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Evaluating Fiscal Regimes for Resource Projects: An Example from Oil Development
Philip Daniel, Brenton Goldsworthy, Wojciech Maliszewski, Diego Mesa Puyo, and Alistair Watson
Taxing Natural Resources: New Challenges and Perspectives
IMF Headquarters, Washington DC
September 25, 2008
The views in this presentation are those of the authors and should not be attributed to the International Monetary Fund, its Executive Board, or its management.
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Purpose and Outline
• Challenges for fiscal regime design (where private investment involved)
• Criteria for evaluating fiscal regimes• Indicators for measuring criteria• A summary approach• Current terms for “Mozambique”• Evaluating an alternative• International benchmarks
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Coverage
• Evaluation from viewpoint of government• Task closely related to company appraisal of projects• Using building block of field development, from which to
“solve backwards” to exploration decisions (exploration decisions require probabilities for development outcomes, and failure.)
• What does fiscal regime imply about “prospectivity”? (IMFstaff not attempting geological assessment!)
• Procedure at this stage similar for mining, while exploration issues differ
• Focus on regimes in Africa, with other comparisons• “Mozambique” taken as stylized example• Health warnings about comparisons.
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Rent, Uncertainty and Instability
• Resource Rent: value minus all necessary costs
• Uncertainty about value of resource and timing of revenues
• Instability caused by volatility of oil prices
Two Oil Price BoomsOil Prices: Spot and Projections
Sources: U.S. Department of Energy Outlook (1982,1985,1991, 1995, 2000 and 2004); and IMF World Economic Outlook (2003,2004,2005,2006,2007, and 2008). After Ossowski et. al. (2008)
Note: Solid lines on the left chart are spot WTI oil prices, on the right chart are WEO average of WTI, and Fateh. The dashed lines are price projections.
U.S. Department of Energy Annual Energy Outlooks (AEO) 1982-2004 (2006 U.S. Dollar per Barrel) 1/2/
0
10
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100
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003
US$
per
bar
r
AEO 1982
AEO 1991
AEO 1985
AEO 2000AEO 1995
AEO 2004
WEO Oil price Forecasts, 2003-2008(U.S. Dollars per Barrel) 1/
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25
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45
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65
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105
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2004 20052006 2007
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/bbl
Apr 03Apr 04
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Apr 06Apr 07
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Oct 07
Sep 04
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Resource Taxation: Criteria
• Neutrality
• Revenue raising potential
• Risk to government (stability and timing)
• Effects on investor perception of risk
• Adaptability and progressivity
• Interactions.
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Indicators for Measurement
Tax analysis measures
• Average effective tax rate
• Marginal effective tax rate
DCF methods and alternatives
• Hurdle rates
• Internal rate of return
• Criticisms
Sensitivities and probability distributions
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888Present value to equalize PV of negative returns
Present value to equalize mean PV to investor“Prospectivity Gap”
Compare expected yield index with expected risk indexRelating Revenue Yield to Investor Risk
Cumulative probability distribution of outcomes
Value of negative returns
Probability of below-target returns
Dispersion of expected IRR (Coefficient of variation of IRR)Investor Perceptions of Risk
Proportion of revenues in first n years
Variance of NPV of revenues (coefficient of variation)Risk to Government
Tax share of total benefitsAdaptability / Progressivity
Share of rent to government
Time profile of revenueRevenue Raising Capacity
Breakeven price
METR (wedge between pre and post-tax IRR, as % of pre-tax)
AETR (government take in a profitable case)Neutrality
Key IndicatorsEvaluation Criterion
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A Fiscal Regime in “Mozambique”• Stylized example assumed in frame of
Mozambique model EPCC for 3rd Licensing round (end-07)
• Country with one gas project in production, other discoveries, and active exploration
• Task is to broaden portfolio of developments and improve revenue yield – especially to encourage “deep water” activity
• Comparable with numerous other countries (Ghana, Uganda, Namibia, Mauritania, etc.)
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Project Examples
• Onshore oil, 100 million bbl, exploration & development costs: $5.5/bbl */
• Shallow offshore oil, 151 million bbl, exploration and development costs: $13.6/bbl
• Deep water oil., 1 billion bbl, exploration and development costs: $11.8/bbl */
(This presentation shows the deep water case alone.)
*/ Onshore and deep water examples supplied by Wood Mackenzie
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Summary of Simulated “EPCC” Terms
10%State equity participation20%Dividend and interest withholding tax (WT)
32%CIT rate50%R-factor > 440%3< R-factor <430%2< R-factor <320%1< R-factor <210%R-factor <1
R-factor based profit petroleum sharing65%Cost Recovery Limit10%Royalty
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WEO Price Forecast, September 08
0
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105
120
2000
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years
US$
/bbl
nom
ina
Projection
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Time Profile of Revenue: Deep Water (WEO Prices)
Deep Water Oil Project
-2,000
-
2,000
4,000
6,000
8,000
10,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29years
$mm
real
Participation shareDividend and interest withholding taxCorporate Income Tax (CIT)Profit Petroleum shareRoyaltyNet cash flow before sharing
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75%Government take (AETR) at 15%14,459Government revenue NPV at 15% ($mm)
4.8Payback period at 15% (years from start of production)
5,393Contractor NPV at 15% ($mm)19,301Project pre-tax NPV at 15% ($mm)40%Post-tax real IRR to contractor54%Project pre-tax real IRR
Summary Results for the “Current Terms”in Deep Water Project
(WEO Prices)
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151515
70%
75%
80%
85%
90%
95%
100%
105%
110%
115%
3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000
Pre-Tax Cash Flow Discounted at 15% ($mm)
Gov
ernm
ent T
ake
Dis
coun
ted
at 1
5%
.State Share of “Rent” (AETR)
Range of Pre-Tax Cash Flows Discounted at 15% (Deep Water Oil Project)
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Share of Total Benefits (Discounted at 15%)
0%
10%
20%
30%
40%
50%
60%
70%
80%
28% 34% 41% 46% 52% 57% 62% 66% 71% 75%IRR pre-tax
Shar
e of
net
ben
efits
dis
coun
ted
at 1
5%
.
Participation shareDividend and interest withholding taxCIT Profit Petroleum shareRoyalty
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Summary of Alternative Package Terms
10%State equity participation10%Dividend and interest WT32%CIT rate85%IRR > 40%75%35% < IRR < 40%65%30% < IRR < 35%55%25% < IRR < 30%45%20% < IRR < 25%35%15% < IRR < 20%25%IRR < 15%
Rate of return profit petroleum sharing90%Cost recovery limit10%Royalty
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Government Revenues: Alternative Package vs. “Current Terms” Deep Water Project (WEO Prices)
-750
-
750
1,500
2,250
3,000
3,750
4,500
5,250
6,000
6,750
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
$mm
real
Mozambique Mozambique alternative packageyears
“Mozambique”
Alternative
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AETR, Breakeven Price, and METRat 15% Discount Rate
475275“Mozambique”434980Alternative package%$/bbl%
METR at 15% post-tax IRR
Price required for 15% post-
tax IRR
AETR(WEO)Deep Water Oil
Project
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Government Share of Total Benefits for Range of Pre-Tax IRR (Deep Water Project)
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65%
Pre-tax IRR
Gov
ernm
ent s
hare
of n
et b
enef
its d
isco
unte
d at
15%
Mozambique Mozambique alternative package result at WEO
Alternative
“Mozambique”
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Mean Government NPV, Coefficient of Variation, and Early Share of Total Benefits
discounted at 15 percent
15597,189“Mozambique”13667,212Alternative package%%$mm
Government share of total
benefits in first 10 years
CVMean Government NPVDeep Water Oil
Project
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Cumulative Distribution of Post-Tax NPVat 15% Discount (Deep Water Project)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
-5,000 -3,000 -1,000 1,000 3,000 5,000
Investor NPV discounted at 15%
Prob
abilt
iy
Mozambique Mozambique alternative package
Alternative
“Mozambique”
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AETR at 15% (WEO Prices)Average Effective Tax Rate Discounted at 15 Percent (WEO Prices)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Ango
laNa
mib
iaEq
uato
rial G
uine
aNo
rway
Cam
eroo
n
Moz
ambi
que a
ltern
ative
pac
kage
Tim
or L
este
Colo
mbi
aM
ozam
biqu
eM
aurit
ania
Mad
agas
car
Ghan
aNi
geria
Austr
alia
Sier
ra L
eone UK
AET
R, a
t 15%
dis
coun
t rat
e .
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Breakeven price for 15% Post-Tax IRRPrice Required to Achieve 15 Percent After-Tax Real Rate of Return
05
101520253035404550556065
Equa
toria
l Gui
nea
Mad
agas
car
Colo
mbi
aAn
gola
Norw
ayM
ozam
biqu
eCa
mer
oon
Mau
ritan
ia
Moz
ambi
que a
ltern
ative
pack
age
Sier
ra L
eone
Austr
alia
Ghan
a
UKNi
geria
Nam
ibia
Tim
or L
este
US$
/bbl
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Revenue Yield and Investor Risk Indexes
64129111Equatorial Guinea
7085115Angola
58146107Colombia
54183107Madagascar
6889106Norway
63100100“Mozambique”
7162101Cameroon
7842103Namibia
677296Mauritania
7073101Alternative package
752595Timor Leste
655786Australia
696588Ghana
586978Sierra Leone
733584Nigeria
625370UK
%Mozambique =100as % of Mozambique
Coefficient of variation of government
receipts
Investor expected risk index (at 15% discount rate)
Expected government receipts discounted at 15% Deep Water
Project
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Investor Perceptions of Risk
394916Equatorial Guinea
313916Angola
364717Colombia
385617Madagascar
294117Norway
264919“Mozambique”
244620Cameroon
153220Namibia
234720Mauritania
244620Alternative package
163821Timor Leste
204322Australia
194422Ghana
194723Sierra Leone
143923Nigeria
124826UK
( Tax-related)After-Tax
74135Project pre-tax
%%%
Probability of expected return below 15%
Coefficient of variation of IRR
Mean expected IRRDeep Water Oil Project
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“Prospectivity Gap”
660 (66)Angola54 852Mozambique200 804Alternative package
$mm$mm
Excess over lowest expected negative
NPV15 to investor
Excess over lowest mean expected
NPV15 to investor
Deep Water Project
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Conclusions
• Attempt to set out evaluation criteria
• Attach indicators or measures to them
• Provide framework for numerical analysis of risk and reward trade offs
• Relating government aims to investor perceptions of risk, and prospectivity
• An aid to judgment in setting and revising fiscal regimes (not a substitute).