What EITI Reports do and don’t tell us about oil deals

A review of reports from Iraq, Nigeria, and Norway.

By Eddie Rich, Sam Bartlett and other Secretariat team

Citizens in resource rich countries want to know whether they are getting a fair return from the exploitation of their (non-renewable) natural resources. EITI reports provide a key piece of the jigsaw puzzle in determining whether a country is getting a fair share. A lot of additional information is needed, and EITI reports are increasingly providing the contextual information to inform public debate about these issues. A comparison of the recently published EITI reports from the three large oil producers - Iraq, Norway and Nigeria - illustrates the opportunities and challenges.

Iraq, Norway and Nigeria have very different oil sectors and tax systems. Investment and production costs vary widely, and changes in commodity process can have a major impact on the total revenue that the government receives in any given year. Cross-country comparisons based on “government revenue per barrel of oil” can thus be misleading. However some “back-of-the envelope” calculations on how the government’s take varies over time raises some very interesting questions.

Iraq

In Iraq, the government owns 100% of the oil sector (apart from separate arrangements in Kurdistan). Their total revenues are offset by their payments to companies providing technical services. 

The political and security risks of operating in Iraq are clearly amongst the highest in the world.  This might be a significant factor leading to high costs of production for the companies in Iraq, which are not set out in the report. 

The latest Iraq EITI report relates to 2010.  Government revenue in 2011 leapt by 60% to $83 bn, driven by a 15% increase in sales and a significant increase in the oil price. Despite these fluctuations, the below table shows that Iraq’s government take was stable at around three-quarters of the total turnover of the oil.

With production expected to increase further, it will be interesting to see how the government’s share of oil sales develops. While a higher figure may be welcomed by citizens, it could imply that there are insufficient incentives for companies to invest, ultimately reducing government revenues in the medium to long term. The data in EITI reports can help inform the debate about getting the balance right.

 2009201020111
Total Production (Barrels m)28808901003
Total Government Revenues (US $m)40 15652 38782 988
Average Brent crude oil prices (US $/barrel)36280111
Government return per barrel produced (US $)465983
Government return per barrel %74.2%73.8%74.8%

 

[1] The 2011 report is not yet available for Iraq, so these figures are taken from the Ministry of Oil’s data.  Available at: http://www.iraq-businessnews.com/2012/01/24/iraq-oil-income-jumped-by-60-in-2011/

[2] BP. 2012. Statistical Review of World Energy 2012. Available at: http://www.bp.com/sectionbodycopy.do?categoryId=7500&contentId=7068481  

[3] Ibid

Nigeria

In Nigeria, companies sign production sharing agreements with the government, and pay taxes on profits and royalties in a mixture of money and oil.  Production Sharing Contracts (PSCs) are designed to flex with price to avoid a temptation by government to change the rules as the split becomes seen as unfair. A PSC splits the upside so that the company benefits from keeping costs down, while the government also benefits at higher prices.

In addition, the government subsidises imported oil products.  In 2011, subsidies on imported oil alone cost the government US $5bn. The NEITI report also contains a number of recommendations on restructuring the national oil company (NNPC). 

As in Iraq, the political and security risks of operating in Nigeria are high, which again might lead to high costs of production in Nigeria.

Nigeria’s take of the total turnover was 65% in 2009 and 2010 but jumps to 72% in 2011.

What triggered this increase? One possibility is that the production sharing agreements are well designed so that the government’s share increases as the oil price increases. Verifying this requires a more detailed analysis of the individual contracts. Several EITI countries are now making these contracts available for public scrutiny.

 200920102011
Total Production (Barrels m)4744860860
Total Government Revenues (US $m)30 12944 94468 442
Average Brent crude oil prices (US $/barrel)6280111
Government return per barrel produced (US $)5405280
Government return per barrel %64.5%65.0%72.1%

 

[4] BP. 2012. Statistical Review of World Energy 2012. Available at: http://www.bp.com/sectionbodycopy.do?categoryId=7500&contentId=7068481  

[5] Ibid

Norway

In Norway, companies pay for a license to drill, and then pay tax on profits.  The government also has a considerable direct ownership stake in fields and licenses in addition to its majority holding in the national oil company, Statoil.  

Although the political and security risks of operating are low, Norway’s predominantly off-shore wells are technically more difficult and typically more expensive than on-shore drilling.  The labour and transportation costs are likely also to be higher. 

The below table shows that Norway’s government take per barrel was 86% in 2009, dropping to 76% in 2010 and 79% in 2011. Once again, these variations are worthy of further investigation.

 200920102011
Total Production (Barrels m)6797723685
Total Government Revenues (US $m)42 34944 01360 421
Average Brent crude oil prices (US $/barrel)76280111
Government return per barrel produced (US $)536188
Government return per barrel %85.5%76.3%79.3%

 

[6] BP. 2012. Statistical Review of World Energy 2012. Available at: http://www.bp.com/sectionbodycopy.do?categoryId=7500&contentId=7068481  

[7] Ibid

Country comparisons

Although the government take per barrel figures are strikingly similar across the three countries, more detailed information is needed in order to make meaningful cross country comparisons. Two key factors are the investment cost and the production cost. The table below illustrates the impact of different production costs. In three hypothetical situations (A, B and C), the oil price is held constant at $111/barrel but the cost of production varies from $5 to $40 per barrel. If government take is fixed at $70/barrel, there would be huge variations in company profitability.

Click buttons (Country A, B or C) in below pie chart to compare countries.

In case A, the companies would appear to be making excessive profits. In case C, the government take is probably too high, deterring further investment. However such calculation can also be misleading. If the capital cost of investment in country A was large, a profit of $36 per barrel may be justified in order to recover these costs.

CountryABC
Oil Price ($ per barrel)111111111
Cost of production per barrel ($)52040
Surplus per barrel ($)1069171
Government Share per barrel ($)707070
Company Profit per barrel ($)36211

Conclusion

Whilst data from the EITI reports alone can’t answer whether governments and companies are striking good deals, there is little doubt that they can trigger further questions about how different governance environments affect revenues.  The EITI reports, alongside other studies, are increasingly helping to explore these issues.