Comparative Economics of Exploration and Production Contracts and Tax Regimes Applied to Expected Oil Prospects
Authors: Lechner H. E. , Altenberger R. F. 
Published: December 2007

During their operations Exploration and Production companies encounter three major risks: the geological risk during exploration, the financial risk during depletion and the political risk. To be an overall success an E&P venture must realize a discovery and provide a good contract and a positive business environment. The aim of this paper is to establish procedures and tools for the purpose of appropriate decision making at the outset of an E&P venture. Various economic parameters are applied to analyze E&P contracts/tax regimes of fourteen countries (Albania, Algeria, Angola, Austria, Bulgaria, Gabon, Indonesia, Libya, Malaysia, Pakistan, Tunisia, UK, Vietnam, Yemen) in order to assess the relative merits of E&P investments. Typical field sizes and reservoir parameters for each country are used in the analysis. Other country-specific features – existing infrastructure, gas market, crude quality – have also been included. CAPEX and OPEX values for the various countries are based on consultant and proprietary information. The production profile is fitted to the type of field and its location. Oil and gas are valued at the point of production, taking into account quality, transport discounts, market assessments, and the underlying E&P contract. All calculations are in real USD (1992), assuming Brent f.o.b. at USD 18 flat. The geological and the political risks are taken into account by using statistical information and political assessments provided by consulting firms.

The applied economic parameters and ratios are: ➪Present value of barrels in the ground➪Profit/Investment and Rate of Return in relation to field size or development costs➪Maximum affordable finding costs, minimum field size to recover previous exploration costs➪Oil price sensitivities of cash surplus in relation to reservoir size and profit/loss situation of a project➪Critical oil price versus reservoir size for the various E&P contracts and tax regimes➪Minimum success of discovery for various field sizes to achieve an EMV larger than zero➪Sharing of net profits between first and second party for different field sizes in the various ventures➪Total government take relative to the contractor's profit situation or reservoir size➪Portfolio resulting from exploration strength and development strength of the various E&P ventures➪Average economic indicators to reflect the status of the present exploration portfolio➪Decision-tree analysis to account for political risks and financial exposures

The economic yardsticks derived can be used to guide the prioritization of E&P investment in existing ventures and to judge new venture opportunities by comparing them to the existing venture portfolio. They also provide vital background information for negotiations of contractual terms in both existing and new contracts. They finally can be used to redefine economic hurdles or major strategies or specify them in more detail. Information about the most recent exploration success in different countries can be evaluated in respect to these new hurdles.