Comparison of Petroleum Fiscal Systems and Auctions

A petroleum fiscal system comprises the taxes, royalties, and similar terms in the lease or contract to explore for or produce oil and gas. A government, as seller of the rights, enacts its distinctive petroleum laws that provide for these terms, determining an offer price. Globally, a large variety of terms are in use, and the fiscal system can provide for an auction that determines the value of the bonus or other bidding variables. The bonus determines which buyer is awarded the rights, and it also serves as a self-adjusting fiscal term that fine-tunes the offer price to fit particular oil prospects and markets. To the extent that different auction formats lead to different results, the format is a significant element of the fiscal system. The oil companies, who are buyers, select rights to purchase by comparing offer prices; comparison among offers is complicated by the diverse quality, risk, and cost of resources offered, as well as the diversity of fiscal systems. The focus in this paper is on the seller who designs a fiscal system with two conflicting goods in view: gaining tax revenue for itself and attracting investment in the competitive market. The trade-off of these goods for a government can be represented with utility theory, and as governments evidently have different utility functions, they can have different fiscal systems generating offer prices. The paper presents empirical models of petroleum fiscal systems around the world and shows how to use them to help assess the current and possible future performance of a fiscal system and auction format. A selection of offshore oil regimes provides a real-life example of a competitive market where multinational oil companies invest globally. The countries are selected from around the world to illustrate diverse fiscal systems, ranging from the US lease system to various other types of licenses and production-sharing contracts. For each country in the selection, three or more oil fields are modeled using fieldspecific data and engineering methods. The models in each instance estimate the government and private revenues, and the relative shares or “take,” given the fiscal terms and auction formats that apply to it. These measures are calculated for actual and possible future prices and costs. The results are plotted to show the comparative performance of the fiscal systems. The same metrics can be used by a government to gauge the implications of changing its terms and auction design.