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

373 Pages·2013·17.13 MB·English

by  Ken Kasriel

“This is a book no deal team should be without. It is a must for those involved in upstream oil and
gastransactions,planning,budgeting,investmentappraisalandportfoliomanagement.Itsstep-by-step
approachcutsthroughcomplexity,makingitcomprehensiveandunderstandablebyawiderangeofusers
withawiderangeofabilities.Itcanbeusedasatextbook,anintroductoryprimerorasahandbookthat
youcandipinandoutoforreadcovertocover.”
MichaelLynch-Bell,SeniorAdvisor,Oil&Gas,Ernst&YoungLLP;ex-officioChairman,UN
ExpertGrouponResourceClassification
“This book is a terrific addition to the existing literature on the subject, and will be invaluable to a
widerangeofprofessionals,fromEnergyMinistrystaffthroughNOCstoenergycompanyeconomists,
advisors and consultants. By far the best way to understand all the subtleties of fiscal regimes is to
buildone’sownmodelsofthem,andthentoplay‘whatif?’gameswiththem.Thisiswhatthebook
encourages,bybeingsetoutsoclearlyandwell,andathoroughstudywilltakethereaderfrombeginner
tonearexpertstatus.”
Graeme Simpson, Honorary Professor in Petroleum Geology / former Professor of Energy
IndustryManagement,theUniversityofAberdeen,Scotland;formerBusinessManager,Exxon
“Thisbookisbothareferenceforthevarioustypesoffiscalregimesandahow-toguideforspreadsheet
modeling.Practitionersateverylevelwillfindittobeavaluableresource.”
Dan Olds, Senior Vice President – International, Ryder Scott Petroleum Consultants / Past
President,SocietyofPetroleumEvaluationEngineers
“Thisbookgivesacomprehensiveandin-depthdiscussionofpetroleumeconomics.Itprovidesastep-by-
stepguidetounderstandingfiscalmodelssimilartowhatmanyresidentialcoursesoffer.Theexcelsheets
andformulasareextremelyhelpfulforthenoviceandusersofeconomicsoftwaresuchasPEEPtostart
modelingfiscalregimes.Asanexperiencedeconomist,thebookhashelpedfillgapsinmyknowledge
and I would personally recommend itas a reference guide for thosein commercial disciplines inthe
industry.”
AdityaMukherjee,EconomicsAnalyst,GlobalNewBusinessDevelopment,
HessServicesUKLimited
“KasrielandWoodhaveproducedamonumentalsetofmaterialsforunderstandinghowtomodeland
analyzetheimpactsofupstreampetroleumfiscaltermsonprojecteconomics.Uniquetotheirapproach
isastep-by-stepguideonusingMicrosoftExcelthatprovidesuserswithakindofx-rayvisionintothe
complex and sometimes unanticipated outcomes associated with various sortsof taxes, royalties, and
productionsharingcontracts.Itisabrilliantpractitioner’sguidetothesubject.”
GrahamA.Davis,Professor,DivisionofEconomicsandBusiness,ColoradoSchoolofMines
“Ifindthebookagreattoolforanyonewhointendstoinitiatehis/hercareerintotheworldofpetroleum
economics.Furthermore,Ithinkexperiencedeconomistsshouldalwayshavethisbookontheirdeskfor
quickconsultation/referenceasitisverycomprehensivearoundthemodelingofoilandgasdeals.This
bookisamust-haveineveryeconomistsbookshelf!”
Germa´nBeckmann,BusinessAnalyst,PremierOilPLC
“Thisbookwillbeauseful,practicaltoolforthepetroleumeconomicspractitioner.Practitionerswillfind
thepracticalspreadsheettips,deliveredinaneasy-to-read,conversationalstyle,particularlyhelpful.”
RoyKelly,ManagingDirector,KerogenCapital
“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
ofdataanddetailedexplanationsthatguidethereaderthroughthecalculations.Ireallyappreciatethe
authors’step-by-stepapproachwhichmakesforapractical‘hands-on’toolthatcanbeeasilyadaptedto
ones’ownneed”
Nadine Bret-Rouzaut, IFP School, Director of the Centre for Economics & Management,
Professor,Upstreammanagement
“This is a very enlightening textbook on Petroleum Economics. It puts a lot of financial decision
makingintheoilindustryinperspective.ThedescriptionsoftypicaleconomicaltermssuchasRoyalty,
AbandonmentandProductionSharingContracts(PSC’s)areverywellexplainedandcometolifewith
theabundanceofexamples.Amust-haveforeveryE&Pprofessional.”
MichielStofferis,FieldReservesManager,CEPSA
“InthisbookKasrielandWoodlaybarethecomplexworldofpetroleumfiscalsystems.Byleadingthe
readerthroughcarefullyworkedexamples,supportedbyextensiveExceldocumentation,theysharetheir
experiencetocreatearesourceusefultothebeginnerandtheexperiencedpractitioneralike.Building
fromfirstprinciplestheylaythefoundationforanunderstandingofthedifferingsystemsinusetoday,
whilstalsoacknowledgingthelikelihoodofevolutionandtheneedforflexibilityinapplication.”
DrJulianA.Fennema,LecturerinPetroleumEconomics,InstituteofPetroleumEngineering,
Heriot-WattUniversity
“KasrielandWoodhavepulledtogetheracomprehensive,wellthoughtthroughandclearguidetothe
topicofUpstreamPetroleumFiscalandValuationModeling.Theiruseofexplanation,examplesand
referencematerialmakesitaveryaccessibleguideforbothbeginnersandexperiencedpractionersalike.
Thisisaveryusefuladditiontotherepertoireofwritinginthisarea.”
TomMorris,CommercialManager,CairnEnergy
“Thisclearlywritten,well-organizedbookisavaluabletooltoassistgovernmentsinfiscaldesignand
toassistinvestorsandfinancierstodetermineandanalyzegovernmenttakeanditseffectontheratesof
costrecoveryandoverallprofitability.”
OwenL.Anderson,EugeneKuntzChairinOil,Gas&NaturalResources,GeorgeLynnCross
ResearchProfessor,TheUniversityofOklahomaCollegeofLaw
“UpstreamPetroleumFiscalandValuationModelinginExcelbyKenKasrielandDavidWoodpresents
a carefully worked out set of examples that deal with a complex topic of importance for all who are
engagedintheoilextractionbusiness.Thechapterslendclaritytoavarietyofcomplextopics,eachof
whichisexplainedclearlyandillustratedwithanappropriateExcelspreadsheet.Thisbookwillprove
invaluabletoindustryparticipantsandanalysts.”
Simon Benninga, Author, Principles of Finance with Excel / Visiting Professor of Finance,
WhartonSchool,UniversityofPennsylvania/ProfessorofFinance,FacultyofManagement,
TelAvivUniversity
“ThisbookisoneofthemostcomprehensiveI’veread,thatprovidesagenericillustrativeroadmapfor
evaluatingfiscalsystemsinalltheirintricaciesthatwillnodoubtbecomethereferencematerialforthose
involvedinunderstanding,applyingandnegotiatingglobalfiscalsystems.”
GerryF.Donnelly,Director,InstitutionalResearch,FirstEnergyCapitalLLP
Upstream Petroleum Fiscal and Valuation
Modeling in Excel
ForothertitlesintheWileyFinanceseries
pleaseseewww.wiley.com/finance
Upstream Petroleum Fiscal and Valuation
Modeling in Excel
A Worked Examples Approach
Ken Kasriel
David Wood
©2013JohnWiley&SonsLtd
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LibraryofCongressCataloging-in-PublicationData
Kasriel,Ken,1965-
UpstreampetroleumfiscalandvaluationmodelinginExcel:aworkedexamplesapproach/KenKasriel,
DavidWood.
pagescm
Includesindex.
ISBN978-0-470-68682-9(hbk.)–ISBN978-1-118-53768-8(ebk.)–ISBN978-1-118-53769-5(ebk.)–
ISBN978-1-118-53770-1(ebk.)
1.Petroleumindustryandtrade–Valuation. 2.MicrosoftExcel(Computerfile) I.Wood,David. II.Title.
HD9560.5.K372013
665.50285′554–dc23
2012050120
AcataloguerecordforthisbookisavailablefromtheBritishLibrary.
ISBN978-0-470-68682-9(hbk)ISBN978-1-118-53768-8(ebk)
ISBN978-1-118-53769-5(ebk)ISBN978-1-118-53770-1(ebk)
CoverimagesreproducedbypermissionofShutterstock.com
TrialCrystalBallsoftwareprovidedwithpermissionfromtheOracleCorporation.
Setin10/12ptTimesbyAptara,Inc.,NewDelhi,India
PrintedinGreatBritainbyCPIGroup(UK)Ltd,Croydon,CR04YY
Contents
Introduction xi
Acknowledgements xvi
1 IntroductiontoTaxandRoyaltyRegimes 1
1.1 Introduction 3
1.2 InflationandDiscounting:TimeValueofMoneyBasicsintheContextof
UpstreamPetroleumModeling 5
1.3 IntroducingBasicComponentsofUpstreamPetroleumCashflowUndera
SimpleTaxandRoyaltyRegime 16
1.4 Another(Important)Multiplier–IntroductiontoModelingCommercial
BehaviorwiththeEconomicLimitTest 20
1.5 ChapterModelHousekeepingNotes 25
1.6 ChapterModelAssumptions 27
1.6.1 Assumptions:GeneralRemarks 27
1.6.2 Assumptions:TimeandtheTimeValueofMoney 28
1.6.3 Assumptions:CommodityPrices 29
1.6.4 Assumptions:ProductionProfile 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:IncomeTaxandRelatedItems 42
1.7 Pre-ELTCalculations 45
1.7.1 Pre-ELTCalculations:OpexandCapexTiming/Inflation 45
1.7.2 Pre-ELTCalculations:BonusandRentals 47
1.7.3 Pre-ELTCalculations:GOCF 48
1.8 ELTCalculationandRoleinEconomicModeling 49
1.9 Post-ELTCalculations 60
1.9.1 Post-ELTCalculations:Abandonment 60
1.9.2 Post-ELTCalculations:Depreciation 62
viii Contents
1.9.3 IncomeTax:BasicConceptsandCalculations 63
1.9.4 ReturningtoMainModel–Post-ELTCalculations:IncomeTax 74
1.9.5 Post-ELTCalculations:NCFandDiscounting 80
1.9.6 Post-ELTCalculations:FinancialMetrics 83
1.9.7 Post-ELTCalculations:VolumetricOutcomes 86
1.10 MultivariableSensitivityAnalysisUsingaTwo-WayDataTable 89
1.11 TheELT–QuestionstoConsider 89
1.12 ReviewExercise:KeyCalculations 89
2 TaxConsolidationandIncrementalValue 91
2.1 TomandCarmenMixLoveandMoney:ARomanticIntroductionto
FiscalConsolidation 93
2.2 PetroleumTaxandRoyaltyRegimes:“Ringfencing”vs.Consolidation 95
2.3 Ringfencing,ConsolidationandIncrementalValue 96
2.4 Ringfencedvs.ConsolidatedIncrementalValueModel:Assumptions 99
2.5 Ringfencedvs.ConsolidatedIncrementalValueModel:Calculations 102
2.6 ModelResultsandAnalysis 105
2.7 Exercise–TryModelingScenario2Yourself 107
2.8 IncomeTaxConsolidationandIncrementalValue(InteractiveAnalysis) 108
3 Royalties 109
3.1 Introduction 111
3.2 RoyaltyBasedonCommodityPrices 113
3.3 RoyaltyBasedonLengthofProduction 119
3.4 RoyaltyBasedonPeriod-EndCumulativeProduction 122
3.5 RoyaltyBasedonCumulativeProductionThroughoutthePeriod 125
3.6 RoyaltyRatesBasedontheProductionRate 143
3.7 RoyaltyBasedonPriceandProductionRates(Version1) 154
3.8 RoyaltyBasedonPriceandProductionRates(Version2–Basedon
Canada’sNewRoyaltyFramework) 160
3.9 RoyaltyBasedonaMeasureofCumulativeProfitability:The“R-factor” 160
3.10 RoyaltyBasedonaMeasureofCumulativeProfitabilityandCommodity
Prices–CanadianOilSands 166
4 Bonuses 167
4.1 Introduction 169
4.2 CommercialityBonuses 170
4.3 BonusesPayableatFirstCommercialProduction 173
4.4 CumulativeProductionBonuses 173
4.5 BonusesBasedontheCumulativeValueofProduction 178
4.6 BonusesBasedontheProductionRateforaSpecifiedPeriod 178
5 Abandonment 189
5.1 Introduction 191
5.2 LumpsumAbandonmentPayments 192
5.3 EqualAbandonmentContributionsMadeOvertheProductionPeriod 194
5.4 UnequalAbandonmentContributions,BasedonAnnualProductionasa
PercentageofUltimateProduction 199