Petroleum Contracts and Economics

SOLUTIONS TO CLASS EXERCISESFISCAL SYSTEMS

Concessionary Fiscal System

Safari Oil Company

Concessionary Fiscal SystemSTATEMENT OF REVENUE SHARE

Concessionary Fiscal System

• What is the Percentage Contactor and Government take?

• Assuming the following information, work out the contractor net cash flows:

• Signature bonus actually paid in 2014 was $225,000 for the entire concession

• Licence fee is non deductible• Operating costs include depreciation and plant

amortisation costs of $400,000

Concessionary Fiscal System

• The senior geologist predicts that there is 45% chance that the exploration will find oil and that dry hole expenses could come to a high of $200,000. This has made the MD nervous and wants to know the maximum size of the cash flow that should go into bidding for the concession. The cost of capital in 2014 will be 12.5%.

Concessionary Fiscal System• Steps• Discount the net cash flow to present terms• Find the expected monetary value from the

project hitting commercial oil• Take the risk capital amount of dry holes from

EMV i.e. The probability of a failure

Concessionary Fiscal System

• EMV = (45% * NCF) + (55% * -$800,000)• The size of the EMV provides a boundary for

the licence or bonus bid.• Bid only a percentage of EMV, say 20-30% of

the EMV

PSC Fiscal Systems

Downtown Oil Company

PSC Fiscal Systems• Note:• Since payments under the fiscal arrangements are in kind,

convert all costs into barrels by dividing costs by cost per barrel of oil.

• In the contract cost oil cap is 60% * 3,000,000 barrels i.e. 1,800,000 barrels. Given the rate of $60/bbl, a total of $60,000,000/$60/bbl = 10,000,000 barrels are required to recover the total development costs.

• However, in this year, after allocating 100,000 bbl to recover OPEX and 1,000,000 to recover exploration costs, only 700,000 bbl were available for the recovery of development expenditures.

• Unrecovered development expenditures will thus be carried forward to be recovered in future

PSC Fiscal Systems

• Unrecovered Costs– Operating costs $0.00– Exploration costs $0.00– Development costs(600,000,000 – (700,000 * $60) $558,000,000

PSC Fiscal Systems

• Given that income tax is charged at 45%, how much is Downtown Oil Company taking home as Net profit oil share?

• Assuming downtown has placed a forward contact for a barrel of oil at $105 in September 2015, how much is the net cash flow upon sale of the entire profit oil share? Assume all development costs were recovered and zero depreciation charge

PSC Fiscal Systems

• Assuming Downtown Oil Co.’s cost of capital accrues at a rate of 13.5% p.a. how much will its actual value profit/ NPV be upon sale of the crude? Once again assume the recovered portion of development costs were the only development costs paid by Downtown Oil. i.e. (total development cost = 343,000 bbl * $60 = $20,580,000. Exploration costs were the same as paid and recovered.

Service Contracts

Diana Oil Company

Service Contracts

Service Contracts• Total fee per barrel

$5,722,5354,000,000 bbl

= $1.4306 per bbl

Since the fee per barrel is greater than the maximum payable in the year, i.e. $1.35, the actual fee payable to Diana Oil Company is

$1.33 * 4,000,000= $5,400,000

The difference between the calculated fee of $5722,535 and the maximum fee of $5,400,000 is $ 322,535. This will be recovered in future.