In most countries other than the United States, the state is the owner of the underground resources and exercises sovereign rights over their exploration and exploitation. The state decides on its long-term petroleum policy and in particular on the role it selects to grant to private investors, mostly foreign companies, in the exploration and production of petroleum in the country. To implement the petroleum policy, the host country may promulgate laws and regulations that define how to authorize foreign investors to carry out petroleum exploration and exploitation operations, how to define the terms and conditions in specific exploration and production (E&P) agreements and how the benefits derived from the exploitation of petroleum resources are divided. These laws, regulations and the associated fiscal systems collectively define the legal, regulatory and financial environment in which the petroleum industry operates and are critically important for both the investor and the hosting country.

This chapter studies the main types of upstream licensing arrangements and examines the related fiscal systems. The first section provides an overview of the main forms of upstream agreements, drawing heavily on Le Leuch (2013) and Tordo, Johnston and Johnston (2010). The second section focuses on the economic analysis of different fiscal regimes. There is an extensive literature on the design of fiscal regimes (e.g. Johnston 1994; Cameron & Stanley 2017). The discussion in this chapter is from the point of view of understanding the business and financial environment in which oil companies operate.

The main types of upstream agreements

Depending on the legal system and regulations of each country, the agreements concluded between host countries and investors in upstream oil and gas industry may take different forms. This may consist of the award of oil and gas licences or concession agreements without the signing of a distinct agreement, or the signing of a quite detailed E&P contract when the petroleum law provides only for a main framework of principles and when the fiscal system is not fully defined by national law.

In countries where the petroleum law and regulations have detailed stipulations about the conduct of petroleum activities and the related fiscal regime, the licences or concessions are usually awarded according to terms entirely defined in the national legislation and regulation.