A delayed royalty framework for investments in the exploration and production of hydrocarbon

Globally, there are two types of petroleum fiscal system; the concessionary and the contractual petroleum fiscal system. The main differences between the two types of petroleum fiscal system is the ownership of the resources and some distinct fiscal terms. The contractual petroleum fiscal system specifies a cost recovery option and profit oil split unlike the concessionary petroleum fiscal system that allows the contractor to recoup his capital before payment of tax. This tends to increase the risk associated with the host government revenue as investment in the production of hydrocarbon is filled with uncertainties. There is a need to redesign the concessionary petroleum fiscal to enable it reduce the risk associated with the host government revenue by making the host government to earn revenue early from petroleum investment. This research therefore evaluated a hybrid petroleum fiscal system for investment in the exploration and production of hydrocarbon. The concessionary petroleum fiscal system was adjusted to include a cost recovery option. Petroleum economic model for investment in a typical onshore oil field was built using spreadsheet modelling technique with the fiscal terms in the hybrid petroleum fiscal system embedded in it. The cost recovery option and oil price in the model were varied between 0-100% and $20-$100 per barrel. The NCF, IRR and payout period of the investment were determined. It was observed that the lower the cost recovery option, the higher the host government revenue. From the profitability analysis of the investment in the hybrid petroleum fiscal system, it was observed that when the price of oil was $100/bbl, the NCF of the host government was $9146 and $8426.3 for 0% and 80% cost recovery option. The lower the cost recovery option, the higher the payout period and the lower the internal rate of return. Though lower cost recovery increased the host government revenue more but it may make the hybrid petroleum fiscal system unattractive for investment in periods of low oil price. Hence a higher cost recovery option was recommended for the use of this type of petroleum fiscal system.

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Modified Straight-Line Depreciation Model for Upstream Petroleum Investment

Ogolo,

Iyalla,

Tahir

et al. 2023

Day 3 Wed, August 02, 2023

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Depreciation is a method used to recover the cost of an asset or facility used to develop and produce petroleum from any oil and gas field. The challenge with the straight-line depreciation method used to depreciate an asset was, it does not take into consideration the time value of money. Over time, the value of money changes. The amount recovered after the depreciation period is usually less than the future value of the asset. This is because the value of money today is not the same as the value of money tomorrow. Hence, there was the need to incorporate the time value of money into the straight-line depreciation model. This research considered the incorporation of the time value of money into the depreciation equation. The conventional straight-line depreciation equation was modified by incorporating the time value concept of money into the equation. A petroleum economic model was developed using a spreadsheet approach. The model was used to evaluate the impact of the modified straight-line depreciation model on the profitability of petroleum investments. Two petroleum investment scenarios were considered. Scenario 1 had the conventional depreciation model. Scenario 2 had the modified depreciation model for comparative analysis. The effect of the conventional and modified depreciation model on the profitability of the investment was evaluated. The NCF of the contractor for Scenarios 1 and 2 when the oil price was $50/bbl was $214 MM and $317 MM respectively. While the NCF of the host government for Scenarios 1 and 2 when the oil price was $50/bbl were $627 MM and $524 MM respectively. It was observed that the incorporation of the time value of money into the depreciation equation increased the NCF of the contractor. This allowed the contractor to mitigate the effect of risk associated with the value of the asset over time due to inflation. The modified depreciation model made the petroleum fiscal arrangement more attractive.

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A delayed royalty framework for investments in the exploration and production of hydrocarbon

Cited by 3 publications

References 8 publications

A new progressive and efficient production sharing Contract for upstream oil and gas industry

A new progressive and efficient production sharing Contract for upstream oil and gas industry

A Hybrid Petroleum Fiscal System for Investment in the Exploration and Production E&P of Hydrocarbon

Modified Straight-Line Depreciation Model for Upstream Petroleum Investment

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