Document Type : Research Paper

Authors

• Parisa Gholipour Feizi ¹
• Ghodratollah Emamverdi ²
• Marjan Damnkeshideh ²
• Aliasghar Esmaeilnia Ketabi ²

¹ Ph.D. Student in Oil and Gas Economics, Department of Economics, Central Tehran Branch, Islamic Azad University, Tehran, Iran

² Assistant Professor, Department of Economics, Central Tehran Branch, Islamic Azad University, Tehran, Iran

Abstract

 Since income tax may reduce the profits and optimal output of a production company, this research extends the concept to oil investor companies by analyzing the optimal oil production path for the Dalpari oil field between 2018 and 2037. Specifically, the study investigates the effects of income taxation on the investor company’s discounted profit, optimal production rate, and changes in the production trajectory. Using a dynamic optimization framework based on the BELMAN model, several scenarios are explored and compared with the proposed production plan for the field. The results reveal that tax policy adjustments can influence the optimal production path. Depending on the scenario, these changes may have adverse or counterproductive impacts on the producer’s interests.
Introduction
In projects for the exploration and extraction of resources such as oil, which require significant investments, governments, as the owners of the resource and the main employers, enter into contracts with domestic and mainly foreign oil investment companies to attract investment in this area. Therefore, the various financial and legal regulations present in different types of contracts can have significant effects on the behavior of the oil investor company and ultimately on the optimal production path. One of the key factors in evaluating investment opportunities is the existence of a transparent financial relationship between the host government and the investor through a clear and codified law. In this context, taxes play a decisive role in the financial relationship between the government and the investor. On one hand, taxes serve as a revenue-generating factor for governments and an incentive tool in international investment, while on the other hand, they are considered the most important factor in assessing the rate of return on investment, risk, and so on, making the evaluation of investment justification meaningless without taxes. Therefore, this research aims to examine and analyze how taxes are applied in various ways, including income tax and the imposition of royalties on the income of the oil investment company, and their effects on the optimal production path. Thus, the question before us is whether the consequences of such tax policies can impact the optimal production path.
In this research, an appropriate optimization model has been specified within the framework of taxation for a depleting resource like oil for Iran, and through a case study, it addresses how the removal of taxes affects the discounted profit rate, optimal production rate, and the optimal oil production path. This study is essentially conducted to highlight and reference the necessity of having an independent tax law in Iran's oil industry. Therefore, firstly, considering the history of exploitation in the Dalpari oil field and using the results of studies on the optimal oil production exploitation model in this field, the optimal oil production path from the Dalpari field is extracted within the framework of a dynamic optimization model for the time period from 2018 to 2037. Subsequently, the scenario of how income tax is imposed on the oil company and its impact on the extraction process of the optimal oil production path is examined.
Methodology and Methods
In this research, the optimal extraction model is specified using the optimal extraction theory of Pindyck (1981), whose theoretical basis essentially includes the optimal control problem of Richard Bellman (the maximum principle technique, which is the most comprehensive method for solving continuous optimal control problems in resource extraction such as oil) or the dynamic programming method. The theory of optimal control is a mathematical optimization method that seeks to find a control law for a given system. Additionally, to specify the dynamic optimization model of oil in the presence of income tax on the oil-producing company, the optimal optimization framework of Zhao et al. (2019) has been utilized. Like any optimal control model aimed at maximizing discounted profit, it includes a state variable or state equation that shows how the remaining reserves in each period are obtained by subtracting the previous period's production from the remaining reserves of the previous period, as well as a control variable that indicates the field's production in each period, the discount factor, and the discount rate. The field's cost function is also dependent on oil production and the remaining reserves of the field in period t. In this model, the parameters of price, income tax rate, and the percentage of royalties or external ownership interest are considered, and the income tax is computable within the model. This research utilizes data related to the Dalpari oil field. The oil field under study is located in the southwest of Iran, 30 kilometers from the central processing unit of the Cheshmeh Khosh Dehloran field. Active oil extraction from this field began in 2000. The in-situ oil volume of the field is 315 million barrels, and the gas volume of the field is 122 billion cubic feet, with current production being approximately 20,000 barrels per day. Cumulative production from this field until 2017 was about 40 million barrels. Additionally, the estimated increase in production for the next 10 years is about 47 million barrels. The API of the oil in the field is 33, and the recovery factor of the field is 41.8 percent. It is worth mentioning that the data used in this project pertains to the existing data of the Dalpari field and the report related to the development and operation contract of the Dalpari oil field, which is modeled for a twenty-year period (2018-2037).
Results and Discussion
With the cost function and objective function specified, as well as the framework of the tax model, the optimal production path of oil from the Dalpari oil field is estimated based on various price scenarios, discount rates, and cost coefficient rates, along with testing various hypotheses such as the negative impacts of income tax on the optimal oil production rate in the first scenario, examining the simultaneous increase of the discount rate and oil price in the second scenario, and also the simultaneous increase of the discount rate and cost coefficient rate in the third scenario, addressing the enhancing and exacerbating effects of the mentioned factors. In the first scenario, the extraction of the optimal production path is executed with the help of changes in the discount rate, and then the effects of changes in the discount rate along with the imposition of income tax on the optimal production path are examined to determine the impact of income tax on the company's optimal production path. The execution of the discount rate scenario before applying the tax model and comparing the optimal production paths with the actual production values (proposed by the concerned oil company) show that although the actual path is more uneven than its simulated values, the slight distance between the simulated optimal paths and the planned path (proposed by the field) indicates that the optimal production rate of the model firstly corresponds with the optimal field rate and also remains constant with changes in the discount rate. With the imposition of tax constraints, the optimal production rate shows a more severe sensitivity compared to the state before the imposition of tax at various discount rates, and with further increases in the discount rate, extraction from the field declines to a lower level of production with a lower recovery factor. The results of this scenario indicate that, according to previous findings and research, the policy of imposing income tax on the producer negatively affects the extraction process and the optimal oil production rate. The price changes applied in the second scenario show that with consecutive changes in oil prices during extraction, the optimal production rate increases, and along with the increase in production level, the recovery factor also significantly increases, leading to greater exploitation in the early years of production. Therefore, it can be confidently stated that the simultaneous increase of the discount rate and oil price can significantly reduce the negative effects of tax imposition on the optimal production rate and improve the optimal production path. By comparing the present value of the discounted profit of the producer along with the simultaneous increase in oil prices, the producer's profit significantly increases compared to the first scenario, despite the imposition of tax constraints. Thus, it can be concluded that in this scenario, the NPV of the company will have a significant increase compared to the first scenario. In the third scenario, changes in the discount rate along with the simultaneous increase in the cost coefficient rate indicate the high sensitivity of the proposed optimization model to changes in the cost coefficient, such that it exacerbates the negative effect of tax imposition on the optimal production path and severely reduces the net present value of the production project. Therefore, firstly, continuous increases in the cost coefficient rate lead to a decrease in the optimal production quantity of the field, accumulated production, and the recovery factor of the field, which causes the optimal production path to shift towards lower production levels. Additionally, with the imposition of tax constraints on the producer, this sensitivity increases further, such that this trend, with continuous increases in the cost coefficient compared to the first scenario, significantly reduces the optimal production rate and negatively impacts the optimal production path.
Conclusion
This research, conducted using real data from the Dalpari oil field, aims to simulate the optimal production path using a dynamic optimization model. This model not only provides a theoretical framework to demonstrate the dynamics of oil production but also effectively reflects the impacts of income tax on the oil investor company's optimal production path. To this end, the question is posed: Can the imposition of income tax on the oil investor company negatively affect the optimal production path? The modeling of this field has been simulated and analyzed under three scenarios: changes in the discount rate, price changes, and changes in the cost coefficient, to answer the research question and assumptions. As expected and in line with previous studies, the results from the sensitivity analysis of discount rates in the first scenario indicate that the imposition of income tax on the oil investor company can reduce the optimal production rate and negatively impact the optimal oil production path. Additionally, the results obtained in the second scenario show that a simultaneous increase in the discount rate and oil prices can significantly reduce the negative burden of taxation on the optimal oil production path. Finally, the results of the third scenario indicate that a simultaneous increase in production costs along with the imposition of a tax on the oil investor company exacerbates the reduction in the optimal production rate and ultimately decreases the optimal oil production path. Therefore, the results obtained from all three scenarios not only provide a positive answer to the question posed in this research but also confirm the consistency of the sensitivity analysis results across different scenarios with previous studies.

Keywords

• Imposition of tax on oil production
• Dynamic optimization of oil production
• Oil producing company