16 June 2015, Lagos – Oil and gas industry pressure is growing for governments to adjust upstream fiscal terms downwards in response to the current low oil price, a new report by Wood Mackenzie has shown.
In a new two-part study, Wood Mackenzie explored the implications of the current low oil price for upstream fiscal terms, highlighting that governments dependent on oil taxation income are wrestling with lower oil revenues for public spending and pressure from oil and gas companies for more lenient terms.
The Vice President in charge of Global Fiscal Research for Wood Mackenzie, Mr. Graham Kellas, explained that fiscal policy-makers around the world are reviewing their upstream fiscal terms, adding that the industry has already witnessed changes to terms by a handful of governments since the price began to fall in 2014.
“For some governments, the impact of the lower price has been devastating for public spending plans, especially those forged on oil price expectations of $100 a barrel, forcing them to slash spending with significant economic and political fallout,” he said.
While companies seek to reduce industry costs to levels compatible with the current oil price, the reported noted that they are also seeking a return to more lenient fiscal terms from host governments that increased tax rates since 2005.
Wood Mackenzie also identified a number of factors which will significantly influence whether a government will effect change.
According to this report, central to this dilemma is how long the current low oil price will sustain.
“Is this a short term blip, or are we witnessing structural change to the industry? The six key factors which Wood Mackenzie claims will have a significant influence on whether a country is likely to change its fiscal terms under the current price environment: Are the fiscal terms making projects uneconomic? Is the tax rate too high? Are there legal constraints on changing the terms? Is there a history of fiscal changes? Is the government dependent on oil taxation? What is the trend in oil production?” the report noted.
Kellas noted that for some governments, the impact of the lower price has been devastating for public spending plans, especially those forged on oil price expectations of $100 a barrel per barrel, forcing them to slash spending with significant economic and political fallout.
“The oil revenue ‘cake’ has shrunk and it is hard for governments reliant on oil tax revenue to agree to a smaller slice of what’s left. But if they don’t offer better terms, the industry may simply stop investing.
In these countries, the inclination will be to increase the government’s share of oil revenue to support its budget. This will make new investment in the country appear even less attractive than the lower price has done already,” Kellas said.
“Many governments will be waiting to see if the lower price becomes established, reflecting a structural change in the industry. If so, there will be considerable pressure to revise applicable terms, but if the price continues to progress toward high levels (US$80/bbl and above) then this pressure will be significantly alleviated,” Kellas added.
Kellas said governments, which are less dependent on oil tax for income could afford to play the long game and would be more likely to reduce tax rates or introduce incentives to try to maintain investment, while companies cut back on new projects elsewhere.
He however pointed out that their ability to do this may be restricted by contracts with oil and gas operators which insist that the fiscal terms remain as they are.
As Wood Mackenzie’s study shows, several countries were already in the process of reviewing their fiscal terms before the oil price plunge, but this is an added complexity.
– This Day