Many petroleum fiscal systems around the world

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Many petroleum fiscal systems around the world exhibit some form of flexibility. Very few of them effectively and efficiently target the economic rent, i.e. are neutral to investment decisions. Fiscal systems that use sliding scales based on daily or cumulative production tar- gets are insensitive to changes in prices and costs. So in a dynamic environment like the one that characterizes the oil industry, these systems are more likely to produce a misalignment of interests between the host government and the investors, as the recent surge in contracts renegotiations suggests. On the other hand, these systems are relatively easy to administer and may prove reasonably efficient in sharing the rent between the contractor and the gov- ernment when project uncertainty is low, especially if used in conjunction with price indices. R-Factor and RoR-based fiscal systems lower the project specific risk by introducing flexibility in the fiscal package to suit the profitability of the particular project. Because of their flexibility, these types of arrangement are more likely to encourage the development of marginal fields, or of complex projects with a long lead time for implementation. In addition, the use of R-factor and RoR-based systems normally lowers the break-even price of a project. This in turn makes these projects more attractive to the contractors and less risky as candidates for project financing. The choice of trigger rates and thresholds is a key issue for all fiscal systems. It is quite unlikely that a particular set of triggers or thresholds would be able to optimize the govern- ment take under all possible scenarios. In order to define relevant thresholds and triggers, the host government would need to make reasonable assumptions about the size and profile of a typical project, as well as to determine the typical variability in key project parameters. This would allow it to determine a representative distribution of R-factors, or RoRs, or other parameters chosen as thresholds and triggers, and to set appropriate floors and ceilings for such thresholds and triggers. The efficiency and neutrality of the fiscal system largely depends on how closely triggers and thresholds relate to the profitability of the underlying projects. In general terms, wide thresholds may not efficiently capture the project rent, and steep trig- ger rates may have distortive effects on investment decisions. The issue of government participation (the back-in option) in oil and gas exploration and production activities deserves special consideration. Nearly half of the countries around the world allow some form of participation through the NOC, the oil minister, or other gov- ernment entity. Countries that use PSCs are more likely to use government participation as means of rent extraction. Governments that allow participation may or may not reimburse exploration costs to the contractor. Those who do not, normally allow the contractor to recover expenses (its share and the “carried”) with a limited or unlimited carry forward.
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  • Winter '14
  • Bijay K Behra
  • host government, fiscal systems, world bank working

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