Petroleum taxation. The effect on recovery rates

Petroleum tax design analysis usually abstracts from the fact that taxation affects not only project selection but also concept design and drainage strategy, and thereby the extraction and recovery rate. The implicit assumption is that oil companies are unresponsive to tax changes where concept selection and production decisions are concerned. In his novel approach, Smith (2014) develops a broader model which accounts for the additional effects. This provides a consistent framework which permits analysis of specific settings. Berg et al. (2018) apply the model to establish the effect of a reduction in uplift on the Norwegian continental shelf (NCS) and find, for this case, that the traditional assumption of an unresponsive company still holds.Analysing field data from the NCS, we find that the actual production profiles do not resemble the mathematically tractable theoretical model of a constant decline in production used in Smith (2014) and Berg et al. (2018), and we explain why this is the case for offshore fields. We propose a novel theoretical resource model which fits the data from the 92 largest fields on the NCS. It is a general resource model that allows for injection from start of production, and where the model of a constant decline in production is a special case. Our model is also a mathematically tractable model of constant decline, but where the decline is at the level of the individual well rather than the field. The recovery rate is thus responsive to the number of wells, and tax design affects the recovery rate. Our findings suggest that companies are responsive, and that tax design should take account of distortions in the selection of development concepts.