The pitfalls of windfalls with high oil prices, the risk of fiscal volatility is very real

摘要

One of the key parameters in determining the attractiveness of a country for exploration is the level of Government Take - the lower the take, the more attractive the opportunity. A low tax rate, however, can be associated with a high risk that this will be changed in the future if windfall profits are realized. To diminish this fiscal risk, production sharing contracts (PSCs) have been employed in many countries, but these restrict companies' ability to book reserves under current Securities and Exchange Commission (SEC) rules. As such, companies appear to "lose" barrels as oil price increases. Modern concession licenses could be adapted to include the fiscal stability that PSCs can offer, without the penalty of reducing bookable reserves. A critical component of this is the inclusion of progressive tax rates based on the economic performance of projects and a proper appreciation of the prospectivity of the acreage on offer in establishing the level of Government Take. Investors appear to face a choice - accept fiscal risk or campaign for predictable fiscal regimes inherently designed to limit their capture of windfall profits.