Capturing the Wealth from Vietnam’s Energy Resources

Patricia Silva, University of CopenhagenHanoi, 18 November 2009

Overview

1. Project background: motivation and research objectives

2. Estimating rents from Vietnam’s energy resources

3. Comparing revenues generated from energy resources with rents

4. Analysis of fiscal instruments for rent capture5. Conclusion

1. Motivation

Over last two decades, Vietnam emerging as important regional producer of oil, gas, and coal

1. Motivation

Oil prices and oil revenues increasing overtime

Oil revenues an important source of revenues—about a quarter of state budget

24%

1. Research objectives

Estimate economic rents from most important energy resources—oil, natural gas, coal

Compare revenues generated from energy resources with estimated rent

Analyze policy implications of fiscal instruments used to capture energy resource rents

2. Estimating Energy Resource Rents

-What is rent?-Estimated rents for oil, gas, and coal

2. What is resource rent?

Resource rent—the value of production after accounting for all necessary costs (exploration, development and extraction), including a minimum return to the producer/investor and all other factors of production

2. Estimated Energy Resource Rents

3. Revenues Generated by Energy Resources

-Why tax natural resource rents?-History of legislation governing natural resources-Fiscal instruments used in Vietnam-Comparison of estimated rents and revenues for oil, gas, and coal

3. Why tax natural resource rents?

• Efficiency argument: pure rent tax is non-distorting

• Equity argument: natural resources are “owned” by people/state and thus profits from its exploitation should accrue for the benefit of society

• Sustainability argument: taxing natural resource rents potentially provides funds to invest in other forms capital and thus maintain intergenerational equity

3. History of Legislation Governing NR

Date Legislation Comments

1987 Law on Foreign Investment

Opened the door to foreign investors. In 1998, 100% foreign ownership disallowedPetroVietnam engaged in all oil exploitation, through joint venture or production sharing contracts (PSC)

1989 Ordinance on Mineral Resources

Regulates mineral license terms, etc

1993 Petroleum Law(revised 2000, 2008)

Set natural resource tax rates

1996 Mineral Law (revised in 2005)

Updated regulations on mineral license terms

3. Fiscal instruments used in NR sector

Instrument Oil Natural gas Coal

Natural Resource Tax

6-25% 0-10% 0-6%

Export Tax

4% in 20008-20% in 2008 50% in 2009?

n/a Abolished in 1998, reinstituted in 2006

at 10%? In 2009 increased to 20% then cut again to

10%

Corporate Income Tax

50% 25-32%??? 25-32%???

3. Oil Rents and Revenues

3. Natural Gas Rents and Revenues

3. Coal Rents and Revenues

4. Analysis of fiscal instruments for rent capture

4. Comparative assessment of fiscal instruments

Neutrality Investor Risk GovernmentRisk

Efficiency Stability Project risk

Loss Flexibility Delay

Resource rent tax

+2 +3 +2 -2 +3 -1

Royalty/production taxes

-3 -1 -1 +2 -1 +3

Corporate income tax

-1 +1 0 0 +1 +2

Production sharing

-1 +1 0 0 +2 +2

4. Comparative assessment of fiscal instruments

Neutrality Investor Risk GovernmentRisk

Efficiency Stability Project risk

Loss Flexibility Delay

Resource rent tax

+2 +3 +2 -2 +3 -1

Royalty/production taxes

-3 -1 -1 +2 -1 +3

Corporate income tax

-1 +1 0 0 +1 +2

Production sharing

-1 +1 0 0 +2 +2

4. Comparative assessment of fiscal instruments

Neutrality Investor Risk GovernmentRisk

Efficiency Stability Project risk

Loss Flexibility Delay

Resource rent tax

+2 +3 +2 -2 +3 -1

Royalty/production taxes

-3 -1 -1 +2 -1 +3

Corporate income tax

-1 +1 0 0 +1 +2

Production sharing

-1 +1 0 0 +2 +2

4. Comparative assessment of fiscal instruments

Neutrality Investor Risk GovernmentRisk

Efficiency Stability Project risk

Loss Flexibility Delay

Resource rent tax

+2 +3 +2 -2 +3 -1

Royalty/production taxes

-3 -1 -1 +2 -1 +3

Corporate income tax

-1 +1 0 0 +1 +2

Production sharing

-1 +1 0 0 +2 +2

4. Comparative assessment of fiscal instruments

Implementation

Design Administration Tax credit?

Resource rent tax

+3 -3 -2

Royalty/production taxes

-1 +1 -3

Corporate income tax

+1 -1 +3

Production sharing

+2 -2 -3

Source: A Primer on Mineral Taxation, Thomas Baunsgaard

5. Conclusion

Oil accounts for two thirds of energy resource rents

Oil revenues amount to just over half of estimated oil rents

Rent capture is lower for gas (16-20%) and coal (3-7%)

Most favored instrument—royalties/production taxes—also the most innefficient