Oil, Gas, and Mining Fiscal Terms by Revenue Watch Institute

Sunday, November 27, 2011
What are best practices for fiscal terms?
Since each country is characterized by variations in economic priorities, administrative capacities, mineral/petroleum endowments, and levels of political risk, it is impossible to identify one type or mix of fiscal instrument as best for all countries across the board.  But there are certain considerations that governments should include in the design of fiscal regimes:
  • The fiscal regime for mining or petroleum should be clearly established by laws and regulations that should be readily accessible to the public.  Minimizing parties' discretion to alter fiscal terms in individual contracts facilitates contract enforcement and the application of a coherent sector-wide fiscal strategy, and reduces the risk of corruption in negotiations.
  • Fiscal regimes are most stable when they contain progressive elements that give the government an increasing share of revenues as profitability increases.  This can be achieved using a variety of instruments, including progressive income taxes, windfall profits taxes, and variable-rate royalties.
  • When developing a fiscal regime, it is important to consider not only the total value over the life of a project, but also the timing of the expected revenue flows.  Some fiscal instruments – bonuses and royalties, for example – generate revenues to the state at an earlier stage than instruments such as profits-based taxes.  Governments should develop their fiscal regimes so as to generate revenues on a timeframe that corresponds with national development plans.
When analyzing the impact of a country’s fiscal terms on revenue generation, there are several potential loopholes that bear close monitoring:
  • Transfer Pricing.  An integrated international company may use sales among various subsidiaries as a means to reduce its fiscal obligations within a particular country.  A sale of mineral or petroleum output from one subsidiary to another at a price under the fair market value may serve to reduce the revenue the company reports to the government and thus limit the royalty or tax payments it owes.  Similarly, by purchasing a good or service from a related company at an inflated price, a company can raise its reported costs, thereby increasing deductions and decreasing income tax liabilities.  In order to limit transfer pricing abuse, a government should put in place a firm policy for the valuation of transactions between related parties, linking the prices utilized for revenue-collection assessments to objective market values wherever possible. 
  • Debt-to-Equity Ratios.  Interest payments on loans are often deductible for income-tax purposes.  Integrated international companies sometimes finance subsidiaries in extractive-rich countries with extremely high levels of debt in the form of related-party loans, which means that interest payments made from the subsidiary to its parent company are deducted, limiting the subsidiary’s tax liability.  Governments can combat this problem by capping the level of debt that an extractive subsidiary can take on in relation to its total capitalization, or by mandating that interest payments made on debt exceeding a certain debt-to-equity ratio will not be deductible for tax purposes.
  • Ring-Fencing Companies that have multiple activities within one country sometimes use losses incurred in one project (say, exploration expenses from a new mine that has not yet begun production) to offset profits earned in another project, thereby reducing overall tax payments.  Governments can overcome this situation through ring-fencing, the separate taxation of activities on a project-by-project basis, which facilitates the government collecting tax revenue on a project each year that it earns a profit.
  • Loss Carry-forwards.  Many tax systems allow a taxpayer to deduct losses generated in one year from income earned in a subsequent year.  Such a system takes into account the heavy up-front costs necessary to get a project off the ground.  But in an effort to prevent unfettered carry-forwards from overwhelmingly reducing long-term revenue generation, some governments have placed limits on them, restricting either the period of time that a loss can be kept on the books or the amount of income in any given year that can be offset by past losses.
  • Stabilization Clauses.  Petroleum and mineral contracts often have clauses that establish that the law that exists on the day that the contract is signed will govern the agreement, and that subsequent legal changes will not have any effect on the contract.  These clauses offer investors some assurance that they will not be subjected by legislative action to a drastically different fiscal regime than the one on which they based their decision to invest.  But in order to protect the interests of citizens, preserve state sovereignty, and remain flexible to changing economic and political circumstances, stabilization clauses should be narrowly drafted and limited to major revenue streams such as royalties, taxes, duties, and major fees.  Stabilization clauses should not freeze environmental, labor or other similar rules....

Astronomers Discover Complex Organic Matter in the Universe

Monday, October 31, 2011
HKU Astronomers Discover Complex Organic Matter in the Universe
 

  A spectrum from the Infrared Space Observatory superimposed on an image of the Orion Nebula where these complex organics are found.
 
 

A schematic structure of organic matter in the Universe. This typical structure is a mixture of ring-like (aromatic) and chainlike (aliphatic) chemical sites and contains about 100 carbon atoms.

   In today’s issue of the journal Nature, astronomers report that organic compounds of unexpected complexity exist throughout the Universe. The results suggest that complex organic compounds are not the sole domain of life but can be made naturally by stars.
   Prof. Sun Kwok and Dr. Yong Zhang of The University of Hong Kong show that an organic substance commonly found throughout the Universe contains a mixture of aromatic (ring-like) and aliphatic (chain-like) components. The compounds are so complex that their chemical structures resemble those of coal and petroleum. Since coal and oil are
remnants of ancient life, this type of organic matter was thought to arise only from living organisms. The team’s discovery suggests that complex organic compounds can be synthesized in space even when no life forms are present.
   The researchers investigated an unsolved phenomenon: a set of infrared emissions detected in stars, interstellar space, and galaxies. These spectral signatures are known as “Unidentified Infrared Emission features”. For over two decades, the most commonly accepted theory on the origin of these signatures has been that they come from simple organic molecules made of carbon and hydrogen atoms, called polycyclic aromatic hydrocarbon (PAH) molecules.         
  From observations taken by the Infrared Space Observatory and the Spitzer Space Telescope, Kwok and Zhang showed that the astronomical spectra have features that cannot be explained by PAH molecules. Instead, the team proposes that the substances generating these infrared emissions have chemical structures that are much more complex. By analyzing spectra of star dust formed in exploding stars called novae, they show that stars are making these complex organic compounds on extremely short time scales of weeks.
   Not only are stars producing this complex organic matter, they are also ejecting it into the general interstellar space, the region between stars. The work supports an earlier idea proposed by Kwok that old stars are molecular factories capable of manufacturing organic compounds. “Our work has shown that stars have no problem making complex organic compounds under near-vacuum conditions,” says Kwok. “Theoretically, this is impossible, but observationally we can see it happening.”
   Most interestingly, this organic star dust is similar in structure to complex organic compounds found in meteorites. Since meteorites are remnants of the early Solar System, the findings raise the possibility that stars enriched the early Solar System with organic compounds. The early Earth was subjected to severe bombardments by comets and asteroids, which potentially could have carried organic star dust. Whether these delivered organic compounds played any role in the development of life on Earth remains an open question.
 

Russian-Ukrainian theory of deep, abiotic petroleum

Thursday, October 27, 2011
Russian-Ukrainian theory of deep, abiotic petroleum

Oil is NOT a fossil fuel


by Peter J. Morgan
    We all grew up believing that oil is a fossil fuel, and just about every day this ‘fact’ is mentioned in newspapers and on TV. However, let us not forget what Lenin said – “A lie told often enough becomes truth.” It was in 1757 that the great Russian scholar Mikhailo V. Lomonosov enunciated the hypothesis that oil might originate from biological detritus. The scientists who first rejected Lomonsov’s hypothesis, at the beginning of the nineteenth century, were the famous German naturalist and geologist Alexander von Humboldt and the French chemist and thermodynamicist Louis Joseph Gay-Lussac, who together enunciated the proposition that oil is a primordial material erupted from great depth, and is unconnected with any biological matter near the surface of the Earth.


    With the development of chemistry during the nineteenth century, and following particularly the enunciation of the second law of thermodynamics by Clausius in 1850, Lomonosov’s biological hypothesis came inevitably under attack. In science, a hypothesis is merely somebody’s attempt to explain something. It is merely that – an attempt. In the scientific method, a hypothesis is also an open invitation for somebody else to discredit it by using physical evidence to demonstrate that the hypothesis is flawed, or incorrect – that is how scientific knowledge is advanced. Einstein is reputed to have remarked that just one fact was all that was needed to invalidate his theory of relativity.
    

   The great French chemist Marcellin Berthelot particularly scorned the hypothesis of a biological origin for petroleum. Berthelot first carried out experiments involving, among others, a series of what are now referred to as Kolbe reactions and demonstrated the generation of petroleum by dissolving steel in strong acid. He produced the suite of n-alkanes and made it plain that such were generated in total absence of any “biological” molecule or process. Berthelot’s investigations were later extended and refined by other scientists, including Biasson and Sokolov, all of whom observed similar phenomena and likewise concluded that petroleum was unconnected to biological matter.
    

   During the last quarter of the nineteenth century, the great Russian chemist Dmitri Mendeleev also examined and rejected Lomonosov’s hypothesis of a biological origin for petroleum. In contrast to Berthelot who had made no suggestion as to where or how petroleum might have come, Mendeleev stated clearly that petroleum is a primordial material which has erupted from great depth. With extraordinary perception, Mendeleev hypothesised the existence of geological structures which he called “deep faults,” and correctly identified such as the locus of weakness in the crust of the Earth via which petroleum would travel from the depths. After he made that hypothesis, Mendeleev was abusively criticised by the geologists of his time, for the notion of deep faults was then unknown. Today, of course, an understanding of plate tectonics would be unimaginable without recognition of deep faults.

    Soon after the end of World War II, the Soviet dictator, Stalin, realized that the then Soviet Union needed its own substantial oil reserves and production system if it was ever again called upon to defend itself against an attacker such as Hitler’s Germany. In 1947, the Soviet Union had, as its petroleum ‘experts’ then estimated, very limited petroleum reserves, of which the largest were the oil fields in the region of the Abseron Peninsula, near the Caspian city of Baku in what is now the independent country of Azerbaijan. At that time, the oil fields near Baku were considered to be “depleting” and “nearing exhaustion.” During World War II, the Soviets had occupied the two northern provinces of Iran, but in 1946, they were forced out by the British. By 1947, the Soviets realised that the American, British, and French were not going to allow them to operate in the Middle East, nor in the petroleum producing areas of Africa, nor Indonesia, nor Burma, nor Malaysia, nor anywhere in the Far East, nor in Latin America. The government of the Soviet Union recognised then that new petroleum reserves would have to be discovered and developed within the U.S.S.R.
    

   Stalin’s response was to set up a task force of top scientists and engineers in a project similar to the Manhattan Project – the top-secret US program to develop the atom bomb during WWII – and initially under the same secrecy, and charged them with the task of finding out what oil was, where it came from and how to find, recover and efficiently refine it.

   In 1951, the modern Russian-Ukrainian theory of deep, abiotic petroleum origins was first enunciated by Nikolai A. Kudryavtsev at the All-Union petroleum geology congress. Kudryavtsev analyzed the hypothesis of a biological origin of petroleum, and pointed out the failures of the claims then commonly put forth to support that hypothesis. Kudryavtsev was soon joined by numerous other Russian and Ukrainian geologists, among the first of whom were P. N. Kropotkin, K. A. Shakhvarstova, G. N. Dolenko, V. F. Linetskii, V. B. Porfir’yev, and K. A. Anikiev.
    

   During the first decade of its existence, the modern theory of petroleum origins was the subject of great contention and controversy. Between the years 1951 and 1965, with the leadership of Kudryavtsev and Porfir’yev, increasing numbers of geologists published articles demonstrating the failures and inconsistencies inherent in the old “biogenic origin” hypothesis. With the passing of the first decade of the modern theory, the failure of Lomonosov’s eighteenth century hypothesis of an origin of petroleum from biological detritus in the near-surface sediments had been thoroughly demonstrated, the hypothesis discredited, and the modern theory firmly established.
    

   An important point to be recognised is that the modern Russian-Ukrainian theory of abiotic petroleum origins was, initially, a geologists’ theory. Kudryavtsev, Kropotkin, Dolenko, Porfir’yev and the developers of the modern theory of petroleum were all geologists.
    

Their arguments were necessarily those of geologists, developed from many observations, and much data, organized into a pattern, and argued by persuasion.
By contrast, the practice of mainstream, predictive modern science, particularly physics and chemistry, involves a minimum of observation or data, and applies only a minimum of physical law, inevitably expressed with formal mathematics, and argued by compulsion. Such predictive proof of the geologists’ assertions for the modern Russian-Ukrainian theory of deep, abiotic petroleum origins had to wait almost a half century, for such required the development not only of modern quantum statistical mechanics, but also that of the techniques of many-body theory and the application of statistical geometry to the analysis of dense fluids, designated scaled particle theory.
    

   To recapitulate, Stalin’s team of scientists and engineers found that oil is not a ‘fossil fuel’ but is a natural product of planet Earth – the high-temperature, high-pressure continuous reaction between calcium carbonate and iron oxide – two of the most abundant compounds making up the Earth’s crust. This continuous reaction occurs at a depth of approximately 100 km at a pressure of approximately 50,000 atmospheres (5 GPa) and a temperature of approximately 1500°C, and will continue more or less until the ‘death’ of planet Earth in millions of years’ time. The high pressure, as well as centrifugal acceleration from the Earth’s rotation, causes oil to continuously seep up along fissures in the Earth’s crust into subterranean caverns, which we call oil fields. Oil is still being produced in great abundance, and is a sustainable resource – by the same definition that makes geothermal energy a sustainable resource. All we have to do is develop better geotechnical science to predict where it is and learn how to drill down deep enough to get to it. So far, the Russians have drilled to more than 13 km and found oil. In contrast, the deepest any Western oil company has drilled is around 4.5 km.
    

   A team consisting of Russian scientists and Dr J. F. Kenney, of Gas Resources Corporation, Houston, USA, have actually built a reactor vessel and proven that oil is produced from calcium carbonate and iron oxide, as detailed on the --
This is what Dr Kenney has to say about how he came to be involved:
“In the first instance, the articles on this” (his company’s website --) “are dedicated to the memory of Nikolai Alexandrovich Kudryavtsev, who first enunciated in 1951 what has become the modern Russian-Ukrainian theory of deep, abiotic petroleum origins. After Kudryavtsev, all the rest followed. Secondly, these articles are dedicated generally to the many geologists, geochemists, geophysicists, and petroleum engineers of the former U.S.S.R. who, during the past half century, developed modern petroleum science. By doing so, they raised their country from being, in 1946, a relatively petroleum-poor one, to the greatest petroleum producing and exporting nation in the world today. These articles are dedicated specifically to the late Academician Emmanuil Bogdanovich Chekaliuk, the greatest statistical thermodynamicist ever to have turned his formidable intellect to the problem of petroleum genesis. In the Summer of 1976, during the depths of the cold war and at immeasurable hazard, Academician Chekaliuk chose to respond, across a gulf of political hostility, to an unsolicited letter from an unknown American chief executive officer of a petroleum company headquartered in Houston, Texas. Thenafter and for almost fifteen years, Academician Chekaliuk was my teacher, my collaborator, and my friend. [JFK] 1. Kudryavtsev, N. A. (1951) Petroleum Economy [Neftianoye Khozyaistvo] 9, 17-29.”
   Needless to say, the last people to tell us the truth about oil will be the oil producers and oil companies, for they of course have a vested interest in perpetuating the myth that oil is a fossil fuel and that it will soon be exhausted, in order to ratchet up the price for as long as they can. And don’t look to the Russians to enlighten the world with the truth about oil either, for they are surely laughing now that the oil price is approaching $US150 a barrel.
    

   A US Public Service Radio interview with Dr Kenney may be heard on the --.
 

   Some may ask “How come all of this isn’t commonly known?” For the answer, one needs to consider what happened to Galileo when he first put forward the hypothesis that rather than the conventional wisdom that the sun revolved around the earth, the earth revolved around the sun. He was branded a heretic and locked up! You are invited to read an excellent article entitled “Cognitive Processes and the Suppression of Sound Scientific Ideas”, by J. Sacherman 1997, at --

       Some may say “Well, even if oil is a renewable resource, mankind should not burn it because the carbon dioxide so produced causes global warming.” My answer to that is that the idea that mankind’s production of carbon dioxide causes global warming is merely a hypothesis, and this has been thoroughly discredited by Prof. Robert Carter and numerous other scientists. You are invited to view a video of Prof. Robert Carter’s demolition of the “mankind’s production of carbon dioxide causes global warming” hypothesis -- where you will see Prof. Carter illustrate five examples of verifiable science that refute the hypothesis. Prof. Carter makes the point that truth in science is never decided by consensus, but if you prefer to believe the pronouncement by the United Nations Intergovernmental Panel on Climate Change (IPCC) that “2,500 scientists of the United Nation’s IPCC agree that humans are causing a climate crisis”, which is repeated ad nauseam by environmentalists, the press and governments around the world, including ours, then you are invited to read an article at -- where Tom Harris and John McLean tell the truth about this deception and point out that “an example of rampant misrepresentation of IPCC reports is the frequent assertion that ‘hundreds of IPCC scientists’ are known to support the following statement, arguably the most important of the WG I report, namely “Greenhouse gas forcing has very likely caused most of the observed global warming over the last 50 years.” In total, only 62 scientists reviewed the chapter in which this statement appears, the critical chapter 9, “Understanding and Attributing Climate Change”. Almost 60% of the comments received from the 62 expert reviewers of this critical chapter were rejected by the IPCC editors and 55 of the 62 expert reviewers had serious vested interest, leaving only seven expert reviewers who appear impartial. In my view, seven does not constitute “a consensus of the world’s scientists..” If it’s consensus you want before you decide on what the truth is, then follow the link to The National Post to read about the petition signed by more than 32,000 scientists, more than 9000 of whom hold PhDs. That’s consensus!

Deepwater Horizon Joint Investigation Team Final Report: Key Regulatory Implications

Tuesday, October 4, 2011
The JIT was formed on April 27, 2010, by the Departments of the Interior and Homeland Security to investigate the causes of the Deepwater Horizon explosion, loss of life, and resulting oil spill, and to make recommendations for safe operations of future oil and gas activities on the U.S. Outer Continental Shelf (OCS). The JIT held seven sessions of public hearings, received testimony from more than 80 witnesses and experts, and reviewed a large number of documents and exhibits pertaining to all aspects of the investigation. The report cam in 2 volumes with Appendices.

Volume I, includes findings on five aspects of the disaster under Coast Guard jurisdiction – including the explosions on the Mobile Offshore Drilling Unit (MODU) Deepwater Horizon; the resulting fire; evacuations; the flooding and sinking of the Deepwater Horizon; and the safety systems of the MODU and its owner, Transocean. The Coast Guard's Final Action Memo details actions directed by Adm. Papp, as a result of the JIT's work, reflecting the Coast Guard's commitment to all of those affected by this tragic yet historic event and underscoring its commitment to the stewardship of our maritime environment.
 
Volume II includes findings on the causes, both direct and contributing, of the Macondo blowout and the resulting explosion and fire aboard the Deepwater Horizon. The report(s) essenttially concludes that BP, Transocean and Halliburton’s conduct in connection with the Deepwater Horizon disaster violated a number of federal offshore safety regulations under BOEMRE’s jurisdiction. Recommendations for the continued improvement of the safety of offshore operations were made.The reforms that followed is said to have strengthened the regulatory requirements for Offshore E&P operations in the US/Gulf of Mexico from well design and workplace safety to corporate accountability.
 

These can be likened to the events that followed simmilar accidents/dissaters in the UKCS....


 

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