There are few areas of economic policymaking in which the returns to good decisions are so high – and the punishment of bad decisions so cruel – as the management of natural resource wealth,” noted Philip Daniel, a reputed expert of the IMF. One of the most important tools in the management of natural resources is the fiscal regime of petroleum exploration and production.
Petroleum fiscal policy is a key instrument through which producing countries aim at getting as large a share of the economic rent generated by oil and gas extraction as possible.
Governments also promote socio-economic objectives: jobs, technology transfer, infrastructure projects, macroeconomic stability by means of steady budgetary incomes etc. Under concession regimes, title holders seek to obtain profits that are proportional with the degree of risk they take when investing in exploration and production. In order to achieve such objectives on the long term, it is paramount to have a transparent, predictable and internationally competitive regulation environment.
However, fiscal stability seems to be harder and harder to achieve, as in the past 15 years international oil markets have become unprecedentedly volatile. Between 2002 and 2008 the Brent barrel price rose fivefold to the historical level of $147, only to fall to $46 within the following three months; then, it went up again to reach $127 at the beginning of 2011, where it stayed relatively stable until the summer of 2014; the price then collapsed 60% from $114 till the year’s end, hovering under the $50 dollar level at present.
The volatility of international oil quotations has challenged the stability of petroleum fiscal frameworks. Thus, starting in the mid-2000s, several producing countries showed their frustration at the fact that fiscal terms failed to generate the expected economic rent. Such governments wanted to renegotiate the fiscal terms in their favor. By the same token, cheap oil pushes companies to ask for milder fiscal treatment, in order to be able to pursue their investment plans. Given that the economic cycle of petroleum projects is about 30 years on average, it is quite a challenge for a petroleum fiscal framework to remain stable for so long, under high oil markets’ volatility.