Enhancing Oil and Gas Sector Attractiveness: The Use of Local Content Policies to Offset Regressive Tax Tools in the Design of Upstream Contracts (Case Study of the Democratic Republic of Congo)
AbstractThe oil and gas industry is facing big challenges towards its future. Among these challenges is listed the trendy energy and economy decarbonization as the core of a fast-pacing energy transition. This particular challenge threatens huge amount of oil and gas reserves throughout the world to remain ‘in limbo’, thereby causing the weakening of the oil and gas sector’s attractiveness which is translated through the scarcity of financing options for exploration and production activities. The Democratic Republic of Congo (DRC) with its big oil and gas potentials faces, beyond this general and crucial context, the threat of a wild competition within the sub-Saharan Africa’s market of petroleum licenses as a result of abundant new discoveries in the Southern and East regions of the continent. However, the DRC, compared to its competitors, suffers a considerable competitive disadvantage due to the geographic isolation of the major part of its resources, implying costly investments to develop oil and gas reserves within its national territory. Therefore, the design of an efficient fiscal regime matching the country’s objectives to create a sustainable wealth from the exploitation of its resources appears as the optimal strategic response to these challenges. This research proposes to the DRC a contractual framework that incentivizes E&P activities without selling off its resources. The proposed framework, labelled as the ‘Local content based-contract model’, is a tax system that integrates neutral local content variables in replacement of regressive petroleum tax instruments so as to alleviate investments risks for oil and gas companies and help the DRC to convert quite directly its resources into a real socio-economic development.Keywords: Local content, petroleum fiscal regimes, regressive tax instruments, progressive tax instruments, neutral local content provisions, neutral tax instruments, local content-based contract
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