Integrated Royalties Model to Promote the Exploration and Exploitation of Tight Oil Reservoirs in the North West of Peru

The decline in oil prices since 2014 and the commitment of many countries to strengthen low-carbon economic development have caused investments within the upstream oil sector to shrink. Oil exploration activities upstream have diminished; besides some oil reserves have been dragged to oil resources by the classification of the Petroleum Resource Management System (PRMS) guidelines. In this context making a competitive and favorable fiscal framework for hydrocarbons investments will improve resource incomes received by countries who are exploiting their natural energy resources. In Peru, the average oil production decreased from 69304 BOPD in 2014 to 48869 BOPD in 2018; moreover, the Peruvian fiscal regimes on royalties do not promote and assure a suitable investment climate for hydrocarbon development. Peru's current petroleum royalty system (PRS) has disadvantages because it does not consider to integrate the oil price fluctuations and oil production performance. This article aims to assess four petroleum royalties’ regimes: i) the current Peruvian petroleum royalty scheme based on the R-Factor; a scheme using royalties based on oil production performance ii) determined ranges knows as a jumping regime, iii) lineal regime; and iv) logarithmic regime. Furthermore, an optimal royalty rate is proposed for an unconventional tight oil reservoir in the Lacones Basin, considering the oil price fluctuations and reserves replacement ratio (RRR) as mechanisms to reduce the royalty rate for the investing oil company. The study concludes that the current Peru's PRS is overestimated for the current potential of petroleum resources and recommends adjusting the PRS to make a favorable investment climate for the unconventional oil and gas resources.