Germany's Oil and Gas Taxation: A Drill Down
A primer on Germany's Fiscal and Regulatory Framework for Oil and Gas
In today's competitive energy landscape, exploration and production (E&P) companies meticulously assess potential business opportunities, considering factors such as geological conditions, geopolitical stability, operational risks, and the fiscal and regulatory environment - we often differentiate between subsurface and above-ground risks. While the transition to renewable energy is gaining momentum, domestic oil and gas production remains a vital component of Germany's energy mix. Despite its relatively small scale, every barrel of oil and gas domestically produced contributes to the country's energy security, please refer to my previous article.
Compared to many other countries, Germany's fiscal regime offers a favorable environment for E&P investments, although certain challenges and uncertainties persist1. The fiscal take in Germany, measured as a percentage of gross revenues, generally ranges from 20% to 40%. However, this can vary significantly depending on the state, with Schleswig-Holstein having the highest fiscal take, please refer to my simplified cash flow in the spreadsheet2.
While Germany's fiscal framework remains relatively favorable for E&P activities, several factors can deter investment. The complex licensing process, coupled with the limited size of oil and gas discoveries, presents significant challenges for operators. The ONE-Dyas saga regarding the development of the GEMS project3 underscores the bureaucratic obstacles and regulatory uncertainties that can arise, see the recent production permit awarded by LBEG4 and its history5. Furthermore, the potential fiscal instability such as changes in royalty rates, as evidenced by the Wintershall and DEA (eventually these companies merged to WintershallDEA before being acquired by Harbour Energy) in Schleswig-Holstein, introduces an element of risk for E&P companies since projects are operational for decades, see6.
Environmental activism and local resistance have created obstacles for E&P projects in Germany, too. The shale gas moratorium7 fueled by "not in my backyard" attitudes, has limited development opportunities. The NO5-A gas field has been a focal point for protests, as evidenced by recent media coverage, see8. Furthermore, the Deutsche Umwelthilfe (DUH) has targeted both the GEMS project9 and the Mittelplate oil platform, challenging the adequacy of their environmental impact assessments, see recent objections10 and media articles11. The operating permit was recently renewed. Also, the recent acquisition of Mittelplate by Harbour Energy, a foreign E&P company, may present an opportune moment for environmental groups to advocate for stricter adherence to local regulations12. Germany's regulatory environment, although generally stable, can be subject to environmental disputes and legal challenges that may impact E&P projects. Legal disputes can be lengthy and costly, requiring significant financial resources and legal expertise. These disputes can easily delay the start-up of E&P projects by several years.
Germany's fiscal and regulatory framework for oil and gas production is relatively straightforward. The system is based on concession contracts, requiring companies to pay a license fee, royalties, corporate income tax, and trade tax. A unique feature of Germany's royalty system is that certain operational expenditures can be deducted from gross revenue before calculating royalties.
Governing body: The German Federal Ministry for Economic Affairs and Climate (BMWK)13 oversees the extractive resources sector.
Federal mining act: The Federal Mining Act14 serves as the primary legal framework for Germany's extractive resources sector.
Regulator: State authorities, mining and geological authorities, are responsible for overseeing mining activities in Germany. Hydrocarbon exploration and exploitation in Germany's exclusive economic zones are overseen by the Federal Agency for Nature Conservation (BfN) and the Federal Institute for Geosciences and Natural Resources (BGR), with additional support by LBEG.
Concession contract: Germany's concession contracts for oil and gas exploration and production involve royalty and tax payments.
Royalty: Germany's Federal Mining Code establishes a baseline royalty rate of 10% for oil and gas production. However, individual states have the flexibility to adjust this rate, leading to a diverse range of royalties across different assets. Royalty rates can range from 0% to 40%, with variations between oil and gas. The Mittelplate field generally faces the highest royalty rates. It's important to note that royalty rates are not fixed and are subject to periodic reassessment, introducing fiscal uncertainty. Considering that E&P projects typically have a lifespan of 10 or more years, this can create significant challenges in project planning and economic evaluation. For a detailed analysis of German royalty rates, please consult the BVEG report15.
License fee: Germany imposes a license fee on oil and gas exploration and production activities. The fee is determined by the size of the exploration or production area and can vary between 0 and 100 EUR per square kilometer. In general, costs are negligible.
Corporate Income Tax (CIT): The corporate income tax (CIT) in Germany is 15%, with an additional 5.5% solidarity surcharge, resulting in an effective tax rate of 15.825%.
Trade Tax: The trade tax in Germany is a local levy imposed on businesses operating within a municipality. The tax rate varies between municipalities and is calculated based on 3.5% and a multiplier, typically between 200% (minimum) and 600%. Worth noting there is a tax exemption amount, though it is a small amount compared to E&P revenues.
Depreciation: straight-line method. The depreciation period of tangible assets is calculated according to the estimated useful life of the asset, often negotiable and accelerated.
Loss Carry Forward (LCF): In Germany, losses incurred by a company can be carried forward indefinitely for tax purposes. his means that if a company experiences a loss in one year, it can offset that loss against future profits to reduce its tax liability. Additionally, assets are not ring-fenced, allowing companies to offset payable taxes against tax losses from other operations.
Carbon Tax: Germany has implemented a comprehensive carbon pricing approach, combining the European Union Emissions Trading System (ETS) with a national carbon tax. Currently, only Scope 1 and 2 emissions are subject to taxation. While processes like steam flooding in Emlichheim are highly carbon-intensive, other hydrocarbon production with a high degree of electrification have a lower carbon footprint. This makes the financial impact of carbon taxation significantly asset-dependent.
EU ETS: As a member of the EU, Germany participates in the ETS. This market-based system allows companies to buy and sell carbon permits, creating a financial incentive to reduce emissions. The current carbon price under the ETS is around €65 per ton of CO2 equivalent.
National Carbon Tax: In addition to the ETS, Germany has introduced a national carbon tax. This tax directly imposes a cost on carbon emissions, providing a clear financial signal for businesses and consumers to reduce their carbon footprint. The national carbon tax was introduced in 2021 with an initial rate of €25 per ton of CO2 equivalent and has been gradually increasing. Currently, the tax stands at €30 per ton, and the government plans to continue raising it in the future to incentivize emissions reductions.
Fiscal incentives: Companies that invest in R&D activities related to E&P can receive tax credits to offset their R&D expenses. The government may provide support for the development of necessary infrastructure
Having recently relocated to Malaysia, I've been delving into the intricacies of the country's oil and gas regulatory framework. My upcoming article will explore the key aspects of Malaysia's fiscal regime, licensing requirements, and environmental regulations that impact the oil and gas industry. Beyond the traditional energy sector, I'll also discuss Malaysia's energy transition and the emerging renewable energy sector.
Image generated with Leonardo.ai16
The excel is simplified, so please take it with a grain of salt: Fiscal Model Germany https://www.dropbox.com/scl/fi/i1nwfphzwt4yi80argkls/2024-10-19_Fiscal_Model_Germany_v01.xlsx?rlkey=jg7mi1nn96543hqium8ne322p&st=c4419atx&dl=0