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Abstract:
This paper examines the equity valuation process for the world's largest privately owned oil and gas companies. Our analyses provide evidence for a structural shift in the valuation of the largest oil and gas companies. Furthermore, we examine the key value-drivers that have been instrumental in the structural shift. Using financial and operational information from 15 international oil and gas companies over the period 1990-2003 and proxies for merger activity and market sentiment, we test for structural shift in the valuation of integrated international oil and gas companies. We show that financial information such as net income, cash flows and accruals, and operational measures such as the size of oil and gas reserves, are instrumental in explaining the structural shift in valuation of oil and gas companies.

company valuation, structural shift, oil company

Abstract:
High oil prices are normally expected to stimulate exploration and the development of new oil and gas fields. But over the last few years, financial analysts have focused strongly on short-term accounting return (RoACE) for benchmarking and valuation, and this has led to high capital discipline among oil and gas companies. We analyse how high oil prices can be explained in terms of an implicit capacity game between the oil companies, and explore the stability of the current equilibrium. Our approach is an investigation of a key assumption among financial analysts, namely the presumed positive relation between RoACE and stock market valuation. Based on panel data for 11 international oil and gas companies, we seek to establish econometric relations between market valuation on one hand, and simple financial and operational indicators on the other. Our findings do not support the perceived positive relation between reported RoACE and market-based multiples. Recent evidence also suggests that the stock market is increasingly concerned about reserve replacement and sustained profitable growth. The current high-price equilibrium is therefore hardly stable.

Abstract:
Tax officials judge whether a multinational's transfer price is consistent with an arm's-length standard, the price at which two independent firms would carry out a similar transaction, by using data from comparable but independent transactions. In vertically integrated industries, the only source of comparable data may be from controlled (non-independent) transactions. This paper challenges the idea that standard arm's-length methods cannot perform well in such markets due to the incentives comparability rules create for tacit collusion of transfer prices. The Cost-Plus method provides the best incentives to induce tacit coordination on a low transfer price even when tax differentials suggest a tax benefit from coordinating on a high transfer price. The transactional profit-based rules adopted by the United States Treasury in 1994 and by the OECD in 1995 perform poorly in this regard. With private and heterogeneous cost information, the Cost-Plus method generates an incentive comparability effect that tax officials can exploit.

Tranfer pricing, vertical integration, incentive comparability

Abstract:
Producers or consumers faced with an increase in taxes are usually able to shift parts of it to other levels in the value chain. We examine who is actually bearing the burden of increased energy taxes in the EU-area - consumers or exporters. Traditional tax incidence theory presumes spot markets. Natural gas in the EU-area, however, is to a large extent regulated by incomplete long-term contracts. Still, spot market forces could be indicative for tax shifting, by determining the ex post bargaining power in contract renegotiations. By examining tax shifting in actual gas sales contracts we test whether this is the case. To calculate tax incidence we derive demand elasticities, income elasticities and cross price elasticities for natural gas, oil and electricity, for different market segments (households, industry, power generators) in EU countries. Particular focus is on tax incidence in gas markets regulated by incomplete long-term contracts. Based on our findings we discuss normative energy tax issues related to revenue, environmental obligations and security of supply.

Energy Markets, Incomplete Contracts, Tax Incidence

Abstract:
Gas exports to the Continent are regulated by long term take-or-pay contracts. The contracts are described and analyzed. We thereafter examine whether the most central European gas market, the German market, is integrated. Are there substantial price differences between gas from different export countries, and do prices move together? Time series of Norwegian, Dutch and Russian gas export prices to Germany in 1990-1998 are examined. Cointegration tests show that the different border prices for gas to Germany move proportionally over time, indicating an integrated gas market (the Law of One Price holds). We find differences in mean prices, with Russian gas being sold at prices systematically lower than Dutch and Norwegian gas. Among the explanatory factors for price discrepancies are differences in volume flexibility (swing) and perceived political risk.

Market integration, gas markets, cointegration test

Abstract:
After opening up of the Interconnector, the liberalized UK natural gas market and the regulated Continental gas markets became physically integrated. The oil-linked Continental gas price became dominant, due to both the large volume of the Continental market and to the fact that the significant call options embedded in the complex take-or-pay contracts make these contracts the marginal source of supply. However, in an interim period - after deregulation of the UK gas market (1995) and the opening up of the Interconnector (1998) - the UK gas market had neither government price regulation nor a physical Continental gas linkage. We use this period - which for natural gas markets displays an unusual combination of deregulation and autarky - as a natural experiment to explore if decoupling of natural gas prices from prices of other energy commodities, such as oil and electricity, took place. Using monthly price data, we find a highly integrated market where wholesale demand seems to be for energy rather than a specific energy source.

energy markets, price interlinkages, cointegration analysis

Abstract:
Two jurisdictions compete to attract shares of the R&D investment budget of a large multinational enterprise, whose investments potentially confer positive spillovers on national firms. The firm contributes to local welfare by these spillovers (should they materialize), by tax payments and by dividends paid to local investors. The firm has private information both about its efficiency and about spillovers, and in particular whether the latter do exist or not. It is shown that strategic tax competition may lead to overinvestments relative to the first-best allocation, that the excessive investments occur in the country where the positive spillover effects are lowest, and that they are most severe for the least efficient firms.

Abstract:
Two jurisdictions compete to capture the rents of a large multinational enterprise (MNE) which invests locally and which is partly owned by local investors. The MNE contributes to local welfare by tax payments and dividends, and it has private information about the efficiency of the operations in the two localisations. It is shown that the distortions in the MNE?s real investment portfolio are determined by a trade-off between fiscal externalities and equity externalities, and that investments in the case of strategic tax competition may be lower than in the co-operative case. Ownership matters, and we show how the firm may reduce its overall tax payments by influencing the distribution of owner shares between investors in the two countries.

Tax competition, mobility, common agency

Abstract:
Following the Brent Spar controversy, the OSPAR countries reached a unanimous agreement in 1998 for the future rules for disposal of petroleum installations. The vast majority of existing offshore installations will be re-used or returned to shore for recycling or disposal. For installations where there is no generic solution, one should take a case-by-case approach. We provide a survey of international economic and regulatory issues pertaining to disposal of petroleum installations, and provide specific examples by analysing the Norwegian decommissioning and disposal policy. Optimal disposal policy can be analysed by cost-benefit analyses with distributional effects, subject to environmental and goodwill constraints.

Petroleum installations, decommissioning, disposal, externalities

Abstract:
This paper attempts to analyze how the government from a social point of view should handle firms that demand preferential tax treatment on grounds of being internationally mobile. A revelation mechanism is constructed taking into account that migration decisions by firms have negative fiscal effects and also affect national industrial clusters. Some important and seemingly counter intuitive results are: (1) Information rent is acquired by immobile (inefficient) firms; (2) The optimal allocation is implementable within the framework of a corporate income tax system, where mobile firms will self-select more unfavorable depreciation allowances as compared to immobile firms; and (3) In relative terms, the immobile sector will expand at the expense of the mobile sector.