Angola tax to lift oil exploration costs, producers can recoup

Luanda-Angola19 October 2013, LUANDA – Angola has hit oil companies with a tax of up to 10 percent of their spending on services, government documents showed, in a move that will raise costs of exploration at a time it is trying to emulate the success of Brazil in deep-water drilling.

Jose Agante, tax expert and manager at PwC in Luanda, said on Thursday that the new rules, introduced last week, would raise costs mostly during exploration but companies can recoup the tax for blocks that are already in the production stage.

Angola, Africa’s second-biggest oil producer after Nigeria, is reforming its tax system to raise revenue. But it also aims to increase oil output.

“The big problem for the oil companies is the additional cost of exploration, which can only be recovered when the blocks start producing,” Agante said.

“For the blocks already in production, the companies will end up recovering the consumption tax they paid through the costs they can deduct when they come to pay another tax, the main Petroleum Income Tax (PIT),” he said.

Agante said the law makes clear that oil companies are not exempt from consumption taxes and must pay them directly to the state, ending a longstanding difference in interpretation of tax rules between the firms and the government.

Major companies such as BP, Chevron, Total and ENI operate in Angola’s oil sector, which produces around 1.75 million barrels per day (mbpd).

Angola wants to raise output to 2 mbpd in 2015.

In 2011, the government signed 11 deals with seven oil majors to drill thousands of metres under the Kwanza Basin seabed through a salt layer, which mirrors a formation off Brazil where major volumes of high-quality light oil have been discovered in recent years.

The tax applies to services such as equipment rental, water, energy, consultancy fees and hotels.

Officials at major oil companies declined to respond to requests for comment.

For blocks already in production, the issue for companies is only timing, Agante said. “The companies have to pay the consumption tax almost immediately, while the PIT accounts, whose calculation includes oil prices, production levels and other factors, are settled quarterly.”

U.S. firm Cobalt International Energy Inc and Denmark’s Maersk Oil last year announced they had found oil in the new blocks.

Analysts at Wood Mackenzie said in a research note in August they expected a major increase in exploration in Angola in the next 12 to 18 months, adding that the costs of drilling will be very high, with each completed well costing around $150 million.

Angola collected around $36 billion in various taxes from its oil sector in 2012, according to government data.

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