WORLD BANK WORKING PAPER NO. 179 Petroleum Exploration Public Disclosure Authorized and Production Rights Allocation Strategies and Design Issues Silvana Tordo with David Johnston and Daniel Johnston Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized THE WORLD BANK WORLD BANK WORKING PAPER NO. 179 PetroleumExploration andProductionRights AllocationStrategiesandDesignIssues SilvanaTordo withDavidJohnston= andDanielJohnston= = = = = = = = = = = = = = = = = = = = = = = = = WWP_179_web_10-29-09.pdfP_179_web_10-29-09.pdf 1 110/29/20090/29/2009 112:45:012:45:01 PPMM Copyright©2010 TheInternationalBankforReconstructionandDevelopment/TheWorldBank 1818HStreet,N.W. Washington,D.C.20433,U.S.A. Allrightsreserved ManufacturedintheUnitedStatesofAmerica FirstPrinting:November2009 Printedon=recycledpaper = 123=45 = = 12111009 = World Bank Working Papers are published to communicate the= results of the Bank’s work to the= developmentcommunitywiththeleastpossibledelay.The=manuscriptofthispaperthereforehasnot beenpreparedinaccordancewiththe=proceduresappropriateto formallyeditedtexts.Somesources citedinthispapermaybeinformaldocumentsthatarenotreadilyavailable.= Thefindings,interpretations,andconclusionsexpressedhereinarethoseoftheauthor(s)anddo= not necessarily reflect the views of the International Bank= for Reconstruction and= Development/The WorldBankandits=affiliatedorganizations,=orthoseofthe=ExecutiveDirectors=ofTheWorldBank=or thegovernmentsthey=represent.== The World Bank does= not guarantee the accuracy= of the data included in this work. The= boundaries,colors,denominations,andotherinformationshownon=anymapinthisworkdonotimply= anyjudgmentonthe=part=ofThe=WorldBankof=the=legalstatusof=any=territoryorthe=endorsementor= acceptanceofsuchboundaries. Thematerialinthispublicationiscopyrighted.Copyingand/ortransmittingportionsorallofthis work without= permission may= be a= violation of applicable law. The International Bank for= Reconstruction= and Development/The World Bank encourages dissemination= of its work and will= normallygrantpermissionpromptlytoreproduceportionsofthework. Forpermissiontophotocopyorreprintanypartofthiswork,=pleasesend=a=requestwithcomplete= information=totheCopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,MA01923,USA,= Tel:9787508400,Fax:9787504470,www.copyright.com.= Allotherqueriesonrightsandlicenses,includingsubsidiaryrights,shouldbeaddressedto=the OfficeofthePublisher,=TheWorldBank,1818H=StreetNW,Washington,DC20433,USA,Fax:202522 2422,email:[email protected]. = = ISBN13:9780821381670= eISBN:9780821381687= ISSN:17265878= DOI:10.1596/9780821381670= = LibraryofCongressCataloginginPublicationDatahasbeenrequested.= = = = = WWP_179_web_10-29-09.pdfP_179_web_10-29-09.pdf 2 110/29/20090/29/2009 112:45:152:45:15 PPMM Contents= Acknowledgments...................................................................................................................vi AcronymsandAbbreviations..............................................................................................vii ExecutiveSummary=..................................................................................................................ix 1.TheExploration,Development,andProductionofPetroleumResources.................1 UncertaintyandRisk:KeyElementsofPetroleum=Exploration,Development, andProduction............................................................................................................1 TheDecisiontoExploreforPetroleum=Resources.........................................................2 ExplorationandInterTemporalDepletionPolicies.......................................................3 ExplorationandInterGenerationalEquity=...................................................................3 ExplorationandtheMaximizationoftheResourceRent...............................................4 WhoCarriestheRiskofExploration?..............................................................................5 2.AlternativeApproachestotheGrantingofPetroleumExploration, Development,andProductionRights=............................................................................8 LegalRegimesforPetroleumE&P...................................................................................8 Concessions....................................................................................................................9 ProductionSharingContracts.....................................................................................=10 ServiceAgreements......................................................................................................10 FiscalRegimesforPetroleumE&P.................................................................................10 TaxationInstrumentsandMethods.............................................................................11 ComparisonofKeyFiscalElementsofConcessions,PSCs,andSAs...........................12 TheAllocationofPetroleum=E&PRights=......................................................................12 OpenDoorSystems=.....................................................................................................14 LicensingRounds.........................................................................................................14 BiddableorNegotiableFactors.....................................................................................17 SomeCountries’Experience.........................................................................................20 3.TheDesignofAppropriateAllocationSystems=............................................................29 AllocationSystem=Objectives..........................................................................................29 ConsistencywithPetroleumSectorPolicy=..................................................................30 SelectingtheMostEfficientOperator..........................................................................31 KeepingComplianceandAdministrativeCostsDown................................................33 MinimizingDistortionaryEffects................................................................................35 AddressingMarketDeficiencies...................................................................................36 KeyIssuesinAllocationSystemsDesign=......................................................................38 OpenDoorSystemsorLicensingRounds?=.................................................................38 AuctionsorAdministrativeProcedures?=.....................................................................38 WhichFormofAuctionIsMoreLikelytoLeadtoHigherBids?.................................39 ArePlanningandCommitmentImportant?...............................................................40 iii WWP_179_web_10-29-09.pdfP_179_web_10-29-09.pdf 3 110/29/20090/29/2009 112:45:152:45:15 PPMM iv Contents WhatReallyMattersfortheDesignofLicensingRounds?=.........................................43 WhatDoesThisMeaninPractice?=.............................................................................45 4.Conclusions=..........................................................................................................................48 WhatTypeofAllocationSystemIsBest?=......................................................................48 WhyDoSoManySystemsLookSoSimilar?=................................................................49 IsSystemDesignImportant?...........................................................................................49 Appendixes=...............................................................................................................................50 I.LifeCycleofaTypicalOilandGasProject....................................................................51 II.MainFiscalInstruments:AdvantagesandDisadvantages.........................................53 III.WorldAverageFiscalTerms...........................................................................................57 IV.SelectCountries’Experience..........................................................................................58 Australia.............................................................................................................................58 Licensingpolicy............................................................................................................58 Licensinghistory=..........................................................................................................=59 Generalobservations....................................................................................................59 UnitedKingdom=...............................................................................................................62 Licensingpolicy............................................................................................................62 Licensinghistory=..........................................................................................................=63 Generalobservations....................................................................................................64 UnitedStates=......................................................................................................................67 Licensingpolicy............................................................................................................67 Licensinghistory=..........................................................................................................=68 Generalobservations....................................................................................................69