Daniel et al - Evaluating Fiscal Regimes for Resource Projects : An Example from Oil Development

Daniel, P., Goldsworthy, B., Maliszewski W., Puyo, D., Watson, A. et al, Evaluating fiscal regimes for resource projects: an example from oil development, in The Taxation of petroleum and Minerals: Principles, Problems and Practice (Daniel, P., Keen, M., McPherson, C., (eds.) Oxon, United Kingdom: Routledge, 2010)

 

The authors outline evaluation criteria and a modelling approach that can be used to analyse fiscal regimes for the petroleum and mining sectors from the perspective of a host government.  They argue that a decision to develop a particular project requires an analysis of the fiscal regimes. On account of that, quantitative array of criteria is suggested in order to evaluate the resource taxation regimes:  neutrality(a tax instrument does not disturb the investor’s decision on a petroleum or mining project) , revenue-raising potential (the extent of revenues a government would intend to raise, given a desired rate of investment in exploration , development and production), risk to government( risks related to a project the government would be willing to bear), stability and timing of resource revenue(sustainable fiscal position and stable revenues), effects on investor perceptions of risk ( government’s response to investor’s concerns), adaptability and progressivity ( flexibility to changes and capable of raising revenues as the rate of return of a project increases).

Further, the authors suggest some indicators for measuring the evaluation criteria so as to aid the investors. Two different types of indicators are given: indicators for evaluating the economics of a project and indicators of fiscal regimes. The former comprise appraisal methods such NPV and variations of the discounted cash flow method – single discounted cash flow, sensitivity analysis, certainty-equivalent cash flows and Monte Carlo simulation -, as well as the managerial flexibility method. The latter are used in general analysis of taxation, which include the average effective tax rate (AETR), that is, the amount of tax a firm will pay on an average investment, and the marginal effective rate(METR), that is, the ratio of the difference between the pre-and post tax rate of return, for a marginal investment, to the pre tax return.

In the meantime, the authors observe that some indicators may have some limitations when applied to a specific project. However, the aim is to provide a framework for numerical analysis of risk and reward trade-offs, as an aid to judgement in setting and revising fiscal regimes.

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