A Comparative Analysis of Cost Recovery and Taxation of Production Sharing Contracts in the Kurdistan Region with Nigeria and Azerbaijan

Abstract

The oil and gas industry is complicated, with significant investment characteristics and high operating risks, including investment failure and safety risks. This industry differs from others in that each company must complete a step-by-step process, starting with exploration, development, and production (exploitation) and ending with cost recovery, production, and taxation. Prospective investors must understand the risk levels associated with each of these points. Since 2007, the Kurdistan Region's oil and gas sector has grown rapidly, and this period has been dubbed as "Kurdistan's Golden Age."  As a new oil-exporting region, the income from oil is of great importance in the development of the country. Presently, several oil and gas exploration and production companies operate in the Kurdistan Region, attracting a growing number of investors. However, the purpose of this study is to better understand what Production Sharing Contracts (PSC) are, including related terms, Cost Recovery, tax processes, and areas that must be addressed in a PSC; as well as to discuss aspects of interest to tax administration, such as the Kurdistan region's Oil PSC's cost recovery issue, and to make comparisons with other developing countries such as Nigeria and Azerbaijan.The findings suggest that Kurdistan region PSC appears to be more favorable to International Oil Company (IOC) in comparison to Nigeria and Azerbaijan. As a result, a plan should be put in place to address the issues that would arise as a result of cost recovery and taxation in PSCs.   The methodology included desk research, which included a review of published literature. Based on the comparative assessment, the paper reached possible conclusions regarding oil cost recovery and fiscal regimes for the respective countries, and made some recommendations for upcoming oil contracts in Kurdistan Region of Iraq (KRI).