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ENH Click to edit Master title style Click to edit Master text styles – Second level Third level – Fourth level » Fifth level 11 1 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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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

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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/

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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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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

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Projection

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Time Profile of Revenue: Deep Water (WEO Prices)

Deep Water Oil Project

-2,000

-

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4,000

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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%

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115%

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Pre-Tax Cash Flow Discounted at 15% ($mm)

Gov

ernm

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at 1

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.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%)

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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

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Mozambique Mozambique alternative packageyears

“Mozambique”

Alternative

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191919

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)

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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)

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Prob

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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)

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Breakeven price for 15% Post-Tax IRRPrice Required to Achieve 15 Percent After-Tax Real Rate of Return

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101520253035404550556065

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agas

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US$

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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).