To help build awareness regarding the different stages at which capital is invested and revenues received by host governments, we have published information which describes when the contractor, typically an international oil company (IOC), commits up-front capital investment to the exploration, appraisal and development phases.
It also describes when the host country’s government begins to receive revenues through their share of production, taxes and royalties resulting from the oil production phase. The IOCs carry all the financial risk and capital exposure through the exploration and appraisal phase.
Typically the IOC will carry the host government's share of costs through to First Oil. In addition to the risked capital, through the exploration, appraisal and development phases the IOC pays the host government a number of taxes including withholding taxes on the capital spent in the host country, VAT on imported goods, PAYE on staff payroll, customs on imported goods as well as land rentals, training and ongoing licence costs. When First Oil is achieved, the host government will receive revenues and taxes in a number of forms. Host governments receive a share of production or 'profit oil' either directly or via a national oil company.
The remainder of the host government's take from oil production is made up of bonuses, royalties, corporate tax and direct interests in projects. A share of the production will also be allocated to the IOC to recover the significant investment that has been made during the exploration, appraisal and development phases. The agreement between the IOC and the host government determines when and how costs can be recovered and how production and revenue are shared. Typically the IOC's share of production or revenue is higher in the earlier years of production as costs are recovered in the form of allowable deductions against corporate tax or as an allocation of production, commonly known as 'cost oil'. Once the IOC's costs have been recovered, then production and revenue sharing between the IOC and host government more closely track the production profile of the project.