Fiscal regimes, such as production sharing contracts (PSC's), specify how hydrocarbons and costs are shared between host governments and contractors. An important part of the economic analysis in any new country or region involves modelling the fiscal terms for that area and determining the value of a new opportunity. In most cases there is uncertainty in the technical components of an opportunity. In addition, there may be uncertainty in fiscal terms since they could be open to negotiation. In either case it is necessary to analyze the fiscal regime under conditions of uncertainty.

Most PSC's are composed of royalty, cost recovery, profit split and taxation components. In older PSC's profit splits between the government and the contractors were often based on quantities such as oil production. More recently it has become common to base profit splits on measures of profitability such as the ratio of costs to revenue, or the rate of return. In this paper we will analyze and compare PSC's in several countries, assuming similar-sized discoveries in each country. Our analysis will include both technical uncertainties around volumes and costs, and fiscal regime and price uncertainties. These simulation techniques can be used to establish thresholds for volumes or costs that will enable an economic development to be carried out. In essence thresholds represent lost value in a project, which can manifest itself in projects not done or redevelopments not carried out. It is to the benefit of all parties to try and minimize that lost value. The simulation methods we will outline can be used to determine the fiscal terms that maximize value for both host countries and contractors where these terms are subject to negotiation. These methods can also be used to estimate the value of tradeoffs made during fiscal regime negotiation.

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