FISCAL SYSTEM

A Joint Venture Must Consider

ECONOMIC RENT

Difference between the value of production and the cost to extract it

EXTRACTION COSTS

Includes normal exploration,development and operating costs as well as required rates of return or share of profit for the contractor

GOVERNMENT POINT OF VIEW

TRADE - OFF

BETWEEN

Risk Aversion

Risk Sharing

Leaning towards bonus bids and royalties

Production or profit sharing through taxation schemes

PERCENTAGE OF COUNTRIES THAT USESignature Bonuses 40 %

Royalties 75 % 1/3 of them are slidingOf the flat ones, 2/3 are less than 12.5%World Average is 7 %

Government Participation

50 % Average workinginterest participation is 30% for those countries with the participation option

Profit –based Mechanisms Taxes P/O Splits

90%

50%

75% are direct25% are deemed paid or in lieu1/3 have additional taxes

85% of these are sliding

Other 25 % have withholding taxes7 % have DMOs

DIVISION OF REVENUES

TAX BASE SPECTRUM

ROYALTY/TAX SYSTEMSFIRST - ROYALTY

AS % OF GROSS REVENUE

SECOND – DEDUCTIONS

OPERATING COSTS, DD& A AND IDCs

THIRD – TAXATIONS

TAXABLE INCOME (REVENUE LESS ROYALTY AND DEDUCTIONS)SUBJECT TO ONE OR MORE LAYERS OF TAXATION

CONCESSIONARY SYSTEM FLOW DIAGRAM    One Barrel of Oil    " Full Cycle "    Gross Revenue  

  Contractor  $20  Government    Share Royalty Share    12.50% $2.50     $17.50  Net Revenue    $5.65  Deductions  

  Assumed cost Capex and Opex    $11.85  Taxable Income  

  Special Petroleum Tax $2.96     25%    $8.89     Income Tax Rate $3.11     $5.78  35%    $11.43  Division of Gross Revenues $8.57   

  $5.78  Division of Cash Flow $8.57     40% TAKE 60%  

  $5.78/($20-5.65) $8.57/($20-5.65)     

  87.5% Lifting Entitlement 12.5%    $17.50/$20 $2.50/$20  

BASIC EQUATIONS, ROYALTY/TAX SYSTEMSGross Revenues = Total oil and gas revenuesNet Revenues = Gross Revenues

( - )   RoyaltiesNet Revenue  ( % ) 100% minus Royalty rate ( % )

Taxable Income = Gross Revenues( - ) Royalties

DEDUCTIONS

( - ) Operating costs( - ) Intangible capital costs (1)( - ) DD&A ( including abandonment costs)( - ) Investment credits ( if allowed)( - ) Interest on Financing ( if allowed)( - ) Tax loss carry forward( - ) Bonuses (2)

Net Cash Flow = Gross Revenues( after tax) ( - ) Royalties

( - ) Tangible capital costs( - ) Intangible capital costs (1)( - ) Operating costs( - ) Bonuses( - ) Taxes

(1)In many systems no distinction is made between operating costs and intangible capital costs, both are expensed.(2) Bonuses are not always deductible for tax calculation purposes.

CONTRACTUAL SYSTEMSFIRST - ROYALTY

AS % OF GROSS REVENUE

SECOND – COST RECOVERY OPERATING COSTS, DD& A AND IDCs

(SUBJECT TO LIMIT SAY 40% OF GROSS REVENUE)

THIRD – PROFIT OIL OR PROFIT GAS SPLIT(REVENUE LESS ROYALTY AND COST RECOVERY)

( SUBJECT TO SPLIT SAY 40% / 60%)

FOURTH – TAXESCONTRACTOR’S SHARE OF PROFIT IS SUBJECT TO TAX