**1. Introduction**

The petroleum industries in oil and gas producing nations play an important role in economic growth through revenue generation for the governmen<sup>t</sup> (Odularu 2008). However, oil prices have been relatively low due to the increase in global petroleum supply which has outweighed demand (Sieminski 2014). The fall in oil prices may affect petroleum investors in the oil and gas sector due to the large amount of capital invested in exploration activities during the period of high oil prices (Evans-Pritchard 2015). The investors now tend to focus on the country's fiscal regimes with regard to the valuation of oil and gas exploration and production (Nakhle 2015).

Petroleum fiscal regimes are set of laws, regulations, and agreements in a country which governs the benefits derived from petroleum exploration and production (Gudmestad et al. 2010). This links the host governmen<sup>t</sup> as the political entity and the international oil company as the legal entity in the transaction. Also, the petroleum fiscal regime sets a standard for the production of oil and gas as well as the income allocation between these two entities (Bindemann 1999; Sunley et al. 2003; Løvås and Osmundsen 2009). The petroleum fiscal regime is important to the governmen<sup>t</sup> because it ensures the appropriate managemen<sup>t</sup> of the country's natural resources (Natural Resource Governace Institute (NRGI) 2015). To the petroleum investors, petroleum fiscal regimes influence their investment decisions in any country of interest (Hvozdyk and Mercer-Blackman 2010).

Ensuring an effective and attractive petroleum fiscal regime is vital and challenging in some developing counties (Sunley et al. 2003; Cottarelli 2012). Myanmar is a resource rich developing country with an estimated proven natural gas and oil reserves of 10 trillion cubic feet and 50 million barrels respectively. Myanmar exports about 12.7 billion cubic meters (2014 estimates), making Myanmar the 17th largest natural gas exporting country in the world1. The petroleum sector is important for Myanmar's economic growth as natural gas contributes about 25% of its foreign earnings. As a developing country, petroleum exploration in Myanmar is mainly carried out by overseas investors (Khine 2008; Asian Development Bank (ADB) 2014). Therefore, it is vital to ensure that the petroleum fiscal regime becomes attractive to petroleum investors through reforms that will lead to economic growth (McLaughlin 2012; Robinson 2012).

This study aims to analyze Myanmar's upstream petroleum regimes, to ascertain whether its current regimes are attractive when compared to its competing countries, from the investor's perspective. In conducting an in-depth analysis of the fiscal regimes, it is necessary to use comprehensive indicators to rank the attractiveness level of Myanmar, as different indicators are used by different investors depending on their experience, in deciding the overseas selection. The research also intends to consider the attitude of investors in real situation, especially those in Korean energy institutions. Moreover, there are potentially over 14 countries competing with Myanmar oil and gas exports. This research regarding the assessment of Myanmar upstream petroleum fiscal regimes is timely and of significance to both the Myanmar governmen<sup>t</sup> and investors for a wide range of reasons.

Firstly, the Myanmar governmen<sup>t</sup> needs to know the exact level of attractiveness of its oil and gas exploration and production investment climate, as the governmen<sup>t</sup> takes measures and policy reform in various sectors for the time being. Secondly, the findings from this research can help international oil companies (IOC) in making overseas investment decisions, because the evaluation and comparison of petroleum fiscal terms have practical significance. Thirdly, this study can also contribute to basic insights into the Myanmar petroleum fiscal regimes package as it thoroughly analyses the whole fiscal package in the Myanmar petroleum industry. Fourthly, the major contribution of this research is to provide policy recommendations for a more favorable investment climate in the Myanmar petroleum Exploration & Production (E&P) industry. Finally, research focusing on the combination of decision maker's attitudes and quantitative analysis regarding petroleum fiscal regimes are scarce. Therefore, this study intends to fill in the gap in the literature.

The rest of this study is arranged as follows. Section 2 presents the theoretical framework based on concept of economic rent. Section 3 the literature survey followed by the quantitative analysis for the analysis of upstream petroleum fiscal regimes in Section 4. The results are presented in Section 5, while Section 6 summarizes the study with some major findings and policy recommendations.

### **2. Theoretical Framework: Concept of Economic Rent**

Economic rent is defined as "the true value of natural resource which is the difference between the revenues generated from resource extraction and the costs of extraction" (Dickson 1999; Nakhle 2007). Most IOCs use cash flow models which are based on the concept of economic rent to evaluate petroleum resource projects. This is due to the model's simplicity as its equations can project cash flow for the whole project's lifespan and reveal the profitability of the project. Moreover, it is also defined as "the surplus return above the value of the capital, labor and other factors of production employed to exploit the resource. It is the surplus revenue of the resource after accounting for the costs of capital and labor inputs" (Banfi et al. 2005).

Significant economic rent can be generated from the exploitation and utilization of exhaustible natural resources, especially oil and gas resources which are exhaustible resources as well as a strategic commodity with no perfect substitute. This implies that the extraction of oil and gas can earn huge economic rent. Rowland and Hann (1987) asserted that "the economic worth of a license to produce oil from a tract may be measured by the present value of the flow of the future revenues from that tract's

<sup>1</sup> https://www.cia.gov/library/publications/the-world-factbook/geos/bm.html.

production less the present value of associated future costs, where the costs include monetary items such as equipment as well as non-monetary items such as exposure to risks. The difference between these two amounts, is the economic rent of that tract. It implies that the licensee enjoys more profits than those who induce the production of petroleum (pure profits)". Similarly, Raja (1999) argued that "taxes should be aimed at taxing positive net present value because the method discounts all future cash flows and incorporates all the relevant rewards to factors of production".

It can be argued that a positive net present value could be considered as economic rent representing the surplus over and above that which is necessary to induce investment. Therefore, in practical terms, it can be suggested that taxes should be aimed at taxing positive present values. When entering a project, IOC can calculate a return. Economic rent may thus be a bonus, a financial return not required to motivate desired economic behavior. This study agrees with simple and practical concept of economic rent by applying it in the discounted cash flow model used for the analysis to measure the attractiveness level of petroleum fiscal regimes. The major concepts of economic rent are shown in Table 1. The economic rent is used in this study due to its simplicity and practical representation of revenue allocation between the host governmen<sup>t</sup> and the IOC. In addition, oil and gas resources can naturally maximize the economic rent of a country through petroleum fiscal regimes.


