Edited by Joanne Evans and Lester C. Hunt
Chapter 17: Petroleum Taxation
Carole Nakhle The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing. (Jean-Baptiste Colbert, French Finance Minister to Louis XIV, Crawson, 2004, p.12) 1 Background: Plucking the Oil Industry Goose Petroleum taxation is the instrument of choice for sharing hydrocarbon wealth between host governments and international oil companies. For all parties, the Colbert adage holds. The concept of taxing oil companies is simple, but the detail is complex and is an art as it requires fine judgement. Compared to the taxation of other sectors and industries, petroleum taxation has some particular features arising from the oil industry’s special characteristics, the central contribution the oil and gas sectors make to all advanced economies, the volatility of oil prices, the large operating and development costs, the high uncertainty associated with petroleum geology, the specific characteristics of individual oilfields and the possibility of re-investment. The costs of petroleum projects tend to be incurred up-front and the time lags between the discovery of oil or gas reserves to the time of first production can be significant. This adds to the challenge of designing and implementing an appropriate petroleum tax system aimed at achieving a balance between both government and industry interests. There are two fundamental objectives of petroleum taxation; to ensure a fair share of the wealth accruing from the extraction of the petroleum resource while also providing sufficient incentives to encourage investment and optimal economic recovery of the...
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