Click to edit Master title style. Evaluating Fiscal Regimes for Resource Projects: An Example from Oil Development. Click to edit Master text styles

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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 Fourth Resources: level 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. 11

2 Click to Purpose edit Master and Outline title style Challenges for fiscal regime design (where private investment involved) Criteria for evaluating fiscal regimes Indicators Fourth for measuring level criteria A summary approach Current terms for Mozambique Evaluating an alternative International benchmarks 22

3 Click to edit Coverage Master title style Evaluation from viewpoint of government Click to edit Master text styles Task closely related to company appraisal of projects Using Second building level block of field development, from which to solve Third backwards level to exploration decisions (exploration decisions require probabilities for development outcomes, and failure.) staff not attempting» Fifth geological level assessment!) What does fiscal regime imply about prospectivity? (IMF 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. 33

4 Click Rent, to Uncertainty edit Master and Instability title style Click Resource to Rent: edit Master value minus text styles all necessary costs Uncertainty about value of resource and timing of» revenues Fifth level Instability caused by volatility of oil prices 44

5 Two Oil Price Booms Oil Prices: Spot and Projections U.S. Department of Energy Annual Energy Outlooks (AEO) (2006 U.S. Dollar per Barrel) 1/2/ WEO Oil price Forecasts, (U.S. Dollars per Barrel) 1/ US$ per barr AEO 1982 AEO 1985 AEO 1991 AEO 1995 AEO 2004 AEO 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. US$/bbl Apr 03 Sep Sep 05 Apr 05 Sep 04 Apr 04 Sep 03 Jun 08 Apr Oct 07 Apr 07 Apr 06

6 Click Resource to edit Taxation: Master Criteria title style Neutrality Revenue raising potential Risk to government Fourth level (stability and timing) Effects on investor perception of risk Adaptability and progressivity Interactions. 66

7 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 77

8 Evaluation Criterion Key Indicators Neutrality Click to edit AETR (government Master take in a profitable title case) style Time profile of revenue Revenue Raising Capacity Adaptability / Progressivity Risk to Government Prospectivity Gap Investor Perceptions of Risk Relating Revenue Yield to Investor Risk METR (wedge between pre and post-tax IRR, as % of pre-tax) Breakeven price Share of rent to government Tax share of total benefits Variance of NPV of revenues (coefficient of variation) Proportion of revenues in first n years Dispersion of expected IRR (Coefficient of variation of IRR) Probability of below-target returns Value of negative returns Cumulative probability distribution of outcomes Compare expected yield index with expected risk index Present value to equalize mean PV to investor Present value to equalize PV of negative returns 88

9 A Fiscal Regime in Mozambique Stylized example assumed in frame of Mozambique model EPCC for 3 rd Licensing round (end-07) Country Second with level 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.) 99

10 Project Examples Click Onshore to oil, edit 100 Master million text bbl, exploration styles & development costs: $5.5/bbl */ Shallow offshore oil, 151 million bbl, exploration and development Third level costs: $13.6/bbl Deep water» Fifth oil., level 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 1010

11 Summary of Simulated EPCC Terms Royalty Cost Recovery Limit R-factor <1 1< R-factor <2 R-factor based profit petroleum sharing 2< R-factor <3 3< R-factor <4 R-factor > 4 10% 65% 10% 20% 30% 40% 50% CIT rate 32% Dividend and interest withholding tax (WT) State equity participation 20% 10% 1111

12 WEO Price Forecast, September 08 US$/bbl nomina Projection years 1212

13 $mm real 10,000 8,000 6,000 4,000 2,000 Time Profile of Revenue: Deep Water (WEO Prices) Deep Water Oil Project - -2, years Participation share Dividend and interest withholding tax Corporate Income Tax (CIT) Profit Petroleum share Royalty Net cash flow before sharing 1313

14 Summary Results for the Current Terms in Deep Water Project (WEO Prices) Project pre-tax real IRR Post-tax real IRR to contractor Project pre-tax NPV at 15% ($mm) Contractor NPV at» 15% Fifth level ($mm) Payback period at 15% (years from start of production) Government revenue NPV at 15% ($mm) Government take (AETR) at 15% 54% 40% 19,301 5, ,459 75% 1414

15 State Share of Rent (AETR) Range of Pre-Tax Cash Flows Discounted at 15% (Deep Water Oil Project) Government Take Discounted at 15%. 115% 110% 105% 100% 90% 85% 80% 75% 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 95% Pre-Tax Cash Flow Discounted at 15% ($mm) 70% 1515

16 Share of net benefits discounted at 15%. 80% 70% 60% 50% 40% 30% 20% 10% 0% Share of Total Benefits (Discounted at 15%) 28% 34% 41% 46% 52% 57% 62% 66% 71% 75% IRR pre-tax Participation share Dividend and interest withholding tax CIT Profit Petroleum share Royalty 1616

17 Summary of Alternative Package Terms Royalty Cost recovery limit Rate of return profit petroleum sharing IRR Click < 15% to edit Master text styles 15% < IRR < 20% 20% < IRR Third < 25% level 25% < IRR < 30% Fourth level 30% < IRR < 35% 35% < IRR < 40% IRR > 40% CIT rate Dividend and interest WT State equity participation 10% 90% 25% 35% 45% 55% 65% 75% 85% 32% 10% 10% 1717

18 Government Revenues: Alternative Package vs. Current Terms Deep Water Project (WEO Prices) 6,750 Alternative $mm real 6,000 5,250 4,500 3,750 3,000 2,250 Mozambique 1, Mozambique years Mozambique alternative package 1818

19 Click AETR, to Breakeven edit Master Price, and title METR style Deep Water Third Oil level Project Alternative package Mozambique at 15% Discount Rate AETR (WEO) % Price required for 15% posttax IRR $/bbl METR at 15% post-tax IRR %

20 Government share of net benefits discounted at 15% Government Share of Total Benefits for Range of Pre-Tax IRR (Deep Water Project) 65% 60% 55% Click to edit Master text styles 50% 45% 40% 35% 30% 25% 20% Alternative Mozambique 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% Pre-tax IRR Mozambique Mozambique alternative package result at WEO 2020

21 Mean Government NPV, Coefficient of Variation, Click to and edit Early Master Share of title Total Benefits style discounted at 15 percent Mean Government Deep Water Oil NPV Project Alternative package Mozambique $mm 7,212 7,189 CV % Government share of total benefits in first 10 years %

22 Cumulative Distribution of Post-Tax NPV at 15% Discount (Deep Water Project) Probabiltiy Alternative Mozambique ,000-3,000-1,000 1,000 3,000 5,000 Investor NPV discounted at 15% Mozambique Mozambique alternative package 2222

23 AETR at 15% (WEO Prices) Average Effective Tax Rate Discounted at 15 Percent (WEO Prices) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Angola Namibia Equatorial Guinea Norway Cameroon Mozambique alternative package Timor Leste Colombia Mozambique Mauritania Madagascar Ghana Nigeria Australia Sierra Leone UK 2323 AETR, at 15% discount rate.

24 Breakeven price for 15% Post-Tax IRR Price Required to Achieve 15 Percent After-Tax Real Rate of Return US$/bbl Equatorial Guinea Madagascar Colombia Angola Norway Mozambique Cameroon Mauritania Mozambique alternative package Sierra Leone Australia Ghana UK Nigeria Namibia Timor Leste 2424

25 Revenue Yield and Investor Risk Indexes Deep Water Project UK Nigeria Colombia Angola Click Expected to government edit receipts Master Investor expected title risk index discounted at 15% (at 15% discount rate) style Sierra Leone Ghana Australia Timor Leste Alternative package Mauritania Namibia Cameroon Mozambique Norway Madagascar 88 Equatorial Guinea as % of Mozambique » Fifth 96level Mozambique = Coefficient of variation of government receipts %

26 Deep Water Oil Project Project pre-tax After-Tax UK Nigeria % % % Click to edit Master 23 text 39 styles Sierra Leone Ghana Australia Timor Leste Alternative package Mauritania Namibia Cameroon Mozambique Norway Madagascar Colombia Angola Equatorial Guinea Investor Perceptions of Risk Mean expected IRR Coefficient of variation of IRR Probability of expected return below 15% 7 ( Tax-related)

27 Prospectivity Gap Deep Water Project Alternative package Mozambique Angola Excess over lowest mean expected NPV15 to investor $mm (66) Excess over lowest expected negative NPV15 to investor $mm

28 Click to edit Conclusions Master title style Attempt to set out evaluation criteria Attach Second indicators level 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). 2828