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Directorate General of Hydrocarbons New Delhi

Directorate General of Hydrocarbons New Delhi. Presentation on FISCAL TERMS - IMPLICATIONS & INHERENT ASPECTS. BID QUALIFYING CRITERIA. ANY UNINCORPORATED / INCORPORATED JV IS ELIGIBLE TO SUBMIT ITS BID PROVIDED

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Directorate General of Hydrocarbons New Delhi

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  1. Directorate General of Hydrocarbons New Delhi Presentation on FISCAL TERMS - IMPLICATIONS & INHERENT ASPECTS

  2. BID QUALIFYING CRITERIA • ANY UNINCORPORATED / INCORPORATED JV IS ELIGIBLE TO SUBMIT ITS BID PROVIDED • It has technical capability to satisfy Minimum qualifying criteria of non-zero points in technical parameters. • It has financial capability to satisfy Minimum qualifying criteria of non-zero points in financial parameters. • And each company in consortium has net worth more than its estimated expenditure to complete the Minimum Work Programme under Phase-I. • Note: If performance cum financial guarantee is given by parent company, the technical and financial parameters of parent company are considered for evaluation.

  3. FINANCIAL PARAMETERS ONLAND SHALLOW WATERS Mini (Points) Max (Points) 5 (0) 50 (2) 3:1 (0) 1:1 (1) 5 (0) 20 (1) DEEPWATERS Mini (Points) Max (Points) 10 (0) 100 (3) 3:1 (0) 1:1 (1.5) 5 (0) 40 (1.5) Net Worth ($MM) Debt Equity (Ratio) Profit Before Tax ($MM)

  4. FISCAL - Standard Uniform Terms • FISCAL TERMS APPLICABILE TO ALL THE BIDS: • 1. No signature, discovery & production bonus. • 2. No levy of cess or custom duty. • 3. Royalty • Oil Gas • Onshore 12.5% 10% • Offshore : Shallow Waters 10% 10% • : Deep Waters First 7 years - half the royalty as applicable for shallow waters. • After 7 years - full rate

  5. FISCAL - Standard Uniform Terms • 4. Income Tax : • Deduction of exploration & drilling expenditure @ 100%. • No ring fencing of expenditure & income for income tax. • 7 year tax holiday from the date of commercial production. • Depreciation @ 25% on WDV of assets. • Carry forward of accumulated losses for a period of 8 years. • Option to amortize accumulated exploration & drilling expenditure over 10 years.

  6. FISCAL - Biddable Terms • THE BIDDING COMPANY HAS TO BID FOR THE FOLLOWING FISCAL TERMS WHILE SUBMITTING THE BID: • Percentage of annual production to be allocated for cost recovery - could bid upto 100%. • Percentage share of Profit Petroleum in the following format • Investment Multiple Ratio % of GOI % of Contractor • less than 1.5 • 1.5 - 2.0 • 2.0 - 2.5 • 2.5 - 3.0 • 3.0 - 3.5 • 3.5 & above • However 100% cost recovery is allowed of the contract costs and un-recovered costs in a particular year are carried forward to subsequent years till all costs are fully recovered.

  7. FISCAL TERMS - Criteria for Evaluation • Based on the standard and biddable terms, Govt. NPV of each Bidder is calculated by considering 10% discount rate. • GOVT. NPV = ROYALTY + PROFIT PETROLEUM + INCOME TAX • Govt. NPV of each Bidder is calculated under 9 Scenarios by taking various Assumptions and other parameters on Cost, Prices, Reserves and Production profiles which are uniformly adopted for all bidders • 9 DIFFERENT SCENARIOS • Low Price Most Likely Price • High Price • Weighted Govt. NPV on the basis individual NPVs for all the 9 scenarios is evaluated and company which gets highest Govt. NPV is given 30 marks and other companies are rated accordingly. Low Reserves Most Likely Reserves High Reserves Low Reserves Most Likely Reserves High Reserves Low Reserves Most Likely Reserves High Reserves

  8. FISCAL TERMS - Investment Multiple Profit sharing between GOI and companies is based on pre tax investment multiple formula (IM). IM = Cumulative Net Cash Income (NCI) / Cumulative Investment (I) NCI = Cost Petroleum + Profit Petroleum + Incidental Income - Production Cost - Royalty Investment = Exploration Cost + Development Cost Hypothetical Example: If company has bid as under: 1. Percentage of annual production for cost recovery = 100% 2. IM GOI% Contractor % <1.5 0 100 1.5-2.0 10 90 2.0-2.5 15 85 2.5-3.0 25 75 above 3.0 30 70

  9. FISCAL TERMS - Investment Multiple CALCULATION OF PROFIT PETROLEUM (US $ MM) Year 1 2 3 4 5 6 7 Revenue - - - - - 40 120 (-) Royalty - - - - - 4 12 (-) Production Cost - - - - - 4 10 (-) Exploration Cost 2 3 2 3 2 10 - (-) Development Cost - - - 5 8 15 30 Unrecovered Cost 2 5 7 15 25 18 - Profit Petroleum - - - - - - 50 CALCULATION OF IM Year NCI Cumu. NCI Investment Cumu. Investment IM 1 - - 2 2 - 2 - - 3 5 - 3 - - 2 7 - 4 - - 8 15 - 5 - - 10 25 - 6 32 [40-4-4] 32 25 50 0.64 7 98 [120-12-10] 120 30 80 1.5 Distribution of Profit Petroleum in Year 8 GOI = 10%Contractor = 90%

  10. FISCAL TERMS - Implications • INHERENT ASPECTS • Every bid for a particular block is evaluated on stand alone basis with common set of assumptions and other parameters applied uniformly to all bidders. • For relative ranking of the Bids, the sensitivity of the Marks in a given fiscal package tends to range between 20-30 Marks out of total 30 Marks assigned to fiscal package, because of following factors. • The factor of Royalty in Govt. NPV is fixed for all Bidders. • The Income Tax Factor is also more or less uniform amongst the Bidders except for little variations on account of different income tax rates for Indian / foreign companies, constituting the JV. • Tax rate : • Indian Companies : 30% + Surcharge 10% + Edu. Cess 2% (33.66%) • Foreign Companies : 40% + Surcharge 2.5% + Edu. Cess 2% (41.82%) • Hence in a fiscal package, the relevant ranking of bids is a direct factor of percentage of Profit Petroleum (PP) to GOI and Cost Recovery Factor given by each Bidder which are biddable items.

  11. FISCAL TERMS - Implications • INHERENT ASPECTS (contd.) • The Cost Recovery Factor (CR) becomes relevant only when the Profit Petroleum to GOI starts - Otherwise it is contractor share of Profit Petroleum and does not improve the Govt. Take. • Earlier, the Profit Petroleum of GOI, higher the impact of CR factor on Govt. NPV. • The lucrative percentage of Profit Petroleum shared with GOI, makes a glaring impact in relevant ranking. • Higher the %age of GOI, higher the Govt. NPV. • The percentage given in first three tranches is very important because in most of the cases, IM tends to remain in these tranches over the effective project life. • However, in very prospective blocks, projects touches the later IM’s also during its effective years of life, hence Profit Petroleum percentage in later tranches have direct bearing on the Govt. NPV. • Hence, Bidding of PP percentage and Cost Recovery Factor should be done very cautiously.

  12. FISCAL TERMS - How the Relative Ranking of Bids Works HYPOTHETICAL EXAMPLE CASE - VERY PROSPECTIVE / BLOCK - DEEP WATERS PRODUCTION OIL (MMBbl) GAS (MMSCM) Low 54 47800 (OEG = 281 MMBbl) Most Likely 72 63800 (OEG = 375 MMBbl) High 90 79000 (OEG = 465 MMBbl) PRICES Oil / Gas (US $/ Bbl) / (US $ / Mm3) Low X Most Likely Y High Z

  13. FISCAL TERMS - How the Relative Ranking of Bids Works FISCAL PACKAGE OFFERED BY COMPANIES A B Cost Recovery Factor % 100 85 IM PP% TO GOI < 1.5 20 20 1.5 - 2.0 30 25 2.0-2.5 45 30 2.5-3.0 60 40 3.0-3.5 70 50 3.5 & above 80 65 WHAT RELEVANT RANKING YOU PERCEIVE OF THE COMPANIES?

  14. FISCAL TERMS - How the Relative Ranking of Bids Works COMPANIES Results A B (at 10% discounting) Govt. NPV (US $ MM) 665.3 674.8 Marks 29.57 30 Ranking II I FISCAL PACKAGE OF COMPANY B IS BETTER THAN COMPANY A

  15. FISCAL TERMS - Observations • In very prospective blocks, where cost recovery is very fast in 2-3 years and IM touches all levels during the project life, both the factors i.e. cost recovery and Profit Petroleum %age directly impact the Govt.NPV and result in higher %age of GOI take as happened in case of company B. The fiscal package offered by Company B is better than Company A because of cost recovery factor of 85% though the Profit Petroleum %ages are lower than that of Company A. • It may not be true in case of less prospective blocks where the cost recovery is not fast and extends to 6 - 7 years with late arrival of Profit Petroleum to GOI. In such cases Company A may be better in ranking than company B though it is taking 100% cost recovery factor. CR factor of 85% of Company B may not improve the relative Govt. Take because of late start of GOI share of Profit Petroleum.

  16. FISCAL TERMS - Observations HYPOTHETICAL EXAMPLE - SHALLOW WATERS PRODUCTION OIL (MMBbl) GAS (MMSCM) Low 25 1357 (OEG = 8 MMBbl) Most Likely 36 1992 (OEG = 12 MMBbl) High 64 4021 (OEG = 24 MMBbl) FISCAL PACKAGE OFFERED BY COMPANIES A B Cost Recovery Factor % 70 100 IM PP% TO GOI < 1.5 35 40 1.5 - 2.0 50 55 2.0-2.5 60 65 2.5-3.0 65 70 3.0-3.5 70 70 3.5 & above 75 70 Observation: Company B’s fiscal package may be better than Company A

  17. FISCAL TERMS - Way Forward • 1. To be cautious on bid qualifying criteria. • 2. To be cautious while bidding the fiscal package. • Prospectivity of the block. • Expected pay back period. • Expected level of IM tranches during the project life. • Cost recovery factor. • Profit Petroleum sharing with GOI - Expected Govt. Take.

  18. THANK YOU

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