Trends in international oil and gas taxation. Pedro van Meurs September 4, 2009 Gubkin Oil and Gas University Moscow Sponsored by the Oil and Gas Centre of Ernst & Young Van Meurs Corporation Nassau, Bahamas Tel: (242) 324-4438 e-mail: firstname.lastname@example.org. Oil and Gas Resource Ownership.
Pedro van Meurs
September 4, 2009
Gubkin Oil and Gas University
Sponsored by the Oil and Gas Centre of Ernst & Young
Van Meurs Corporation
Tel: (242) 324-4438
In most countries in the world the State is the owner of the oil and gas in the subsoil.
Governments have therefore the right to maximize the benefits from the production of these resources for their citizens.
One of the benefits is taxation.
The word “taxation” is used in this presentation in a broad sense and includes all types of government revenues derived from oil and gas production.
The current Russian oil taxation system consists primarily of:
Export duties, which collect $ 4 per barrel plus 65% of the price differential over $ 25 per barrel
Mineral Extraction Tax (“MET”), which is also sensitive to price and is also calculated on the basis of gross revenues
Profits tax of 20%.
Russia has been very successful with this system in maximizing taxation despite a weak administrative framework, since export duties and MET are easy to collect.
From an international perspective the Russian system is strongly gross revenue based and only very modestly profit based.
During the 2003 – 2008 period the tax percentage has increased in many countries.
This has been due to two factors:
The increases in oil prices, which increased demand for new investment opportunities
The shortage of available areas for exploration and production, because most of the world petroleum basins are now under licenses or contracts with oil companies and there is limited “open acreage”.
The methods in which the tax percentages were increased were different in the various countries.
A number of countries had already created taxation systems that automatically resulted in a higher percentage tax under higher oil prices. This resulted in an increase of the average taxation rate. These countries include:
Trinidad and Tobago
Other countries used other methods to increase the tax rate, such as:
Changing the fiscal terms: UK, Alaska, Alberta, Algeria, Bolivia and Kazakhstan.
Using the bid system for new acreage to increase terms: Libya, India
Create higher levels of state participation: Venezuela, Algeria, or
Increases in tax percentage for gas have been much less because there are still considerable gas reserves around the world.
Therefore 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 & Tobago
An important international trend is therefore that oil taxation systems are becoming more different from gas taxation systems. This is also the case in Russia.
The very long term future of the oil industry is more uncertain than ever. The IEA predicts that oil demand in 2009 will be about 84 million barrels per day.
Broadly three rather different scenarios of future oil demand are possible for 2050:
Continued increases in oil demand resulting in a demand of about 130 million barrel per day, which is still predicted by some oil companies.
The so-called “peak oil” concept whereby oil demand is constrained by production and will reach a peak of about 100 million barrels per day over the next two decades and will decline thereafter, which is predicted by the company TOTAL.
A climate change driven scenario whereby oil demand has to be gradually reduced to maybe as low as 50 million barrels per day in order to meet the objective of reducing CO2 emissions by 50% on a world wide basis as currently advocated by the G8 nations. The “oil era” may not come to an end due to lack of oil, but simply because it becomes unacceptable to burn it.
I agree with TOTAL that the peak oil scenario is a probable scenario. Oil will not reach a peak because oil “runs out”, but because political and taxation conditions simply will not make it possible to produce more. Recent developments in Iraq and Brazil have made the peak oil scenario more likely.
This scenario would create an important possibility for Russia to continue to expand its oil production under relatively attractive prices, provided the amendments to the taxation are put in place to achieve this goal.
The upcoming conference in Copenhagen on climate change will indicate whether the climate change constrained scenario becomes more likely.
Under this scenario the window of opportunity for Russia to benefit from its vast remaining oil potential based on new developments would be limited and early action to promote increased oil production in the medium term, before world demand is constrained, would be of great importance.
Against the back ground of a highly uncertain long term future, governments are now faced with the task to maximize the benefits from oil and gas production in the next decades.
Russia and other oil and gas exporting countries face a particular difficult task, due to the fact that government budgets are too dependent on oil and gas revenues.
The process of maximizing benefits from oil and gas, has to proceed while diversifying the economies.
The main trends in international taxation are the following:
Reduction of profit tax rates
Globalization of VAT
Possible introduction of carbon taxes
Reduction of import duties and other cost base taxes
More emphasis on price sensitive taxation
Less emphasis on taxation structures that over-encourage capital investment
Transition to fiscal structures designed for “expensive” oil and gas resources.
An important international trend is that profit tax rates are declining.
15 years ago profit tax rates were in the range from 25% – 55%.
Today, most countries are in the 15% – 40% range.
Russia has a rather low profit tax rate of 20%.
Several oil producing nations maintained or established a higher rate for the oil industry or introduced hydrocarbon taxes.
There is therefore “space” in the Russian taxation system to become somewhat more profit based.
TRINIDAD AND TOBAGO 25% (35%,55%)
NORWAY 28% (78%)
MALAYSIA 25% (38%)
CANADA (Alberta) 30%
UNITED KINGDOM 30% (50%)
THAILAND 30% (50%)
NIGERIA 30% (50%,85%)
BRAZIL (incl social) 34%
VENEZUELA 34% (50%)
UNITED STATES 35%
JAPAN, Typical: 40.69%
The high oil prices of the last few years have made governments aware of the fact that oil and gas taxation has to be designed to increase tax rates under higher prices. As mentioned before, a number of nations had already price sensitive taxation including Russia.
Other jurisdictions have now also established such mechanisms, including:
Alaska (profit tax)
China (windfall profit tax)
Algeria (windfall profit tax)
Nigeria has introduced a new bill (Petroleum Industry Bill) which contemplates price sensitive royalties
The Russian system has worked so far very well for Russia.
However, under current economic conditions the export duty are relatively tough. This may impede the development of more costly oil resources in new and existing fields and therefore hamper the further expansion of the Russian oil production.
A softening of the export tax, possibly compensated by other measures to maintain government revenues from low cost resources, is therefore a matter that deserves consideration.
Due to the high price levels of US $ 60 or higher, many countries are now in a transition to make more expensive resources attractive for investment with more diverse or flexible fiscal terms.
Examples of such new resources are:
heavy oils, oil sands, oil shales,
coal bed methane, shale gas, gas hydrates
Frontier areas, deep water
Gas to Liquids (“GTL”) and LNG
Enhanced oil recovery in existing fields
This trend is very important for Russia because very large relatively untapped oil and gas resources remain available, such as:
offshore oil and gas including Arctic areas
oil from new regions, such as Eastern Siberia
increased production opportunities from existing fields through application of new technology.
It is therefore important for Russia to consider a more diverse or flexible oil and gas taxation system to accommodate the development of these new resources.
The existing oil and gas taxation system has served Russia very well so far and is consistent with modern international trends.
However, in order to ensure that Russia fully benefits from possible increased oil production during the next few decades, it can be recommended that Russia adopts some adjustments in its oil taxation structure.