Which countries and producers take the lead to meet the world's energy needs in the next 20 years will be determined by the availability of capital, or lack thereof because of oil and gas taxes, the chief energy strategist for IHS Cambridge Energy Research Associates (CERA) said Tuesday.
Speaking at the World Economic Forum in Tianjin, China, David Hobbs said government policies in investor nations "that either support or restrict foreign investment will be an important determinant of how companies and countries do in the investment race," which has become increasingly critical as competition increases.
IHS CERA created a new benchmark to analyze the competitive positions of different countries (see Daily GPI, Aug. 3), which Hobbs explained. "To understand the fiscal competitiveness of companies, you have to consider not only the fiscal terms in the country where oil and gas are being developed, but also the fiscal terms in the home country of the company.
"This new analysis helps explain why the share of investment by U.S. companies is declining. The costs of repatriating income from international operations back to the United States are higher for U.S. companies than what many of their chief competitors face when repatriating income back to their respective countries.
"That places a hurdle in the path of U.S.-based oil and gas companies that is higher than for companies based in other countries. Securing new concessions requires them to overcome this hurdle."
The United States, said the energy strategist, has fallen behind in the investment race because of less competitive policies at home and growing competition abroad.
Some of the current tax proposals in Congress "would make things even more difficult for U.S. companies," he said. "The rapid economic growth in Asia emphasizes the importance of timely development of energy supplies in order to avoid future crises and disruptions and damage to the global economy."
The Obama administration wants to repeal two major oil and gas tax credits: the Section 199 and dual capacity deductions (see Daily GPI, Sept. 14). The Section 199 credit allows manufacturers to deduct from taxable income an amount equal to 6% of their qualified production activities income; the dual capacity credit is used by U.S. companies to offset foreign-sourced income.
However, Hobbs told the audience that the number of companies producing more than 1 million boe/d "has become geographically more diverse and more than doubled in number over the past three decades." The list now includes traditional oil and gas companies and a growing number of state-owned national oil companies that operate both in their home countries and abroad.
Some U.S. legislative proposals "could actually make the current hurdle even worse for U.S. companies, making them the least competitive among the analyzed peer group, excepting India," he noted. The United Kingdom, Netherlands, Russia, Canada, Norway, Italy and China pay less in additional taxes "on their repatriated income and are therefore able to compete more effectively against U.S.-based companies -- in some cases enabling them to afford to bid twice as much for oil and gas concessions."
The new IHS CERA report, "Fiscal Fitness: How Taxes at Home Help Determine Competitiveness Abroad," in which Deloitte collaborated, is based on the firm's integrated fiscal database and was developed to assess the relative fiscal systems of different countries. The firms examined the tax policies of the 10 countries that are home to the largest international oil companies and the tax policies' impact on companies' competitive advantage/disadvantage when bidding for oil and gas rights in a representative group of host countries.
"The combined costs of the fiscal systems of 'host' countries and of 'home' countries create differences in the valuation of assets," said Hobbs. "This difference is reflected in the amounts that companies can afford to bid for oil and gas rights."
As a home base for overseas upstream oil gas investment, the United States ranks near the bottom, according to the analysis. "If U.S. companies are unable to invest competitively, then companies from other nations will need to take more of the lead in meeting the investment challenges," Hobbs said.
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