Fiscal Regimes Competitiveness Comparison of Oil and Gas Producing Countries in the Asia Pacific Region: Australia, China, India, Indonesia and Malaysia

Abstract

Abstract Fiscal Regimes is one of the most important factors to be considered for investment decisions in oil and gas industry. Royalty Rate, Cost Recovery, Contractor Share, Domestic Market Obligation, Investment Credit, Signature Bonus, Production Bonus, First Trance Petroleum and Corporate Tax Rate have a significant effect on the investment decisions. The paper examines and compares the fiscal regimes in Australia, China, India, Indonesia and Malaysia. In order to analyze the advantages and disadvantages of each fiscal regime, the economic analysis of the same hypothetical fields with the applications of those different fiscal regimes are presented and discussed. Generic fiscal terms are used in the analysis since contractors usually can negotiate the special terms with governments. The information of this paper is useful for oil and gas companies around the world when they want to decide where in Asia Pacific Region they want to invest their money. They can compare which fiscal regime gives them the most favorable return of their investment. In addition, the information is useful for the governments when they want to assess their fiscal regime competitiveness compared to other fiscal regime in that region. In depth analysis on fiscal regimes of those countries is very important for oil and gas industry and it will add to the knowledge base of this industry. Conclusions are made of the effects of these different fiscal regimes on oil and gas company cash flow and profitability and how they affect company investment decisions in oil and gas industry and government policy. Introduction Asia Pacific is still one of the most attractive places for investment in oil and gas sector. Among countries in Asia Pacific, China, Indonesia, Australia, Malaysia and India are the largest oil and gas producers respectively (see Table 1). Being the largest producers countries, every country tries to attract companies from various aspect of investment. Fiscal term is one of the aspects for investment decision. Obtaining good terms in the global context is one thing, but nobody wants to negotiate the worst terms in a country even if these are relatively good terms. For many oil companies, an important part of the negotiations is to secure terms acceptable to the new potential partner. Knowing the market and what terms are realistic depends on a region's potential and factors. Most countries developing petroleum fiscal systems are opting for the Production Sharing Contract (PSC). Now, nearly half of the countries with the petroleum potential have a system based on the PSC. However, financial result could be the same as in royalty/tax arrangement. Economics depend primarily on division of profits or what is known as government/contractor take. Fiscal comparisons center on government/ contractor take. Contractor take is the percentage of profits going to the contractor or oil company. Government take is the remaining share. Division of profits is one of the most important benchmarks for comparing fiscal systems. It correlates directly with reserve values, field size thresholds, and other measures of relative economics. Detailed economic modeling using cash flow analysis is the best way to compare the fiscal terms for each country. Once cash flow is projected, the respective profit shares can be evaluated. Besides the profit share, the contractor receives revenue or production for cost recovery. Profit share combined with cost recovery is the total contractor entitlement.