Tax reform needed in oil sector

  • Business
  • Friday, 15 Aug 2003


REFORM is urgently being sought in the tax and incentive regimes of the Malaysian oil and gas industry to encourage deepwater exploration and the greater use of “next generation” technology.  

An industry tax expert has called on the government to consider more tax breaks and a simplified tax structure for the sector in its budget next month. 

Anand Chelliah

Such changes would attract the right investments in upstream exploration to reverse the trend of Malaysia’s dwindling oil reserves and help the government secure future oil revenue flows, said Anand Chelliah, head of tax at the energy and utilities group of PricewaterhouseCoopers (PwC). 

He said the government could consider abolishing the 10% export duty on crude oil, reducing the rate of petroleum income tax for deepwater exploration and “next generation” technology investments, and simplifying withholding tax processes for industry subcontractors. 

“The petroleum tax structure is really due for a re-examination,” he said, adding that there had been no changes for five years since a 2% cut in petroleum income tax in 1997 brought the rate down to 38% from 40%.  

Anand was speaking to Starbiz in an interview ahead of a PwC-organised oil and gas service contractors' meeting in Kuala Lumpur today to discuss tax and legal issues affecting industry players. 

PwC advises the majority of the large global oil companies. 

“We need more incentives as sweeteners,” he said of a sector where huge investments are often accompanied by equally high risks. “Tax breaks will make it more feasible to employ next generation technologies to do the job.” 

Anand said investment in deepwater exploration particularly “should be singled out and given special treatment immediately” by the government due to the urgency of finding new sources of oil. He suggested an income tax rate of 30% for deepwater exploration and 35% for other next generation technology investments could prove attractive enough in investment returns for oil firms to start looking here.  

The country's oil and gas sector has recently overtaken manufacturing as its biggest export earner and foreign direct investment recipient, and players in the industry are among the Inland Revenue Board’s largest taxpayers, and thus the government's single largest income source from the private sector.  

Industry analysts have estimated that between RM30bil and RM50bil worth of contracts could be on offer in oil and gas activities over the next five years. 

In addition to Petroliam Nasional Bhd, all of the world's largest oil companies, the so-called “super-majors” like Exxon-Mobil, Shell, BP-Amoco and Chevron-Texaco operate in Malaysia, together with many “independent majors” in specialist areas such as exploration and rig construction. 

Supporting them are a growing number of local oil and gas contractors, including some listed on the KLSE like Scomi Bhd, Crest Petroleum Bhd and Petra Perdana Bhd. The huge deepwater oil find last year 150 km off Sabah, dubbed the Kikeh field by independent major Murphy Oil, with a recoverable reserve of up to 700 million barrels of crude oil or 21% of Malaysia's current reserves, sparked renewed interest in the sector. 

Without Kikeh's discovery, the country would have become a net oil importer by 2007 and its reserves expected to be fully depleted in less than 15 years. 

Analysts believe that exploiting other deepwater oil fields like Kikeh, which is located some 1.3 km under the South China Sea, could help to boost the country's oil reserves but generating sufficient interest for foreign oil prospectors to do so would need support from the government. 

Anand said “support” measures such as investment allowances, tax holidays and reduced tax rates “will not result in a significant loss of revenue for the government”, adding that any loss would be more than compensated by the multiplier effects of higher investments and larger revenues in the future.  

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