Oil Search: Effective Tax Rate for 2010 Financial Year (Papua New Guinea)

Further to the other guidance provided to the market in Oil Search’s 2010 fourth quarter report on 25 January 2011, Oil Search advises that its 2010 full year effective tax rate is expected to be approximately 35%, compared with the statutory rate of 50% applicable to oil operations in PNG. The effect of the lower tax expense will be to materially increase the net profit after tax for the financial year ended 31 December 2010.

The lower effective tax rate is primarily due to the once-off restatement of the oil fields’ deferred tax balances, resulting from the PNG LNG Project. This restatement will be reported as a significant item.

Following achievement of Financial Close on the PNG LNG Project, the Company’s deferred tax balances have been reviewed. In accordance with Oil Search’s accounting policies and IAS 12, future temporary differences are required to be measured at the tax rates expected to apply at the time when the associated asset is realised or liability is settled. As such, the assessment has been conducted against the business plan outcomes from the Strategic Review which has just been completed by the Company.

The PNG LNG Project will result in the extension of a number of the oil field lives and ultimately the conversion of these fields from predominantly oil to predominantly gas production at different points in the future. The outcome is that these fields will move from the current tax rate of 50% applicable to oil operations into the gas tax regime of 30% at the time the fields start to sell gas. This has resulted in a net credit to deferred income tax expense, reducing the 2010 effective tax rate to approximately 35%.

As this restatement of the deferred balances to the 30% rate is an accounting adjustment, the actual amounts of income tax payable will not change in the near term.

The Company’s financial results for the year ended 31 December 2010 will be released to the market on 22 February 2011. The above information is subject to completion of the financial statements, conclusion of the year end audit taking place and the Board’s review and approval of the statements.

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Source: Oil Search, February 15, 2011;