15 January 2014, LONDON, UK – Increasing exploration and development of unconventional resources will prove the most significant issue concerning Chile’s upstream oil and gas sector over the coming years; however, the attractiveness of the country’s current fiscal regime means it is unlikely to require any major changes to incentivize development activity, says a new report from research and consulting firm GlobalData.
According to the company’s latest report*, the flexibility of tax rates and the remuneration rates already in place within Chile’s fiscal regime offer companies the incentives needed for the exploitation of unconventional resources, including shale oil, shale gas and tight gas. Given the increased costs, this flexibility, which is offered as part of the Special Operation Contract (Contrato Especial de Operación: CEOP) framework, should enable the government to improve the commercial viability of challenging areas.
Adrian Lara, GlobalData’s Senior Analyst for the Americas, says: “Chile is heavily dependent upon energy imports and is likely to maintain an attractive fiscal regime as it seeks to maximize domestic hydrocarbon production and promote exploration for additional reserves.
“Under Chile’s current CEOP framework, licensees receive remuneration equivalent to a percentage of gross production based on the R-factor, a profitability measure. Under the latest contracts, the formula allows them to receive 95% of production until their costs have been recovered. This means that the state’s entitlement presents a relatively small barrier to profitability.”
Since the introduction of CEOPs in the 1970s, the fiscal and regulatory framework governing Chile’s upstream oil and gas industry has undergone very few changes. Although there is some potential for a tightening of fiscal terms in the prospect of increasing Chile’s corporate tax rate, GlobalData says that this risk is mitigated significantly by the flexibility that the law provides for the taxation of contractors under CEOPs.
The government already has the option to set specific tax rates for each contract. GlobalData believes this will be employed for future bid rounds to avoid higher corporate taxes from becoming an obstacle to investment in unconventional resource exploration.
Lara concludes: “Based upon current activity levels and discovery rates in Chile, there seems to be little prospect of any significant change in the country’s perceived hydrocarbon potential that would trigger an overhaul of its fiscal regime.”