Debating taxing oil companies in Sudan

By Alsir Sidahmed

It is a sellers’ market, where producing countries are getting the upper hand.

November 5, 2007 — Last month, Ecuador raised the taxes on foreign companies to 90 percent from 50 percent of extraordinary profit above a set contractual bench market price. Russia managed to make use of changing oil market to take control of Sakhalin 2 project at the expense of a world oil major, Royal Dutch Shell.

It is almost a set practice, not restricted to what is currently known as oil nationalism. Back in 1975 and following the first oil shock, Britain introduced Petroleum Revenue Tax (PRT), where investment was treated as current cost and PRT has to be paid when accumulated cash turns into black. The PRT rate that was originally set at 45 percent was raised to 80 percent following the second oil shock and skyrocketing of oil prices after the Iranian Revolution. Even Norway is renegotiating its current contracts to get a piece of the windfall profit oil companies are currently enjoying.

Can Sudan do the same?

Egbert Wesselink, coordinator of the European Coalition on Oil in Sudan (ECOS), thinks Sudan can and should consider taxing oil companies so as to get part of windfall profit and spend on various areas from environment, to compensations to socio-economic development specially in areas affected by oil production.

But first there is a need to note that Sudan’s oil contracts were negotiated back in 1997 at the time oil prices were soft, a buyers’ market. Moreover, and later in the year, oil prices tumbled to below $12/barrel following a disastrous OPEC decision to raise output by 10 percent. Besides, Sudan was and still facing a boycott from western countries and their businesses. So it has to offer lucrative incentives to attract potential investors.

According to the Exploration, Production, Sharing Agreement (EPSA) stipulated by Wesselink’s paper, the profit oil is to split revenue between the government and companies at a rate of 80-20 percent favoring the government when production exceeds 50,000 barrel per day, which is the case now. And companies are not subject to taxes inside Sudan.

According to his calculation these companies namely CNPC, Petronas and ONGC, which replaced Talisman have netted between 1999, when oil started to be exported and 2005 a total of 4.7 billion euros out of their operations under Greater Nile Petroleum Operating Co.(GNPOC). And, given high prices, GNPOC profit for this year could range between $1.5 billion- $2 billion, while total oil revenue for the Government of Southern Sudan is estimated at $1.4 billion.

The main question raised is whether CPA will allow for such consideration. The answer is that CPA prohibits “renegotiation”, but there is a room for review, modification, revision and clarification. And such a process does not constitute a violation of CPA, he said.

Moreover, he thinks lifting tax exemption could be easier and more practical than re-negotiating the profit split between the government and foreign oil companies.

He concluded by pointing out that it will be costly, “to implement issues like compensation, local development and consultation. There is enough money for all that, but it is being taken out of the country.”

It is high time to engage in a serious debate about the whole issue.

Alsir Sidahmed, a free-lance journalist, media consultant and trainer. He wrote this comment exclusively for Sudan Tribune.com could be reached at: [email protected]