We present a simple model of petroleum exploration and development that can be applied to study the performance of alternative tax systems and identify potential distortions. Although the model is a highly simplified, it incorporates many factors and some of the key tradeoffs that would influence an investor’s investment behavior. The model recognizes the role of enhanced oil recovery and treats the impact of taxation on exploration and development in an integrated manner consistent with an investor’s joint optimization of investments at both stages of the process. The model is simple and user-friendly, which facilitates application to a broad range of problems.
, even a modest rise in oil price could effect a substantial increase in IOCNPV, so delay becomes attractive. Thus, we should be concerned about diligence issues and conflicts mainly in the realm of high-cost, low-margin developments like oil sands, heavy oil, and deepwater or Arctic operations.
Figure 7 illustrates the strength of the private incentive to delay development of a high-cost field due to expectations of rising prices. For these calculations, most parameters are kept to previous values, but variable operating cost is increased to $60 per barrel (from