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Risk and rewards dynamics: Measuring the attractiveness of the fiscal regime in the presence of exploratory risks

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  • Furtado, Lucas S.
  • Gonçalves, Edson
  • Costa, Luciano A.R.

Abstract

The government needs to consider risk when designing a fiscal regime and oil companies need to assess prospect's risks when facing investment decisions. This paper analyzes how the fiscal regime dictates the risk-reward partition between companies and the government in a portfolio of prospects. The expected monetary value is provided as the decision criteria, and a decision model is presented where all the prospects are graphically represented. The fiscal regime's contract is generalized as a mathematical function and plotted together with the exploratory opportunities. This type of representation helps the policymakers to fine-tune petroleum contracts. It is also of great value to companies because it helps to understand the risks and rewards of a portfolio. We used the recent Brazilian fiscal regime change from a royalty and tax contract (R/T) to a partition share contract (PSC) to understand the impacts of the fiscal regime in the risk-reward balance of the prospects located at the recently discovered Pre-Salt geologic province offshore Brazil. We show how the policymakers can fine-tune the fiscal regime and how companies can better understand the contracts considering both the rewards and the risks involved.

Suggested Citation

  • Furtado, Lucas S. & Gonçalves, Edson & Costa, Luciano A.R., 2019. "Risk and rewards dynamics: Measuring the attractiveness of the fiscal regime in the presence of exploratory risks," Energy Policy, Elsevier, vol. 132(C), pages 1274-1287.
    • Handle: RePEc:eee:enepol:v:132:y:2019:i:c:p:1274-1287
    DOI: 10.1016/j.enpol.2019.05.059
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    References listed on IDEAS

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