Wood Mackenzie: 6 Key Factors Influence Upstream Fiscal Change

In a new two-part study, research firm Wood Mackenzie has identified six key factors which the organization claims influence whether a country is likely to change its upstream fiscal terms under the current oil price environment.

Fiscal terms making projects uneconomic, high tax rates, legal constraints, fiscal change history, a government’s dependence on oil taxation and the trend in oil production are the top factors, according to Wood Mackenzie, although the group’s analysis of fiscal changes from 2014 to date concludes that few governments have actually made any fiscal changes during that time.

 VP Global Fiscal Research for Wood Mackenzie Graham Kellas commented in a company release:

"Fiscal policy-makers around the world are reviewing their upstream fiscal terms and we've 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 US$100 a 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. 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 per barrel and above) then this pressure will be significantly alleviated.

"Governments which are less dependent on oil tax for income can afford to play the long game and will be more likely to reduce tax rates or introduce incentives to try to maintain investment while companies cut back on new projects elsewhere. However 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. It's important to note that governments facing declines in oil production would be considering how they can stimulate investment in any circumstances, and depressed oil prices makes this task more difficult and more necessary...Fiscal incentives for new investment, particularly challenging projects such as unconventional resources, are likely to become common."



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