Analyzing and Understanding Petroleum Fiscal Systems

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

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Upstream petroleum (Oil, Gas and Condensates) sector occupies very critical position and, accordingly, has influential impacts on the national economies of Iraq, some Middle East and North America- MENA countries, as well as many other developing countries that are endowed with such natural resources.

This importance is manifested through many significant economic parameters at macro-economy level, including balance of payments, trade balance, State budget (covering both investment and recurrent allocations), current account, it's share in GDP among others. Foreign exchange and revenues generated through this sector are the main fiscal determinants for financing socio-economic development plans.

Moreover, ownership of petroleum resources is, mostly, vested to the people through legal instruments such as constitutions.

The development of petroleum resources requires, in most cases, different forms of cooperation with and the  involvement of the international oil companies-IOCs through variety of  legal means and instruments such as contracts, agreements, memoranda of cooperation or understanding, protocols and alike. The involvement of IOCs (regardless of their 'home country' and associated geostrategic and geopolitical implications) is thus regulated and, accordingly, impacted by different components of the "Fiscal System" that are highlighted in or premised on many host-country national laws, regulations, directives among others and then translated into specific provisions, i.e., articles, and inserted into and comprised in these binding documents, mostly named contracts or agreements, with an IOC or a consortium of IOCs.

Analysing and professionally understanding upstream petroleum fiscal systems is a prerequisite qualification for all those who are involved directly in the development of petroleum resources in any country, particularly the related authorities and entities. Also, the comparative assessments of different fiscal systems is critically vital for national decision makers to be conversant with prior to deciding which system and what components of that system serve better their national aspirations in developing the upstream petroleum.

As a matter of practical and implementation purpose, understanding upstream petroleum fiscal system, of a concluded contract or agreement, is not and should not be confined only to those who are involved directly; reasonable familiarity with the components of the fiscal system of the concluded contracts is surely needed for many more others of officials at different branches of government as well as experts, research and consulting centres, academics, media, civil society organisation, economists, petroleum professionals and political leaders among others.

There is a wide range of reference books, publications, models and specialised consulting firms alike that cover variety of upstream petroleum fiscal regimes used in the global upstream petroleum industry.

Among the most important and relevant references is the book reviewed here.*

This is an excellent book, well written, carefully structured, articulate in debating the issues objectively- pros and cons, and follows good and constant methodology for each chapter; it is, therefore, a valuable addition to the library and knowledge of petroleum resource development and helps in formulating prudent management of these natural resources.

The book comprises three parts (not four, p. 13) and between them they have a combined total of sixteen chapters, in addition to Glossary and Bibliography. Part one, the shortest among the three and includes the first two chapters, presents the topics for the book, explains some terminology used, introduces fiscal systems in terms of what functions they have, their different forms and the process of licensing petroleum and outlines the structure of the book.

This part refers to the distinctions that sometimes made regarding the categories of fiscal systems such as concessionary, royalty/tax and contract-based systems and reviews four broad alternatives forms of petroleum licensing; these are:  Concessions (also called leases, licenses or extraction permits); Production sharing agreements/ contracts-PSA/C; Service agreements/ contracts  (including risk service contracts) and other agreements/contracts (mostly tax-based).

The second part addresses various Fiscal Instruments, i.e., the core and main pillars of petroleum fiscal system, and has chapters 3 to and including chapter 11.

Each chapter follows the same methodology: it begins with Definition and purpose, followed by thorough review and elaborated discussion of the topics covered in that chapter, a summary and ends with notes. The nine chapters of this part provide insights on and cover all important fiscal instruments by different governing modalities in upstream petroleum contracts and agreements. Fiscal instruments and issues covered in this part include: Levy on production (Royalty, severance tax, and revenue sharing); Production sharing; Remuneration for service;  Bonuses, lease sales and area fees; Privileged state participation; Tax on corporate income and distributed profits; Petroleum resource taxes; Taxes related to inputs and externalities; Business obligations in the national interests.

A significant and very helpful sub-section on the "Economic characteristics...." of the above mentioned instruments enriches the quality and usefulness of the book and expands the debates around these fiscal instruments. Also, this part addresses, rather eloquently and at length, with quantitative comparative analysis four main "trigger parameters" for "sharing of profit petroleum" or for fee payment that are in use in different contracts.

By this way the authors facilitate the understanding of the applications of these trigger parameters in the latter chapters of part three. These four triggers are: Rate of Return (ROR); R-Factor; Daily Rate of Production (DROP) and Cumulative Production (CP).

Examples on related contractual provisions drawn from many different countries are used or referred to throughout this part.

This part of the book is a must-read for those involved in upstream petroleum development through involving IOCs in such development, particularly professionals, ministry officials, legislating authorities and executive decision makers among others.

The third part focuses on Applications and comprises chapters 13 to 16. It aims at providing integrated perspective on the implication and implementation of the fiscal systems and their instruments. It begins with issues relating to fiscal valuation, particularly those connected to international tax issues then addresses some economic characteristics of petroleum operations and links fiscal analysis to some important economic features of the business.

Important feature of this part is the review of computer modelling, providing helpful insights on some available models, and uses its own fiscal model, Petrosharing, which was developed to support the analysis in this book. The last chapter proposes a step-by-step framework or a roadmap to design petroleum fiscal system, premised on the fiscal instruments that are discussed throughout the book.

This part presents many charts, uses simulations and modeling, and discuses thoroughly critical issues and development scenarios using data drawn from, mostly, Norwegian upstream fields.

The Glossary lists explanation of the main terms and concepts mentioned in the book and the book has Bibliography but has no Index, brief bios and photos of the authors are provided twice.

The authors' academic and professional backgrounds, an economist and legal profession, stand probably behind the impressive quality of this unique book as manifested by the depth and objectivity when analysing various economic and legal matters.

The book helps, to a great extent, in making a clear distinction between petroleum fiscal systems (and their different instruments on one side) and other macro-economy issues such as revenue management, oil policy and national development plans or programmes (on the other) to mention a few. Issues that are, more often than not, mixed up by commentators and result in confusion, unnecessarily, and spread inaccurate interpretation (this is much evidenced through debating such issues in Iraq over the last ten years). A contract relates to a specific oilfield project falls within the sphere of micro-economics analysis, while oil policy or revenue management and utilization and national development are of macro-economic nature. But surely, many fiscal instruments (such as taxation, state partner share, type of contract among others) are of macro-nationwide applications and implications, and thus, have direct bearings on upstream petroleum projects. Hence, there are dual attributions of or organic linkages between three levels of analysis; micro, sector-wide and macro level, which entails very careful and proper understanding and distinction.

The essence of and why there is petroleum fiscal systems, according to the authors, is sharing the resource rent between the host country and the resource firms, i.e., IOCs. But, the book asserts, "Calculating the resource rent is not straightforward, and is rarely done explicitly. It is an economic term discussed on a conceptual level, seldom found in Excel spreadsheets." (P. 4) and "rarely calculated as a precise value." (P. 457). Yet, there are, throughout the book, numerous examples on "resource rent tax" that are applied by many countries and jurisdictions. When a tax, which is important and significant petroleum fiscal instrument, is premised on or justified by the resource rent, then it is an empirical and material manifestation of a quantified/ quantifiable resource rent. Moreover, the "Project economics" spreadsheet (Excel or others) comprises a "precise value" of the resource rent tax as highlighted in Table 14.2, (P. 348). Is there some inconsistency here!

There is a strong link between resource rent and sovereignty, particularly in most developing countries. But the book refers twice to sovereignty: with regards to "Stabilization clauses" (P. 43) and a citation on the, "[R]enewed interest in such [risk service] agreements since the 1990s, largely due to national concerns with sovereignty over their petroleum." (P. 125).  The book, surprisingly, did not discuss or highlight the issue of state permanent sovereignty over its natural (in this case) petroleum, which is significant nation's right issue and has been recognized under international law for decades.[1]

Also, there is a sense of generalization in considering sharing resource rent between host country and the resource firms under all petroleum fiscal systems, but this is not necessarily the case. If "remuneration fee" is included in production cost, as it should be, then the whole resource rent is acquired by the host country under service contracts, such as the one adopted by Iraq' federal ministry of oil, and this is vital feature of this type of petroleum fiscal system.

The issue of "gold plating", the tendency that the contractor will be economically motivated to spend money unnecessarily,(P. 134) and thus "benefitting,..., due to distortions caused by the fiscal regime, (p. 405), attracted good attention by the authors, as evidenced by the frequency of the term in the book. It was discussed, at depth using its Petrosharing Model, with respect to "Saving index" (Pp. 380-90), with regards to the issue of "Neutrality" of fiscal system (Pp. 393-405 ) and with regard to Iraq, among others.

When it comes to service contracts adopted by Iraq, the book focus on "gold plating" relies on two references relating to Rumaila oilfield: Ghandi and Lin Lowell (2016) (p. 134) and Van Meurs (2009) (p. 136). Both studies give the impression that "gold plating" is peculiar to and intrinsic of service contracts; it is not. Moreover, both studies seems to premise their analysis on a "draft" model contract not on a "signed" contract; Rumaila is a brown oilfield that has been producing since mid-1950s and, thus, it is unreasonable to offer its re-habilitation under production sharing contract, as suggested by the two studies; the authors of the two studies seemed unaware of the measure to combat "gold plating" that were introduced in service contracts for the second bid round, due to a learning-curve, and finally, economic efficiency and cost effectiveness are, practically, impacted by both the "text" of the contract and the "monitoring and management" of the contact through various decision-making chain from the bottom at the field' joint management committee up to Energy Committee at the Council of Ministers.

That said, there are growing number of high profiled cases indicating to serious fraud and corruption in the Iraqi petroleum upstream projects, the impact of which could very well dwarf "gold plating" effects associated with Service contracts. Similarly, corruption in the KRG' production sharing contracts has been even more detrimental.

This brings to the discussion the importance and impacts of vital political economy factors and geopolitical considerations on these projects, since petroleum fiscal system is formulated upon or functions within the environment dictated by these factors and considerations.

The book uses the term "resource firms" instead of the widely used term IOCs; the authors' argument for adopting this term are not very convincing (Pp. 6/7) and they only add one more term to the existing ones: IOCs, Oil Majors; Big Oil; transnationals; multinationals.

Also the book mentions Middle East Gulf-MEG (P. 308; P. 416), probably referring to the known Arabian Gulf or Persian Gulf (depending where one stands) but hardly MEG!!

A few typing errors and sometimes numbers do not add up corresponding to what the narratives lead to; this could be due to either typing errors or to rounding effects. Some charts, particularly in part three are not clear due to scanning.

To sum up, this is invaluable highly informative and thus recommended book for oil professionals, contracts formulation and negotiation, and for authorities entrusted with upstream petroleum development. Moreover, from my own experience, this book is excellent source for designing and delivering human capacity development activities such as workshops and training on petroleum fiscal systems.


* Petroleum Fiscal Systems,

Erik T. Jarlsby and Eduardo G. Pereira (2019)

Publisher: PennWell Corporation. Oklahoma, USA,

ISBN: 978-1-59370-480-3 (hbc); 471 pages

Price: $101.15


My edited review article of the above book was published on:  Journal of Contemporary Iraq & the Arab World, Volume 14, Number 3, 1 September 2020, pp. 261-265(5)

[1] Brownlie, Ian (1995), Basic Documents in International Law, Clarendon Press, Oxford, UK, 4th Edition, Part Five.


Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq's Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at), Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad's biography here.

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