The fiscal systems for hydrocarbon exploration and development have come a long way during the last 75 years. The current fiscal systems are much more sophisticated as compared to the ones seven decades ago. Some very critical factors are still often overlooked. The ideal fiscal systems are designed in such a way that it is simple to apply and provide the contractor with a fair rate of return (ROR) on investment commensurate with the project risks, and provide the host government (HG) with an adequate resource for rent, thereby resulting in a win-win situation. Some fiscal systems are unnecessarily cumbersome and do not achieve the main objective.

The information given in this paper is applicable to the design of fiscal systems worldwide. Every year new exploration blocks and/or development fields are farmed out to either International Oil Companies (IOCs) or International National Oil Companies (INOCs). These farm-outs are based on fiscal and legal arrangements.

No matter how sophisticated a fiscal system you design, if it fails to address the expected boundary conditions of the project under consideration then it is not a good system. A poor fiscal system will either give more to the contractor at the expense of the HG or vice versa. Developing a fiscal system — without knowing the effect of various variables on the end result of the fiscal system — will end up merely in an academic exercise. Several hypothetical field development and product pricing scenarios are used to test various fiscal systems. The outcome of each is evaluated in terms of the end benefit to the contractor and the HG. This paper also highlights one of the major outcomes that most analysts overlook during the designing of a fiscal system. This paper concludes that it is not necessary to have a cumbersome fiscal system if the same objective (reasonable return for the contractor and a reasonable government take (GT)) can be achieved with a simple system.

The key elements of a fiscal system are examined in this paper and it aims to outline desirable features that should be considered in the design of a fiscal policy with the objective of optimizing the HG’s take while providing an acceptable contractor’s ROR.

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