EC50C5: PETROLEUM ECONOMICS AND POLICY (2022-2023)

This course introduces the underpinning theories of supply and demand, which will help you to understand the unique characteristics of the oil market and the long-time horizons over which oil companies must operate. The prevalence of OPEC and the nature of global market forces explains some of the recent adjustments that have been made to the way in which oil is supplied, and how the most important producers have, in one way or another, impacted prices.

Then it describes the theory of taxation based on the historical notion of economic rent and progressed to the challenges faced by Governments in attempting to identify the scale and frequency of rents in the petroleum industry, and how to extract and share these rents with companies that are prepared to take significant risks in order to attain them.

Using techniques adopted by the oil industry we describe how economic rent can be measured, by first calculating the supply price of petroleum and then deducting it from anticipated revenues, and by accounting for the time value of money by using discounted values for both project cashflows and government tax takes. We look at various methods of investment appraisal by which oil companies assess the potential economic attractiveness of making investments both at the exploration stage, prior to a discovery, and at the development stage, once a discovery has been made. And we showe how a basic pre-tax cashflow model is created using typical oil field data.

In the major part of this course we focuse on the sharing of the economic rent in a manner which is neutral and non-distorting, by which we mean that an investment decision made in the absence of a tax is not altered by the imposition of a tax. We consider the characteristics of an optimal system of taxation that could achieve this and how, by highlighting the regressive and progressive nature of a tax instrument, or a combination of fiscal instruments, neutrality could be assessed.

Furthermore, we looke in depth at the characteristics of a number of fiscal instruments. We showe where in the life-cycle of the project these instruments tend to impact, which countries use them (and how they use them), and their contribution to an optimal system that is progressive and neutral.

Further, we extend the pre-tax cashflow model to incorporate some of the tax instruments described above and analyse their interaction under different price scenarios and noted their regressive or progressive nature.

Finally, we looke at the legal structure of fiscal regimes. Analysing both the tax and royalty type, as well as their discretionary or contractual nature.

There are no assessments for this course.