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The Influence of Different Methods of Royalty Calculation on Renegotiation Requests under Upstream Oil Investment Contracts
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Abstract: (4955 Views) |
Payment of royalty by an international oil company (IOC) to a host government is one of the principal elements of fiscal regimes in upstream oil investment contracts like production sharing agreements. Unlike traditional methods, which were only based on value and production volume, the new methods of royalty calculation contain a combination of price, production volume and the profitability of an oil field. One bone of contention between parties in such a contract is the conditions under which a party can request renegotiation of the contract. In this study, we assess how royalty calculation methods can affect renegotiation requests. We see that the role of exogenous conditions in calculating royalty payments can justify a hardship situation through either a longer period of investment return for the foreign company (IOC) or a reduction in government income. We conclude that the need for contract renegotiation can be reduced through measures such as: applying the combinational methods of royalty calculation, exact determination of royalty rates, flexibility in royalty payment method and attention to the life cycle of a field at the moment of contracting.
JEL Classification: K12, M41, F21, Q49 |
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| Keywords: Royalty, Royalty calculation methods, Upstream oil investment contracts, Renegotiation |
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Full-Text [PDF 555 kb]
(2212 Downloads)
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Type of Study: paper |
Subject:
Contracts
Received: 2016/06/16 | Accepted: 2017/05/28 | Published: 2017/09/20 | ePublished: 2017/09/20
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