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Fiscal Regimes for Extractive Industries –
Old and New Challenges
Philip Daniel
IDS, Sussex 5 April 2017
Oil price forecasts and outturns
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WEO Oil Price Forecasts 2002-2019(Monthly prices, 2013 U.S. Dollar per Barrel)
Oct 2010
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WEO (IMF) Oil Price Forecasts 2002-2021(Monthly prices, 2016 U.S. Dollar per Barrel)
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Sep 2004
Sep 2011
Oct 2008
Oct 2009Oct 2007
Sep 2006
Sep 2005
Oct 2012Sep 2013
Oct 2014Oct 2010
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Why distinct fiscal regimes for EI? Substantial rentsPervasive uncertaintyAsymmetric informationHigh sunk costs, long production periodsExtensive involvement of multinationals in some
countries…and of State-Owned Enterprises in others
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Why distinct fiscal regimes for EI? (2)
Few of these considerations are unique to resources—they’re just bigger. What is unique is:
Exhaustibility
—Recognize revenues as transformation of finite assets in the ground into other assets
—Possible cost of extracting now rather than in future
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Central objectives
Maximize PV of net government revenues
Timing of receipts
“Progressivity” – taxing rents
Ease of administration (for authorities) and compliance (for taxpayers)
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Three main fiscal schemes (sometimes blended)…Contractual, including production sharing or
service contracts
Tax and royalty, with licensing of areas
State ownership or participation These can be made fiscally equivalent
Design to achieve efficiency and transparency in each case
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Fiscal Instruments for EI Bonuses (with bidding) Royalty Corporate income tax Explicit rent taxes (and alternative forms) State participation
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Evaluation is essential…Two approaches:
Model effects on exploration, development, and extraction
Scenario analysis – the FARI modeling system
Use indicators related to objectives and criteria, e.g.
—Average effective tax rate
—Progressivity in prices
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North American shale gas
- 20% 40% 60% 80% 100% 120%
Oklahoma; Conventional
Texas; Conventional
Texas; Unconventional
Oklahoma; Unconventional
North Dakota; Conventional
North Dakota; Unconventional
Pennsylvania; Unconventional
Pennsylvania; Conventional
Alberta; Conventional
Saskatchewan; Conventional
Saskatchewan; Unconventional
Alberta; Unconventional
Average Effective Tax Rate
Average Effective Tax Rate NPV0
Average Effective Tax Rate NPV0
Average Effective Tax Rate NPV10
Maginal
Not viableSize: 1 Tcf
Costs: $2.1 BOE
Oil price: $80
Gas price: $4 Mcf
Project
Field : Shale Gas North America
IRR pre tax: 34%
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Europe: marginal tax and hurdle price
11.4
9.5
7.77.1
6.5 6.4 6.3 6.3
-
2.0
4.0
6.0
8.0
10.0
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0%
10%
20%
30%
40%
50%
60%
70%Alg
eria
: Con
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iona
l (Are
a C
)
Chi
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SC
Ons
hore
; C
onve
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Alg
eria
: Unc
onve
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Chi
na: P
SC
Ons
hore
; U
ncon
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Pol
and:
Fut
ure
Reg
ime;
C
onve
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Pol
and:
Fut
ure
Reg
ime;
U
ncon
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UK: C
onve
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UK: U
ncon
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Hur
dle
Oil
Pric
e $M
cf
MET
R
METR and Hurdle Gas PriceMETR METR Gas price required for hurdle rate (right axis)
Hurdle rate: 12.5% IRR pre tax: 26%Field : Shale Gas Europe
Where does it all lead?(1)
Fiscal regimes for EI vary greatly Simulations for mining suggest government shares of 40-60
percent—but collection data suggest lower in practice
For petroleum the simulated shares are higher: 65 to 85
percent
Achieved shares below these ranges are cause for concern,
or regret
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Where does it all lead?(2)
Country circumstances require tailored advice, but
generally within a framework that combines A royalty on gross revenue
A tax targeted explicitly on rents (and thus on the achieved
results of extraction)
Together with normal corporate income tax
Bonus-bidding may have a role in promising environments
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And what will that do?Such a regime:
Ensures revenue from day one
Also that government’s revenue rises as rents increase – whether from rising prices or from favorable geological or cost conditions
Transparent rules and contracts promote stability and credibility
Inclusion of rent taxes reduces pressures to renegotiate or unilaterally change the rules
But processes to allow review and revision may be needed
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Different for unconventional oil/gas?Justification for concessions to shale/tight oil and gas is not obvious
Concessions made have a fiscal cost
Concessions and incentives are perverse in the face of potential environmental costs
Fiscally neutral taxation of unconventionals would be the starting point for suitable environmental taxation.
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EI fiscal regimes…and environmentChanging patterns of tax
Saturation of labor tax and consumption tax
Costs – evolution in high and low prices Elasticity of cost response to prices
Effects of carbon tax – is it just more royalty?External costs of resource extraction
Royalty? Additional charge? Bonuses?
Abandonment and reclamation
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Administration EI tax administration should not in principle be hard
Nonetheless, often both difficult and badly done
Administration of profit/rent-based EI taxes is possible, impose royalties for policy reasons, not administration
Principles of effective modern tax administration are equally relevant to EI
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International tax issues central because…
Multinationals’ central role means full set of tax avoidance issues arises
Tax competition may erode revenues Pe
trole
um
Min
ing
Petro
leum
Min
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Min
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Petro
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Petro
leum
Min
ing
Petro
leum
Petro
leum
Min
ing
Petro
leum
Afghanistan (2011)
Ghana (2014)
Liberia (2013)
Nigeria* (2012)
Peru* (2012)
Trinidad (2013)
Tanzania (2014)
Yemen (2011)
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Perc
ent P
aid
by M
NE'
s
…and
• Deposits may cross national borders or lie in disputed areas
• Cross-border infrastructure may be essential
Responses to commodity price falls A flexible regime should require little change, BUT: UK has cut oil taxes Mexico reduced tax in its privatised sector Argentina cut taxes at both central and provincial levels China reduced taxes on iron ore Egypt reduce its share of profit oil to zero in a large
contract Iraq is renegotiating RSCs to reduce government
exposure to oil prices
Some governments hold firm Peru ruled out tax cuts (though a new government may change that)
Norway faced huge losses of savings and oil investments, but kept to its tax regime, including reduced allowances of 2013.
Nevertheless:
Some are reviewing long term reform – Indonesia, Nigeria, Trinidad and Tobago, South Africa (for example)
The reviews may not increase taxes, simply make regimes more flexible.
Energy and commodity outlook Responses to climate change essential but may add to
costs in the short run (carbon tax, for example)
Long term scenarios (IEA, BP, Exxon, for example) show continued importance of hydrocarbons in energy mix, along with growth of renewables
Important to have fiscal schemes that deal adequately with gas
Outlook does not, at the moment, call for changes to principles and frameworks set out here.
Transparency EITI, IMF Guide on Resource Revenue Transparency, Natural
Resource Charter…
Transparency in fiscal regime design and implementation is vital but often lacking
Transparency for environmental protection
Obligations on companies?
Obligations on governments
Educated and informed citizenry.
Draft IMF “4th Pillar”
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