Preliminary / Incomplete paper , please don ’ t quote it . Tax Effects on Timing , Scale , and Learning Options in Petroleum Upstream

The escalation of oil prices in the last years has motivated a debate about natural resources taxation. This paper uses real options approach to discuss different taxation devices for exploration & production (E&P) with focus in Brazilian petroleum sector. The concept of tax neutrality under uncertainty is established when both the project value and investment follows correlated stochastic processes, analyzing the option to delay a project considering corporate income tax and royalties. Other issues like tax efficiency, risk exposition and simplicity, are also considered. The paper discusses the taxation effect on optimal investment timing when exists discrete mutually exclusive alternatives to develop an oilfield, that is, consider the scale option issue on taxation. Next, the paper analyzes the special participation tax for high productive oilfields when there is technical uncertainty about the size and quality of the oilfield considering the learning option before developing the field. The paper suggests a more efficient and win-win design for this special participation tax. JEL classification: G38; H21; G31; G11.