1. Trends in petroleum fiscal systems A host government perspective Pedro van Meurs October 20, 2009 AIPN Bangkok - Thailand Van Meurs Corporation Nassau, Bahamas Tel: (242) 324-4438 e-mail: info@vanmeurs.org

2. Oil and Gas Resource Ownership In most countries in the world the State is the owner of the oil and gas in the subsoil. Governments have therefore the right to maximize the benefits from petroleum production for their citizens. Important benefits are the government revenues to be derived from oil and gas. The word “fiscal” is used in this presentation in a general sense and includes all government revenues The government revenues as a percentage of the total divisible income (revenues less costs) is defined as “government take” 2

3. Mega Trends of Government Take Phases since 1974: 1974 – 1984: strong increases in government take: -- Increase in oil prices -- Reduction in acreage through nationalizations 1984 – 2003: decreases in government take: -- Decrease in oil prices -- Expansion of acreage (political, technological) 2003 – 2008: increases in government take: -- Increase in oil prices and also greater volatility of oil and gas prices -- No more new acreage 2009 - ?: uncertainty 3

4. Trends in Government Take 2003 – 2008 During the 2003 – 2008 period the government take has increased in many countries. This has been due to two factors: The increases in oil prices, which increased demand for new investment opportunities The shortage of available areas for exploration and production, because most of the world petroleum basins are now under licenses or contracts. 4

5. Trends in Government Take 2003 – 2008 The methods for increases in government take were different in the various countries. A number of countries had already created fiscal systems that automatically resulted in a higher government take under higher oil prices. Examples: Angola Malaysia Trinidad and Tobago India, Libya, and Russia 5

6. Trends in Oil Taxation 2003 – 2008 Other countries used other methods to increase the government take, such as: Changing the fiscal terms: UK, Alaska, Alberta, Algeria, Bolivia and Kazakhstan. Using the bid system for new acreage to increase terms: Libya, India Creating higher levels of state participation: Venezuela, Algeria, or New legislation and renegotiations: Nigeria 6

7. Trends in Government Take for Gas 2003 – 2008 Increases in government take for gas have been much less because there are still considerable gas reserves around the world. Therefore government takes for gas in some countries stabilized or continued to decline and governments seek instead greater market access: Qatar, Venezuela, Norway and Egypt. However, government takes for gas have also increased in some jurisdictions: Algeria, Bolivia, UK, Trinidad & Tobago An important international trend is that government revenue systems for oil and for gas are becoming more different, in particular in those countries where gas has to be transported over large distances to market, either as LNG or by pipeline. 7

8. Future trends in Government Take 2009 - 2010: Short term In the short term there is a downward pressure on government take due to the financial crisis. Russia reduced its Mineral Extraction Tax and more importantly, exempted Eastern Siberian oil fields from export tax. Trinidad and Tobago may offer more attractive terms in its upcoming bidding rounds. 8

9. Future trends in Government Take 2010 - 2050: Very Long term The very long term future of the oil industry is more uncertain than ever. The IEA predicts that oil demand in 2009 will be about 84 million barrels per day. Broadly three rather different scenarios of future oil demand are possible for 2050: Continued increases in oil demand resulting in a demand of about 130 million barrel per day, which is predicted by some oil companies. The so-called “peak oil” concept whereby oil demand is constrained by production and will reach a peak of about 100 million barrels per day over the next two decades and will decline thereafter, which is predicted by the company TOTAL and others. A climate change driven scenario whereby oil demand has to be gradually reduced to maybe as low as 50 million barrels per day in order to meet the objective of reducing CO2 emissions by 50% on a world wide basis as currently advocated by the G8 nations. 9

10. Future trends in Government Take 2010 - 2050: Very Long term I agree with TOTAL that the peak oil scenario is a probable scenario. Oil will not reach a peak because oil “runs out”, but because political and government take conditions simply will not make it possible to produce more. There are many examples of such restrictions: Venezuela - Slow development of Orinoco heavy oil belt Kuwait - No service contract on North Kuwait Iraq- A largely failed bidding round Brazil- Increased Brazilian (state) ownership of new deep water developments Mexico- Strong political opposition to large scale foreign investment despite Reform package Iran- Continued political problems and unattractive service contracts Russia- Only modest foreign investment World wide- Continued emphasis on royalties and cost limits in PSCs, which impede development of marginal fields 10

11. Future trends in Government Take 2010 - 2050: Very Long term The upcoming conference in Copenhagen regarding climate change will largely determine the long term trend in the use of fossil fuels and a declining oil consumption scenario may become more likely if this conference is successful. The “oil era” may not come to an end due to lack of oil, but simply because it becomes unacceptable to burn it. The governments of the world are still largely schizophrenic with respect to climate policies and energy consumption/taxation policies. Electricity prices and petroleum products are still subsidized in many nations (Russia, China, India, most OPEC countries, including Nigeria). I agree with ExxonMobil that it is necessary to introduce carbon taxes in order to promote an orderly transition from coal and oil to natural gas in the medium term and to renewable resources in the long term. Carbon credit markets are too volatile and implementation is too weak to rely upon it as the main instrument for reducing CO2 emissions. 11

12. Future trends in Government Take 2010 - 2020: Medium term Against the back ground of a highly uncertain long term future, governments are now faced with the task to maximize the benefits from oil and gas production in the next decades. If the “peak oil” scenario unfolds in the medium term, oil prices may increase and government takes may go up in various countries. Governments of oil and gas exporting countries face a difficult task, due to the fact that government budgets are too dependent on oil and gas revenues. The process of maximizing benefits from oil and gas, has to proceed while diversifying their economies. 12

13. Future trends in government take structure 2010 – 2020: Medium term The main trends in the structure of the oil and gas government take are the following: Reduction of corporate income tax rates Globalization of VAT Possible wider introduction of carbon taxes Reduction of import duties and cost base taxes More emphasis on price sensitive fiscal features Less emphasis on taxation structures that over- encourage capital investment Transition to fiscal structures designed for “expensive” oil and gas resources. 13

14. Reduction of Corporate Income Tax rates An important international trend is that corporate income tax rates are declining. 15 years ago profit tax rates were in the range from 25% – 55%. Today, most countries are in the 15% – 40% range. Several petroleum producing nations maintained or established a higher rate for the petroleum industry or introduced hydrocarbon taxes. 14

15. More emphasis on price based petroleum government revenues The high oil prices of the last few years have made governments aware of the fact that oil and gas government revenues have to be designed to increase government take under higher prices. As mentioned before, a number of nations had already price sensitive government take. Other jurisdictions have now also established or strengthened such mechanisms, including: Alberta (royalties) Alaska (profit tax) China (windfall profit tax) Algeria (windfall profit tax) Nigeria has introduced a new bill (Petroleum Industry Bill) which contemplates price sensitive royalties as well as hydrocarbon taxes 15

16. Transition to more expensive resources Due to the high price levels of US $ 60 or higher, many countries are now in a transition to make more expensive resources attractive for investment with more diverse or flexible fiscal terms. Examples of such new resources are: heavy oils, oil sands, oil shales coal bed methane, shale gas, gas hydrates Frontier areas, deep water Gas to Liquids (“GTL”) and LNG Enhanced oil recovery in existing fields In order to maintain revenues governments from oil exporting countries may increasingly apply (“old oil” versus “new oil” concepts. 16

17. Changes in the nature of petroleum arrangements The new trends will also bring changes in the nature of petroleum arrangements: smaller blocks – more competition: – more legislation/bidding, – less negotiation for new blocks fiscal stability provisions will be reduced. Where fiscal stability provisions continue to exist they will be restricted in terms of: – time, – volume, and/or – economic indicators 17

18. Conclusion It can be expected that in the medium term the world will continue to experience significant changes in the level of government take and the structure of oil and gas fiscal systems. Much of these changes will apply to existing operations. 18