A deterministic approach was used to calculate

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without applying any interest rate. A deterministic approach was used to calculate production levels, costs and prices. Statistical or stochastic methods could have been applied to determine the possible value distri- bution of the project variables, which in turn would have provided valuable information for the design of the fiscal system. Because the objective of this paper is not to optimize the fiscal system in a particular coun- try, but merely to show how different fiscal systems respond to changes in economic and project conditions, this approach was not attempted as it would not significantly affect the result of our analysis.
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22 World Bank Working Paper 44. When simulating the impact of variations in production levels, the same percentage was applied through out the production horizon (that is, no adjustments were made to the production rate to take into account facilities specifications and/or reservoir management needs). 45. Theoretically it is possible to exactly replicate a particular fiscal regime using different combina- tions of fiscal instruments—for example a production sharing contract can be replicated by a combination of royalties and taxes. Hence the choice between contractual systems and concessionary system mainly depends on the country’s administrative capacity or on the objectives of its sector policy (Baunsgaard 2001). For this reason, concession agreements were not modeled in this paper as this would not significantly affect the analysis. 46. The R-Factor was calculated as the ratio between after-tax revenues and total project costs (capital expenditure and operating costs). As it is the case for many other system parameters, the definition of R-Factor tends to be country (sometimes contract) specific. Therefore, one should be cautious in compar- ing fiscal parameters among countries/contracts as their effect on project economics can be quite different. 47. See Appendix B, Table 11. 48. To simplify the interpretation of the results, only one parameter at a time was allowed to change. In reality, there are dependency relationships among parameters. The likelihood, magnitude, and timing of changes in technical and economic parameters have different effects on project economics, and on the overall performance of the system. A stress test was, however, carried out for all fiscal models by calculat- ing the project’s NPV at different discount rates resulting from decreasing the production level and price by 20 percent and increasing capex and opex by 20 percent. 49. The minimum level of gas price that causes the project’s NPV to become zero. 50. This indicator allows companies to compare investments around the world, irrespectively of the size of the project. 51. The operating leverage was calculated as the ratio of the net present value of total cost to the net present value of gross revenue. Both flows were discounted at 10 percent. The higher the operating lever- age, the more exposed the project profitability is likely to be to a fall in prices.
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