Govt withdraws tax benefit for oil, gas extraction
Oil and gas companies previously enjoyed a tax waiver on their extraction expenses, known as a depletion allowance. However, this benefit has been removed in the finance bill for the fiscal 2024-25, which was presented in parliament on 6 June
The government has withdrawn depletion allowances for oil and gas extraction companies starting in the next fiscal year as part of its efforts to increase revenue collection.
Oil and gas companies previously enjoyed a tax waiver on their extraction expenses, known as a depletion allowance. However, this benefit has been removed in the finance bill for the fiscal 2024-25, which was presented in parliament on 6 June.
Earlier, the International Monetary Fund (IMF), in its tax expenditure report for Bangladesh, recommended ending the waiver as part of its prescription to increase the tax-GDP ratio of the country.
Industry insiders have said if the parliament passes the bill, it will frustrate the government's extraction plans, as the move will increase the tax burden on those companies.
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They further emphasised that this could lead to a greater reliance on liquefied natural gas (LNG) imports to meet the growing demand for gas amidst a shortage of foreign currency.
Most of the international oil companies are either owned by governments or their taxes are payable to governments.
Ayub Khan Chowdhury, a former director of Petrobangla, said, "We have no idea why the tax benefit for oil and gas extraction companies is withdrawn."
He further said that if the parliament approves this proposal, that will double the extraction costs.
A senior official of the National Board of Revenue (NBR) said that if the parliament approves this proposal, it would help them realise another Tk3,000 crore in revenue from this sector.
The official mentioned that they are under pressure to increase the tax-to-GDP ratio revenue to meet the conditions set by the IMF as part of its $4.7 billion loan package.
Snehasish Barua, partner at Snehasish Mahmud & Co, a leading chartered accounting firm, told TBS that the proposed budget has withdrawn depletion allowance for oil and gas companies.
According to industry insiders, there are two types of oil and gas extraction contracts in Bangladesh: rental payment contracts, under which the government bears all expenses; and production sharing contracts, under which companies carry out drills at their own cost.
When successful, these companies can claim up to 80% of the resources as their extraction costs, which are waived from taxes as a depletion allowance. They share the remaining amount with the government as their profit.
In response to how this will affect oil and gas companies, Snehasish Barua said the depletion allowance is calculated from either 50% of the annual profit or 15% of the wellhead value, whichever is lower.
The wellhead value is calculated by multiplying the total delivered quantity by the unit price for that year. He added, "Most of the international oil companies are either owned by governments or their taxes are payable to governments."
Effectively, the Power, Energy, and Mineral Resources Ministry will have to bear the expenses of the increased tax, which ultimately flow to the Finance Ministry, said the chartered accountant.
He added that Petrobangla will likely be burdened with this additional tax.
To address soaring gas demand and a desire to reduce dependence on expensive LNG imports amid dollar shortage, state-owned Petrobangla has laid out an ambitious plan to significantly boost domestic gas production, which includes drilling 100 new and old wells between 2025 and 2028.
Petrobangla is currently implementing another project for drilling 48 exploratory, development, and work-over wells to boost gas production by an additional 618mmcfd. Of these wells, the drilling of 23 will be handled by the state-owned Bangladesh Petroleum Exploration and Production Company Ltd (Bapex), while work on the remaining 25 will be outsourced.
According to Petrobangla, the country's gas demand is around 4,000 million cubic feet per day (mmcfd), but the average supply is only 2,700mmcfd, including 644mmcfd from imported liquefied natural gas (LNG), resulting in a shortfall of approximately 1,300mmcfd.
Petrobangla foresees gas demand rising to 6,655mmcfd by 2029-30 with a projected supply of 4,352mmcfd, underscoring an urgent need for action. To bridge this gap, the government is prioritising domestic gas production, investing in onshore and offshore projects, as detailed in a Petrobangla document.
