Contract Renegotiations and Other Recent Changes in the Oil and Gas Industries

1. Contract Renegotiations and Other Recent Changes in the Oil and Gas Industries Juan Carlos Quiroz Matt Genasci Revenue Watch Institute

2. Recent changes in contracts and fiscal terms • IFI’s often warn countries that changes in contractual terms would undermine their competitiveness. Countries who change rules are seen as unreliable partners. • However, more than 30 oil and gas producers have revised their contracts or fiscal terms since 1999. • Change has two directions: on the one hand, increase of government share of profits through royalties, taxes and windfall taxes. On the other, many countries still willing to offer incentives to attract investment.

4. Drivers of change • Prices: record-high oil price highlights inadequacies in contracts signed under low-price conditions. • Control: some government want greater control over petroleum sector (e.g. to leverage public policies, equity gains, patronage) or resource nationalism. • Competition: most hydrocarbon reserves are hold by NOC and more players compete for new acreage, which provides countries an opportunity to impose tougher terms and makes companies willing to pay. • Incentives to investment: reducing government take is still common in mature producers, net energy importers, frontier areas, marginal fields, deepwater projects.

5. What does change mean? • Market conditions, prices and technology change overtime, while contract’s assumptions and expectations remain fixed. So, change is almost inevitable. • Renegotiation process around the world resembles a rental market with five “cases”: • Fearing eviction • Suffering a rent increase • Finding a good deal • A good location often cost a “premium” • Paying a condo’s utility bill

6. Overview of recent changes

7. Some conclusions • Change is more common than acknowledged; it is inherent in prices, markets, technology and expectations • Contracts balance risk and expectations about future profits sharing, therefore it is important to introduce some flexible and progressive measures • Companies accept several levels of profit share renegotiation, provided ventures are not turned uneconomical • Public and open bidding rounds have helped some countries to increase their share of profits • Transparency and regulatory improvements also attract investment

8. Merci beaucoup! Contact information: Juan Carlos Quiroz Policy Analyst Revenue Watch Institute jquiroz@revenuewatch.org Matt Genasci Legal Analyst Revenue Watch Institute mgenasci@revenuewatch.org