Taxation and the Optimization of Oil Exploration and Production: The UK Continental Shelf

This paper allows for the effect of taxation in the econometric model for the analysis of exploration and production policies of "price taking suppliers" recently proposed in Pesaran( 1990). The tax system in the UKCS is neither neutral nor stable, therefore the separation of the "deep" parameters in the model from the tax parameters is an issue of crucial importance. The inclusion of taxation in the empirical analysis of oil exploration and extraction on the UKCS over the period 1978:l-1986:4 confirms the results obtained in the model without taxes of a zero discount factor for the producers but delivers much more plausible estimates for the marginal extraction costs.