Comprehensive Report: Features of an Ideal Hydrocarbon Fiscal System

This report examines the features of an ideal hydrocarbon fiscal system, using the UK's oil discovery near Gatwick Airport as a case study. The report explores the collaboration between the government and oil drilling firms and contrasts the contractual and concessionary systems. It identifies key characteristics of an ideal fiscal system, including governmental authority, favorable fiscal terms (taxes, royalties, and incentives), environmental sustainability, and favorable policies for both the government and the explorer. The report emphasizes the importance of balancing the government's ownership and taxation rights with the explorer's rights to manage the exploration process and adhere to contract terms. References from BBC News and World Bank are used to support the analysis.

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Features of an Ideal Hydrocarbon Fiscal System
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Features of an Ideal Hydrocarbon Fiscal System
On April 9, 2015, John Moylan published an article in the BBC News dubbed, ‘‘Oil
discovery near Gatwick airport 'significant.'” In this article, John presented a comprehensive
report on the oil discovery that had been made around Gatwick Airport, Southern England. From
the research conducted by the explorers, this is a significant discovery that will improve the
country’s economy a great deal. The author quotes UK Oil & Gas Investments (UKOG), the
leading explorers for reporting that the oil is plenty because it is present in large quantities-100
billion barrels to be exact (Moylan 2015). Such a large quantity of oil resource cannot go into
waste because the UK government, as the chief custodian of the oil deposits, has to be involved
in its exploration.
World over, the common trend is that the exploration of oil and other hydrocarbons is
usually done as a result of a collaboration between the government and an oil drilling firm. In
order to reap the benefits of the oil, the government should sign a deal with an oil exploration
company to be in charge of the drilling of the oil. This however, should be based on a good
system that will enable the government to enjoy the full benefits of the oil deposits (Cevik 2019).
This can be done by using either the contractual system or the concessionary system. Under the
contractual system, the contractor (explorer in this case) gets a contract and shares in the project
for an agreed time. However, this differs from the concessionary system in which the title is
granted to the explorer who is then obliged to pay taxes, royalties, and other levies to the
government.
An ideal hydrocarbon fiscal system that the UK government should sign, therefore,
should be characterized by many factors. First, it should be characterized by governmental

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authority. The agreement should give government full powers to be in charge of its resources.
Oil is a natural resource that belongs to the government (Mariano, de Souza & Narciso Filho
2018). So, even if it decides to sub-contract the exploration to a third party, the government
should not be deprived of powers to use its officers to license, assess, monitor, levy taxes,
royalties, and fines on the explorer whenever necessary. It therefore, means that the explorer
should collaborate with all the governmental agencies to ensure that everything is done as per the
agreement.
The other characteristic of an ideal system is that it should have favorable and acceptable
fiscal terms. The government should get an opportunity to generate enough and commensurate
revenues from the project. This should be in the form of taxes, royalties, bonuses, incentives, and
all the other necessary statutory and non-statutory levies. Moreover, an ideal system should have
an element of environmental sustainability (Tordo 2007). Meaning, the exploration should be
done in a strict compliance with all the environmental policies and standards. The government
should, therefore, ensure that it conducts an Environmental Impact Assessment (EIA), constantly
monitor the exploration process, and ensure that no environmental degradation occurs.
Last, but not least, the system should have favorable policies for both the parties. While
the government enjoys its exclusive rights to ownership, licensing, access, and taxation, the
explorer should be entitled to other rights such as management of the exploration process,
adherence to the contract terms, and renewal of the contract whenever necessary (Mariano, de
Souza & Narciso Filho 2018). All these conditions are necessary because they are for the mutual
benefit of the government and the explorer.

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References
Cevik, S., 2019. Policy coordination in fiscal federalism: Drawing lessons from the Dubai debt
crisis. International Journal of Emerging Markets.
Mariano, J.B., de Souza, J.L. & Narciso Filho, N., 2018. Fiscal Regimes for Hydrocarbons
Exploration and Production in Brazil. Energy policy, 119, pp.620-647.
Moylan, J., 2015. ‘‘Oil discovery near Gatwick airport 'significant.'” London: BBC News.
Tordo, S., 2007. Fiscal Systems for Hydrocarbons: Design Issues. Washington, D.C.: The
International Bank for Reconstruction and Development / The World Bank.