myanmar’s new foreign investment law, rules and notification with respect to energy matters james...


PerspectiveMyanmar’s New Foreign Investment Law (FIL) was passed on November 2, 2012. It replaces the MFIL of 1988. The rules and notification to this Law were issued on January 31, 2013Oil & gas is one of the industries listed in the State Owned Enterprise Law of 1989 (SOE Law). This means oil & gas is a monopoly of the state. With FIL approval comes a notification issued under the SOE Law to grant an exemption.

Foreign Investment Law--Perspective


FILDeals are done by a PSC signed between MOGE as owner and generally a branch of a foreign company. The branch now will be required to enter into a JOA with a local company approved by MOGE. According to MOGE recently, the percentage of the local party is fixed by negotiation.Article 10 i provides that an investment shall be in the form of a company. In fact, a review of the Rules suggests that a branch will be allowed as before.

FIL


Rule 34. If SOE law applies as in oil & gas, the FIL application is filed through the relevant ministry, not directly to the MIC. In this case MOGE submits the application to the MIC.Procedure based on above. Once a bidder is selected via the competitive bidding process:

Process under SOE Law and MFIL: Foreign company submits a “SOE proposal” to EPD. EPD submits the documentation (PSC, JOA) to the MOE, with its

comments Negotiation process, between the EPD and the foreign energy

company if MOE agrees Draft PSC agreed by both parties to be submitted to the Attorney

General's Office (AGO).

The new rules—Application procedure


MOGE submits an MIC proposal to the MIC as a promoter, accompanied by the final draft

MIC will evaluate the MIC proposal and approves the final draft in principal

MIC proposal and the final draft contract then be submitted to the Cabinet for final approval.

The approval of the parliament would be required under the FIL. After Cabinet and [the parliament] approves the contract, sign

PSC and JOA. MIC permit and Notification for exploration and production

issued under the SOE will then be granted to the foreign energy company,

Apply for a “permit to trade” (the Directorate of Investment and Companies Administration)

Registration of branch office by foreign company at DICA

The new rules—Application procedure

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• Rule 60—PSC will contain “construction period,” the period for drilling of well or wells.

• Rule 61—If construction period not met, permit can be revoked with no compensation.

• Schedule 1 to Rules: prohibitions for foreign investors—hand dug wells up to 1,000 feet, power plants less than 10 megawatts. 49-51 as decided by Parliamane on Friday.

Additional provisions in Rules


Requires EIA for all petroleum and natural gas exploration, drilling and production, likewise pipelines. The Environmental Conservation Rules, issued pursuant to the Environmental Conservation Law will include the requirements.

Notification


II Steps to DealBidding and Foreign ParticipationOnshore deals require a local energy company, which has been registered at EPD of MOE. According to an official of EPD, that an open tender for offshore blocks would be launched at the end of this month and, under such bidding process, offshore deals would also require a local partner. When and if it is lunched, tender procedures for offshore blocks will be published in state-owned newspapers, which is not available yet. Assuming tender procedures for offshore blocks is similar to that for onshore blocks, we have inserted procedural steps in next fews slides. There is no stipulation for the minimum or maximum percentage requirement. Thus the percentage of the deal is negotiable. EPD is not interested in what will be the ratio as long as a local company has the participating interest in the deal whereby the local company could obtain exploration technologies and experience from the international oil and gas deals. A PSC will be signed only between MOGE and a foreign energy company. The foreign energy company will be a contractor and operator. The foreign energy company and the local company will sign a MOU and then a Joint Operating Agreement (the "JOA"). The MOU and JOA will set forth, inter alia, the participating interest of the local company. The question as to whether local partners have to put capital or just get a carried interest will depend on negotiation. Both onshore and offshore deals under a PSC does not require to form a Joint Venture.

Local Partner, Bidding Process


EPD will insert an invitation for bids to conduct petroleum operations in offshore blocks in state-owned newspapers.

The bidder will have the following documents endorsed for authenticity by the Myanmar Embassy of country of incorporation: (i) a copy of Certificate of Incorporation, (ii) a copy of By-Laws or memorandum and article of association, (iii) a copy of Annual report, (iv) a copy of Financial Statement or Financial Report.

Prepare a Letter of Expression of Interest. Put the Letter of Expression of Interest and the documents

mentioned in above (b) in a sealed envelope superscripted “Confidential” “Myanmar Offshore Blocks Bidding Round-2012”

Send the envelope to Director General, EPD, MOE, Building No.6, Nay Pyi Taw, The Republic of the Union of Myanmar.

A short-list of bidders will be selected by the MOE.

Bidding Process


MOGE will give the short-listed bidders a “General Data Overview” presentation for Bidding Blocks.

EPD will explain the preferable “Standard Terms and Conditions” to the short-listed bidders.

EPD will give the short-listed bidders a list of local companies, which have been registered at the EPD.

Negotiate the terms of a MOU and the Joint Operating Agreement ("JOA") with the local partner.

Sign a MOU with the local partner. Prepare proposed terms and conditions for PSC. These are the negotiable terms. The bidder submit a proposal with proposed Terms and Conditions for PSC

together with the signed MOU with the local partner. The bidder can only bid for a maximum of 3 blocks.

The proposed Terms and Conditions will be assessed by EPD. The best offered Terms and Conditions will be selected for awarding blocks. The Model PSC will be provided to Awarded Potential Bidders.

Bidding Process continued




III. Tax on a dealRoyalties

Foreign energy company pays royalty in whole or in part, in cash or in kind, at the option of the government.

Royalty paid equal to 12.5% of the value of available petroleum

Available petroleum means all production minus petroleum used by the operator free of charge for production operations.

Example Whiteacre PSC

– Whiteacre PSC (Normally done quarterly – but for tax we will do this annually) • Offshore PSC• Year 4 (after tax holiday ends)• Producing Natural Gas for water

depths of more than 600 feet: – 600 MMCFD x 365 = 219000 MMCF – Gas used for production operation 500

MMCF per year– Available petroleum in year 4 is 219,000 –

500 = 218,500 MMCF – Royalty 12.5% of 218,500 MMCFD =

27,312 MMCFD

PSC WITH TAX EXAMPLE

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II. Cost Recovery Foreign energy companies recover all costs

and expenses of the petroleum operation. Cost petroleum: 1) costs and expenses of

exploration operations, (2) costs and expenses of development and production operations in development and production areas.

Not included in cost petroleum: outside of the production area, costs attributable to logistics, administration and design.

Maximum percentage of fixed available petroleum to be applied to cost petroleum from the contract area: 40% to 50% of production.

In practice, 40% and 50% is fixed on onshore blocks and offshore blocks respectively.

Percent may go to of 60% when the water depth is more than 600 feet.


– 219000 MMCF = rough value of available petroleum (US$ 2570 MMCF) = $562.83 million

– Let’s say total cost petroleum is US$500 million and this is the first year of recovery because of small production in earlier years

– 50% for offshore of 562.83 million is 281.41 million

– So, only 281.41 million available in year 4 as recovery of cost petroleum

– So US $ 281.41 can be recovered in this year.

– The rest (US $ 218.59 million ) can be recovered in future years.

– Costs outside of the production area, logistics, administration and design. Not recoverable (see below) Total: US $ 100 million

PSC WITH TAX EXAMPLE continued

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III. Signature Bonus

Foreign energy company: to pay signature bonus /production bonus, not recoverable as cost petroleum.

Signature bonus: a flat amount determined on a case-by-case base, based on MOGE's data on the particular block.

In practice, the signature bonus is between US$ one and fifteen million, depending on the block.


– Whiteacre PSC: Year 1 : Signature bonus : 3 million dollars

– Not recoverable as cost petroleum, but deductible as discussed later.


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IV. Data Fee

To obtain MOGE's data MOGE requires a data fee.

Example

– Whiteacre PSC : Year 1 :– Data fee : 250,000 dollars– Not includable as cost

petroleum. – Deductable as explained

later.


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V. Production Bonus

Example for natural gas: Upon approval of

development plan = US$1M

300 MMCFD = US$1 M to US$3 M

600 MMCFD = US$1.5 M to US$4 M

900 MMCFD = US$2M to US$5 M


-Producing 600 MMCF –Production Bonus is US$ 3 million


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V. Production Bonus

Example for crude oil: Upon approval of

development plan = US$1 M

25,000 BPD= US$2 M 50,000 BPD= US$3 M 100,000 BPD = US$4 M 150,000 BPD = US$5 M 200,000 BPD = US$10 M


– No oil production – Production bonus: 0


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VII. Allocation of Share Available Petroleum not taken for

the purpose of payment of Royalty or as Cost Petroleum is allocated between MOGE and the foreign energy company.

Examples of allocation of share are in the next two slides.

Example– Available Petroleum 218,500

MMCFD x 2570 = 562.83 million

562.83 minus royalty (12.5%)= 70.35million minus Cost Petroleum 281.41 million = 211.07 million

70% 30% (MOGE) (Contractor) 30% of USD 211.07 million is US $ 63.32

million


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Available Petroleum not taken for the purpose of payment of Royalty or as Cost Petroleum is allocated between MOGE and the foreign energy company.

For example:

Crude Oil (a) Available Crude Oil for water depths of 600 feet or less: MOGE’s Share Contractor’s Share 0 – 25,000 bbls/day 60% 40% 25,001 – 50,000 bbls/day 65% 35% 50,001 – 100,000 bbls/day 80% 20% 100,001 – 150,000 bbls/day 85% 15% > 150,000 bbls/day 90% 10%

PSC WITH TAX EXAMPLE continued Example : Allocation of Share

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Natural Gas

(a) Available Natural Gas for water depths of 600 feet or less: MOGE’s Share: 65% Contractor’s Share: 35% (b) Available Natural Gas for water depths of more than 600 feet: MOGE’s Share Contractor’s Share 0 – 300 MMcf/day 60% 40% 300-600 MMcf/day 70% 30% 600- 900 MMcf/day 80% 20%

PSC WITH TAX EXAMPLE continued Example: Allocation of Share

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Net taxable income – For the purposes of determining net

taxable income, the Contractor may deduct legitimate and reasonable expenses incurred for the purpose earning income under existing Myanmar Income Tax Laws. These include interest incurred by the Contractor to finance Petroleum Operations (to the extent not cost recoverable), and the data fee and bonuses paid by the Contractor .

– Corporate tax will be 25% on net taxable income.

Rate– US $ 63.32 million minus normal

business expenses yearly : US $ 22,000,000

– Minus Items not cost recoverable: – logistics administrative and

design outside production area:$ 10 million

– Data fee: $250,000– Signature bonus: $3 million– Production bonus $ 3 million– US $ 63.32 million minus all items

above= US $ 25.07 million x 25% (corporate tax rate)= US$ 6.2675 million in tax


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Subject to Myanmar Income Tax Laws of 1974 in respect to the filing of returns, tax assessments, and the keeping and showing of books and records.

Subject to income tax at the rate of 25% after enjoying tax exemption period, whether sales are on or off shore

Normally, MOGE discharges all other taxes imposed on the Contractor including import and export duties, customs duties, commercial tax and other duties levied on the materials, equipment and supplies imported into Myanmar.

INCOME TAX IN OIL AND GAS SECTOR

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Ministry of Finance and Revenue Notification № 121/2006

Income tax on capital gains in oil and gas sector Emphasize the words “by any means” foreign tier issue. Transfer of shares to be approved by MOGE

Up to 100 million : 40% Between 100 and 150 million : 45% 150 million above : 50%

Capital Gain Tax

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SERVICE OIL AND GAS: MATERIAL FOR OFF-SHORE PLATFORMS AND INSTALLATIONS

EPC with MOGE and foreign oil and gas companies Foreign Contractor, without having a legal presence in

Myanmar. Withholding tax 2% for all subsidiaries and MFIL branches.

3.5% for non MFIL branch and offshore company. Resident foreigners are subject to a 2% withholding and this

is credited toward overall tax payment Nonresident foreigners are subject to a 3.5% withholding and

this is treated as a final tax payment

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