Page 359 - Hydrocarbon Exploration and Production Second Edition

346 Constructing a Project Cashflow

140 straight
120
Capital allowance $m 100 line
80
declining
60
balance
40
20
(UOP)
0 depletion
1 2 3 4 5 6 7 8 9 10
Years
Figure 14.4 Comparison of capital allowance methods.

allowances and thus less tax payable in the early years of the project. The scheme for
claiming capital allowance is however set by the host government.

14.2.2.4. Project net cashflow
Having discussed the elements of the cashflow calculation, remember that in any
one year this can be calculated from gross revenues and expenditure as follows (for a
tax and royalty fiscal system).

Project net cashflow ¼ Gross revenue expenditure
¼ Gross revenue CAPEX OPEX royalty tax
Project net cashflow may also be referred to as project cash surplus/deficit.
Note that capital allowances do not appear in the expression since they are not
items of cashflow. Capital allowances are calculated in order to determine the fiscal
allowances and thus the amount of tax payable.
Below is an example of the calculation of the net cashflow for just 1 year of the
project.
Suppose in any particular year
Production ¼ 12 MMbbl CAPEX ¼ $80 million
Oil price ¼ $50/bbl OPEX ¼ $15 million
Royalty rate ¼ 10%
Tax rate ¼ 50%

Assume that the only previous CAPEX had been $120 million, spent in the
previous year, with 25% straight line capital allowance, thus capital allowance in this
year ¼ 0.25 $120 million+0.25 $80 million ¼ $50 million.

Revenue ¼ Production oil price
¼ 12 MMbbl $50/bbl ¼ $600 million
CAPEX ¼ $80 million