Fiscal Regimes in a Volatile Oil Price Era: What options exist for balancing the interest of the Resource Country and Investor Company?
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Fiscal Regimes in a Volatile Oil Price Era: What options exist for balancing the interest of the Resource Country and Investor Company?

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Volatility in oil prices is a reflection of the common characteristic of the commodity-oil. This is linked to a high uncertainty associated with resource development, and the high specificity of ...

Volatility in oil prices is a reflection of the common characteristic of the commodity-oil. This is linked to a high uncertainty associated with resource development, and the high specificity of investment along the entire energy value chain. Oil price volatility has become a recurring dilemma in an energy market mired in cyclical trends of pricing shocks. The International Energy Agency (IEA) in its World Energy Outlook 2008 predicted an increasing demand at the rate of 1.6%/y on average between 2006 and 2030. As a result, issues of fiscal terms re-negotiations and rent-seeking will shape the relationship between producing countries and investor companies. A major corollary of this instability in oil prices is a renewed battle for rent between host governments and investors. This in effect would engender a shift in balance of the applicable petroleum fiscal regimes.

The challenge of a fiscal policy in a volatile price oil era is ensuring a high share of value is secured for the Government. At the same time, the fiscal policy strives to encourage the exploration of these valuable resources without harming the commercial interest of the oil companies. Price volatility fundamentally alters the sharing formula; it is therefore imperative for a correct balance to be achieved between the competing state interests and the oil companies. The question becomes how equilibrium can be achieved in a petroleum fiscal system design, which guarantees suitable government take and avoids the negative effect of instability and re-negotiation of fiscal terms.

The objective of this paper is to analyse the options available to resource countries in securing appropriate economic rent and safeguard the interest of the investors in the face of pricing volatility. The paper will adopt both analytical and descriptive approaches in articulating these issues.

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Fiscal Regimes in a Volatile Oil Price Era: What options exist for balancing the interest of the Resource Country and Investor Company? Presentation Transcript

  • 1. Fiscal Regimes in a Volatile oil price regime: What options exist for balancing the interest of the Resource Country and Investor Company? Humphrey Onyeukwu, SPE International Oil and Gas Conference and Exhibition in China, 8 – 10 June 2010
  • 2. Overview
    • Introduction
    • Analysis of Oil Pricing and Volatility
    • Key Issues in Fiscal and Contractual Systems for Volatility
    • Effects on the Resource Country and Investor Company
    • Conclusion
  • 3. Introduction
    • Characteristic of Oil: Price volatility
    • Price volatility alters the sharing formula between Company and Country
    • Options for securing appropriate economic rent for Company and Country
  • 4. Analysis of Oil Pricing and Volatility
    • Price volatility risk associated with Oil
  • 5. Key Issues in Fiscal and Contractual Systems for Volatility
    • The framework for Risk and Reward
          • Fiscal Design Approach
          • Contractual System Approach
  • 6. Key Issues in Fiscal and Contractual Systems for Volatility
    • Fiscal Design Approach
      • The Resource Country’s Perspective
      • The Investor Company’s Perspective
      • Petroleum Fiscal Designs
        • The Royalty/Tax (Concessionary) System and Contractual (PSC) System
  • 7. Key Issues in Fiscal and Contractual Systems for Volatility
    • Petroleum Fiscal Systems
  • 8. Key Issues in Fiscal and Contractual Systems for Volatility
    • Royalty/Tax (Concessionary) System
    • exclusive right to exploration and production and own all oil and gas upon production, subject only to the royalty and bonuses etc.
    • Company’s profits subject to tax
    • Exclusive right of company over hydrocarbons
  • 9. Key Issues in Fiscal and Contractual Systems for Volatility
    • Contractual (PSC) System
    • state retains ownership to hydrocarbons and appoints the IOC to explore for oil at its own risk and expense under the control of the government.
    • Contractor gets a share of production under cost recovery limit and profit oil split
  • 10. Key Issues in Fiscal and Contractual Systems for Volatility
    • Contractual (PSC) Systems
    • HYBRIDS
      • Production Sharing Agreements
        • Peruvian Model
        • Indonesian Model
      • Service Agreements
        • Pure Service
        • Risk Service
  • 11. Key Issues in Fiscal and Contractual Systems for Volatility
    • Contractual System Approach
      • Stabilisation and Fiscal Stability Clauses
        • means of securing terms of agreements concluded between a resource country and the IOC
        • Classical method - freeze terms of contract
        • Modern approach - economic balancing provisions , types: Stipulated Economic Balancing (SEB), Non-specified Economic Balancing (NSEB), Negotiated Economic balancing (NEB)
      • Renegotiation Clauses
  • 12. Effects on the Resource Country and Investor Company
  • 13. Effects on the Resource Country and Investor Company
  • 14. Conclusion
    • Success of a fiscal regime relies on its robustness to different levels of oil prices
    • Fiscal design Vs. Contractual Mechanisms
    • Examples:
      • UKCS System a neutral system by abolishing royalties, lacking stability
      • Nigeria used the Memorandum of Understanding (MOU) to hedge the IOC from very low oil prices
      • Bolivia Hydrocarbon Law
      • Russian Sakhalin PSA