Effect on investment decisions sliding scale profit

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Effect on Investment Decisions Sliding scale profit oil split, especially if linked to R-Factors or, even better, to the return on investment, are favorably considered by investors as they lower the project specific risk by introducing flexibility in the fiscal package to suit the actual profitability of the particular project. Because of their flexibility, these types of arrangement are less likely to discourage the development of marginal fields. 92 Profit oil applies to contractual systems. 93 This concept corresponds to the taxable income in concessionary systems and to the service fee in service contracts. The difference is linked to the ownership of hydrocarbons (at the delivery point in production sharing contracts, at wellhead in concessionary systems. In pure service contracts all production belongs to the government). 94 Approximately 80 percent of the profit oil split around the world has a sliding scale of some sort (D. Johnston).
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Table 19. Foreign Exchange Controls How do they work? Normally, investors are allowed to hold foreign exchange accounts offshore where they can earn hard currency based interest. They can receive and make payments related to the project directly offshore without the obligation to repatriate the proceeds in the country of operation. Conversion to local currency is normally limited to the amount needed to cover domestic expenditure obligations, including tax payments. Advantages and Disadvantages to Host Governments There are no particular disadvantages to government that apply limited foreign exchange controls, as controls over the convertibility of currencies have become less dominant than in the past. To satisfy statistical needs, companies are normally asked to report all currency movements to the central bank. To guarantee domestic expenditure obligations, performance bonds and similar guarantees are equally effective and less costly to investors. In countries that apply strict foreign exchange regulations, petroleum contracts normally grant exemptions to oil and gas companies. This is because oil and gas normally is sold on international markets, and the proceeds of sale are often pledged as security for repayment of project loans. Effect on Investment Decisions In cases where investors are required to surrender their foreign currency to the central bank at the time of export and repurchase the same at official rates to satisfy domestic project obligations, the spread between buying and selling rates (assuming no other restriction) increases the cost of doing business. Restrictive foreign currency regulations contribute to increasing the perception of sovereign risk, thus impacting a project’s net present value. Table 20. Environmental Taxes and Bonds, and Other Performance Bonds How do they work?
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  • Winter '14
  • Bijay K Behra
  • host government, fiscal systems, world bank working

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