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Fiscal Agreement, in the Oil and GasIndustry

Dr. George Georgiadis2

Petroleum Fiscal Regimes

Concession Agreements In the early days of the oil industry concessions, granted exclusive rights to an IOC:

1. Rights for mineral development over a vast area2. Rights for near-exclusive development for a long period of time3. Control over the schedule and manner in which the oil filed is to be developed4. Rights to all profits except for a royalty payment to the state

Concessions are still used today, but are now called licenses or leases and arecategorized as royalty / tax agreements

Fundamental difference is the shift from an unequal bargain-based model to apartnership-based one.

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Royalty / tax systems

The modern form of the concession, the royalty/taxsystem, is much more comprehensive in protectingthe interests of the state (figure 6-2).

The typical royalty/tax system structure today is for a much shorter period of time, a much smaller portion of a potential hydrocarbon

deposit, and requires specific exploration and development

efforts within a set period of time, or the rights expire. 4

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The IOC takes it's profit from producing and selling thehydrocarbons, while the state's income is confined to royaltyand tax.

Royalties are typically calculated as a percentage of revenue sothe income to the state is more predictable and stable thanincome generated from profitability (such as taxes or dividenddistributions).

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Figure 6-2. Royalty/ Tax System Financial Flows

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Production sharing agreements. Under a PSA, the IOC is fully responsible for the development of the oil

and gas. This includes all aspects of getting the oil and gas out of the ground

and delivery to some point for transportation and sale. Under most PSAs, the state accrues cash flow returns via three

primary channels:1) royalties,2) taxes, and3) ownership interest.

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Figure 6-3. Production Sharing Agreement Financial Flows

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Many PSA have cumulative production sliding scales for tax rates and profit oil splits. For example the staff's profit oil split may rise as production volumes rise, either in

an individual year or cumulatively over the production life of the reservoir. The net revenues (revenues less the royalty) generated from production are unique

to PSAs and are then reduced by the allowable cost recovery. Cost recovery in a PSA is, in principle, the deduction of a proportion of the oilcost oil-

to compensate for the capital and operating expenses related to the project.

Ring Fencing