Normally the investment risks are assumed by oil

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Normally, the investment risks are assumed by oil companies rather than the state/owner of the resource. In general terms, the higher the risk of investment activities in a country, the higher the portion of the rent received by the investor. 9 The fundamental difference between concessionary and contractual systems relates to the ownership of the natural resources: Under a concessionary system, the title to hydrocarbons passes to the investor at the borehole. The state receives royalties and taxes in compensation for the use of the resource by the investor. Title to and ownership of equipment and installation per- manently affixed to the ground and/or destined for exploration and production of hydrocarbons generally passes to the state at the expiry, or termination, of the con- cession (whichever is earlier). The investor is typically responsible for abandonment. Under a contractual system, the investor acquires the ownership of its share of production only at the delivery point. 10 Title to and ownership of equipment and installation permanently affixed to the ground and/or destined for exploration and production of hydrocarbons generally passes to the state immediately. Furthermore, unless specific provisions have been included in the contract (or in the relevant legislation) the government (or the national oil company, “NOC”) is typically legally responsible for abandonment.
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Fiscal Systems for Hydrocarbons 9 Table 1. Key Features of Concessionary and Contractual Systems Concessionary Systems In its most basic form, a concessionary system has three components: royalty; deductions (such as operating costs, depreciation, depletion and amortization, intangible drilling costs); and tax. The royalty is normally a percentage of the proceeds of the sale of hydrocarbon 11 . It can be determined on a sliding scale, the terms of which may be negotiable or biddable, and paid in cash or in kind. The royalty represents a cost of doing business and is thus tax-deductible. The definition of fiscal costs is described in the legislation of the country or in the particular concession agreement. Royalties and operating expenditures are normally expensed in the year in which they occur, and depreciation is calculated according to applicable legislation. 12 Some countries allow the deduction of investment credits, interest on financing, and bonuses. The taxable income under a concession- ary agreement may be taxed at the coun- try’s basic corporate tax rate. Special investment incentive programs and spe- cial resource taxes may also apply. Tax losses are normally carried forward until full recovery. 13 Contractual Systems Under a production sharing contract (PSC) the contractor receives a share of production for services performed. In its most basic form, a PSC has four components: royalty, cost recovery, profit oil, and tax.
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  • Winter '14
  • Bijay K Behra
  • host government, fiscal systems, world bank working

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