EI Energy Week 2009

Negotiation of Oil and Gas Contracts

Negotiation of Oil and Gas Contracts

Silvana Tordo, Lead Energy Economist, COCPO

Washington, D.C.
March 3, 2009

EI Energy Week 2009

Negotiation of Oil and Gas Contracts

Discussion topics:
Price shifts, resource owners expectations,
and investment cycles
Are fiscal regimes getting more flexible,
neutral, and stable?
Petroleum contracts: not just deals

EI Energy Week 2009

Negotiation of Oil and Gas Contracts

SDN week 2008

Bush: America is Addicted to Oil

EI Energy Week 2009

Negotiation of Oil and Gas Contracts

Some side-effects of high oil prices

Substantial increase in Governments revenues
and companies profits
Renewed interest in previously unaffordable
projects
Shortages of specialized manpower, goods and
services
Inadequacy of most fiscal regimes
Resurgence of resource nationalism

EI Energy Week 2009

Negotiation of Oil and Gas Contracts

Much of the focus has been on changes to fiscal

regimes.
Countries examples

EI Energy Week 2009

Negotiation of Oil and Gas Contracts

USA OCS

Effect on fiscal regime flexibility

Improved
Same/reduced

Increased royalty rates

- Deep water 12.5% to 16.7% (2007)
- All new leases 18.75% (2008)

Abolition of royalty relief

USA Alaska

Profit based tax on value at point of production

Deduction of exploration expenditure
Tax credit for investment and cash for loss carry fwd
Sliding scale tax on profit per barrel

Canada Alberta
New royalty regime for conventional oil and gas (sliding scale on price
and volume)
Reduced minimum royalty and introduced NPI on oil sands

EI Energy Week 2009

Negotiation of Oil and Gas Contracts

Effect on fiscal regime flexibility

Improved
Same/reduced

United Kingdom

Introduced 10% supplementary corporate tax, then doubled it

Allowed total depreciation in year investment incurred

Norway

Exploration cash back or loss carry forward with uplift for new
entrants

Kazakhstan

Limited foreign participation to 50%

Profit oil share sliding scale 50 to 90%
Minerals extraction tax instead of royalty on production
Abolition of export duty

Russia
Increased mineral extraction tax
Increased export duty

EI Energy Week 2009

Negotiation of Oil and Gas Contracts

Venezuela

Effect on fiscal regime flexibility

Improved
Same/reduced
x

Increased royalty for heavy and extra heavy crude oil

Increased PDVSA minimum participation to 51%
Conversion of Risk EPS agreements to mixed companies

Bolivia

Nationalization of hydrocarbon sector

Increased corporate income tax from 25% to 32%

Argentina

Sliding scale export duty on crude oil (capped)

Increased export duty on natural gas
Tax breaks based on production increase and job creation

Ecuador
Windfall profit tax (up to 99% above price set in Operating Contracts)

EI Energy Week 2009

Negotiation of Oil and Gas Contracts

Nigeria

Effect on fiscal regime flexibility

Improved
Same/reduced
x

Increased deep water royalty

Introduced R-Factor for profit share
Cost recovery limit made biddable

Equatorial Guinea

Increased royalty to 13%

Introduced windfal profit tax linked to price

Algeria

Introduced tax on windfall profits linked to price

Minimum NOC participation to 51%

Libya
Cap on primary production allocation (35-40%)

EI Energy Week 2009

Negotiation of Oil and Gas Contracts

Today
RUSSIA:
Oil
pricesProblems
dive amid
Rise With Falling
financial crisis
Oil Prices
worries

Venezuela to
slash public
spending to
confront the
falling price of
oil

Iran feels
economic
pain as oil
prices fall

Glob
a
crisis l financia
l
p u ts
U
inves
K
tmen oil
t at
risk

Petrobras to
postpone
projects amid
financial crisis,
oil price fall

EI Energy Week 2009

Negotiation of Oil and Gas Contracts

Have fiscal regimes become more flexible, neutral,

and stable?
Most changes aimed to capture more revenue
Some increased government direct participation or
government control over operations
Few targeted the economic rent
Even less improved tax neutrality

A new round of adjustments is starting

EI Energy Week 2009

Negotiation of Oil and Gas Contracts

Stability versus flexibililty

Not an oxymoron. Changes are:
predictable
based on equitable principles

Profit-based fiscal regimes?

Cost control
Acceptable level of profit/economic rent (fair deal)

EI Energy Week 2009

Negotiation of Oil and Gas Contracts

More often than not the relationship between a host

government and an oil company goes beyond the
duration and scope of a single contract.
Philosophical changes are needed to improve contract
stability.
Respond to the countrys particular situation and objectives
Identify and reflect technical and non-technical risks that
may affect the project
Provide for mechanisms for dispute resolution to reduce
the risk of litigation and arbitration
Adapt to evolving role of the project, needs of host
government/other stakeholders, and market over the lifespan
of the project

EI Energy Week 2009

Negotiation of Oil and Gas Contracts

Thank you!