59 similar consideration applies to sliding scale

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59. Similar consideration applies to sliding scale royalties and taxes. Table 6. Contractor’s and Host Government’s NPV Variation Field A Field B Field C Field D Contr. Govt. Contr. Govt. Contr. Govt. Contr. Govt. 20% increases in Capex - Fiscal Model 1 65% 35% 65% 35% 64% 36% 57% 43% - Fiscal Model 2 65% 35% 65% 35% 64% 36% 52% 48% - Fiscal Model 3 50% 50% 61% 39% 50% 50% 50% 50% - Fiscal Model 4 22% 78% 17% 83% 150% 250% 63% 37% 20% reduction in Capex - Fiscal Model 1 65% 35% 65% 35% 64% 36% 58% 42% - Fiscal Model 2 65% 35% 65% 35% 64% 36% 49% 51% - Fiscal Model 3 44% 56% 11% 89% 18% 118% 54% 46% - Fiscal Model 4 34% 66% 26% 126% 104% 204% 35% 65% The choice of trigger rates and thresholds is a key issue for all fiscal models. It is quite unlikely that a particular set of triggers or thresholds would be able to optimize the gov- ernment take under all possible scenarios. For example, if the thresholds for triggering higher profit oil/gas splits are too wide, the system may not efficiently capture the economic upside of a project. 59 This can be seen in Appendix F, which shows the effect on govern- ment take and project IRR of applying different daily production thresholds to calculate the royalty and the profit oil split for Field A.
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The comparison of NPV and government take shown in Appendix D illustrates the complexities of defining efficient profit oil splits between the host government and the investor. In particular: The daily and cumulative production thresholds necessary to trigger higher profit oil splits in favor of the government were never reached when Fiscal Models 1 and 2 were applied to Fields A and B, and the percentage profit oil split remained the same for the economic life of the two fields (see Tables 22 and 23). On the other hand, when applied to Field C, Fiscal Model 2 was able to capture more revenue for the host government than Fiscal Model 1. This is because under Fiscal Model 2, the field reached its second profit sharing and royalty threshold at approximately 50 percent of total production, while under Fiscal Model 1, the daily production level was only slightly above the first threshold for a short period of time (see Table 23). Because of the high level of capital investment, the application of Fiscal Model 2 to Field D made the project uneconomic (see Table 24). There were no significant differences between R-Factor and RoR-based profit split in the first four years of production and between the seventh and the eleventh year of production for Field A. 60 This is because during these periods, changes in thresh- old in both the R-Factor and the RoR-based models corresponded to changes in the project’s internal rate of return. These examples illustrate that in order to capture a suitable share of profit oil the host government would need to make reasonable assumptions about the size and profile of a typ- ical project, as well as to determine the typical variability in key project parameters. This
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  • Winter '14
  • Bijay K Behra
  • host government, fiscal systems, world bank working

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