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Graham Kellas
This paper was prepared for the IMF conference on Taxing Natural Resources: New
Challenges, New Perspectives, September 25-27, 2008. It is work in progress: please do not
cite without permission. Views expressed here should not be attributed to the International
Monetary Fund, its Executive Board, or its management.
www.woodmac.com
Graham Kellas
Wood Mackenzie Ltd.
Re-gasification
Re-gasification
Gas
Gas Processing
Processing // // distribution
distribution //
Pipeline
Pipeline Transportation
Transportation Consumer
Consumer
Production
Production liquefaction
liquefaction power
power
generation
generation
Mid/downstream Regime
Upstream Regime
Note: number of links in each chain depends on the project (e.g. gas may be sold directly to consumer after processing)
IMF Resource Taxation Conference 2008 - 4
Elements of the fiscal regime may only apply to specific links in the chain
Mid/downstream elements tend to be treated as general industrial projects and are subject
only to standard corporate income tax
• major projects, such as greenfield LNG plants, may also receive fiscal incentives such as tax
holidays
Upstream production tends to be subject to more complex fiscal terms
• bonuses, royalty, production sharing, windfall profits taxes
• corporate income tax may also be payable or replaced with a special petroleum profit tax
• oil and gas production may be treated separately or together for tax purposes
• individual licences or fields may be ring-fenced for elements of the fiscal regime
The fiscal ‘take’ tends to be much higher from upstream than mid/downstream
Only projects which have a fiscal ‘ring fence’ around the entire project are truly ‘integrated’ -
if different tax systems apply to upstream and mid/downstream then, even with common
ownership, the project is ‘segmented’
PLANT
GATE
UPSTREAM DOWNSTREAM
TAX SYSTEM TAX SYSTEM
INTEGRATED
PSC TERMS
projects uneconomic 6
5
Gas price too low
US$/mmbtu
4 Dow nstream Costs
• Fiscal terms need to be adjusted to take this 3 Upstream Costs
Consumer Price
into account 2
1
-
• Regressive fiscal terms (i.e. revenue rather -1
US$/mmbtu
Government Take
low that only oil producers who receive 85% 2
Upstream Costs
tax relief on capital costs (but pay 30% tax on 1 Maximum Dow nstream Price
-1
Assess pipeline
Assess average Calculate appropriate
connections around
each area
pipeline lengths pipeline tariff X
Pipeline losses C
Define average
distance to Regas losses B
notional terminal
Calculate appropriate
Analysis of reasonable
shipping assumptions
shipping tariff to
notional terminal
Z
Boil off A
Source: Wood Mackenzie
IMF Resource Taxation Conference 2008 - 12
LNG price
Netback
GTP
Cost Plus
Upstream operating cost
Upstream gas project economics are normally much less robust than oil
• lower prices per boe (either domestic regulations or export netbacks)
• higher transportation costs
• longer, flatter production profiles (which impacts the “present value” of future production)
To compensate, many governments offer fiscal incentives to gas
• lower royalty rates (e.g. Nigeria, Tunisia, Vietnam)
• higher cost recovery ceilings and/or profit shares (e.g. Egypt, Indonesia, Malaysia)
• lower tax rates (e.g. Nigeria, Tunisia, Papua New Guinea)
• exemption from certain oil taxes (e.g. Trinidad & Tobago (SPT))
Alternative approach is to levy additional taxes on export sales to reduce incentive to export
• e.g. Argentina, Russia
Where local gas prices are not regulated, fewer (if any) incentives offered
• e.g. USA, Canada, Norway, UK
• can create problems if a divergence between oil and gas prices emerges
IMF Resource Taxation Conference 2008 - 16
Increasing trend toward linking fiscal take to project profitability enables the same fiscal
terms to apply to oil and gas
• automatically provides lower take from less valuable projects and vice versa
Major issue in differentiated fiscal regimes is the treatment of liquids associated with gas
production (condensate) – treat as oil or gas revenues?
• high liquids content reduces breakeven gas prices and can often “make or break” gas projects
• very high taxation (i.e. oil rates) on condensate can nullify this – e.g. recent changes in taxation
proposed for North West Shelf gas project in Australia
• particularly important issue when gas is associated with oil production
Many PSC regimes only include terms for oil; gas will be subject to separate agreement
• if gas is associated with oil, it may be delivered to government for free, with upstream
development and operating costs recoverable from oil revenues
• non-associated gas will be subject to separate agreement – and government may argue that
the existing PSC owners have no rights at all to gas discoveries
Snohvit
Shtokman
Sakhalin 2
Sakhalin
Kenai
Qatargas
Iran LNG Qatargas-2
Pars LNG Qatargas-3
Persian LNG Qatargas-4
Supply - Existing Supply - Under Construction Supply - Proposed Regas - Existing Regas - Under Construction Regas - Proposed
Graham Kellas
VP, Energy Consulting
T: +44 203 060 0452
E: graham.kellas@woodmac.com
Wood Mackenzie has been providing its unique range of research products and consulting services to the Energy industry
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