Tax & Royalty Concessions

At its most basic, concessions or tax & royalty regimes describe a system where the oil industry is granted the rights to prospect for resource within
a defined onshore or offshore acreage. The concession holder takes ownership of all minerals found on that acreage, but pays a % of their value upon extraction to the government together with a modest annual fee to retain the acreage. This is typically through the payment of a royalty on the revenue base (e.g. 18.75% in the US Gulf of Mexico) and the payment of tax at the determined corporate rate on profits (e.g. 35% in the US Gulf of Mexico). Consequently, as the oil price rises, government’’s share of the barrel remains broadly constant, with full upside accruing to the contractor.



Overall, government take under a concession is generally relatively easy to tabulate. It will vary depending upon royalty rate, corporation tax rate and the rate at which capital expenditure can be recovered against profits i.e. the tax depreciation schedule. This latter point is important in that, at times of rising costs the pace of capital recovery against profits may be such that capex cannot be recovered until several years after it is incurred. For reference we show below the main components of taxation in several key geographies.

Outside royalty and corporation tax, the rise in the price of crude oil in recent years has seen the introduction of several sources of additional taxation as governments have looked to capture a greater share of the value of the resource base. Not least amongst these have been export taxes in Russia (65% tax on all revenues over $25/bbl) and Argentina (no upside over $42/bbl to the concession holder), sliding scale royalties in Canada and Alaska (whereby royalty rates rise at higher oil prices) and the introduction of supplementary petroleum taxes in the UK and Norway (now a 20% increment to corporation tax in the UK and 50% in Norway).

Don’’t forget reserve bookings!
There is, however, one final key point regarding concession systems. This is that, under SEC reserve reporting requirements, even if 99.9% of the revenues realised from the production of a company’’s working interest in a field is to be paid away as royalty and tax, the company is still entitled to book all of the barrels to which it is entitled as reserves (with the exception of the US where royalty barrels may not be consolidated). As we shall see, this stands in stark contrast to the rules for PSCs whereby only the barrels to which it will be entitled at the year-end oil price qualify as proven reserves.


Source: Deutsche Bank " Oil gas for beginners"