Title: Contract Renegotiations and Other Recent Changes in the Oil and Gas Industries
1Contract Renegotiations and Other Recent Changes
in the Oil and Gas Industries
- Juan Carlos Quiroz
- Matt Genasci
- Revenue Watch Institute
2Recent changes in contracts and fiscal terms
- IFIs often warn countries that changes in
contractual terms would undermine their
competitiveness. Countries who change rules are
seen as unreliable partners. - However, more than 30 oil and gas producers have
revised their contracts or fiscal terms since
1999. - Change has two directions on the one hand,
increase of government share of profits through
royalties, taxes and windfall taxes. On the
other, many countries still willing to offer
incentives to attract investment.
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4Drivers of change
- Prices record-high oil price highlights
inadequacies in contracts signed under low-price
conditions. - Control some government want greater control
over petroleum sector (e.g. to leverage public
policies, equity gains, patronage) or resource
nationalism. - Competition most hydrocarbon reserves are hold
by NOC and more players compete for new acreage,
which provides countries an opportunity to impose
tougher terms and makes companies willing to pay. - Incentives to investment reducing government
take is still common in mature producers, net
energy importers, frontier areas, marginal
fields, deepwater projects.
5What does change mean?
- Market conditions, prices and technology change
overtime, while contracts assumptions and
expectations remain fixed. So, change is almost
inevitable. - Renegotiation process around the world resembles
a rental market with five cases - Fearing eviction
- Suffering a rent increase
- Finding a good deal
- A good location often cost a premium
- Paying a condos utility bill
6Overview of recent changes
Cases Tools Examples Effect
Eviction Nationalization, expropriation, change of rules or contract, increase of taxes Bolivia, Ecuador, Kazakhstan (Kashagan), Russia (Sakhalin 2), Venezuela Increase government take also change of operator or participation
Rent increase Royalties, taxes, special duties, profit oil share, windfall taxes, cost recovery limits Alaska, Alberta, Algeria, Angola, Bolivia, Ecuador, Nigeria, UK Increase government take but need to consider incentives if any, affects companies and fields differently
Offering incentives Royalty holidays, tax cuts, cost recovery provisions, price protections, market liberalization, regulatory quality Brazil, Colombia, Indonesia, UK, USA Reduce government take but intends to promote investment, exploration, production
Premium payments Basically higher than expected signature bonuses or market obligations in bidding rounds Angola and Nigeria, reports from Algeria and Libya Increase government take but increase cost of development, risk of overbidding
Utility bill Crypto taxes, domestic market obligations, export duties, price controls Argentina, Ecuador, Indonesia, Russia Increase government take but often associated to fuel subsidies
7Some conclusions
- Change is more common than acknowledged it is
inherent in prices, markets, technology and
expectations - Contracts balance risk and expectations about
future profits sharing, therefore it is important
to introduce some flexible and progressive
measures - Companies accept several levels of profit share
renegotiation, provided ventures are not turned
uneconomical - Public and open bidding rounds have helped some
countries to increase their share of profits - Transparency and regulatory improvements also
attract investment
8Merci beaucoup!
- Contact information
- Juan Carlos Quiroz
- Policy Analyst
- Revenue Watch Institute
- jquiroz_at_revenuewatch.org
- Matt Genasci
- Legal Analyst
- Revenue Watch Institute
- mgenasci_at_revenuewatch.org