CHAPTER 8 A FISCAL REVIEW: COMMERCIAL ATTRACTIVENESS OF LATIN AMERICAN OIL AND GAS REGIMES
| Jurisdiction | Derecho Internacional |
(Mar 1999)
A FISCAL REVIEW: COMMERCIAL ATTRACTIVENESS OF LATIN AMERICAN OIL AND GAS REGIMES
Daniel Johnston & Co., Inc.
Dallas, Texas
For the Rocky Mountain Mineral Law Foundation
Special Institute
March 17-19, 1999
INTRODUCTION
Competition for capital and technology is more intense than ever as the industry enters a dramatic new era. More companies than ever before have been scouring the planet for investment opportunities and there has never been so many countries competing for capital. Countries are getting more aggressive and proactive in their efforts to compete.
8.1 GLOBAL SETTING
The global setting on the threshold of the next millennium is extremely dynamic. Countries develop their policies and strategy within the framework of their own particular objectives, concerns and boundary conditions.
Policy changes in the Gulf states particularly Saudi Arabia are creating a new dynamic. Existing policies and strategies in many countries will not be sufficient to ensure survival. Competitive responses must be more flexible and timely.
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a) Oil Prices
At the Petronas Petroleum Conference in Kuala Lumpur in March of last year Dr. Fereidun Fesharaki opened his keynote speech with the words, "Eleven to thirteen dollars a barrel? — Get used to it!" It is entirely possible that the low price environment may be here to stay for some time. If that is true there are many fiscal systems that need an overhaul. Existing policies and current strategies will not work.
Exploration efforts are alive but not well in many parts of the world. There have been some exciting discoveries, but so many of them are in ultra-deep water. And, low oil prices and deep water are not compatible.
b) Saudi Arabia
Closed door policies are changing but the most dramatic of course is Saudi Arabia because of the scale but also because of their unique multidimensional strategy. There is much discussion about the objectives of the new Saudi strategy. Market share has always been a primary concern of the Saudi's and it appears to be driving a major change in policy.
It is likely that the price shock last year was not exactly engineered by the Saudi's. However, they must be careful to keep prices from getting too high again. Lower oil prices can insulate them from some heavy sources of competition. Low prices have marginalized numerous projects and whole provinces and this is probably consistent their strategy. This is particularly true of deepwater frontiers. They certainly must be viewing the deepwater of today as another potential North Sea which gained an unexpected 5 MMBOPD of demand growth.
Another part of the reported Saudi strategy is to remove capital sources from competing provinces worldwide. This will also limit competition for market share of worldwide demand growth.
The reopening of Saudi Arabia, Iran, Kuwait and Iraq is perhaps one of the more dramatic dynamics today.
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c) Exploration vs Development Projects
Exploration success in the past two decades has been disappointing for many companies. As a result, low risk development or rehabilitation projects have captured their interest. Companies have redirected much of their focus away from exploration toward development type projects. This may be particularly true of the huge companies born of the megamergers. The exploration efficiency of many of the large companies was already suspect before they became super-large.
d) The Former Soviet Union
The breakup of the Soviet Union launched the largest gold rush in history (black gold). The yield from the intense activity and huge investments has been poor. Even with healthy oil prices the results were disappointing. The potential to increase production was (is) there but the ability to deliver does not appear to exist under the existing legal/fiscal/cultural frameworks.
It is even less likely that the FSU will be a dynamic force in the industry with low oil prices.
8.2 LATIN AMERICAN PROSPECTIVITY
8.2.1- Geopotential
Figure 1 depicts the relative maturity of various provinces. Our industry has drilled around 3.5 million wells in the US. By comparison in the vast provinces of the former Soviet Union (FSU) less than a million wells have been drilled. In Latin America an order of magnitude difference. Less than 200,000 wells have been drilled in this region that originally had the same potential as North America. It would take 50,000 wells per year every year in Latin America for 50 years to catch up to where the US is today.
The relative maturity can also be seen to some extent in the average production rate statistics summarized in Figure 1 and Table 1. Unfortunately, the collected statistics are limited to what is reported—some countries restrict publication of technical data. This is particularly true of the leading Gulf states; Saudi Arabia, Iran, Iraq, and Kuwait and also of Mexico.
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There have been approximately 100 discoveries reported each year worldwide for the past 3 years and about 30% are in Latin America. Latin America has had some world class discoveries but regionally West and North Africa are where most of the larger reported discoveries are being made. The average well test rate for oil discoveries the past 3 years is around 5,000 BOPD and for gas discoveries 21 MMCFD.
Discovery well test rates for wells that test greater than 200 BOPD are found in Appendix 1, 2, and 3.
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Table 1
RESERVES AND PRODUCTION — LATIN AMERICA
| 1/1/1999 Proved | Estimated Reserves* | ||||||
| COUNTRY | Oil (MMBBLS) | Gas (TCF) | BOE 6:1 (MMBOE) | Percentage of Total % | Est. 1998 (MBOPD) | Producing Oil Wells 1/1/98 | Average Rate Per Well (BOPD) |
| Argentina | 2,621 | 24.1 | 6,646 | 4% | 848 | 12,609 | 67 |
| Barbados | 2 | 0.0 | 2 | 2 | 80 | 19 | |
| Bolivia | 132 | 4.3 | 855 | 28 | 330 | 85 | |
| Brazil | 7,106 | 8.0 | 8,446 | 5% | 956 | 7,358 | 130 |
| Chile | 150 | 3.5 | 727 | 9 | 315 | 29 | |
| Colombia | 2,577 | 6.9 | 3,733 | 2% | 743 | 3,072 | 242 |
| Cuba | 284 | 0.6 | 390 | 7 | 245 | 29 | |
| Ecuador | 2,115 | 3.7 | 2,727 | 1% | 383 | 981 | 390 |
| Guatemala | 526 | 0.1 | 544 | 26 | 20 | 1,315 | |
| Mexico | 47,822 | 63.5 | 58,398 | 32% | 3,048 | 3,605 | 846 |
| Peru | 773 | 7.0 | 1,937 | 1% | 110 | 4,001 | 27 |
| Suriname | 74 | 0.0 | 74 | 10 | 317 | 32 | |
| Trinidad & T | 534 | 18.3 | 3,584 | 2% | 121 | 3,475 | 35 |
| Venezuela | 72,600 | 142.5 | 96,350 | 52% | 3,108 | 14,694 | 212 |
| Total | 137,316 | 282.6 | 184,411 | 99% | 9,398 | 51,102 | 184 |
| United States | 22,546 | 167.2 | 50,417 | 20% | 6,375 | 573,962 | 11 |
| Canada | 4,931 | 63.9 | 15,576 | 6% | 2,020 | 50,756 | 40 |
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Table 2
REPORTED DISCOVERIES — LATIN AMERICA
Well Test Rates
1996, 1997, 1998
| Oil Discoveries | Gas Discoveries | |||
| Number Reported | Average Test Rate (BOPD) | Number Reported | Average Test Rate (MMCFD) | |
| Argentina | 28 | 620 | 16 | 15.8 |
| Bolivia | 3 | 670 | 2 | 6.7 |
| Brazil 1 | 10 | 3,450 | 4 | 9.5 |
| Colombia | 12 | 4,120 | 0 | |
| Ecuador 2 | 7 | 1,690 | 0 | |
| Trinidad | 1 | 108 | 7 | 37.5 |
| Venezuela | 17 | 3,620 | 3 | 8.1 |
| 78 | 2,267 | 32 | 18.5 | |
| World Average | 185 | 5,018 | 138 | 21.0 |
| Range | ||||
| Lower — Upper Quartile | 610 — 10,750 | 3 — 53 |
From: American Association of Petroleum Geologists "Explorer" January, 1997; 1998; 1999 Major discoveries compiled by Petroconsultants SA
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8.3 PROBLEMS WITH TERMINOLOGY AND ANALYSIS
Economic discussions from one country to another or with various companies can be frustrating because of the diversity of terminology and various definitions of key concepts. For example the very important concept of resource rent has three main prevailing definitions in use worldwide.
Table 3
What Constitutes Resource Rent?
| 3 Common Definitions | #1 | #2 | #3 |
| Gross Revenues | $ 200 | MM | |
| Capital Costs | - 50 | ||
| Operating Costs | - 40 | ||
| Total Economic Profit | 110 | 110 | |
| Royalties | - 20 | 20 | 20 |
| Taxable Income | 90 | ||
| Normal Income Tax | - 30 | 30 | |
| (All industries) | |||
| Special Petroleum Tax | - 20 | 20 | 20 |
| Contractor Take | $ 40 | MM | |
| Total Royalties & Taxes | 70 | 70 | 70 |
| Total Economic Rent ($MM) | 110 | 70 | 40 |
From: Johnson, D.: International Petroleum Fiscal Systems and Production Sharing Contracts Course Workbook, 1999
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Interpretation #1 — Total profits equals economic rent. Therefore negotiations and fiscal design focus on appropriate "sharing" of rent.
Interpretation #2 — Economic rent is equivalent to "excess profits". Therefore it is the governments objective to extract all rent which is consistent with allowing a share of profits for industry sufficient to encourage as much exploration and development as the government desires.
Interpretation #3 — Economic rent is that portion of profits in excess of normal industry taxation, ie only royalties and excess profits taxes directed exclusively towards the petroleum industry can extract rent.
8.3.1 Take
The division of profits is a key element in any contract or fiscal system. It is the most common means of comparison between fiscal systems. The widely quoted statistics regarding the division of profits or government/contractor "take" collapse a variety of fiscal elements such as bonuses, royalties, profit oil splits, various layers of taxes and National Oil Corporation (NOC) back-ins, into an overall effective tax rate which provides a useful index.
Unfortunately, the terminology associated with the division of profits is not standardized and whenever terms are used relating to the division of profits, the terms should be defined. The most common terminology uses the term take — such as government take and/or contractor take. These are expressed as percentages. Contractor take is the percentage of profits to which the contractor is entitled. Government take is the complement of that.
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| Take definitions: | |
| Economic profit ($) | = Cumulative gross revenues less cumulative gross costs over life of the project (full cycle). |
| Government take (%) | = Government receipts from royalties taxes, bonuses, production or profit sharing etc., divided by the Economic profit |
| Contractor |
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