Report: Fiscal regime instability continues as countries weather falling oil prices

The global implication of a low oil price environment on the fiscal and regulatory framework of countries is evident even after two years of the start of the oil crisis, says a GlobalData expert insight.

Titled ’Increased Fiscal Regime Instability Likely with Continued Low Prices’, the insight states that certain countries have self-adjusting fiscal frameworks that automatically adjust to price changes. This adjustment is due to price-linkages or the cost recovery options in production sharing and pure-tax regimes. Certain economies, on the other hand, need to adapt policy changes to accommodate for changing prices.

Countries such as the UK have responded promptly to the changing industry landscape by reducing their taxes. The headline tax rate on upstream oil and gas production in the UK has been slashed from 62% to 40%, while a new form of allowance has also been introduced.

The Indonesian government had previously announced plans to exempt exploration activities from land tax to reduce the tax burden. Regulatory uncertainty, however, is still prevalent in the country, as it mulls altering production sharing agreements.

According to the GlobalData expert insight, not all countries are implementing steps to reduce tax burden in a low oil price environment. A number of countries have also resorted to amending the existing investment framework.

Steps have been initiated to extend the exploration licences and allow for postponement of drilling commitments as the exploration and production budgets of oil companies have seen a substantial cut.

Governments are now adopting a more lenient approach in case oil companies fail to fulfil their work obligations. Instead of revoking the license of defaulting companies, authorities are now offering extensions, which is much easier than finding a new licensee.

There are still certain governments that have decided to increase additional revenue and not provide any relief to the oil and gas sector. The Norwegian government, for instance, has retained its 78% headline tax rate and put the decision with the E&P companies to reduce their costs.

The instability is fiscal regimes will remain in the medium term, reveals the GlobalData insight, as governments will continue to adopt different approaches to deal with the low oil prices. Certain markets still exist where authorities are yet to respond to falling prices and adapt fiscal regimes.