Fiscal Policies in Oil and Gas Sector: Quantitative Assessment of Impact of Royalty Terms on Proved Reserves Estimation

Abstract

Abstract Petroleum Fiscal Systems refer to the arrangements between a host government and an oil and gas exploration and production company to explore, develop and produce hydrocarbons. Royalty term is a key element of any petroleum fiscal policy and it could be fixed-by-terrain or sliding by volume and petroleum price. Nigeria like most countries operates a fixed-by-terrain royalty system. The defects of such a system include negligence of the size of the firm and the price of hydrocarbon in determining royalty terms. This is attended by negative shock on profitability of small firms and their operations on the one hand and the take statistics of the host government on the other. For example marginal field operators find it difficult to operate under fixed-by-terrain royalty system. All previous investigators on fiscal terms have focused quantitative evaluation on impact of fiscal terms on profitability indicators vis-à -vis impact on government and contractor take statistics without extending to proved reserves impact. This paper fills this gap. This paper focuses investigation on quantitative analysis of impact of variable and fixed-by-terrain royalty terms on proved reserves using an archetypal onshore producing oil and gas asset, existing royalty term in Nigeria as well as the archetypal sliding royalty terms in Nigerian 2012 draft Petroleum Industry Bill. A proved reserves economic spreadsheet model based on SPE Petroleum Resource Management System (PRMS), sliding and fixed royalty systems was developed and used for the study. The investigation shows that with two-tier sliding royalty system (based on volume and oil or gas price) impact on proved reserves could be positive, in effect meaning less exposure on proved reserves in existing assets than under fixed royalty term. Also under a period of global low oil price like in late 2014 to early 2016 where oil price has dropped by close to 250%, the firm may have positive effect on proved reserves due to reduced royalty payment used in economic limit test analysis. These conclusions should guide policy makers and negotiators in deciding royalty terms in fiscal policy formulation.