Oil and Gas Finance Lectures 3

BUS 407: OIL AND GAS FINANCE AND MANAGEMENTJohn G. [email protected]

JOHN G. GATSI @ 2011 @ OIL AND GAS FINANCE &MGT, SCHOOL OF BUSINESS,UNIVERSITY OF CAPE COASTDEPARTMENT OF ACCOUNTING &FINANCESCHOOL OF BUSINESS UNIVERSITY OF CAPE COAST

JOHN G. GATSI @ 2011 @ OIL AND GAS FINANCE &MGT, SCHOOL OF BUSINESS,UNIVERSITY OF CAPE COAST

Taxonomies in Oil and Gas FinanceThere are many terminologies in oil and gas finance and management which are relevant for the courseSome of the terminologies deal with environment conservation, pricing of oil and gas resources and revenue management.Key macroeconomic indices can not be divorced from oil and gas finance bearing in mind that zeal with which countries invest in the oil and gas industry is to improve the macroeconomic JOHN G. GATSI @ 2011 @ OIL AND GAS FINANCE &MGT, SCHOOL OF BUSINESS,UNIVERSITY OF CAPE COAST


Macroeconomic Factors in Oil and Gas FinanceEconomics literature identify gross domestic product(GDP), Foreign Exchange Rate, Interest Rate, Employment/Unemployment, InflationOther factors closely related to the key macroeconomic factors are food security, population and general infrastructural developmentWealth Distribution and National and Personal Security are equally important in discussing the macroeconomic factorsJOHN G. GATSI @ 2011 @ OIL AND GAS FINANCE &MGT, SCHOOL OF BUSINESS,UNIVERSITY OF CAPE COAST


Gross Domestic Product(GDP)This deals with the overall economic activities by residents of a country over a period of time normally , yearly though we now have quarterly and semi-annual GDP figures.It measures the market value of all final goods and services over a period of time in a countryGDP very important economic indicator:Health of the economyPer capita income ie wealth distributionFiscal strengthDebt sustainability JOHN G. GATSI @ 2011 @ OIL AND GAS FINANCE &MGT, SCHOOL OF BUSINESS,UNIVERSITY OF CAPE COAST


Balance of payment and international trade competitiveness



Some Demand PressuresIncrease world vehicular population( 2010 passenger car pop in N/A- 259M est 295M in 2020; Middle East &Africa 2010- 26M est 42M in 2010; World 840M in 2010 est 1,070M in 2020) [World Oil Outlook , 2009]Development in all transportation modes, Increased world population put pressure on demand for petroleum productsInstability in oil rich regions will mainly result in supply constraints

The Dutch DiseaseThe Dutch disease or the curse of natural resources is the chronic overvaluation of a country's exchange rate, caused by its exploitation of abundant and cheap resources whose commercial production is consistent with an exchange rate clearly below the average exchange rate that paves the way for tradable economic sectors using state-of-the-art technology.

Human Capital and The Dutch DiseaseA recent report compiled from Australia indicate that a shift in movement of labour from manufacturing, services and agricultural sectors to the mining sector is a sign that the Dutch Disease has occurred (Robyn Swift, 2006).In Ghana, many training programmes from government and private sector are on-going to feed the oil and gas industryWe do not see the same scale of training in sectors such as Agriculture

Some professionals are going through re- training programmes to fit into the oil and gas industryWe must be mindful of any large scale shift of labour

Larsen (2004) Explains the Dutch disease is a product of market failure and the curse of natural resources that may result from corruption or rent-seeking, arising from the abundance of natural resources in countries with weak institutions.The Dutch disease affects not only countries that exploit natural resources but also countries with significant remittances from immigrants (Acosta, Lartey and Mandelman, 2007).

What Do We say?Reduction in a countrys export performance as a result of an appreciation of the exchange rate after a natural resource such as oil has been discovered.

How does Aid cause Dutch Disease?Aid is a generally a transfer of foreign currency.2 This helps the recipient country by enabling it to import goods and services without having to produce and sell exports to pay for them.(Burnside, Craig, and David Dollar 2000)

How To Deal With The DutchThe way we respond to any possible Dutch Disease phenomenon is crucial. Many developing countries have idle, underutilized productive capacities that could be readily mobilized to respond to this increased demand(Nkusu 2004).Rearrange our demand for importsFocus on export led economic strategyInvest oil revenue in key productive economic sectors such as Agriculture, Road , Rail and focused researched and development in Science and technology

RoyaltyRoyalty is the share of production or the value or proceeds of production free of costs of production.For the Oil and gas industry it is the share of oil and gas resources produced by an investor or contractor or IOCsCharacteristicsIt is a right to share and not the right to produceIt is not profit sharing or cost bearing



Petroleum Income Tax (PIT)In many oil and gas economies, separate tax regimes are applied apart from the corporate income taxIn Ghana three laws apply:1. Internal Revenue Act , 2000 (Act 592) 2.PITL PNDCL 1882.Petroleum Agreement (PA)JOHN G. GATSI @ 2011 @ OIL AND GAS FINANCE &MGT, SCHOOL OF BUSINESS,UNIVERSITY OF CAPE COAST


IssuesRoyalties- With respect to Gas 3% of gross production 5% to 10% with respect to Crude oilExperience in the industry show that this arrangement may change in the future since Ghana needs massive investment in the industry now.JOHN G. GATSI @ 2011 @ OIL AND GAS FINANCE &MGT, SCHOOL OF BUSINESS,UNIVERSITY OF CAPE COAST


Income TaxUpstream Activities- 50% but reduced to 35% for some companies that signed the PA

Downstream 25%JOHN G. GATSI @ 2011 @ OIL AND GAS FINANCE &MGT, SCHOOL OF BUSINESS,UNIVERSITY OF CAPE COAST


Annual and quarterly returns are required to be filled by the petroleum contractor or operatorAnnual corporate tax should be filled four (4) months after the financial year of the operatorContent of Quarterly ReturnsDisclosure of taxable incomeDisclosure of tax payableNB: Ghana applies the ring-fencing rule. i.e. downstream revenue cant be used to offset upstream costsJOHN G. GATSI @ 2011 @ OIL AND GAS FINANCE &MGT, SCHOOL OF BUSINESS,UNIVERSITY OF CAPE COAST


No capital gain tax on disposal of depreciable assetsCapital gain tax is paid on chargeable assets such as good will and technical know howCapital losses are not carried forward and not allowed against gains from chargeable assetsCapital losses can not be regain from taxable incomeDividend income is not taxable under the PITLJOHN G. GATSI @ 2011 @ OIL AND GAS FINANCE &MGT, SCHOOL OF BUSINESS,UNIVERSITY OF CAPE COAST


Oil and Gas Finance Lectures 3

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