Economic Assessment of Deep-Water Fields in China Under Present Fiscal Scheme

Abstract

This study examines current fiscal system for the petroleum industry in China using three hypothetical oil field models which are assumed in the South China Sea and tries to find whether current regime can boost oil production in deep-water oil fields in South China Sea. The result is discouraging. All the fields are marginal and are not worth to invest. Because of low oil price, high cost and high government take, all three fields show negative post-tax NPV and negative NPV/I ratio. High case which is 250 million barrels reserve shows the highest IRR, 7.88%. Furthermore, it is found that Chinese fiscal system is regressive. When economic rents are lower, government takes higher share. The early revenue to government further aggravates burden to investors and discourage investment. From the sensitivity analysis, the biggest influencing factor is development cost including capital expenditure and drilling cost. The second and third ones are oil price and reserve. The final one is operating cost or OPEX which is very small in scale. From Monte Carlo simulation, the probability of loss for post-tax NPV is higher than 50% in most circumstances.