Chapter 1: Introduction

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Introduction

A tax is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity)

by a state or the functional equivalent of a state such that failure to pay is punishable by law.

Taxes are also imposed by many administrative divisions. Taxes consist of direct or indirect

taxes and may be paid in money or as its labor equivalent. Tax assessment is very important for

every sector. In this report tax assessment process of ‘Oil and Gas Industry’ has been discussed.

The supply of gas as a primary source of energy will be dried out soon if immediate steps are not

taken for exploration of new gas fields and extraction thereon. In the use of commercial energy,

Exploration activities carried out so far could not discover any significant oil deposit. The only

oil deposit so far has been discovered in the country.

Gas and oil is an important resource of any country. The oil production has since ceased because

of reduction of pressure and influx of water in the oil zone. Comprehensive exploration efforts

need to be mounted in this field.

Bangladesh is poor in natural resources by global standards. Natural gas is the most important

natural resource that has been discovered and being utilized. Other important discoveries include

coal, peat, hard rock and modest reserves of limestone, gravel, glass sand and various types of

clay.

The development of the oil and gas sector is vital for further strengthening of the national

economy. Expansion of the energy sector since the 1980's is mainly attributed to increased

natural gas production. The presence of Natural Gas in Bangladesh has been established through

exploration by Bangladesh’s public energy company, Petrobangla, and more recently

international oil and gas companies (IOCs) have established the existence of a significant energy.

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Origin of the Study

Now-a-days academic education is not enough to enable students to compete with confidence

and reach their goal. In order to have idea and gain practical experiences, about the managerial

and leadership issue in an organization we have done this study on’ Gas & Oil industry and its

tax assessment process’ to complete the course requirement of ‘Business Taxation’ which is a

mandatory course of Masters of Business Administration program.

Background of the Study

To know about how oil and gas industry make their assessment about taxation, this report has

been prepared. The study was conducted on the oil and gas industry of Bangladesh. The industry

is divided into several sub-sectors namely oil, gas, petroleum, coal etc. This report intends to find

out the marketing, technical, financial and strategic aspect of the oil and gas industry of

Bangladesh

Development of any country depends on its natural resources. Natural resources occur naturally

within environments that exist relatively undisturbed by humanity, in a natural form. Natural

recourses are Gas, Oil, and Energy etc. They are the valuable resources of the country. Natural

gas is the most important natural resource that has been discovered and being utilized. Other

important discoveries include coal, peat, hard rock and modest reserves of limestone, gravel,

glass sand and various types of clay. Environmental issues and problems in Bangladesh are now

recognized as the key concerns for the sustainable development of the country. Magurcherra gas

field, 8 km from Srimangal on the road to kamalganj. The gas field caught fire in 1997 and was

ablaze for three months, laying waste to betel-nut plantations and tea estates in the vicinity

(McAdam, 2008).

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Objectives

Broad Objectives:

1. To fulfill the course requirement.

2. To gain practical knowledge about Gas and Oil Industries.

3. To prepare a guideline so that it is useful to the organization.

4. To relate theoretical knowledge with the practical situation

Specific Objectives:

To find out the demand-supply gap in the industry

To find out the profitability of the industry

To study the performance of the industry in Bangladesh.

To find out the different risk parameters and environmental issue associated with this

industry

Identify what to do and what not to do from Tax authority’s point of view.

Identifying the present situation in the Gas & Oil Industry.

To understand how the information disseminate to the entire department.

Previewing the future prospect level of the Gas & Oil Industry.

Methodology

The study can be divided in two stages. In the first phase, exploratory research was undertaken to

gain better understanding of the industry. The study started with secondary data and information

collection regarding the oil and gas industry.

The second phase of the research process was a causal research. The researcher tried to analyze

the growth prospect of this sector, the strengths and weaknesses of the sectors, and the

opportunities and threats that might affect the growth for the industry.

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In this study information about the following things are gathered_

• Gross Income and Operating Expenses

• Remaining Economic Life of Property

• Real Property Taxes

• Net Income

• Depreciation

• Depletion

• Income and Other Taxes

• Capital Investment

• Rate of Return

Source of Information:

Primary: The primary information will be collected through:

Primary Sources of Data:

Informal conversation with the workers.

Face to face conversation with the officers and staffs

Exposure on different desk of the organization.

Direct involvement in the General Banking activities in Exim Bank Limited

Secondary: The secondary information was gathered from:

Secondary Sources of Data:

Raw data of Petro bangla. Business journal.

Unpublished data. Different websites.

Different textbooks.

Newspapers.

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Type of Study:

The study can be divided in two stages. In the first phase, exploratory research was undertaken to

gain better understanding of the industry. The study started with secondary data and information

collection regarding the oil and gas industry.

The second phase of the research process was a causal research. The researcher tried to analyze

the growth prospect of this sector, the strengths and weaknesses of the sectors, and the

opportunities and threats that might affect the growth for the industry.

In this study information about the following things are gathered

• Gross Income and Operating Expenses • Depletion

• Remaining Economic Life of Property • Income and Other Taxes

• Real Property Taxes • Capital Investment

• Net Income • Rate of Return

• Depreciation

Limitations

The companies considered many of the information required as highly confidential and

sometimes it was difficult to interview the clients. Many respondents were afraid of providing

actual data.

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Chapter 2: Overview of the energy sector of Bangladesh

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Energy sector of Bangladesh:

In recent times, establishment of important physical infrastructures, setting up of new power

plants and the pace of industrialization in the country has slowed down due to energy supply

shortage. The sluggish industrialization which has hindered development activities is

apprehended to create a negative impact on employment and consequently on the people’s

livelihood. This dismal state of energy sector has resulted from lack of initiatives and insufficient

investment in the sector during the past years. Realizing the necessity for its improvement, the

present government has indicated energy sector as a priority sector.

The Proportion of using energy in Bangladesh

Different types of energy are available in Bangladesh. A brief review is given below:

Non-renewable energy

The proven reserve of natural gas which is the principal source of nonrenewable energy of the

country is gradually depleting. The supply of gas as a primary source of energy will be dried out

soon if immediate steps are not taken for exploration of new gas fields and extraction thereon. In

the use of commercial energy, the notable ones include the following:

i. Natural gas

ii. Oil from minerals and other sources

iii. Coal and coal like substance

iv. Compressed natural gas (CNG)

v. Natural Gas Liquid (NGL)

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Renewable Energy

In our country renewable energy such as biomass, solar power and wind power are being used

since time immemorial. Especially in areas which are outside gas coverage, usage of biomass for

cooking and solar power and wind for drying of different grains as well as clothes are known to

all. However, we are still lagging far behind in the scientific use of such energy. Moreover, the

use of renewable energy has become popular worldwide in view of depleting reserve of non-

renewable fossil fuel. Renewable energy is environment-friendly. At present, the different

categories of renewable energy that are being used in limited ways in our country are as follows:

i. Hydro-electricity

ii. Solar power generation using solar rays

iii. Wind-mill power generation using wind power

iv. Production of bio-gas using waste

v. Electricity produced by Biomass Gasification Method using wood, rice husk, etc

Potential Sources of Natural Resources

Natural Gas

One of the country's few mineral resources is natural gas, which is the basis for nitrogenous

fertilizer production sufficient to meet the country's needs. Estimated national reserves range

from 182 billion to 623 billion cubic meters. Deposits lie in more than a dozen different

locations, six of which were producing in 1986. The country's gas production is concentrated in

the northeastern part of the country. Reserves also have been discovered offshore, but extraction

is not yet cost effective.

Oil

Exploration activities carried out so far could not discover any significant oil deposit. The only

oil deposit so far discovered in the country is in Haripur which produced a total of about 0.65

million barrels of crude oil till 1994. The oil production has since ceased because of reduction of

pressure and influx of water in the oil zone. Comprehensive exploration efforts need to be

mounted in this field.9

Coal

Discovery of coal dates back to late fifties, when an exploratory oil well was drilled through coal

beds in Bogra. Subsequent explorations resulted in the discovery of the Jamalgonj coal deposit at

a depth of about 1,000 meters from the ground level and having an estimated reserve of more

than 1,000 million tons of coal. Feasibility studies have indicated that the development of this

deposit is not yet feasible under the prevailing international market price. However, with the

increase in gas price, these deposits may become competitive. After evaluation of a detailed

geological and geophysical survey, Geological Survey of Bangladesh (GSB) identified 13

locations in the region of greater Rangpur and Dinajpur districts as the prospective basins for

coal exploration.

Peat

Deposits of peat occur at shallow depths in different low lying areas of Bangladesh. According to

the Geological Survey of Bangladesh, the reserve of dry peat is about 170 million tons. The

major deposits are in greater districts of Faridpur (150 million tons), Khulna (8 million tons) and

Sylhet (13 million tons). Peat requires drying before making briquettes for use as fuel. A pilot

project for extraction of peat and making briquettes was implemented by Petro Bangla, but the

results were not encouraging and extraction was assessed as economically not viable. However,

in future, this resource may be viable as and when prices of other fuels rise.

Hard rock and Limestone

Hard rock was discovered by GSB in Madhyapara area of Dinajpur District in 1964 at a depth of

285 meters from surface. An agreement was signed with North Korea in 1993 for the opening of

an underground hard rock mine with a target production of 1.6 million tons per annum. The hard

rock mine is expected to come into operation by the year 2000/01. Madhyapara hard rock will be

used for river training, heavy construction work, railway ballast, highway, etc. The granite slabs

excavated from this mine can also be used as polished tiles and paving. Presently these are

imported.Considerable import substitution and increased revenue earning may, therefore, be

expected from this rock. Limestone has been found at Joypurhat and some other places of Sylhet

district. The production of sub-surface limestone of Joypurhat is yet to materialize.10

Petroleum

Bangladesh holds unknown quantities of commercially exploitable reserves of petroleum, both

on land and offshore. In December 1986, oil was discovered in the Haripur gas field, south of the

city of Sylhet, in northeastern Bangladesh. Lucky Well Number Seven promptly went into

production at the rate of several hundred barrels per day, the first commercial oil production in

Bangladesh. The crude was shipped by rail to the Eastern Refinery in Chittagong, where it was

combined with other lighter imported crude oil for refining. The Eastern Refinery had been

operating at just 66 percent of capacity and processing 34,000 barrels of crude per day. The

domestic addition did not in itself have much of an impact on energy use in Bangladesh, but it

was a beginning that fed hopes for further development. In the late 1990s, the Bangladesh Oil,

Gas, and Minerals Corporationwas carrying on further test drilling in western Bangladesh as well

as in the vicinity of the successful Haripur strike. The government formed a high-level

committee under the minister of energy and mineral resources to formulate recommendations for

stimulating oil exploration and extraction in Bangladesh. In 1997 the U.S.A. signed protocol to

provide assistance for oil exploration, a broadening of its traditional cooperation in the field of

power generation, transmission, and distribution.

Natural Gas and Oil Exploration

National Petroleum Policy which came into force from July 1993 has already attracted foreign

investment in oil and gas exploration and development. Five international oil companies have

signed production sharing contracts for exploration and development of hydrocarbon. The five

companies are:

i. Occidental Exploration of Bangladesh Ltd.

ii. Occidental of Bangladesh

iii. Cairn Energy PLC and Holland Sea Search Bangladesh

iv. Rexwood Oakland

v. United Merridian International Corporation (UMIC)

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Chapter 3: Overview of Oil and Gas Industry in Bangladesh

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Current production

Currently, gas production per day is 2000 MMCF in our country. Imported oil accounts for the

lion’s share of the rest of the energy requirement. Our annual requirement of fuel is

approximately 3.7 million metric ton. The present per-capita consumption of non-renewable

energy resources in Bangladesh is about 64 Kilogram of Oil Equivalent (KGOE) which is one of

the lowest in the world. Per-capita energy use in KGOE is 123 in Sri Lanka, 236 in India and 267

in Pakistan. Of the total non-renewable energy consumption, about 60 per cent is derived at

present from indigenous resources and the rest is met from imported petroleum and coal.

Moreover, the entire reserves of exploitable indigenous primary energy resources are located in

the east zone, thereby resulting in a gap in energy supply between the east and west zones.

Newly discovered gas fields

A brief description of some newly discovered gas fields is given below:

Saldanadi Gas Field

Saldanadi gas field is situated along the India-Bangladesh border under Kashba Thana of

Brahmanbaria district. The structure was selected for exploratory/appraisal drilling after

evaluation of seismic data collected during 1991/92 field season by BAPEX. Accordingly,

drilling was undertaken in 1996 and a prospective gas reserve was discovered at a depth of 2,511

metres. After reviewing the data, a preliminary estimate of gas reserve was given at 0.202 TCF.

Shahbazpur Gas Field

Shahbazpur field is located in the central part of Shahbazpur island of Bhola district. The

location was selected for exploratory drilling after evaluation of seismic data collected during

1986/87 field season. Shahbazpur well was spudded in December, 1993 and in 4 months, a depth

of 3,631 metres was reached. Due to encountering of over pressure, the well had to be abandoned

after flowing gas through coil tubing from interval 3,201-3,210 metres. Subsequently, it was

decided to drill a side-track hole. After drilling of side-tracking hole down to 3,342 metres,

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commercial gas flow was ensured. Analysis of results obtained from vertical and side-track

drillings indicated an in-place reserve of 0.5138 TCF

Shangu Gas Field

Bangladesh Government signed a Production Sharing Contract (PSC) with Cairn Energy and

Holland Sea Search for oil and gas exploration in Chittagong and its adjacent coastal areasThe

first well was drilled down to the depth of 3,500 metres and four gas zones were reached.

Examination of two zones indicated the presence of significant amount of gas and Shangu was

declared a gas field. Then the second well was drilled to estimate the gas reserve and a reserve of

0.848 TCF was determined and to exploit the gas reserve, development of the field was planned.

To make it commercial, plan was prepared to drill additional production wells, construct

platform and install pipelines and processing plants. After successful completion of all these

activities, it is expected that the production of natural gas from this field will be possible from

April,1998.

Patharia Oil and Gas Exploration Well

Patharia area is located in the north-eastern part of Bangladesh under Baralekha Thana of

Moulvibazar district. After evaluation of seismic data and gravity survey, the location was

selected for exploratory drilling. Drilling of one exploratory well with Saudi assistance was

planned during the Third Plan period. Patharia well was spudded in 1989. The well was designed

to be drilled down to a depth of 5,000 metres. However, due to several changes in casing points

and whole deviation, it could reach only down to 3,438 metres. Then the drilling was terminated

for deterioration of casing due to frequent reaming, slow drilling rate and risk factor in

continuation of drilling.

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Chapter 04: Tax Assessment of Oil and Gas Industry

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Assessment of Oil & Gas

Oil and gas producing properties are assessed as economic units. An economic unit encompasses

all real property, associated with the exercise of oil and gas rights, including the un extracted oil

and gas, oil and gas rights, and any and all wells, equipment, fixtures and pipeline, necessary to

drill, mine, operate, develop, extract, produce, collect, deliver or sell the oil or gas to a point of

sale to a commercial purchaser, a pipeline or equipment of a user.

To compute the assessment of an oil and gas economic unit, the assessor must multiply the

amount of production by the appropriate unit of production value. The production used in the

calculation is from the production year preceding the applicable taxable status date as reported

by the producer. The result of this calculation must be multiplied by the most recent state

equalization rate.

Types of Cost

In case of oil and gas industry, there are 3 main types of cost. These are -

1. Exploration Cost : This include drilling cost, depletion, seismic survey etc.

2. Development Cost : It includes drilling cost, well development cost etc.

3. Lifting Cost : This includes labor cost.

Accounting Method:

There are 2 accounting method in oil and gas industry

1. Full Cost Method: It is traditional method. In this method Exploration and development cost

whether successful or unsuccessful is charged as production cost (Government allow 30% as

amortization) in income statement. Here some cost is capitalized and go to balance sheet.

2. Successful Afford Method: All cost is expenses and charged to income statement nothing is

carry forward to balance sheet. Successful portion is charged as production cost (Government

allow 30% as amortization) in income statement. The unsuccessful portion is charged as

operating expense in income statement. 16

Natural Gas

Of the various natural resources available, natural gas in particular:

a. supplies primary commercial energy for electricity generation to accelerate the pace of

agricultural and industrial development and reduces the kitchen drudgery at the level of

individual households; b. helps in narrowing the deficit in the balance of payments by reducing

import bill for oil, coal, etc.;

c. mobilizes resources for the national exchequer; and

d. provides raw materials for the production of urea fertilizer and fuel for electricity generation.

Contractor shall have the right to produce annually a total volume of Gas up to 7.5% of the

Proven Recoverable Gas reserves from onshore blocks. In case of offshore blocks a greater

percentage may be agreed by Petrobangla and the Contractor.

Natural Gas for Export

Contractor shall have the right to export any Marketable Natural Gas produced from the Contract

Area in the form of Liquefied Natural Gas ("LNG"), subject to first right of refusal of

Petrobangla

Gas Price

Onshore gas: 75% of HSFO with biddable discounts. The price will have a floor of US

$70/metric ton and a ceiling of US$180/metric ton of HSFO

Offshore gas (Type – A blocks): 25% higher than the onshore gas price

Offshore gas (Type – B blocks): 100% of the HSFO

Western zone (Onshore): 25% higher than for the other onshore gas price.

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Pipelines

Contractor shall have the right to operate the Pipeline until cost recovery is completed. If

Petrobangla, so desires the Contract or shall continue to operate the Pipeline after the Cost

Recovery.

Except Petrobangla, all parties who use the Pipeline downstream of Measurement Point shall pay

1% tariff against their share of Petroleum transmitted through the pipeline for transmission

service. Any tariff received will be paid to the account of Petrobangla.

However, the Contractor will be exempted from paying tariff during cost recovery of the said

pipeline. Title to the Pipeline(s) shall be with Petrobangla.

Cost Recovery and Profit Allocation

Cost Recovery

Contractor shall recover all costs and expenses in respect of Exploration, Appraisal and

Development related operations. The Cost Recovery limit shall be maximum of fifty-five percent

(55%) per Calendar Year of all Available Oil /Natural Gas/ Condensate/ NGL from the Contract

Area.

Profit Sharing

The Profit Petroleum shall be allocated between Petrobangla and Contractor in the following

proportions:

Type – A Block

Oil/Condensate/NGL: Biddable from 55% to 80% on tranches from 12,500 to 100,000 bbl/day or

above

Gas: Biddable from 55% to 80% on tranches from 75 to 600 mmscf/day or above.

Type – B Block

Oil/Condensate/NGL: Biddable from 50% to 75% on tranches from 12,500 to 100,000 bbl/day or

above

Gas: Biddable from 50% to 75% on tranches from 75 to 600 mmscf/day or above.

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Valuation of Petroleum

For third party sales, the value of petroleum will be realized atarms length.

If there have been no sales of Crude Oil to third parties at arm'slength, the Value of Oil shall be

determined as follows:

on the basis of the FOB selling price per Barrel of a basket of three Crude Oils

On the basis of the spot market for the same Crude Oils

Spot price and FOB selling price will be taken from Platt's Oilgram or Asian Petroleum

Price Index (APPI)

Taxes and Duties

No taxes will be imposed on materials and equipment related to Petroleum Operations brought

into Bangladesh by Contractor, its subcontractors or by any agent on permanent or re-exportable

basis.

Contractor shall be liable to pay including but not limited to the following:

o Corporate income tax

o Income tax of employees of Contractor

Income tax of sub-contractors:

o Duties and taxes on locally purchased goods and commercial services

o Any levies or exaction in respect of property including leased property, capital, net worth,

operations, remittances or transactions

o Duties and VAT on imported office equipment, air conditioners, refrigerators, sedan cars

and station wagons, microbuses, household utensils.

o Value Added Tax and Supplementary Duty (if any) for goods and services purchased to

implement Petroleum Operations as per provisions of the Value Added Tax Act. 1991

and the Value Added

o Tax Rules, 1991 or as may be amended from time to time.

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Chapter 5: SWOT Analysis of Oil and Gas Industry

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Strength

Gas, the main source of commercial energy and plays an active role towards the growth

of the economy.

Currently, about 90 per cent of power generation is based on natural gas and the whole of

the urea fertiliser requirements of the agricultural sector is met by using gas as feed stock.

Currently Total gas production was 2.9 billion cubic meters, with production rising at

least 10 percent per year

The development of Bangladesh's natural gas resources has contributed to the reduction

in deforestation

The sector also contributed to an increase in tax revenue for the government through the

levies

Weaknesses

It is estimated that minimum growth rate of about 10 percent per annum in gas

production will be required to meet the average GDP growth target of 7 per cent per

annum during the Fifth Plan period.

The existing gas infrastructure has limited capacity and needs to be expanded as per

requirement.

Opportunities

For long-term gas supply commitments, particularly for the planned power plants, the

government is encouraging private sector participation in the oil and gas exploration

activities through the Production Sharing Contract (PSC) with the International Oil

Companies.

By conservative estimates of reserves and consumption trends, the supply was expected

to be adequate for Bangladesh's requirements through the year 2030.

Natural gas output now accounts for about 70 per cent of the country's commercial energy

supply. Current gas reserve (proven) has been estimated at about 22.90 TCF of which 13.60 TCF

is considered as recoverable. So far 2.72 TCF has already been consumed and as of September

1996, the recoverable reserve was 10.87 TCF.

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Threats

Additional investment is, required to enable Bangladesh to utilise its available gas

reserves and to increase exploration activities for new gas and oil fields.

Reserves also have been discovered offshore, but extraction is not yet cost effective.

The development of the oil and gas sector is vital for further strengthening of the national

economy.

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Chapter 6: Closing of the report

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Recommendation & Conclusion:

Oil and gas industry plays an important role in our country. A huge amount of profit comes from

this sector. To run other businesses properly, gas and oil are needed. So to know about their tax

assessment process is very much important. From our deep study through the information and

data from various sources we would like to note that there is no sufficient tax assessment

procedure for oil and gas industry in our country. But in the developed countries there are strong

and effective procedures about this issue. And in this situation we have the pleasure to

recommend that Bangladesh authority can develop tax assessment procedure by taking

guidelines from the developed countries. We know there is huge political and economic debate

about this issue. But it seems that if the governments develop assessment procedure and take

initiatives to collect tax from this industry the benefit will be higher than collection cost as

Bangladesh has a lot of natural resources. This initiative may reduce the government’s

dependency on foreign aid and donation. In a word this sector is very prospective. So, effective

and efficient assessment process is needed in this sector. If proper steps are taken, then this

sector can be very much profitable for our country.

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Bibliography:

Annual Report of Gas & Oil Industry 2012.

Several Booklets from Gas & Oil Industry.

Several Newsletters from Gas & Oil Industry.

Accounting report of Gas & Oil Industry.

Different publications regarding Gas & Oil Industry.

Gas & Oil Industry official website.

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