Oil exploration negotiations between Chevron Corp and the government are currently stalled over contradictions between a contract signed by both parties in 2002 and the country’s current tax law, according to sources with knowledge of the discussions.
The sources said that Chevron’s original contract was drafted using regulatory documents from 1991 that do not comply with Cambodia’s 1997 law on taxation.
According to the tax law, Chevron should pay income tax of 30 percent on its earnings. However, Chevron’s 2002 contract with the government is based on petroleum industry regulations drafted in 1991 which state that oil companies should pay just 25 percent tax on income, according to the sources.
There are also other taxation issues that are raising questions about how compliant with the 1997 law Chevron’s contract with the government is, including shareholder dividends.
The 1997 tax law states that a tax on dividends to shareholders would be paid back to the company. However, under a 2003 amendment to the 1997 law, dividends to shareholders are subject to a 14 percent levy. What is more, in January 2010 the government also passed a subdecree stipulating that all crude oil exports would be subject to a 10 percent tax.
While the details of Chevron’s contract with the government are a closely guarded secret, four sources with knowledge of the negotiations said the issues on taxation had slowed Chevron’s plans to make a final investment decision on the project in Cambodia’s offshore block A in the Gulf of Thailand.
Last year, Chevron announced that it would make a final investment decision on block A before the end of 2011, but that has still not materialized.
“The government and Chevron have now been working on how to give effect to the contract keeping in mind the tax laws,” said one of the sources with knowledge of Chevron’s contract.
“Depending on how this all plays out, this could affect the [petroleum] investment climate.”
Gareth Johnstone, Asia Pacific region spokesperson for Chevron, said only that the talks were still ongoing and progressing towards a final agreement on the terms and conditions of the project.
“We are continuing to work with the Royal Government of Cambodia to move the Block A project towards a final investment decision,” Mr Johnstone said in an email.
Diep Sareiviseth, spokesman for the Cambodian National Petroleum Authority (CNPA), the government body tasked with overseeing the Chevron deal, declined to provide details on the state of negotiations but said that the government was “committed” to the project.
“Our negotiation with Chevron is an ongoing process, CNPA and Chevron is working tirelessly to move this project forward,” he said in an email. “Our objective and target is to get that production onstream as soon as possible.”
“We are committed to this project and…will do our utmost best to accommodate the investors,” he added.
Haggling over the amount of tax Chevron pays the government is likely being complicated by doubts over Block A’s long-term profitability.
According to a diplomatic cable from the US Embassy in Phnom Penh published by the anti-secrecy organization Wikileaks last year, Chevron’s analysis of its Block A exploration area had shown that it is “probably not even profitable if exploited on its own.” The cable quoted Gerry Flaherty, Chevron’s exploration manager at the time, as saying that Chevron estimated there to be 500 million barrels of oil in Block A, but with possible recovery rates of only 10 to 20 percent of that amount.
A second source familiar with the negotiations said the future of the entire deal was still in the balance: “If the fiscal matters make the development noncommercial, it will not go ahead anyway.”