EI Energy Week 2009Negotiation 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 2009Negotiation 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 2009Negotiation of Oil and Gas Contracts
Bush: “America is Addicted to Oil”
SDN week 2008 …
EI Energy Week 2009Negotiation 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 2009Negotiation of Oil and Gas Contracts
Much of the focus has been on changes to fiscal regimes….
Countries’ examples
EI Energy Week 2009Negotiation of Oil and Gas Contracts
Improved Same/reducedUSA OCS x
Increased royalty rates - Deep water 12.5% to 16.7% (2007) - All new leases 18.75% (2008)Abolition of royalty relief
USA Alaska xProfit based tax on value at point of productionDeduction of exploration expenditureTax credit for investment and cash for loss carry fwdSliding scale tax on profit per barrel
Canada Alberta x
Reduced minimum royalty and introduced NPI on oil sands
Effect on fiscal regime flexibility
New royalty regime for conventional oil and gas (sliding scale on priceand volume)
EI Energy Week 2009Negotiation of Oil and Gas Contracts
Improved Same/reducedUnited Kingdom x
Introduced 10% supplementary corporate tax, then doubled itAllowed total depreciation in year investment incurred
Norway x
Kazakhstan xLimited foreign participation to 50% Profit oil share sliding scale 50 to 90%Minerals extraction tax instead of royalty on productionAbolition of export duty
Russia xIncreased mineral extraction taxIncreased export duty
Effect on fiscal regime flexibility
Exploration cash back or loss carry forward with uplift for new entrants
EI Energy Week 2009Negotiation of Oil and Gas Contracts
Improved Same/reducedVenezuela x
Increased royalty for heavy and extra heavy crude oilIncreased PDVSA minimum participation to 51%Conversion of Risk EPS agreements to mixed companies
Bolivia xNationalization of hydrocarbon sectorIncreased corporate income tax from 25% to 32%
Argentina xSliding scale export duty on crude oil (capped)Increased export duty on natural gas Tax breaks based on production increase and job creation
Ecuador x
Windfall profit tax (up to 99% above price set in Operating Contracts)
Effect on fiscal regime flexibility
EI Energy Week 2009Negotiation of Oil and Gas Contracts
Improved Same/reducedNigeria x
Increased deep water royaltyIntroduced R-Factor for profit shareCost recovery limit made biddable
Equatorial Guinea xIncreased royalty to 13%Introduced windfal profit tax linked to price
Algeria xIntroduced tax on windfall profits linked to priceMinimum NOC participation to 51%
Libya xCap on primary production allocation (35-40%)
Effect on fiscal regime flexibility
EI Energy Week 2009Negotiation of Oil and Gas Contracts
Oil prices dive amid financial crisis
worries
Global financial crisis puts UK oil investment at risk
Iran feels economic pain as oil prices fall
Petrobras to postpone
projects amid financial crisis,
oil price fall
Venezuela to slash public spending to confront the
falling price of oil
Today …
RUSSIA: Problems Rise With Falling
Oil Prices
EI Energy Week 2009Negotiation of Oil and Gas Contracts
• 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
Have fiscal regimes become more flexible, neutral, and stable?
A new round of adjustments is starting
EI Energy Week 2009Negotiation of Oil and Gas Contracts
• Not an oxymoron. Changes are:– predictable– based on equitable principles
Stability versus flexibililty
Profit-based fiscal regimes?Cost control
Acceptable level of profit/economic rent (fair deal)
EI Energy Week 2009Negotiation 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 country’s 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 2009Negotiation of Oil and Gas Contracts
Thank you!