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Upstream Petroleum Fiscal and Valuation Modeling in Excel: A Worked Examples Approach


"This is a book no deal team should be without. It is a must for those involved in upstream oil and gas transactions, planning, budgeting, investment appraisal and portfolio management. Its step-by-step approach cuts through complexity, making it comprehensive and understandable by a wide range of users with a wide range of abilities. It can be used as a textbook, an introductory primer or as a handbook that you can dip in and out of or read cover to cover."--Michael Lynch-Bell, Senior Advisor, Oil & Gas, Ernst & Young LLP

In the upstream petroleum industry, it is the value of post-tax cashflows which matters most to companies, governments, investors, lenders, analysts, and advisors. Calculating these cashflows and understanding their “behavior,”  however, is challenging, as the industry’s  specialized fiscal systems can be complex, jargon-laden, and sometimes seem to be a “world of their own”.

Upstream Petroleum Fiscal and Valuation Modeling in Excel: A Worked Examples Approach demystifies fiscal analysis which, unlike disciplines such as Earth sciences and engineering, can be learned from a book. Written in plain English for laymen and for experienced practitioners alike, it is a reader-friendly, clear, practical, step-by-step hands-on guide for both reference and self-paced study.

The book does not catalogue the 100+ different petroleum fiscal regimes in use at the time of writing. Rather, drawing on the authors’ combined 48 years’ experience, it takes a more timeless, generic  treatment, by covering the most common variants of royalties, taxation, production sharing arrangements, bonuses and abandonment funding , through a dual approach: first, showing  how to model them in Excel , and then providing interactive exercises to prompt (and answer) questions that analyze impacts on cashflows.

In addition to the main text, the book consists of over 120 Excel files (ranging from modular examples to full models) in Excel 2007 and 2003 formats; over 400 pages of supplementary PDF files; VBA features to enhance model functionality; and an introduction to risk modeling with exercises for the included trial version of Oracle’s Crystal Ball software. It offers both a wealth of content and models equal to or surpassing what is available from fiscal modeling courses costing several times more; and greater insights into underlying calculations than commercially available “black box” fiscal software.

New Securities and Exchange Commission (SEC) rules planned for 2013 will force petroleum companies to disclose more fiscal information on an individual country basis. This will make it more important than ever for analysts to understand how to model oil and gas terms and the potential impacts of the disclosed government payments on future oil and gas company profitability.

KEN KASRIEL is a Senior Petroleum Economist with RPS Energy, London. He has 18 years of experience in petroleum finance. He has performed numerous upstream petroleum valuations of assets in Africa, Asia, Europe, the Former Soviet Union, the Middle East and North America. His valuations and analyses have been used in public offerings, annual reports and other regulatory filings in various jurisdictions; and for the purposes of project financing, bid rounds, transaction valuation, portfolio optimization, expert witness support in commercial arbitration, and governmental fiscal design advisory. Before joining RPS Energy he worked 7 years as Senior Analyst for the Global Petroleum practice of PriceWaterhouseCoopers. He has also worked as an oil and gas equities analyst with Robert Flemings Securities (now part of JPMorganChase) and Creditanstalt Investment Bank (now part of BankAustria), and as an independent consultant to London-based oil and gas equity research teams. He has written on petroleum economics in the Oil and Gas Journal

DR. DAVID WOOD has over 30 years of energy industry experience, mainly in petroleum, spanning technical and commercial exploration and production operations, mid- and downstream projects, and contract evaluation. His early energy industry experience includes Phillips Petroleum, Amoco (Africa, Europe and UK), and Lundin Oil (South America, Africa, Middle and Far East). From 1993-98 he was UK Managing Director for a portfolio of North Sea and onshore UK oil and gas assets. Since 1998 he has worked as an independent consultant, training provider and expert witness. He runs an oil and gas consulting company, DWA Energy Limited. He has published on energy related topics including: performance modeling of fiscal designs, petroleum economics and risk analysis, enterprise risk and portfolio management, LNG, GTL, gas storage and supply, deepwater E&P techniques, corporate performance, M&A, negotiations and project management. He has provided fiscal design advice to organizations including the Alaskan Legislature and the Yemen Government. He is involved in professional training, research, publication and development programs and is the assistant editor-in-chief of the Journal of Natural Gas Science & Engineering. He has designed and taught online training courses including oil and gas MBA programs.

Introduction xi

Acknowledgements xvi

1 Introduction to Tax and Royalty Regimes 1

1.1 Introduction 3

1.2 Inflation and Discounting: Time Value of Money Basics in the Context of Upstream Petroleum Modeling 5

1.3 Introducing Basic Components of Upstream Petroleum Cashflow Under a Simple Tax and Royalty Regime 16

1.4 Another (Important) Multiplier - Introduction to Modeling Commercial Behavior with the Economic Limit Test 20

1.5 Chapter Model Housekeeping Notes 25

1.6 Chapter Model Assumptions 27

1.6.1 Assumptions: General Remarks 27

1.6.2 Assumptions: Time and the Time Value of Money 28

1.6.3 Assumptions: Commodity Prices 29

1.6.4 Assumptions: Production Profile 34

1.6.5 Assumptions: Capex 34

1.6.6 Assumptions: Opex 36

1.6.7 Assumptions: Abandonment 37

1.6.8 Assumptions: Royalty 38

1.6.9 Assumptions: Rentals 39

1.6.10 Assumptions: Bonuses 40

1.6.11 Assumptions: Income Tax and Related Items 42

1.7 Pre-ELT Calculations 45

1.7.1 Pre-ELT Calculations: Opex and Capex Timing/Inflation 45

1.7.2 Pre-ELT Calculations: Bonus and Rentals 47

1.7.3 Pre-ELT Calculations: GOCF 48

1.8 ELT Calculation and Role in Economic Modeling 49

1.9 Post-ELT Calculations 60

1.9.1 Post-ELT Calculations: Abandonment 60

1.9.2 Post-ELT Calculations: Depreciation 62

1.9.3 Income Tax: Basic Concepts and Calculations 63

1.9.4 Returning to Main Model - Post-ELT Calculations: Income Tax 74

1.9.5 Post-ELT Calculations: NCF and Discounting 80

1.9.6 Post-ELT Calculations: Financial Metrics 83

1.9.7 Post-ELT Calculations: Volumetric Outcomes 86

1.10 Multivariable Sensitivity Analysis Using a Two-Way Data Table 89

1.11 The ELT - Questions to Consider 89

1.12 Review Exercise: Key Calculations 89

2 Tax Consolidation and Incremental Value 91

2.1 Tom and Carmen Mix Love and Money: A Romantic Introduction to Fiscal Consolidation 93

2.2 Petroleum Tax and Royalty Regimes: “Ringfencing” vs. Consolidation 95

2.3 Ringfencing, Consolidation and Incremental Value 96

2.4 Ringfenced vs. Consolidated Incremental Value Model: Assumptions 99

2.5 Ringfenced vs. Consolidated Incremental Value Model: Calculations 102

2.6 Model Results and Analysis 105

2.7 Exercise - Try Modeling Scenario 2 Yourself 107

2.8 Income Tax Consolidation and Incremental Value (Interactive Analysis) 108

3 Royalties 109

3.1 Introduction 111

3.2 Royalty Based on Commodity Prices 113

3.3 Royalty Based on Length of Production 119

3.4 Royalty Based on Period-End Cumulative Production 122

3.5 Royalty Based on Cumulative Production Throughout the Period 125

3.6 Royalty Rates Based on the Production Rate 143

3.7 Royalty Based on Price and Production Rates (Version 1) 154

3.8 Royalty Based on Price and Production Rates (Version 2 - Based on Canada’s New Royalty Framework) 160

3.9 Royalty Based on a Measure of Cumulative Profitability: The “R-factor” 160

3.10 Royalty Based on a Measure of Cumulative Profitability and Commodity Prices - Canadian Oil Sands 166

4 Bonuses 167

4.1 Introduction 169

4.2 Commerciality Bonuses 170

4.3 Bonuses Payable at First Commercial Production 173

4.4 Cumulative Production Bonuses 173

4.5 Bonuses Based on the Cumulative Value of Production 178

4.6 Bonuses Based on the Production Rate for a Specified Period 178

5 Abandonment 189

5.1 Introduction 191

5.2 Lumpsum Abandonment Payments 192

5.3 Equal Abandonment Contributions Made Over the Production Period 194

5.4 Unequal Abandonment Contributions, Based on Annual Production as a Percentage of Ultimate Production 199

5.5 Equal Abandonment Contributions, Starting when Depletion Reaches a Specified Threshold 200

5.6 Equal Abandonment Contributions Starting from a Specified Number of Periods Before Economic Production Ends 203

5.7 Equal Abandonment Contributions Starting when the Producer Chooses 204

5.8 Multiple Methods, Using Whichever One Makes Abandonment Contributions Start Earlier 206

5.9 Abandonment Contributions which Earn Interest (Single Rate) 206

5.10 Abandonment Contributions which Earn Interest (Variable Rates) 211

6 Introduction to Production Sharing Contract-Based Fiscal Regimes 213

6.1 Overview: PSCs as a Specialized Revenue Sharing Framework 215

6.2 Looking Ahead: Road Map for This and the Next Chapters 217

6.3 Simple Example of PSC Revenue Distribution 218

6.4 Simplistic (Single-Year) Model Revenue Distribution Calculations, Including Cost Oil Determination 220

6.5 Introducing “Entitlement Volumes” 229

6.6 Simplistic, Multi-Period PSC Model: The Calculation of Cost Oil 234

6.7 Topic in Depth: Contractor Entitlement 242

7 More Realistic PSC Modeling 243

7.1 Introducing a More Realistic PSC Model 245

7.2 Arriving at Our “Core” PSC Model 261

7.3 "Uplifts" to Cost Oil 265

8 PSC Regime Variations 273

8.1 PSCs with Explicit Income Tax Provisions 275

8.2 Profit Oil Sharing Based on Commodity Prices 288

8.3 Profit Oil Sharing Based on the Production Rate 308

8.4 Profit Oil Sharing Based on Cumulative Production 318

8.5 Introduction to Profit Sharing Based on a Measure of Cumulative Profitability: The “R-factor” 327

8.6 R-factors and the “Gold Plating” Effect 341

Appendices (Available on Disk)

Appendix I: Depreciation

Appendix II: Tax Loss Carrybacks

Appendix III: Time-Limited Tax Loss Carryforwards

Appendix IV: Knowing when to Quit: An Alternative Economic Limit Test Method

Appendix V: Introduction to Probability and Crystal Ball

Index 345

Accompanying Materials on Disk

See the file "Kasriel Wood disk contents.xls" on the disk