Petroleum fiscal system design and cost-related incentives in oil and gas projects : a comparative study of UK, Norway, Indonesia and China

Abstract

In recent years, the oil and gas industry has been facing unprecedented cost and time overruns while delivering megaprojects both in Norway and internationally. Combined with a dramatic oil price drop, cost overruns became a hot topic in both academic and business worlds. Whilst the project management aspects were in the spotlight, external factors, such as government policies, were paid much less attention. Although, oil companies are cost minimizers, in a situation of a moral hazard presented in the oil and gas industry, certain petroleum fiscal designs can create incentives for cost inflation. Thus, the focus of the current master thesis is to understand how different fiscal designs affect cost consciousness of the companies on the examples of Norway, UK, Indonesia and China. According to the comparative study, petroleum fiscal design that incorporates high marginal rates on the profits rather than revenues, i.e. more back-end loaded, in combination with additional capital allowances and uplifts, tends to create higher incentives for operators to inflate their costs. However, such a design is also referred to as neutral and provides additional incentives for investments. Therefore, the optimal balance in risk sharing between the company and the host government in petroleum fiscal designs is crucial.