International Petroleum Fiscal Regimes: Concessions, Tax-Royalty Schemes
Posted by D Nathan Meehan May 21, 2011

Concessions

While many major fields were developed under the concession model, this is generally a historical artifact.  In the first two-thirds of the 20th century it was not uncommon for sovereign nations to grant large concessions to operators. This was in a time of relatively low and nearly constant oil prices and a time when access to refineries, transportation and distribution systems were nearly as important as exploration and production expertise in generating value from an oil and gas field.

Concessions were large grants of acreage rights, occasionally for an entire nation’s onshore or offshore rights. They had long duration, sometimes as many as fifty to ninety-nine years. The recipient of the concession had complete oil and gas rights in the concessions including all management decisions. The host nation was typically paid a flat royalty per barrel or percentage of revenue. In many cases the taxes imposed on the IOC by its own home government were higher per barrel of oil than the host government received from that same barrel. Eventually the inequities of such contracts resulted in either the renegotiation of the terms and conditions or replacement of the IOC. In some cases the host government unilaterally abrogated a concession or “nationalized” the assets previously belonging to the IOC.

Joint Ventures

Typical Joint ventures for development share the risks and benefits from oil and gas development. The NOC partner may receive a relatively large initial payment for the execution of the JV and the contractor group partners may carry 100% of exploration costs and potentially all costs “to the tanks” for first oil.  Subsequent capital and operating costs are shared in the proportions of the JV ownership. Management decisions for the field and staffing of the JV are also shared with the host government, typically via the NOC as the JV partner.   There is nonetheless a clear separation between the government as a taxing and licensing authority and the government owned IOC JV partner. Some portion of the exploration and development “carried costs” are typically reimbursed by the NOC partner to the contractor group either in cash or oil. Ownership of the crude government share of the oil is independent of the contractor group ownership. The contractor group is typically entitled only to book reserves for their share of the JV’s gross reserves less any government royalty and potentially the reimbursable costs if they are repaid from crude oil.

Tax/Royalty Schemes

Tax/royalty schemes grew out of concession systems. The concept of tax and royalty schemes are easy to describe in that the government owners of the minerals leases tracts for exploration and development either directly to an IOC contractor group through negotiations or through some sort of competitive bidding. An initial cost including acreage rental payments plus fixed or variable royalties are typical schemes. The government taxing authorities tax the contractor group members based on their profitability from the block.

The US Outer Continental Shelf (OCS) mineral leases represent a tax/royalty scheme.  While most OCS leases contain a competitive bid and fixed royalty payments, tax/royalty schemes can include work commitments, variable royalties, net profit interests, etc.

A number of countries with tax/royalty regimes include, in addition to corporation tax, various forms of “rent” or taxes to capture a greater share of the economic benefit arising from operations, whether these result simply from highly profitable fields or from windfalls such as high petroleum prices.  Examples include the UK’s (Petroleum Revenue Tax (PRT), Norway’s Supplemental Petroleum Tax (SPT), Brazil’s Special Participation (SP), Australia’s Petroleum Resource Rent Tax (PRRT) and Alaska’s Production Tax (known as ACES).  In the case of UK, Norway and much of offshore Australia no royalty at all is now levied and the countries rely on “rent” and income taxes for virtually their entire share of profits.

Leases granted under a tax/royalty style arrangement are quite different to the old-style concession agreements, even though the term “concession” may still be used (as are permit or license).  While details vary from one jurisdiction to another, they all contain significant term provisions, usually involving relinquishment of some part of the acreage at various stages such that only the immediate producing area remains held for a long time (typically the life of production).  In some jurisdictions minimum work obligations will also apply to different holding periods.  Operators are generally able to book their “net” reserves which are 100% of the gross reserves less royalty.

3 responses | Add Yours

Responses

Eric Sintim-Aboagye says:

I’m really impressed by the way and manner you operate and also the equipment and tools used in extracting the raw materials. I’m from Ghana West Africa and iwould be much pleased if i have the privilege to work in your oil field in Ghana.

Rodolfo Galecio says:

By definition Joint Ventures are agreements to share profits and risks but, there is any chance that host goverments through theirs NOCs can actually lose real money facing a dry hole?

D Nathan Meehan says:

Many JVs have some periods early in the life of the JV in which the NOC carries the higher levels of risks. In joint developments where risks are lower (but still present) these JVs call on the host government to participate and be exposed to that risk. Dry holes are possible for mechanical reasons even in infield wells. Host governements try to derisk the projects in which they participate in the approval process for development plans and some may indeed balk at paying for higher risk projects than they expected. But many IOCs do in deed take that risk. Risks to NOCs may be greater for IOCs that pay their share (even of successful projects) very slowly or not at all.

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