Royalty and Tax versus Production-Sharing Petroleum Fiscal Models: An Analysis of Risk and Return of the Optimal Production Strategy Applied in Brazil

Abstract

Abstract Brazilian Government has proposed a change in the current fiscal regime because of the recent discoveries of large oil reserves in Brazilian pre-salt areas, from royalty/tax system to production-sharing contracts. Implementing the production-sharing system, the government believes that this is the best policy to increase gains to be transferred to society. Although, the production-sharing system is not currently clearly defined in Brazil, some debates among companies and government are occurring. Some questions may arise when comparing royalty/tax and production-sharing contracts under the company's point of view: 1) Are the appropriate oil exploitation strategy different for each fiscal model regarding configuration of wells? 2) What are the risk and return created by each fiscal regime for companies? The aim of this paper is to present a comparative analysis considering risk and return of the optimum exploitation strategy for both systems, regarding number of injectors and producers and their allocation in the reservoir. The methodology consists of: (1) selection of a typical oil field from pre-salt area; (2) optimization of an oil exploitation strategy through reservoir simulation aiming to maximize company NPV for a single deterministic scenario for each fiscal system; (3) modeling of uncertainty in oil price, capital and operating costs etc. (4) Monte Carlo simulation and quantification of risk and return (Expected Monetary Value, EMV) of royalty/tax and production-sharing systems (5) sensitivity analysis of parameters of major interest. Results indicate that the optimal production strategy to maximize NPV is different for each fiscal system. The uncertainties in the economic scenario considered in this work influence the EMV significantly. Moreover, it is also important the cost structure of the oil field and how production is shared between the parts involved over time.