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

Overview

“This book is a terrific addition to the existing literature on the subject, and will be invaluable to a wide range of professionals, from Energy Ministry staff through NOCs to energy company economists, advisors and consultants. By far the best way to understand all the subtleties of fiscal regimes is to build one’s own models of them, and then to play ‘what if?’ games with them. This is what the book encourages, by being set out so clearly and well, and a thorough study will take the reader from beginner to ...

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Overview

“This book is a terrific addition to the existing literature on the subject, and will be invaluable to a wide range of professionals, from Energy Ministry staff through NOCs to energy company economists, advisors and consultants. By far the best way to understand all the subtleties of fiscal regimes is to build one’s own models of them, and then to play ‘what if?’ games with them. This is what the book encourages, by being set out so clearly and well, and a thorough study will take the reader from beginner to near expert status.”—Graeme Simpson, Honorary Professor in Petroleum Geology, the University of Aberdeen, Scotland / former Business Manager, Exxon / former Professor of Energy Industry Management

“This book is both a reference for the various types of fiscal regimes and a how-to guide for spreadsheet modeling. Practitioners at every level will find it to be a valuable resource.”—Dan Olds, Senior Vice President – International, Ryder Scott Petroleum Consultants / Past President, Society of Petroleum Evaluation Engineers

“This book gives a comprehensive and in-depth discussion of petroleum economics. It provides a step-by-step guide to understanding fiscal models similar to what many residential courses offer. The excel sheets and formulas are extremely helpful for the novice and users of economic software such as PEEP to start modeling fiscal regimes. As an experienced economist, the book has helped fill gaps in my knowledge and I would personally recommend it as a reference guide for those in commercial disciplines in the industry.”—Aditya Mukherjee, Economics Analyst, Global New Business Development, Hess Services UK Limited

"Kasriel and Wood have produced a monumental set of materials for understanding how to model and analyze the impacts of upstream petroleum fiscal terms on project economics. Unique to their approach is a step-by-step guide on using Microsoft Excel that provides users with a kind of x-ray vision into the complex and sometimes unanticipated outcomes associated with various sorts of taxes, royalties, and production sharing contracts. It is a brilliant practitioner's guide to the subject."—Graham A. Davis, Professor, Division of Economics and Business, Colorado School of Mines

"I find the book a great tool for anyone who intends to initiate his/her career into the world of petroleum economics. Furthermore, I think experienced economists should always have this book on their desk/tablet for quick consultation/reference as it is very comprehensive around the modeling of oil and gas deals. This book is a must-have in every economists book shelf!"—Germán Beckmann, Business Analyst, Premier Oil PLC

"This book will be a useful, practical tool for the petroleum economics practitioner. Practitioners will find the practical spreadsheet tips, delivered in an easy-to-read, conversational style, particularly helpful."—Roy Kelly, Managing Director, Kerogen Capital

"This book fills a gap in the existing literature - a valuable work for anyone confronted with the complexities of Upstream Petroleum Fiscal and Valuation Modeling. I am impressed by the quantity of data and detailed explanations that guide the reader through the calculations. I really appreciate the authors' step-by-step approach which makes for a practical 'hands-on' tool that can be easily adapted to ones' own need"—Nadine Bret-Rouzaut, IFP School, Director of the Centre for Economics & Management, Professor, Upstream management

“This is a very enlightening textbook on Petroleum Economics. It puts a lot of financial decision making in the oil industry in perspective. The descriptions of typical economical terms such as Royalty, Abandonment and Production Sharing Contracts (PSC's) are very well explained and come to life with the abundance of examples. A must-have for every E&P professional.”—Michiel Stofferis, Field Reserves Manager, CEPSA

“In this book Kasriel and Wood lay bare the complex world of petroleum fiscal systems. By leading the reader through carefully worked examples, supported by extensive Excel documentation, they share their experience to create a resource useful to the beginner and the experienced practitioner alike. Building from first principles they lay the foundation for an understanding of the differing systems in use today, whilst also acknowledging the likelihood of evolution and the need for flexibility in application.”—Dr Julian A. Fennema, Lecturer in Petroleum Economics, Institute of Petroleum Engineering, Heriot-Watt University

“Kasriel and Wood have pulled together a comprehensive, well thought through and clear guide to the topic of Upstream Petroleum Fiscal Analysis and Valuation. Their use of explanation, examples and reference material makes it a very accessible guide for both beginners and experienced practioners alike. This is a very useful addition to the repertoire of writing in this area.”—Tom Morris, Commercial Manager, Cairin Energy

"This clearly written, well-organized book is a valuable tool to assist governments in fiscal design and to assist investors and financiers to determine and analyze government take and its effect on the rates of cost recovery and overall profitability.” —Owen L. Anderson, Eugene Kuntz Chair in Oil, Gas & Natural Resources, George Lynn Cross Research Professor, The University of Oklahoma College of Law

“Upstream Petroleum Fiscal and Valuation Modelling by Ken Kasriel and David Wood presents a carefully worked out set of examples that deal with a complex topic of importance for all who are engaged in the oil extraction business. The chapters lend clarity to a variety of complex topics, each of which is explained clearly and illustrated with an appropriate Excel spreadsheet. This book will prove invaluable to industry participants and analysts.”—Simon Benninga, Author, Principles of Finance with Excel / Visiting Professor of Finance, Wharton School, University of Pennsylvania / Professor of Finance, Faculty of Management, Tel Aviv University

"This book is one of the most comprehensive I’ve read, that provides a generic illustrative roadmap for evaluating fiscal systems in all their intricacies that will no doubt become the reference material for those involved in understanding, applying and negotiating global fiscal systems."—Gerry F. Donnelly, Director, Institutional Research, FirstEnergy Capital LLP

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Product Details

  • ISBN-13: 9780470686829
  • Publisher: Wiley
  • Publication date: 5/28/2013
  • Series: Wiley Finance Series
  • Edition number: 1
  • Pages: 370
  • Sales rank: 1,185,138
  • Product dimensions: 6.60 (w) x 9.70 (h) x 1.20 (d)

Meet the Author

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.

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Table of Contents

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

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