Published 9 August 2017
In drafting petroleum contracts with an effective fiscal regime, it is paramount for negotiators to ensure that the expected benefits to clients are secured and managed. An effective fiscal regime means the fiscal regime prevailing on the cash flow of the project taking into account any and all contractual and legal elements and categories of costs and revenues of the project over a given time period. In practice, the fiscal parameters of a petroleum contract could either be regressive or progressive depending on whether the net-of-cost to income for the government grows faster than the net-of-cost to project income (progressive regime) or vice-versa (regressive regime). Two key measures of profitability are often used to estimate the income accruable in progressive regimes: (a) the R-factor designated and agreed in the contract used to determine the fee per barrel (FPB) for contractors, and (b) the percentage of rate-of-return (ROR) agreed by the parties in the contract. Such income may be generated in the project out of the royalty fee, taxes and other revenue streams to the government. In this article, the fiscal issues arising from the R-factor agreed in the risk-taking service contracts, particularly as it affects the control exerted over contractor's ROR will be closely investigated. This article examines theoretical and practical insights in order to demonstrate that the R-factor approach on its own may be insufficient in securing a fair division of benefits (the revenues generated from the contract and/or the rate of return achieved by the Parties under the Contract) between the parties to a petroleum contract. This article assumes that in order to arrive at a fair division of benefits, contractor's ROR should be controlled by some other contractual tool rather than a simple R-Factor in the contract. Since the sliding scale of ROR is due to the various X-Factors defined by the Parties under the Contract it is assumed that a sliding scale of ROR is an effective approach to achieve equitable division of benefits in a risk-taking service contract.