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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”? (IMF staff 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 Booms Oil 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/

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    AEO 1982

    AEO 1991

    AEO 1985

    AEO 2000AEO 1995

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    WEO Oil price Forecasts, 2003-2008 (U.S. Dollars per Barrel) 1/

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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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    888 Present 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 participation 20%Dividend and interest withholding tax (WT)

    32%CIT rate 50%R-factor > 4 40%3< R-factor

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    WEO Price Forecast, September 08

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    Projection

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    Time Profile of Revenue: Deep Water (WEO Prices)

    Deep Water Oil Project

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    Participation share Dividend and interest withholding tax Corporate Income Tax (CIT) Profit Petroleum share Royalty Net 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 contractor 54%Project pre-tax real IRR

    Summary Results for the “Current Terms” in Deep Water Project

    (WEO Prices)

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