Caveat Emptor: Purchasing Petroleum Industry Investment with Fiscal Incentives

Abstract

Increasing international competition is encouraging governments to negotiate fiscal incentives with oil producers. The asymmetrical nature of information driving industry development decisions means that governments do not know how much they are paying with these incentives or what they are getting in return. This paper models renegotiating of fiscal terms for a petroleum prospect as an economic game. Nash equilibrium strategies are derived for the government and the developer for revising royalty rates, investment credits, and profit shares, The paper also addresses how the developer's strategic sharing of information may affect the outcome of negotiations. The model results suggest that governments should exercise caution with the use of discretionary incentives.