PETROLEUM TAXATION
PSA vs. TAX/ROYALTY REGIMES
…A 15 MINUTES PERSPECTIVE / ONE MESSAGE
April 11th 2011
Gustavo Montenegro
PETROLEUM TAXATION
THE BASICS
CHARACERISTICS
• DIFFERENT NAMES
• Tax / Royalty
• PSA
• EPSA
• Service Contracts
• COMMON ELEMENTS
• TAX RATE
• COMPLICATED MECHANISM
• Depreciation
• Uplift
• Interest
• State Participation
• Loss carried forward
1
SYSTEMS AROUND THE GLOBE
PETROLEUM TAXATION
PETROLEUM TAXATION
Image source
2
MARGINAL TAX SAMPLE
PETROLEUM TAXATION
90
PERCENTAGE MARGINAL TAX
80
70
60
50
40
30
20
10
0
Oman
Image source
Syria
Sudan
Yemen
Egypt
Lybia
Norway
Uganda
Afghanistan Denmark
3
MARGINAL TAX SAMPLE
PETROLEUM TAXATION
90
PERCENTAGE MARGINAL TAX
80
70
60
50
40
30
20
10
MARGINAL TAX
deviation from median
0
Oman
Syria
Sudan
Yemen
Egypt
Lybia
Norway
Uganda
Afghanistan Denmark
Oman
Syria
Sudan
Yemen
Egypt
Lybia
Norway
Uganda
Afghanistan
60 %
40 %
20 %
0%
-20 %
-40 %
-60 %
Image source
4
THE MESSAGE
PETROLEUM TAXATION
DEDUCTIONS
THE MORE THE MERRIER
TIMING
BETTER NOW THAN LATER
5
TIMING
PETROLEUM TAXATION
ASSUMPTIONS
DEPRECIATION
MARGINAL TAX
• NORWAY (NOR) = 78%
• PSA
= 78%
DEPRECIATION PERIOD
• NOR
= 6 YEARS
• PSA
= 6 YEARS
DEPRECIATION START
• NOR
= On disbursement
• PSA
= Production start
* 22% x 78% = 17%
DEP NOR
DEP NOR
DEP NOR
DEP PSA
DEP PSA
DEP PSA
CAPEX CAPEX
CAPEX
CAPEX CUM
CAPEX CUM
CAPEX CUM
DEP NOR
CUM
DEP
NOR CUM
DEP NOR CUM
DEP PSA
CUM
DEP
PSA CUM
DEP PSA CUM
MUSD
MUSD
-4
MUSD (10%)
YEARLY DISBURSEMENT = MUSD 100
MUSD
TOTAL CAPEX = MUSD 400
400 400
400
300 300
300
200 200
200
100 100
100
0
0
0
-100 -100
-100
-200 -200
-200
-300 -300
-300
-400 -400
-400
-4 -3-4 -2-3 -1-2 0 -1 1 0 2 1 3 2 4 3 5 4
-3
-2 -1 0
1
YEAR YEAR
YEAR
YEAR
2
3
4
5
5
55
253
198
NOR
PSA
DIFF
•
55 MUSD / 253 MUSD = 22%
•
78% Marginal Tax = 17% lower NPV terms*
6
PSA SYSTEMS -BASICS
Production
COST OIL
PROFIT OIL
Cost oil
– Part of the production which is allocated to cover the
contractors costs
• CAPEX & OPEX
Profit oil
– Part of production to be distributed betweeen government and contractor
7
PSA SYSTEMS -EXAMPLE
Net Revenues
40%
60%
carried forward to next year
COST OIL
* 22% x 78% = 17%
PROFIT OIL
…if
excess money
after paying
CAPEX
OPEX
NO
Loss
X
KBPD
Y
60%
75%
85%
00-25
25-50
50+
40%
30%
20%
x%
YES
Government
y%
Contractor
8
SIMPLIFIED COMPARISON
PSA
TAX ROYALTY
500
400
-4
MUSD
200
100
MUSD (10%)
0
-100
-200
-300
-3
-2
-1
0
1
2
3
4
5
6
7
•
•
3
4
Profit
5
5
Tax
Expenditu
Revenues
0
55
NPV 10%
-100
-200
253
198
-300
-3
NOR
500
2
Pre Tax C
-2
-1
8
YEAR
Profit
400
Tax
Expenditures
300
Pre Tax Cash Flow (CUM)
Revenues
200
NPV 10%
-2 -1 0
1
YEAR YEAR
YEAR
YEAR
100
-4
-4
MUSD
MUSD
-3
Expenditures
300
Pre Tax Cash Flow (CUM)
Revenues 200
NPV 10%
300
DEP NOR
DEP NOR
DEP NOR
DEP PSA
DEP PSA
DEP PSA
CAPEX CAPEX
CAPEX
CAPEX CUM
CAPEX CUM
CAPEX CUM
DEP NOR
CUM
DEP
NOR CUM
DEP NOR CUM
DEP PSA
CUM
DEP
PSA CUM
DEP PSA CUM
MUSD
MUSD
78% Net tax
MUSD
•
400 400
400
• 40% Cost Oil
300 300
300
• 60% Profit Oil at 75% Tax
200 200
200
100 100
100
0
0
0
-100 -100
-100
-200 -200
-200
-300 -300
-300
500
-400 -400
Profit
-400
-4 -3-4 -2-3 -1-2 0 -1 1 0 2 1 3 2 4 3 5 4
400
Tax
PSA
0
1
2
3
4
5
6
7
8
YEAR
DIFF
Profit
Tax
55 MUSD
/ 253 MUSD = 22% difference
Expenditures
Pre Tax Cash Flow (CUM)
78% Revenues
Marginal Tax = 17% lower NPV terms*
NPV 10%
100
0
-100
-200
-300
YEAR
9
SUMMARY
• PSA ARE WORKABLE SYSTEMS
• MARGINAL TAX IS RELEVANT
• BUT DEDUCTIONS & TIMING ARE THE VALUE DRIVERS
• CURRENT PSAs
• UNDER-INVESTMENT ON GREEN FIELD DEVELOPMENTS
• NO INCENTIVE TO VALUE FUTURE FLEXIBILITY
• FOCUS ON BIG FIELDS
• SMALL & MARGINAL RESOURCES NOT MATERIAL
• EOR MIGHT NOT BE ATTRACTIVE
• BETTER NOW THAN LATER
• BUT THE ONE WITH THE INVESTOR SHOULD BE PRIORITIZED
10
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