Comparing petroleum fiscal regimes under oil price uncertainty

This study investigates and compares five upstream petroleum fiscal systems under crude oil price uncertainty. The fiscal systems analyzed are: the Alberta Canada tax and royalty system, the Papua New Guinea (PNG) (pre-2003) traditional Rate of Return (ROR) system, the Sao Tome and Principe/Nigerian Joint Development Zone (SNJDZ) Production Sharing Contract (PSC), the Tanzanian PSC/ROR hybrid system and the Trinidad and Tobago PSC. Contingent claims analysis is used to value the governments’ tax claims under uncertainty using a numerical approach, viz., Monte Carlo simulation. Each system is tested to obtain the after-tax value accruing to firms as well as the distortionary effects introduced by the fiscal systems. The results are then ranked. The Alberta Canada and PNG fiscal systems provide companies with the highest after-tax values while also being the least distortionary. The Tanzanian system is the lowest in both rankings, providing relatively low after-tax values and introducing strong distortionary effects. The SNJDZ PSC imposed a relatively high tax burden on companies with median distortionary effects. The Trinidadian PSC generated a median tax burden on companies but has strong distortionary effects.