Title: Pitfalls of percentage take metric for assessment of petroleum fiscal regimes
Author: Mansoor H. Al-Harthy
Address: Department of Petroleum and Chemical Engineering, Sultan Qaboos University, Oman, P.O. Box 33, Al-Khod, Muscat PC 123, Sultanate of Oman
Abstract: With today's volatile oil prices, contractors and host governments seek ways to maximise wealth and minimise risk in developing oil fields. Fiscal regimes are used by governments and contractors to maximise wealth and minimise risk. Both contractors and host governments use economic metrics to evaluate the economic viability of a fiscal regime. Some of these economic metrics are net present value, internal rate of return and percentage take. The objective of this paper is to show the pitfalls associated with the percentage take metric. A production sharing contract for an oil field with a reserve of 100 million barrels equipped with risk analysis is used to illustrate the pitfalls and to quantify their impact. The main conclusion is that the government and the contractor percentage take do not capture the impact of changing oil prices and the size of the cash flow. Furthermore, the government percentage take misleads contractor investment decisions by causing them not to invest in severe fiscal regimes with higher oil prices, even though the financial rewards would be the same as those achieved with a lenient fiscal regime under lower oil prices.
Keywords: fiscal regimes; petroleum industry; economics; percentage take metric; government percentages; risk analysis; oil prices; oil contractors; petrol; energy; wealth maximisation; oil fields; oil exploration; economic metrics; economic viability; net present value; internal rate of return; production sharing; contracts; oil reserves; investment decisions; financial rewards; sustainable society; sustainability; sustainable development.
Int. J. of Sustainable Society, 2010 Vol.2, No.4, pp.393 - 405
Available online: 18 Nov 2010