Key elements of successful petroleum legal frameworks

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Key Elements of Successful Petroleum Legal Frameworks 35 B Tax and Non-Tax Components of Petroleum Fiscal Systems 37 C Government Take 47 D Economic Impact of Alternative Fiscal Parameters 49 E Government Take and Project IRR at Different Levels of Cost Recovery Limit 55 F Field A, Fiscal Model 1: Alternative Triggers 61 G Government Take and Project IRR at Different Price Levels 63 H Government Participating Interest 69 Bibliography 71 L IST OF T ABLES 1. Key Features of Concessionary and Contractual Systems 9 2. Main Differences between Concessionary Systems and Production Sharing Contracts 10 3. Flexible, Neutral, and Stable Fiscal Regime 14 4. Key Project Parameters 22 5. Fiscal System Indices 23 6. Contractor’s and Host Government’s NPV Variation 25 iii
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7. Break-Even Price 27 8. Royalties 37 9. Ring Fencing 38 10. Corporate Income Tax 39 11. Resource Rent Tax 40 12. Import and Export Duties 41 13. Value Added Tax 41 14. Surface Taxes 42 15. Bonuses 42 16. Government Participation 43 17. Cost Recovery Limit 44 18. Profit Oil Split 44 19. Foreign Exchange Controls 45 20. Environmental Taxes and Bonds, and Other Performance Bonds 45 21. Local Content Obligations 46 22. Economic Impact of Alternative Fiscal Parameters—Field A 50 23. Economic Impact of Alternative Fiscal Parameters—Field B 51 24. Economic Impact of Alternative Fiscal Parameters—Field C 52 25. Economic Impact of Alternative Fiscal Parameters—Field D 53 26. Government Participating Interest—Field A 70 L IST OF F IGURES 1. The Project Cycle 4 2. Petroleum Legal Arrangements 8 L IST OF G RAPHS 1. Government Take and Project IRR at Different Levels of Cost Recovery Limit—Field A 56 2. Government Take and Project IRR at Different Levels of Cost Recovery Limit—Field B 57 3. Government Take and Project IRR at Different Levels of Cost Recovery Limit—Field C 58 4. Government Take and Project IRR at Different Levels of Cost Recovery Limit—Field D 59 5. Government Take and Project IRR at Different Price Levels—Field A 64 6. Government Take and Project IRR at Different Price Levels—Field B 65 7. Government Take and Project IRR at Different Price Levels—Field C 66 8. Government Take and Project IRR at Different Price Levels—Field D 67 iv Contents
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v Abstract A lthough host governments and the investors may share one common objective—the desire for the project to generate high levels of revenue—their other goals are not entirely aligned. Host governments aim to maximize the rent for their country over time, while achieving other development and socioeconomic objectives.Investors’aim is to ensure that the return on investment is consistent with the risk associated with the project, and with their corporations’ strategic objectives. To reconcile these often conflicting objectives, more and more countries rely on transparent institutional arrangements and flexible,neutral fiscal regimes. This paper examines the key elements of the legal and fiscal frameworks utilized in the petroleum sector and aims to outline desirable features that should be considered in the design of fiscal policy with the objective of optimizing the host government’s benefits, taking into account the effect that this would have on the private sector’s investment.
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