Govt and oil companies at loggerheads

Press, 18 October 1976, Page 5

Govt and oil companies at loggerheads

From

OLIVER RIDDELL

Wellington The disagreement between the Government and the oil companies over the Government’s proposed levy of $3 a barrel of domestically produced oil is but one of four major disagreements between them.

The other three are about the recovery of future exploration costs, control of future production, and the desirability of having future pricing guidelines. Discussions about the levy have already been held between the companies and the Acting Prime Minister (Mr Tal-

boys), who has indicated that the Government might amend the levy. The levy was supposed to catch “windfall” profits made by the companies as a result of the increase in the price of oil, but the companies considered it a disincentive to locally produced energy.

The Government has also been seeking to gain a 51 per cent controlling share in any future production, written into the terms of any new licences for exploration. Control is held 50-50 for the present off-shore Maui field, but the Government wants control to be 51-49 in its favour in future.

The companies have made a counter-offer of 60-40 control in their favour, and point to the

British situation, where this ratio applies, as their justification. The Government’s package offer for new e xploration licences is to reduce its participation in the cost of exploration from the 40 per cent it pays at present to nothing, and for 51 per cent control instead of 50.

Also, under the present arrangement, the Government allows all parties to exploration costs to recover those costs as a first charge on production before the agreed price comes in at the agreed ratio. Thus, the companies get 60 per cent and the Government 40 per cent until the costs are recouped; and then profits are shared 50-50 as per control.

Under the new proposals, the Government intends to end the concept of preferential recovery of costs, while at the same time withdrawing from the costs of exploration. The companies have so far declined to comment on the Government’s decision to withdraw from involvement in exploration. They consider that it is the Government’s prerogative to act as it sees fit in the best interest of the taxpayers when considering new agreements. But the companies still want to recover their own exploration costs; and in the case of the off-shore Maui field, these costs are already estimated at SBOOM. The companies also want to recover a multiple of their costs, so that they can recoup in real terms and not just in simple ones. They base this claim on the risks they have taken, which will be greater in future if they pay all the exploration costs, and on the depreciation of currency in the period between capital outlay and getting a return. The companies expect to make a profit on the field, and so they do not require a profit on the outlay, just recoupment. Control of 51 per cent would give the Government total control of production, the companies consider, but they regard themselves as much more expert in oil production than the Government. They also consider a minority control would give them only the choice of accepting Governmental decisions or cutting their losses and getting out. They also want provision in any licence terms for arbitration,, but the Government has not agreed to this so far, “on the ground that arbitration is not a satisfactory way of doing business,” according to one oil industry source.

It is believed that all the companies involved in oil exploration * — Shell-BP-Todd, Hunt, Phillips, and Aquitaine — have told the Government that they are not prepared to take out new licences under the proposed terms. These disagreements refer only to future licences, and may be just the first stage in a general jockeying for position; but the $3 a barrel levy has been imposed on existing production or on production under licences which have already been issued. The companies consider it a unilateral action by the Government to vary the terms of the licences as they apply to royalities, and therefore possibly make them illegal and capable of restraint in the courts, unless the Government takes the extreme step of varying the licences retrospectively in legislation. The companies consider this unlikely, although there is a precedent.

After World War 11, the British Government froze the assets of Burma Oil retrospectively, to avoid paying the millions of pounds of compensation due to the shareholders.

But the companies also object to the levy on the more general ground that it is a disincentive to exploration and to the development of locally produced energy.