I am continuing to defer the petroleum economics section updates based on questions from blog readers. I am now commencing a series on International Petroleum Fiscal Regimes that will go for nine blog entries. In this series I will describe the issues in different oil and gas fiscal regimes generally and discuss concessions, joint ventures, tax-royalty schemes, production sharing, ring fencing and other topics of interest. I will then describe the fiscal regimes in several different countries as illustrations. I want to extend my appreciation to Bob George of Gaffney-Cline & Associates (part of Baker Hughes’ broad reservoir capabilities) for not only correcting the many shortfalls of my first efforts in this area but for adding significant content.
However, it became apparent that simply turning over rights to an IOC in return for just cash (and in many cases, a minor share of the cash being generated), did nothing for the host nation. Their staff remained inexperienced and with the oil or gas being exported no industry was being created locally either. While the share of profitability began to be changed in the 1950s, issues of control, involvement of citizens in more than just low-level roles and development of local industry and infrastructure did not really develop until the 1960s. At this point sovereign nations usually established one or more NOCs with the goal of addressing all these issues, and changed the way that IOCs were allowed to operate in their country.
It should also be noted that there is no one best approach. None of the specific approaches discussed is necessarily more or less generous than the others as the specific levels of payments and handling of risk can and do vary greatly from country to country and contract to contract.
Although this section is entitled Types of International Petroleum Fiscal Regime, it might also be entitled simply Types of International Petroleum Regime; the point being that it is not always easy to separate the fiscal terms from the legal and contractual structure under which they exist.
Typically there are taken to be three “headline” styles of petroleum regimes: concessions, production sharing contracts (PSCs) and service contracts. A discussion of the general features of each of these follows, but typically under a concession arrangement the fiscal components are handled separately from the award of rights to explore and produce, while under PSAs and service contracts the fiscal structure is usually tightly interwoven with the underlying contracts specifying each party’s rights.
However, as with any generalization, care must be taken as it is possible to construct any of the headline regime styles to look and act very much like another; in particular the financial returns from each may be very similar notwithstanding more obvious differences. Indeed, when countries look to update or modify their petroleum contractual or fiscal regime, they are always “benchmarking” it against those of other countries, and aspects are “borrowed” from one to another regardless of the headline contract style involved.