Tordo et al - Petroleum Exploration and Production Rights

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Transparency and Accountability

Policy, Legal and Contractual Framework

Sector Organization and Institutions

Fiscal Design and Administration

Revenue Management and Distribution

Sustainable Development

Tordo, S., with Johnston, D., and Johnston, D., Petroleum Exploration and Production Rights: Allocation Strategies and Design Issues, (Washington D.C., United States of America, World Bank, no. 179, 2009)

The publication aims at providing practical information to policy makers on the advantages and disadvantages of varying practices used by petroleum producing countries to allocate exploration, development and production rights. The findings were guided by the results of a study aimed at collecting information on countries’ experiences with regards to the management and allocation of their petroleum rights.

Often governments must rely on oil companies to effectively and efficiently exploit their natural resources but whether they choose to invest directly or allow private investors to do so, their primary concern should be the maximization of social benefits from the exploitation of their resources. Where governments choose to allow private participation in exploitation the challenge comes when they have to decide which companies should be awarded the exclusive rights to do so and under which conditions such rights should be awarded, not least because, according to the authors, an appropriate allocation system would not just spread risks suitably across these parties but would also ideally capture the most rent for the government not just in the short term but also as a long term strategy.

To that end the authors identify alternative approaches to the granting of petroleum exploitation rights. They begin by defining the various legal regimes and fiscal conditions under which such rights typically exist. They then provide an overview of the main tax and non-tax instruments commonly used in the oil industry and an evaluation of these instruments' effects on government revenues and investment decisions. In sum, the form of fiscal regime utilized in any given context typically reflects the perceived risk associated and changes in project variables, such that often times the legal regime might not always follow the typical fiscal structure.

The design of an appropriate allocation system, thus, is realized by the government identifying the economic, social and political objectives that they wish to achieve. For instance, the decision to choose either an open-door bidding system or award rights based on licensing rounds clearly reflects the socio-economic and political context of the particular country coupled with the realistic understanding of the geological prospects. The authors provide examples of the mechanisms used by various countries to acheive one goal or another. For example, if a main policy area is promoting local content participation, the Venezuelan or Nigerian examples provide two different ways of how that might be achieved including the advantages and disadvantages.  

In conclusion, it is acknowledged that there is no model system for the allocation of petroleum rights that will be appropriate in every context; an optimal design, however, indicates that it is vital that any design is cognizant that coordination and coherence among different policy tools might be the best way of attracting maximum rent and social benefit.

 

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