Cost Oil and Profit Oil Sharing Regime of Albania Free Exploration Blocks, Lorenc Gordani | Tuesday, June 30, 2015AEI Updates June 2015Posted by Adv. Lorenc Gordani, PhD Tue, June 30, 2015 14:18:14
Albania has announced the open tender for the Areas 4, 5 and Dumre, C and Panaja with deadline of application 15.07.2015. Meanwhile for the onshore and other offshore Areas, due to the consolidation of seismic data, to a postponed period. The "Petroleum Law", No. 7746, date 28.07.1993, authorizes the Ministry to enter into a Production Sharing Agreement (PSA).
According to "Petroleum Law", the Production Sharing Agreements PSA regard the Cost Oil and Profit Oil Sharing regime establish by first that the exploration expenditures and capital expenditures are recoverable only in the case of a commercial discovery but not before the start-up of production. Operating expenditures are recoverable during the year in which they are incurred. Reasonable and necessary administrative expenditures of the Contractor are recoverable.
A negotiable set of a sliding scale of daily production for the part of oil referred to as “profit oil” can be used to share the profit. Based on that model, the oil from which costs are recovered is referred to as "Cost Oil". The remaining part of production, which is referred to as "Profit Oil" is shared between National Agency of Natural Resources and the Contractor according to the sliding scale (bbl/day);
Or an "R” factor model can be also used to Profit Share. The "R” factor is defined as the ratio between the cumulative revenues of Contractor reduced by cumulative tax assessed on Contractor and the cumulative costs and expenses incurred in Petroleum Operations. Based on different negotiated “R”-factor values, after the Cost Oil is recovered, the remaining part of production, which in this case is referred to as “Excess Cost Oil”, is shared between National Agency of Natural Resources and the Contractor.
The Contractor is subject to tax on profit, according to the Law No. 7811, April 12, 1994, “On approval of Decree No. 782, February 22, 1994, "On the fiscal system in the hydrocarbons sector (Exploration-Production)", and the Royalty according to the Law No. 9975, July 28, 2008, “On the National Taxes”. The tax is at the rate of 50% of the realized profit and the Royalty is 10% of sales revenues. In compliance with the above-mentioned Law, The National Agency of Natural Resources takes the Government's tax and/or its share of profit oil in cash.
The Contractor shall have the right to receive and retain abroad the proceeds from its export sales to the extent not required to meet on a current basis its local currency costs in Albania. The Contractor shall have the right to convert foreign currency into local currency at the generally applicable rate of exchange for commercial transactions.
Other miscellaneous prevision regard the Contractor and its sub-contractors are allowed to import into Albania all equipment and materials required for use in petroleum operations provided that National Agency of Natural Resources has certified that equipment and materials are to be used solely in petroleum operations. By both, Law No. 7811, April 12, 1994, and Presidential Decree No. 1510, June 28, 1996, the Contractor and his sub-contractors are exempted from the customs and VAT duties and obligations either for the imported goods and services or services provided by the local market.
The Contractor may export the share of production to which he is entitled. The Contractor may assign all or part of its interest under the contract to any affiliate or third party, which assignation is subject to a guarantee for the performance of Contractor's obligations to be submitted by the assignee, as well as subject to the consent of the National Agency of Natural Resources.
The petroleum agreement and petroleum operations are governed by the laws of Albania and the generally accepted practices of International Oil Industry. Arbitration shall be in accordance with the Uncitral arbitration rules, preferably under English Law. All international oil industry investments are fully protected (as are all foreign investors) pursuant to Law No. 7764, November 22, 1993, "On Foreign Investments".