Acknowledgments ................................................ vi
Acronyms and Abbreviations .................................... vii
Executive Summary .............................................. ix
1 The Exploration, Development, and Production of Petroleum
Resources .................................................... 1
Uncertainty and Risk: Key Elements of Petroleum
Exploration, Development, and Production ..................... 1
The Decision to Explore for Petroleum Resources .............. 2
Exploration and Inter-Temporal Depletion Policies ......... 3
Exploration and Inter-Generational Equity ................. 3
Exploration and the Maximization of the Resource Rent ..... 4
Who Carries the Risk of Exploration? ......................... 5
2 Alternative Approaches to the Granting of Petroleum
Exploration, Development, and Production Rights .............. 8
Legal Regimes for Petroleum E&P .............................. 8
Concessions ............................................... 9
Production Sharing Contracts ............................. 10
Service Agreements ....................................... 10
Fiscal Regimes for Petroleum E&P ............................ 10
Taxation Instruments and Methods ......................... 11
Comparison of Key Fiscal Elements of Concessions, PSCs,
and SAs .................................................. 12
The Allocation of Petroleum E&P Rights ...................... 12
Open-Door Systems ........................................ 14
Licensing Rounds ......................................... 14
Biddable or Negotiable Factors ........................... 17
Some Countries' Experience ............................... 20
3 The Design of Appropriate Allocation Systems ................ 29
Allocation System Objectives ................................ 29
Consistency with Petroleum Sector Policy ................. 30
Selecting the Most Efficient Operator .................... 31
Keeping Compliance and Administrative Costs Down ......... 33
Minimizing Distortionary Effects ......................... 35
Addressing Market Deficiencies ........................... 36
Key Issues in Allocation Systems Design ..................... 38
Open-Door Systems or Licensing Rounds? ................... 38
Auctions or Administrative Procedures? ................... 38
Which Form of Auction Is More Likely to Lead to Higher
Bids? .................................................... 39
Are Planning and Commitment Important? ................... 40
What Really Matters for the Design of Licensing
Rounds? .................................................. 43
What Does This Mean in Practice? ......................... 45
4 Conclusions ................................................. 48
What Type of Allocation System Is Best? ..................... 48
Why Do So Many Systems Look So Similar? ..................... 49
Is System Design Important? ................................. 49
Appendixes ..................................................... 50
I. Life Cycle of a Typical Oil and Gas Project ............... 51
II. Main Fiscal Instruments: Advantages and Disadvantages ..... 53
III. World Average Fiscal Terms ................................ 57
IV. Select Countries' Experience .............................. 58
Australia ................................................. 58
Licensing policy ....................................... 58
Licensing history ...................................... 59
General observations ................................... 59
United Kingdom ............................................ 62
Licensing policy ....................................... 62
Licensing history ...................................... 63
General observations ................................... 64
United States ............................................. 67
Licensing policy ....................................... 67
Licensing history ...................................... 68
General observations ................................... 69
Brazil .................................................... 73
Licensing policy ....................................... 73
Licensing history ...................................... 74
General observations ................................... 78
Mexico .................................................... 81
Licensing policy ....................................... 81
Licensing history ...................................... 82
General observations ................................... 84
Republic of Yemen ......................................... 87
Licensing policy ....................................... 87
Licensing history ...................................... 88
General observations ................................... 90
V. Allocation Systems Design: Example .......................... 92
Glossary ....................................................... 94
References .................................................... 100
Tables
Table 2.1 Objectives of Fiscal Systems ........................ 11
Table 2.2 Fiscal Elements of Petroleum Agreements ............. 13
Table 2.3 Overview of Allocation Systems in Select
Countries ........................................... 21
Table A.l Alternative Bid Design .............................. 67
Table A.2 Overview of Brazil's Licensing Rounds ............... 77
Table A.3 Bidding Rounds Summary .............................. 84
Table A.4 Biddable Parameters ................................. 89
Figure
Figure 3.1. Allocation Policy Flow Chart ....................... 30
Boxes
Box 3.1 Licensing Policy as a Means to Promote Local
Content ............................................... 32
Box 3.2 Tax Implications of the Transfer of E&P Rights ........ 33
Box 3.3 Administrative Complexity ............................. 33
Box 3.4 Examples of Bidding Parameters ........................ 34
Box 3.5 Minimum Bidding Requirements .......................... 34
Box 3.6 Excessive Royalty Rates ............................... 35
Box 3.7 Oversized Work Programs ............................... 35
Box 3.8 Fiscal Incentives to Cost Saving ...................... 36
Box 3.9 Information and Risk Perception ....................... 37
Box 3.10 Joint Bidding or a Forced Marriage? ................... 37
Box 3.11 Example of Sequential Auction ......................... 39
Box 3.12 Issues with the Planning of Licensing Rounds .......... 41
Box 3.13 Changing the Rules of the Game ........................ 42
Box 3.14 Reserve Prices ........................................ 44
Box 3.15 Transparency Mechanisms ............................... 45
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