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Mr. James L. Smith
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.
Mr. James L. Smith

other blocks; they may only be carried forward to shelter future revenue on the present block if and when a commercial discovery is made. Under a ring fence, therefore, a decision to abandon the block is also a decision to abandon a tax shelter, and this consideration is factored into the IOC’s decision. 19 Figure 17. Maximum Exploratory Failures before Abandonment Figure 17 reports results from the two alternative assumptions regarding the IOC’s information set. Scenario A (“Drill Bit”) assumes the IOC places greater weight on the results of exploratory