Index useful for evaluating petroleum fiscal systems

Daniel Johnston

Daniel Johnston & Co. Inc.

Dallas

A useful index for evaluating fiscal systems collapses a variety of elements such as royalty cost recovery limit, and profit oil split. This adds a new dimension to 'take' statistics by indicating a country's minimum share of revenue.

From the government's point of view, I refer to this index as 'revenue protection' (RP). The complement of RP from the oil company point of view is 'access to gross revenues' (AGR).

For example, contractor take for oil under the standard Indonesian and Malaysian contracts is roughly the same, in the low teens. Yet in any given accounting period, the government minimum revenue share in Indonesia is 14% and in Malaysia 36%. The maximum revenue oil companies may access, therefore, is 86% in Indonesia and only 64% in Malaysia.

Division of profits

Division of profits is a key element in contract negotiations for exploration or development rights. Statistics regarding the division of profits or 'take' provide a useful means of comparing one fiscal system or contract with another.

Take statistics are widely quoted; yet standing alone they indicate little on how government/state take is structured. An important aspect of fiscal design stems from the fact that few governments are willing to allow an accounting period to pass, once …