Page 357 - Hydrocarbon Exploration and Production Second Edition

344 Constructing a Project Cashflow

Table 14.2 Straight line capital allowance

Year CAPEX Capital Allowance

1stYear 2nd Year 3rd Year Total

1 100 20 20
2 400 20 80 100
3 200 20 80 40 140
4 20 80 40 140
5 20 80 40 140
6 80 40 120
7 40 40
8
700 100 400 200 700

14.2.2.3.1. Straight line capital allowance method. This is the simplest of the
methods, in which an allowance for the capital asset is claimed over a number of
years in equal amounts per year, for example 20% of the initial CAPEX per year for
5 years.
Capital allowances may be accepted as soon as the capital is spent or may have
to wait until the asset is actually brought into use. In the case of the newcomer
company or the ring-fenced project the allowance may only be applied once there is
revenue from the project.
A newcomer company is a company performing its first project in the country,
and therefore has no revenues against which to offset capital allowances.
A project is ring-fenced if, for fiscal purposes, its fiscal allowances can only be
offset against revenues earned within that ring fence (Table 14.2).

14.2.2.3.2. The declining balance method. Each year the capital allowance is a
fixed percentage of the unrecovered value of the asset at the end of the previous
year. The same comments about when the allowance can start apply (Table 14.3).
At the end of the project life a residual unrecovered asset value will remain. This is
usually accepted in full as a capital allowance in the final year of the project. Hence
the total asset value is fully recovered over the life of the field, but at a slower rate
than in the straight line method.

14.2.2.3.3. The depletion method or unit of production method. This method
attempts to relate the capital allowance to the total life of the assets (i.e. the field’s
economic lifetime) by linking the annual capital allowance to the fraction of the
remaining reserves produced during the year. The capital allowance is calculated
from the unrecovered assets at the end of the previous year, times the ratio of the
current year’s production to the reserves at the beginning of the year. As long as the
ultimate recovery of the field remains the same, the capital allowance per barrel of