last 35 years (Falkland Islands Governement Department Of Mineral resources, 2009). Fiscal Regime Variable ac reage rental Variable acreage rental are not subject to any deduction. Licensees for their first license have to pay an acreage rental of $30,000 during the initial term and second exploration term. A further $10,000 must also be paid during the initial term and second exploration term for each for each further licences held by the licensee. An extra $375,000 must be paid in relation to a discovery area and an extra $375,000 for every square kilometre of a production field (this can be deducted if the company is already paying royalties) (Falkland Islands Governement Department Of Mineral resources, 2003). Royalty The royalty rate is levied at a 9% on production (Falkland Islands Governement Department Of Mineral resources, 2003). Corporation tax The corporate tax is levied at a 25% on incomes. Incomes are defined as gross revenues less all capex, opex, and other allowances (see The Taxes (Amendment) Ordinance 1997 and The Taxes (Amendment) Ordinance 1997). Losses can be carried forward indefinitely (Falkland Islands Governement Department Of Mineral resources, 2003). Analysis Falkland Islands have also a concessionary tax system and are easily the most readable tax system of the different oil provinces analyzed here. The Falkland government, due to the political instability, follows to trends: oil 7
  9. 9. development promotion with very low cumulative taxes (the oil production in the Falkland Islands on paper is the most attractive with very low government takes), and early revenues’ achievement (acreage rentals, royalty tax). Conclusion All the taxation systems studied here are concessionary tax systems; the major difference between them is the focus between early government revues (royalties) and latter revenues (corporate taxes). This difference is mainly reflected on the development stage of the oil provinces, that is if the development is in its early stage, such as Newfoundland & Falkland Island, governments tend to favor early revenues, on the contrary if the development has already been extensively undertaken and revenues from the industry are pretty stable, governments are keen to delay their take in order to allow the most efficient development (UK & Norway). Another difference is the need for some province to promote their appeal to investors because of depleted oil reserves (UK) or political instability (Falkland Islands) that is reflected by less cumulative taxes and thus government take. Recommendation Recommendations will be strongly influence by the type of company we are and the strategy we want to follow. Indeed, Norway & Falkland Islands are probably the provinces which are the more easily accessible to new businesses (political instability and easily accessible exploration license for Falkland Island, consortium creation during licensing for Norway), on the other hand, the much smaller government take of Falkland Islands and UK, made these provinces extremely attractive fiscally speaking. Finally the fairest taxation system, concerning production quantities and licensing regimes is probably Newfoundland. Indeed, it is the only system that adapts itself to production quantities. However if I had to choose only one system based only on the licensing and tax Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010 aspects, I would go for the UK’s one because of its simplicity and the low government take. Lionel Wandfluh © 8
  10. 10. Bibliography CERA. (2007, October 18). A Comparison of Fiscal Regimes. Retrieved March 12, 2010, from CERA: http://lba.legis.state.ak.us/aces/doc_log/2007-11- 10_cera_a_comparison_of_fiscal_regimes_presented_to_sen_fin.pdf C-NLOPB. (n.d.). Legal and Land. Retrieved March 15, 2010, from C-NLOPB: http://www.cnlopb.nl.ca/land_issuance.shtml#Exploration Falkland Islands Governement Department Of Mineral resources. (2009). Offshore Petroleum (Licensing)(Amendment) Regulations 2009. Retrieved March 16, 2010, from Falkland Islands Governement Department Of Mineral resources: http://www.bgs.ac.uk/falklands-oil/download/F1GazetteSub.pdf Falkland Islands Governement Department Of Mineral resources. (2003). Taxes (Amendment) Ordinance 2003. Retrieved March 14, 2010, from Falkland Islands Governement Department Of Mineral resources: http://www.bgs.ac.uk/falklands-oil/download/TaxesAmendmentBill2003.pdf Fusco, L. (2006). Offshore Oil: An Overview of Development in Newfoundland and Labrador. HM Revenue & Custom. (2008, January). International - taxation of UK oil production . Retrieved March 13, 2010, from HM Revenue & Custom: http://www.hmrc.gov.uk/international/ns-fiscal2.htm Nakhle, C. (2008). Petroleum taxation: sharing the oil wealth : a study of petroleum taxation yesterday, today and Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010 tomorrow. Routledge. Norwegian Petroleum Dictorate. (1996). CO2 discharge tax . Retrieved March 14, 2010, from Norwegian Petroleum Dictorate: http://www.npd.no/en/Regulations/Acts/CO2-discharge-tax/ Norwegian Petroleum Directorate. (2009). Governement Petroleum Revenues. Retrieved March 14, 2010, from Norwegian Petroleum Directorate: http://www.npd.no/global/engelsk/3%20- %20publications/facts/facts2009/chapters/kap3.pdf NPD. (2010). Production licence – licence to explore, discover and produce. Retrieved March 13, 2010, from NPD: http://www.npd.no/en/topics/production-licences/theme-articles/production-licence--licence-to-explore- discover-and-produce-/ OPSI. (1998). Petroleum Act 1998. Retrieved Mars 14, 2010, from OPSI: http://www.opsi.gov.uk/acts/acts1998/ukpga_19980017_en_1 Petroleum and Natural Gas Act. (2003, July 8). Royalty Regulations. Retrieved march 16, 2010, from House of Assembly of Newfoundland : http://www.assembly.nl.ca/legislation/sr/regulations/rc030071.htm 9

×