Page 355 - Hydrocarbon Exploration and Production Second Edition

342 Constructing a Project Cashflow

useful life is less than 1 year (e.g. chemicals, services, maintenance, overheads,
insurance costs) would then be classed as OPEX.
The capital cost estimates are generated by the engineering function, often
expressed as 50/50 (or p50) estimates, meaning an estimate with equal probability
of cost overrun and underrun. It is recommended that the OPEX is estimated
based on the specific activities anticipated during the field lifetime (e.g. number
of workovers, number of replacement items, cost of forecast manpower
requirements). In the absence of this detail it is common, though often inaccurate,
to assume that the OPEX will be composed of two elements: fixed OPEX and
variable OPEX.
Fixed OPEX is proportional to the capital cost of the items to be operated and is
therefore based on a percentage of the cumulative CAPEX. Variable OPEX is
proportional to the throughput and is therefore related to the production rate (oil or
gross liquids). Hence

$ bbl
Annual OPEX ¼½Að%Þ cumulative CAPEXð$ފ þ B production
bbl year
Any OPEX estimate should not ignore the cost of overheads which the project
attracts, especially for example, the cost of support staff and office rental which can
form a significant fraction of the total OPEX, and does not necessarily reduce as
production declines.
The sum of OPEX and CAPEX is sometimes termed the technical cost or total
cost. OPEX may be referred to as a lifting cost, while CAPEX can be referred to as a
development cost.

14.2.2.2. Host government take
‘Fisc’ is an Old English word for taxman. A fiscal system refers to the manner in
which the host government claims an entitlement to income from the production
and sale of hydrocarbons on behalf of the host nation. The simplest and more
traditional fiscal system is the tax and royalty scheme, such as that applied to income
from hydrocarbon production in the United Kingdom.
Royalty is normally charged as a percentage of the gross revenues from the sale of
hydrocarbons, and may be paid in cash or in kind (e.g. oil). The prevailing oil price
is used.

$
Royalty ¼ Royalty rate ð%Þ production ðbblÞ oil price
bbl
In addition to royalty, one or more profit taxes may be levied (such as a special
petroleum tax, plus the usual corporation tax on company profits).
Prior to the calculation of tax, certain allowances may be made against the gross
revenue before applying the tax rate. These are called fiscal allowances and commonly
include the royalty, OPEX and capital allowances (which are explained later in this
section). Fiscal allowances may also be referred to as deductibles.
Fiscal allowances ¼ Royalty þ OPEX þ capital allowances ð$Þ