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Finger on the pulse-

Phuket 2001
The concept of greed
Govt Take
Indonesia get away
Keeping cost down
Booking barrels
Taxes in lieu
Govt Disbursement
Which system is best.
The concept of greed.
A prevailing belief among some oil companies that terms are too tough in many countries.
Governments award licenses to highest bidder assuming the bidders are technical and
financially sound but Oil companies argue that there is difference between it.
The competition is heavy for exploration acreage and projects around the and world which
makes oil companies frustrated.
This is not to say that greed doesn’t exist but the terms are tough but not because of greedy
Example of Trinidad and Tobago :
Launches an effort to design and structure terms to accommodate their Deepwater environment
and conditions.
But the oil companies were making proposals much more robust than expected.
The govt essentially decided to evaluate all the proposals and take the best ones.
Government Take.
It provides the host government with profit shares without the risk of direct investment.
The very first attempts of the Countries in signing PSAs were mostly driven by a desire to receive
profits from the natural resources they have.
The govt take involves Bonuses oil production, Royaltee, Product sharing, Taxes, Government
Create healthy competition and market efficiency.
Indonesia’s Get away
Even Instead of tough terms Indonesia adopted combination of ringfencing and relinquishment.
In Indonesia is whole is typically ringfenced. If a discovery is made within the license area, then
exploration costa can be cost recovered and tax deducted.
The relinquishment provisions are also fairly liberal. Indonesian relinquishment requires the oil
company to relinquish 25% of the original area at the end of the first and second phases.thus if
contractor has made discovery it has 50 % of the original area remaining.
Keeping costs down
Continuing from Trinidad and Tobago example the secretary was asked regarding incentives a
usual asked questions to government.
It is a fairly difficult to design a fiscal system that actually encourages oil companies to spend
more than they would otherwise spend.
Gold plating of cost and claiming not providing incentives to be frugal is simply wrong.
Some companies book working interest barrels and some book entitlement barrels.
Some companies will book gas used as fuel in operations that can amount to upwards
Most western companies are legally bound to report reserves, yet some countries do
not want any foreign companies booking barrels for operations in their country.
Some companies feel that they can book royalty barrels if the government exercises
their option to take its royalty in cash as opposed to in kind
In countries where taxes are paid in lieu, it appears that most companies gross-up
their actual entitlement as if they had paid taxes directly. This allows them to book
more barrels.
The means by which government take is a bit more highly evolved than the means by
which governments disburse.
Few Examples:
Colombia: Guerilla Vaccine is illegal
Ecuador: The Uwa tribe has threathened to commit mass suicide.
Nigeria: The government is concerned with how to disburse funds yet not increase
The list goes on: Papua New Guinea, Indonesia, the former soviet union, California,
Venezuela, Myanmar.
Tax in lieu
A payment in lieu of taxes (usually abbreviated as PILOT, or sometimes as PILT) is a payment
made to compensate a government for some or all of the property tax revenue lost due to tax
exempt ownership or use of real property
In numerous countries, in come taxes are imbedded in the government share of profit
oil(Philippines, Egypt, Syria, Oman etc)
This can provide stability because if tax rates are increased, the contractor is immune.
Countries with these tax in lieu have some of the highest ERRs in the world
Which system is best?