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
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
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
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
Two Oil Price Booms Oil Prices: Spot and Projections U.S. Department of Energy Annual Energy Outlooks (AEO) 1982-2004 (2006 U.S. Dollar per Barrel) 1/2/ WEO Oil price Forecasts, 2003-2008 (U.S. Dollars per Barrel) 1/ US$ per barr 100 90 80 70 60 50 40 30 20 10 AEO 1982 AEO 1985 AEO 1991 AEO 1995 AEO 2004 AEO 2000 0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 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 135 125 115 105 95 85 75 65 55 45 35 25 15 2002 2003 2004 Apr 03 Sep 06 2005 2006 2007 2008 2009 2010 Sep 05 Apr 05 Sep 04 Apr 04 Sep 03 Jun 08 Apr 08 2011 2012 2013 Oct 07 Apr 07 Apr 06
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
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
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
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
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: $11.8/bbl */ (This presentation shows the deep water case alone.) */ Onshore and deep water examples supplied by Wood Mackenzie 1010
Summary of Simulated EPCC Terms Royalty Cost Recovery Limit R-factor <1 1< R-factor <2 R-factor based profit petroleum sharing 2< R-factor <3 3< R-factor <4 R-factor > 4 10% 65% 10% 20% 30% 40% 50% CIT rate 32% Dividend and interest withholding tax (WT) State equity participation 20% 10% 1111
WEO Price Forecast, September 08 US$/bbl nomina 120 105 90 75 60 45 30 15 0 Projection 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 years 1212
$mm real 10,000 8,000 6,000 4,000 2,000 Time Profile of Revenue: Deep Water (WEO Prices) Deep Water Oil Project - -2,000 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 years Participation share Dividend and interest withholding tax Corporate Income Tax (CIT) Profit Petroleum share Royalty Net cash flow before sharing 1313
Summary Results for the Current Terms in Deep Water Project (WEO Prices) Project pre-tax real IRR Post-tax real IRR to contractor Project pre-tax NPV at 15% ($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 5,393 4.8 14,459 75% 1414
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
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
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
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 1,500 750 - -750 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Mozambique years Mozambique alternative package 1818
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) % 80 75 Price required for 15% posttax IRR $/bbl 49 52 METR at 15% post-tax IRR % 43 47 1919
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
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 $mm 7,212 7,189 CV % 66 59 Government share of total benefits in first 10 years % 13 15 2121
Cumulative Distribution of Post-Tax NPV at 15% Discount (Deep Water Project) Probabiltiy 0.90 1.00 0.80 0.70 0.60 0.50 0.40 0.30 Alternative Mozambique 0.20 0.10 0.00-5,000-3,000-1,000 1,000 3,000 5,000 Investor NPV discounted at 15% Mozambique Mozambique alternative package 2222
AETR at 15% (WEO Prices) Average Effective Tax Rate Discounted at 15 Percent (WEO Prices) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Angola Namibia Equatorial Guinea Norway Cameroon Mozambique alternative package Timor Leste Colombia Mozambique Mauritania Madagascar Ghana Nigeria Australia Sierra Leone UK 2323 AETR, at 15% discount rate.
Breakeven price for 15% Post-Tax IRR Price Required to Achieve 15 Percent After-Tax Real Rate of Return 65 60 55 50 45 40 35 30 25 20 15 10 5 0 US$/bbl Equatorial Guinea Madagascar Colombia Angola Norway Mozambique Cameroon Mauritania Mozambique alternative package Sierra Leone Australia Ghana UK Nigeria Namibia Timor Leste 2424
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 84 35 Sierra Leone Ghana Australia Timor Leste Alternative package Mauritania Namibia Cameroon Mozambique Norway Madagascar 88 Equatorial Guinea as % of Mozambique 70 78 86 95 101» Fifth 96level 103 101 100 106 107 107 115 111 Mozambique =100 53 69 65 57 25 73 72 42 62 100 89 183 146 85 129 Coefficient of variation of government receipts % 62 73 58 69 65 75 70 67 78 71 63 68 54 58 70 2525 64
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 35 26 23 22 22 21 20 20 20 20 19 17 17 17 16 16 Coefficient of variation of IRR 41 48 47 44 43 38 46 47 32 46 49 41 56 47 39 49 Probability of expected return below 15% 7 ( Tax-related) 12 14 19 19 20 16 24 23 15 24 26 29 38 36 31 39 2626
Prospectivity Gap Deep Water Project Alternative package Mozambique Angola Excess over lowest mean expected NPV15 to investor $mm 804 852 (66) Excess over lowest expected negative NPV15 to investor $mm 200 54 660 2727
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