In the exploitation of petroleum resources of a country, the interests of the host country and the investing oil company are not al- ways in alignment. Most significantly, economic rents expected from exploration and production tend to compete. The competing interests are best handled and reconciled through a win-win fiscal system that not only protects the interests of the host govern- ment, but also provides sufficient incentives to the investing oil company. Such a fiscal system enables E&P activities to proceed. The task, however, is not easy.

A win-win upstream fiscal system is one that (1) encourages exploration, (2) promotes development of small as well as large pe- troleum reserves, (3) allows special incentives for difficult-to-explore or difficult-to-develop situations, and (4) enables equitable sharing of economic benefits between the host government and the investor. What constitutes equitable sharing is best judged from the relationship between the Government Take and the investor’s Rate of Return.

A practical way to achieve a win-win a fiscal system is through economic modeling. Economic models constructed to represent various scenarios, each representing certain reserves, an exploration and development program, production profile, capex, oil price, etc., can be evaluated under the proposed contractual terms. The inefficiencies can then be removed by adjusting the fiscal terms. The process is one of trial-and error involving fiscal simula- tion of various exploration and development scenarios.

The efficiency of Country A’s draft petroleum law, based on Royalty/Tax system, was evaluated through economic modeling. The evaluation, encompassing six scenarios, revealed that the pro- posed system, lacking the features of a win-win fiscal system, was economically inefficient. Instead, a Production Sharing structure with a graduated Profit Oil split, a cost recovery limit of 80%, and a sliding-scale income tax rate of 0-40% would yield the desired results.

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