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!