Wood Mac looks at government take changes

Petroleum News

Consulting firm Wood Mackenzie is exploring implications of current low crude oil prices for upstream fiscal terms. In a two-part study the firm says governments dependent on oil tax revenues are facing pressures on public spending from lower oil revenues and from oil companies for more lenient terms.

“While companies seek to reduce industry costs to levels compatible with the current oil price, they are also seeking a return to more lenient fiscal terms from host governments that increased tax rates since 2005,” Wood Mackenzie said.

The company cited six factors which will have a significant influence or whether a country changes its fiscal terms, and said key is how long oil prices will remain low. “Is this a short term blip, or are we witnessing structural change in the industry,” Wood Mackenzie asked.

Factors are: so fiscal terms make projects uneconomic; is tax rate too high; are there legal constraints on changing terms; is there a history of fiscal changes; is government dependent on oil taxation; what is oil production trend.

“Fiscal policy-makers around the world are reviewing their upstream fiscal terms and we’ve already witnessed changes to terms by a handful of governments since the price began to fall in 2014,” Wood Mackenzie VP Global Fiscal Research Graham Kellas said in a statement. He said the price drop has already been devastating to countries whose public spending plans were based on US$100 a barrel oil.

“The oil revenue ‘cake’ has shrunk and it is hard for governments reliant on oil tax revenue to agree to a smaller slice of what’s left,” Kellas said, noting that without better terms companies may stop investing.

If the lower price becomes established, there will be considerable pressure to change fiscal terms, but if the price continues to move toward US$80 per barrel, the pressure will be “significantly alleviated,” he said.

Wood Mackenzie said its analysis of fiscal changes from 2014 to date concludes there has been much talk but only a few countries have followed through, most notably the United Kingdom.

Kellas said what countries do depends on their circumstances.

“Governments which are less dependent on oil tax for income can afford to play the long game and will be more likely to reduce tax rates or introduce incentives to try to maintain investment while companies cut back on new projects elsewhere,” he said, although that ability may be restricted by terms of contracts with oil and gas operators.

The most obvious targets for fiscal changes, especially “in systems where the minimum government share of revenue is particularly high,” Wood Mackenzie said, are regressive fiscal terms - royalty, export duty, cost recovery ceilings and indirect taxes - because they have the most impact on investment decisions.

Citing Indonesia as an example, Kellas said countries facing declining oil production “would be considering how they can stimulate investment in any circumstances, and depressed oil prices makes this task more difficult and more necessary.”

“Fiscal incentives for new investment - particularly challenging projects such as unconventional resources - are likely to become common,” he said.