SPE 162990

Comparative Performan
P nce Analy
ysis of Pe
etroleum Sharing Contractts in
Angola, Equato
orial Guin
nea, Gabo
on And N Nigeria
Joseph C.
C Echendu, SPE,
S AUST; Omowumi
O O. Iledare, SPE , LSU Centerr for Energy S
Studies; Emm
manuel I.
Onwuka, SPE, AUST
Copyright 2012
2, Society of Petroleum
m Engineers

s prepared for presenta

This paper was ation at the 2012 SPE Nigerian Annual Intern
national Conference annd Exhibition held in Ab
buja, Nigeria, 6-8 Augu
ust 2012.

This paper was s selected for presentattion by an SPE program committee following g review of information contained in an abstra act submitted by the au uthor(s). Contents of th
he paper have
not been review wed by the Society of Petroleum
P Engineers and
a are subject to corre ection by the author(s)). The material does noot necessarily reflect any position of the Society of
Petroleum Engineers, its officers, or members.
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is prohibited. Pe
ermission to reproducee in print is restricted to
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acknowledgment of SPE copyright.

In
ntroduction
n
Abstrac
ct T
There is enouggh statistical evidence to ssuggest that
Petroleumm Fiscal System m (PFS) is a key
k determinan nt of A
Africa is endow wed with vastt quantities off both fossil
investmennt decision in the exploratio on and production annd renewablee energy resoources. Africa currently
(E&P) off oil and gass. It describess the relationsship suupplies about 111% of the gloobal oil demandd and boasts
between the host govvernments, the investors, and off significant uuntapped reserrves estimated at between
communitty stakeholderss with respect to how costs are 9%% - 10% of thee world’s provven reserves (BBP Statistical
recoveredd and profitts are shareed equitably. A R
Review, June 2011). Acccording to aan African
comparattive economicss of the perfo ormance of fisscal D
Development B Bank report, Affrica is the most important
regimes becomes
b imperrative as it aff
ffects stakehold
ders coontinent in thhe world with frequent andd substantial
in makin ng informed decisions
d on the oil and gas neew findings off oil and gas rresources. Thee sustainable
business investments
i woorldwides. deevelopment off oil and gas reesources requirres policies,
This pap per evaluates the structurre, conduct and prrinciples, and practices that support the uutilization of
performan nce of PFS in i Gabon, Eq quatorial Guin nea, thhese resources in a manner thhat does not prrevent future
Angola and
a Nigeria in n the Gulf off Guinea (GO OG). geenerations froom benefittingg from the reesources. A
These cou untries hold about
a 90% of the GOG pro oved grreat challenge, particularly for oil produccing African
reserves. Economic ana alysis of the same
s E&P pha ases coountries, is to ensure ssufficient, relliable, and
using hypypothetical fieeld and cost data under the ennvironmentallyy responsible supplies of oiil, at prices
different PFS are presented
p andd discussed for thhat reflect markket fundamentaals (ADB/AU Oil and Gas
comparattive PFS performancce evaluatio
ons. inn Africa, 2009)).
Comparisson of the effe fects of producction delay, front
fr T
The Gulf of G Guinea ranks aamong the most attractive
loaded government
g ta
ake and taxa ation shows that peetroleum provvince for E&P P investment worldwide.
petroleumm sharing contrract fiscal termms and instrumeents The majority off oil reserves (and productioon) in GOG
T
in Gabon n, Equatorial Guinea,
G Angolaa and Nigeria are coomes from A Angola, Equatoorial Guinea, G Gabon, and
relatively competitive. We found tha at as the riskk in N
Nigeria which toogether producce more than 990 percent of
deepwater investment increases wiith water dep pth, thhe continent’ss reserves (see Figure 1)). Nigeria’s
return onn investment rises
r in thesee GOG countrries. deeepwater oil reeserves and unnderdevelopedd natural gas
Monte Carlo
C simulattion process incorporated to reeserves and ssignificant oill deposits fouund in the
account for risk and uncertaintiies reveal ea arly w
western part off offshore Ghaana are a logiccal target of
discounteed payout for in nvestors in thesse GOG counttries innternational oill companies (IO
OCs) in the GOOG region.
with signif
ificant degree of
o ceteris paribbus.
A key determ minants of globbal investmennt flows for
E
E&P activity is the attractivenness of the PFS
S underlying
oiil developmentt worldwide. B Basically, a PFS describes,
2 SPE 162990
in general, the legislative, tax, contractual and fiscal
elements underlying the exploration and production
operations in a petroleum province, region or country
(Iledare, 2004). The purpose of PFS is to determine
equitably how costs are recovered and profits are shared
between firms and the host governments. Its helps to
allocate the rights for development and operation of
specific business within a country (Campbell, et al.,
2001). Ownership of mineral rights could belong to
individuals or state, but in the GOG it is almost entirely
vested in the national government (state). The federal
petroleum laws form the basis for all petroleum
operations. The host government -- represented by
either a national oil company, an oil ministry of the
country, or both -- grants licenses or enters into contract
with a contractor -- an international oil company (IOC),
contractor group, or consortium of these -- for a given
contract area. PFS agreements vary considerably and
countries seldom follow the same pattern. However,
there are two broad types of PFS -- Concessionary
system also referred to as Royalty/Tax system and
Contractual system. The primary difference between
the two is basically how costs are recovered, risks
shared, and profits divided. Interestingly, most oil
producing least developed countries, especially where
financial resources are limited, are opting for
Production Sharing Contract (PSC) agreements
(Dharmadji T. and Parlindungan T., 2002).
This study describes and compare the structure, contract
terms and performance of PSCs in Angola, Equatorial
Guinea, Gabon, and Nigeria in the GOG. Deepwater
economic models incorporating the fiscal terms for
these countries are developed. The effects of the PFS
terms and instruments are analyzed to characterize the
systems and recommendations are made on how the
variations (if any) would give government equitable
share of economic rents from its developed and
extracted resources. We compare the effects of a
production delay, front-loaded government take, and
tax instruments on the PFS using a wide range of
profitability and system performance indicators such as
Government Take (GTake), Contractor Take (CTake),
Net Present Value (NPV), Internal Rate of Return
(IRR), Profitability Index (PI), Savings Index (SI),
Return on Investment (ROI), Discounted Payout (DPO)
period, Effective Royalty Rate (ERR), Growth Rate of
Return (GRR), Discounted Net Cash Flow (DNCF),
and Front Loading Index (FLI) are estimated, reviewed,
and analyzed.
Angola PSC Terms and Structures
Angola is the second largest oil producer in the GOG
and third largest oil producer in Africa following after
Nigeria and Libya. It became the 12th member of the
Organization of Petroleum Exporting Countries
(OPEC) in 2007. Angola has proven reserves of 9.5
billion barrels (OPEC, 2011) and a production capacity
of 1.95 million BOPD and has therefore joined the
ranks of the major producers. Angola exports more than
90% of its crude oil primarily to China and the US.
Sonangol is the government agency (established in
1976) that manages all oil production and distribution
in Angola. Angola 1990 and 2004 PSCs are considered
in this study and the fiscal year corresponds to the
calendar year.
E&P Period: Angola PSCs allow for an initial
exploration period of three years and extension to a
maximum of three additional years. For deepwater, its
initial exploration period is four years and a two years
addition. The production period is 20 years from date of
discovery and it allows for relinquishment of all except
development areas after 5 years for onshore and 6 years
for deepwater. There is a negotiable exploration
obligation in the PSC.
Bonuses: There is no signature, production, or
discovery bonus payment in Angola PSC. Angola has
no royalty definition in the 1990 and 2004 PSCs.
Surface rental is $300/km2.
Domestic Market Obligation: There is a Domestic
Market Obligation (DMO) of up to 40% of production.
ANGOLA 1990 PSC
Depreciation: Exploration costs are expensed while
development costs are depreciated 5 years using
straight line depreciation method.
Cost Recovery: A limit of 50% of yearly gross
production can be used for cost recovery with 40%
uplift on development costs. For cost recovery, there is
ring fencing around license for exploration and around
field for development.
Profit Oil: After royalty payment and cost recovery,
the remaining revenue known as ‘Profit oil’ is shared
based on average production rate as typically denoted
below (Meraks, 2010).
Average Oil Production Contractor’s Profit Share
(MBOPD) (%)
< 25 50 – 60
25 – 50 30
50 – 100 20
> 100 10
Taxation: In the 1990 PSC of Angola, Sonangol pays
50% tax in lieu for the contractor with economic
equilibrium/stability clause. This is governed by Decree
No. 52/89, of 8 September 1989.
ANGOLA 2004 PSC
Depreciation: Exploration and development costs are
depreciated 6 years using straight line depreciation
method or at a uniform rate of 16.66667%. This
SPE 162990
includes dry hole costs. Costs incurred before
production are depreciated at a flat rate of 25% per year
over a 4-year period.
Cost Recovery: A limit of 50% of yearly gross
production can be used for cost recovery with 40%
uplift on development costs. For cost recovery, there is
ring fencing.
Profit Oil: After royalty payment and cost recovery,
the remaining revenue known as ‘Profit oil’ is shared
based on average production rate as typically denoted
below (Meraks, 2010).
Average Oil Production Contractor’s Profit Share
(MBOPD) (%)
< 25 50 - 60
25 – 50 30
50 – 100 20
> 100 10
Taxation: The 2004 PSC of Angola is governed by
Law 13/04 of 24 December, 2004, and it provides for
the payment of the following tax charges;
 Petroleum Production Tax (PPT)
 Petroleum Income Tax (PIT)
 Petroleum Transaction Tax (PTT)
 Surface Fee
 Levy for the training of Angolan personnel
PPT is levied at a rate of 20% and may be reduced to as
little as 10%, if the government decides, in the
following cases;
 Petroleum exploitations in marginal fields
 Petroleum exploitation in offshore depths
exceeding 750 meters
 Petroleum exploitation in onshore areas which
the government has previously described as
difficult-to-reach.
PSC shall not be subject to PPT.
PIT is charged at a rate of 50% for production sharing
agreements and 65.75% for non-production sharing
agreement. PIT is based on taxable income which is
revenue less expenses (premiums, bonuses, state
concessionaire, and so on) attributable to the same
fiscal year. In PIT payments, deductible costs and
losses includes OPEX, depreciation, amortization, other
taxes, etc., while bonus, interests are non-deductible
costs. PTT is zero percent for production sharing
agreement and 70% for non-production sharing
agreement. For PTT, production and investment
allowances are additional deductibles, while other tax
charges are non-deductibles.
Equatorial Guinea PSC Terms and Structure
3
Equatorial Guinea became a large oil producer in Sub-
Saharan Africa in 2004 subsequent to the discovery of
large oil reserves in 1996. Equatorial Guinea has
estimated proved oil reserves of 1.755 billion barrels as
at December 31, 2007 (Mbendi, 2011). The
Government’s Ministry of Mines and Hydrocarbons
regulates the industry. The Ministry is also the licensing
authority. Petroleum licensing is governed by the 1981
Hydrocarbons Law, amended in 1998, and taxation is
covered by the general tax provisions of 1986, amended
in 1988, 1991 and 1997. Contracts governing the
exploration and exploitation of hydrocarbons are based
on the Model Petroleum Production Sharing Contract in
1998, revised and updated in 2006. In the 2006 PSC,
there is a value-added-tax of 15% for goods, services,
and imports.
Bonuses: Signature, production, or discovery bonus
payment is negotiable in the Equatorial Guinea PSC.
Surface rental is also negotiable. These are not cost
recoverable but tax deductible. Training fee is also
negotiable and cost recoverable as intangible.
The 1998 PSC
E&P Period: The 1998 contract allows for an initial
exploration term of 5 years followed by two terms of 3
and 2 years extendable on a yearly basis for up to a total
of 8 years. There is a 5% carried interest through
exploration for state participation.
Royalty: Royalty rate is a negotiable incremental
sliding scale with 10% as minimum royalty rate and
16% as maximum royalty rate based on daily oil
production as shown below
Average Oil Production
Royalty (%)
(MBOPD)
< 25 10
25 – 50 12
50 – 100 14
> 100 16
Depreciation: Tangible development costs are
depreciated 6 years using straight line depreciation
method.
Cost Recovery: A limit of 60% of revenue after
deducting royalty is used for cost recovery. For cost
recovery, there is ring fencing around the block.
Operating cost, intangible cost, and abandonment fund
deposit are expensed.
Profit Oil: After royalty payment and cost recovery,
the remaining revenue known as ‘Profit oil’ is shared
based on cumulative production with incremental
sliding scale as shown below (Meraks, 2010).
Cumulative Oil Contractor’s Profit Share
Production (MMBOE) (%)
< 50 90
4 SPE 162990
50 – 100 80
100 – 200 60
> 200 40
Taxation: In the 1998 PSC of Equatorial Guinea, tax
rate is 25%. Also operating cost, intangible cost, and
abandonment fund deposit are expensed. For tax, there
is ring fencing around the country.
The 2006 PSC
E&P Period: This contract allows for an initial
exploration period divided into two sub-periods, the
first and second exploration sub-periods. The duration
of the initial exploration period shall be between 4 and
5 years, while the second sub-period is a maximum of
two extension periods which shall be for a term of one
year each. The production period which also comprises
development and appraisal phases shall be further
defined in the contract.
Royalty: Royalty rate is a negotiable direct sliding
scale with 13% as minimum royalty rate and 19% as
maximum royalty rate based on daily oil production as
shown below
Average Oil Production
Royalty (%)
(MBOPD)
< 25 13
25 – 50 15
50 – 100 17
> 100 19
Abandonment Fund: In the 2006 PSC the contractor
must submit a plan for abandonment cost to be placed
in an escrow account upon the earlier of:
 Six (6) years prior to the estimated
commencement of abandonment operations
 The date on which 50% or more of recoverable
hydrocarbons from a development and
production area have been produced
 One year prior to termination of applicable
contract or the proposed date of the
abandonment of any product area.
Depreciation: Tangible development costs are
depreciated 10 years using straight line depreciation
method and it is for tax purpose.
Cost Recovery: A limit of 60% of revenue after
deducting royalty is used for cost recovery; the cost
recovery limit is negotiable. For cost recovery, there is
ring fencing around the block. Operating cost,
intangible cost, and tangible development costs are
expensed. Abandonment fund is cost recoverable.
Profit Oil: After royalty payment and cost recovery,
the remaining revenue known as ‘Profit oil’ is shared
based on cumulative production with incremental
sliding scale as shown below (Meraks, 2010).
Cumulative Oil Contractor’s Profit Share
Production (MMBOE) (%)
< 50 90
50 – 100 80
100 – 200 60
> 200 40
Taxation: In the 2006 PSC of Equatorial Guinea, tax
rate is 35%. Operating cost and intangible cost are
expensed. For tax, there is ring fencing around the
country. Bonuses and surface rental are not tax
deductible, but tariff, training fee and abandonment
fund are tax deductible.
Gabon PSC Terms and Structure
Gabon is fourth largest oil producer in sub-Saharan
Africa whilst holding the third largest estimated proved
oil reserves in the region. The country is almost wholly
dependent on oil revenues to fund its economy. Natural
gas is a relatively unexploited natural resource in
Gabon. According to the 2008 BP Statistical Energy
Survey, Gabon has proved oil reserves of 1.995 billion
barrels at the end of 2007.
The state oil company Société Nationale Petrolière
Gabonaise (SNPG) is responsible for overseeing oil and
gas operations in the country. The ownership of oil and
gas resources is vested in the State. It is the only
titleholder of all mining rights as per the Mining Code
established by Law No 15/62 (1962) --Decree No
981/PR (1970) and modified under Ordinance 45/73
(1973). The new taxation system is governed by Law
No 14/74. Oil exploration and production licences are
acquired by means of Exploration and Production
Sharing Contracts (EPSC) according to Law No 14/82
passed in January 1983 established the EPSC which
replaces the Concession Agreement. The fiscal terms
and instruments in the 1997 PSC of Gabon are
summarized below.
The 1997 PSC
E&P Periods: The exploration phase can comprise
either two periods of five years, or three periods
comprising an initial five years followed by two 2-year
terms. This is based on the location of the block and the
work programme. The exploitation phase comprises an
initial 10 year period followed by a second and third
period of 5 years each.
Bonuses: Signature, production bonuses, training fee,
or surface rental is negotiable in the Gabon PSC. There
is a $0.05 per barrel of production hydrocarbon support
fund required.
Royalty: Royalty rate is collected on gross revenue on
incremental sliding scale with 5% as minimum royalty
rate and 8% as maximum royalty rate based on daily oil
production as shown below
SPE 162990 5

upstream and downstream oil and gas development,

Average Oil Production which entails exploiting, refining, and marketing
Royalty (%)
(MBOPD) Nigeria’s crude oil (NNPC, 2008). The corporation is
< 25 5 involved in several fiscal arrangements including Joint
25 – 50 6 Development Zone (JDZ) PSC 2003, 1993, 2000, 2005
> 50 8 PSCs, and so on. There is also a proposed Petroleum
Industry Bill (PIB) before the National Assembly. The
Cost Recovery: 50% of revenue after deducting royalty 1993 and 2000 PSC model contracts are based on the
is used for cost recovery. For cost recovery, there is Petroleum Profits Tax Legislation of 1959, while the
ring fencing around the block. All costs including fees government legislation of the 2005 PSC is governed by
are expensed. Bonuses and hydrocarbon support fund the Petroleum Profits Tax Act Cap 354 Laws of the
are not cost recoverable. If development costs have not Federation f Nigeria 1990 (“PPT Act”).
been recovered after five years of production, this could
be raised to 75% at the company’s request. The 1993 & 2000 PSC
Profit Oil: After royalty payment and cost recovery, Bonuses: Signature and production bonuses are
the remaining revenue known as ‘Profit oil’ is shared negotiable. Surface rental is negotiable in these PSCs.
based on daily production rate with incremental sliding Royalty: Royalty rate is determined by water depth on
scale as shown below (Meraks, 2010). There is ring jumping sliding scale with 0% as minimum royalty rate
fencing around the block for water depth greater than 1000m and 20% as
Daily Oil Production Contractor’s Profit Share maximum royalty rate for onshore fields as shown
(MBOPD) (%) below
< 10 35 Water Depth (Meters) Royalty (%)
10 – 20 30 Onshore 20
20 – 40 25 <= 100 18
> 40 15 101 – 200 16.667
Taxation: For Gabon 1997 PSC, the state pays income 201 – 500 12
tax on behalf of contractor. 501 – 800 8
801 – 1000 4
Domestic Market Obligation: The contractor is
> 1000 0
obligated to sell a portion of its oil to the National Oil
Company at a discounted price. There is a pro rata Depreciation: Tangible development costs are
(maximum 10% of contractor entitlement) at 75 – 85% depreciated 5 years straight line for cost recovery and
of prevailing cost. petroleum profit tax purposes.
Nigeria PSC Terms and Structure Cost Recovery: 100% of revenue after deducting
The Nigerian oil and gas reserves have grown royalty is used for cost recovery. For cost recovery,
tremendously since the discovery of hydrocarbon in there is ring fencing around the block. Operating,
Oloibiri in 1956. Nigeria attained the status of a major Exploration, Abandonment Fund Deposit, and
oil producer, ranking 7th in the world in 1972, and Intangible Development costs are expensed.
becoming the 6th largest oil producing country in the Profit Oil: Revenue remaining after royalty payment
world (OPEC, 2011). In 2011, according to the OPEC and cost recovery is shared based on cumulative
bulletin, Nigeria’s estimated proven oil reserves was production with sliding scale as shown below (Meraks,
37.2 billion with a daily extraction rate of over 2 2010). There is ring fencing around the block. There is
million BOPD. This production success story has been the provision that the profit sharing after cumulative
associated with the great incentives to investors by the production above 2000 MMBOE would be negotiated.
Nigerian Government in the existing fiscal regimes.
NIGERIA 1993 PSC
The Minister of Petroleum Resources is charged with
Cumulative Oil Contractor’s Profit Share
the responsibility of issuing mining and operating
Production (MMBOE) (%)
licenses. The Department of Petroleum Resources
< 350 80
(DPR) in the Ministry of Petroleum Resources is
350 – 750 65
agency charged with the regulatory responsibility and
the supervision of all the operations under licenses and 751 – 1000 55
leases in the oil and gas industry. 1001 – 1500 50
The Nigerian National Petroleum Corporation (NNPC) > 1500 40
is the commercial agency of the federal government of NIGERIA 2000 PSC
Nigeria. It is vested with the exclusive responsibility for
6 SPE 162990

Cumulative Oil Contractor’s Profit Share Abandonment Fund Deposit, and Intangible
Production (MMBOE) (%) Development costs are expensed.
< 350 70 Profit Oil: Revenue remaining after royalty payment,
350 – 750 65 cost recovery and PPT is shared based on R-Factor
751 – 1000 52.5 linear sliding scale as shown below (Meraks, 2010).
1001 – 1500 45 There is ring fencing around the block.
> 1500 35 R-Factor Contractor’s Share (%)
Education Tax: A provision of 2% levy after royalty, R < 1.2 70
operating and exploration costs, and intangible 1.2 < R < 2.5 70 – 25
development costs deduction from sales revenue serves R > 2.5 25
for education tax. This base for the levy is called R = (Profit oil + Cost oil) / (Cumulative capital +
assessable profit.
Cumulative non-capital)
Petroleum Profit Tax: In the 1993 and 2000 PSCs of Education Tax: A provision of 2% levy after royalty,
Nigeria, a tax rate of 50% is levied as Petroleum Profit operating and exploration costs, and intangible
Tax (PPT). This levy applies after education tax,
development costs deduction from sales revenue serves
depreciation, and investment tax allowance have been for education tax. This base for the levy is called
deducted from the assessable profit. assessable profit.
Investment Tax Allowance: 50% of tangible
Other Levies: In 2005 PSC, there is a Niger Delta
development is deductible for taxable income. This is a Development Commission (NDDC) Levy of 3%
form of incentive that reduces taxable revenue that incurred on annual costs. This levy is for the
should have accrued to government.
development of Niger Delta area of Nigeria that is
The 2005 PSC endowed with the country’s rich petroleum resources.
There is also an Asset Tax Final charge which is the
Bonuses: Signature and prospectivity bonuses are maximum of the NDDC or the Education Tax.
negotiable. Surface rental is also negotiable.
Petroleum Profit Tax: The 2005 PSC of Nigeria has a
Production Bonus: Production bonus could be paid in Petroleum Profit Tax rate of 50% levied on deep
cash or kind, and it is based on cumulative production offshore and inland basins. This levy applies after
level reached. education tax, depreciation, and investment tax
Cumulative production allowance have been deducted from the assessable
Bonus
(MMBOE) profit. Other tax rate for different terrains and
1 200 MBOE or cash companies are illustrated below.
220 1000 MBOE or cash Tax rate
500 1000 MBOE or cash Terrain Duration/Classification
(%)
Royalty: Royalty rate is determined by water depth on Onshore/Shallow First 5 years/New
67.5
jumping sliding scale with 8% as minimum royalty rate Offshore comers
for water depth greater than 500m and 20% as First 5 years/Existing
85
maximum royalty rate for onshore fields as shown companies
below Subsequent years/All
85
Water Depth (Meters) Royalty (%) companies
Onshore 20 Deep Offshore /
Flat rate 50
<= 100 18.5 Inland Basins
101 – 200 16.5 Investment Tax Allowance: 50% of tangible
201 – 500 12 development is deductible for taxable income for inland
> 500 8 basins and water depth greater than 200m. This is a
Inland basins 10 form of incentive that reduces taxable revenue that
should have accrued to government. For all terrains, the
Depreciation: Tangible development costs are
incentives based on tangible development costs are:
depreciated 5 years straight line for cost recovery and
Terrains (Meters) Tax rate (%)
petroleum profit tax purposes.
Onshore 5
Cost Recovery: 80% of revenue after deducting royalty < 100 10
is used for cost recovery. For cost recovery, there is 100 – 200 15
ring fencing around the block. Operating, Exploration, > 200 50
Inland basin 50
SPE 162990
Methodology and assumptions
The petroleum project evaluation process applied in this
paper to determine its economic viability using system
measures such as GTake, IRR, DPO, SI, and NPV is
described in this section. It entails description of
required data, forecasting of production decline rate,
cost treatment analysis, and PSC Economics using
fiscal terms and instruments applicable to the countries.
The economic model is formulated using Excel
spreadsheet after the pattern presented by Iledare O. O.
(2010) and Mian M. A. (2002).
The basic input variables and assumptions are based on
the generic input data of table 1. The same production
profile of the oil field development plan with linear
build up and exponential decline is used for the
comparison purpose of this analysis. After establishing
the production pattern for the field development, the
economic model proceeds with the cost outlay
estimation for developing the field within the period.
The same technical cost outlay is imposed for all fiscal
terms with an assumed production delay of 5 years to
accommodate for exploration and geological and
geophysical works including facilities installation.
Technical cost is then depreciated following the PFS
specification. Applying the fiscal terms, PSC
Economics before Corporate Income Tax (CITA) and
after CITA is modelled to capture total yearly
expenditure and the Net Revenue, contractor’s and
government take before CITA and after CITA. Gross
revenue is the product stream multiplied by the
projected product price and net revenue is share of
marketed production multiplied by net price.
Depending on countries’ fiscal instrument
specifications, non-technical cost treatment of royalties,
bonuses, rentals, and crypto taxes as previously
discussed are imposed to estimate front loaded
government take. Afterwards, cost recovery economics
is modelled for all PSCs with the relevant cost recovery
limit (CRL) specifications applied before calculation of
government take before tax. Government and contractor
takes after income tax is estimated after imposing the
specified corporate income or petroleum profit tax in
the PFS of each country.
Deterministic performance indicators are estimated
from generalized net cash flow (NCF) model of the
form;
The deterministic economic system measures and
statistics are generated such as NPV, IRR, GTake,
DPO, PI, ERR, DNCF, SI, GRR, FLI, PVR, and ROI.
7
Stochastic economic models were simulated based on
the inputs reported in table 1 using the Monte Carlo
simulation process in palisade @RISK program. This is
to account for uncertainty and risk in the deterministic
result and the probability of success of the venture to
changes in reserves, peak production rate, and
development cost and crude oil prices. Objective
functions analyzed are the NPV, GTake, IRR, DPO,
and GRR using an assumed hurdle rate (discount rate)
of 12.5%. Table 2 shows the more common probability
distribution functions imposed on selected stochastic
variables in the model.
Result and Analysis
Table 3 shows deterministic undiscounted GTake,
CTake, Govt. NCF results, and estimated reserves. In
table 3 an undiscounted GTake of 79.86% for Angola
PSC (1990) yielded a government net cash flow of
$14.33 billion. With the Angola PSC (2004) fiscal
terms, an undiscounted GTake of 79.28% is achieved
which is a lower GTake compared to Angola PSC
(1990), but Govt. NCF increased to about $14.52
billion. A comparison of GTake and Govt. NCF
between Angola PSC (1990) and Gabon PSC (1997)
shows a 3.5% change from Gabon’s 76.36% to
Angola’s 79.86% GTake, but a 4.8% change from
Angola’s $14.3 billion to Gabon’s $15 billion. The
result shows that an increase in percentage government
take does not necessarily mean a proportional increase
in the Govt. NCF. It is actually a function of the
intricacies embedded in the fiscal terms and their
interpretation, methodology, and applications. Hence,
using GTake as the only yardstick of system
performance might be misleading to both government
and investors.
However, comparing Nigeria PSC (1993) and Nigeria
PSC (2005) shows another interesting ideology which
could culminate in fiscal systems design. Under the
1993 PSC, GTake was 64.18% and NCF was $12.75
billion, and they increased to 91.63% and $27.3 billion
in 2005. This is an increase of about 41% in GTake and
115% in NCF. These statistics compared to Nigeria
proved reserves rising from a modest 0.184 billion
barrels in 1958 to 25.93 billion barrels (NNPC, 2008) in
2000 gives a guide as to how to progressively design a
fiscal system that would benefit the nation at large. The
low GTake and NCF of 1993 led to much petroleum
activity in the nation and discovery of new reserves,
and in 2005 the nation begins to reap what it sowed
earlier to grow its proven reserves.
Government main rent extraction components are;
Front loaded take, Profit oil, and Taxes. The front-end
loaded take consist of the signature bonuses and
royalties. The profit-based mechanism is the profit oil,
while taxes make up the final portion. Figure 2
indicates the dynamics of fiscal terms and their effects.
8 SPE 162990
Equatorial Guinea PSCs have the highest contribution
from front loaded government take of about 20% to its
GTake but with the least government take of about
55%. This is because their FLIs are lower and close to
zero. Angola with no FLGT still has GTake statistics
greater than 75%. Despite the 50% income tax on the
average for most countries, tax effects vary greatly on
government take. The contribution from tax is highest
in Nigeria PSC (1993) at about 62% and least in Angola
PSC 1990 at about 25% contribution. From figure 2, it
is evident that profit oil contributes most to government
take and therefore should be a key element in designing
fiscal terms. Though exempting taxation in its fiscal
term, Gabon could still extract as much as $13 billion
as profit oil to government (PO/Govt). This portrays the
gimmicks of zero taxation system. Table 4 summarizes
the deterministic results.
Table 5 presents a summary of stochastic output for
50% and 90% certainty levels. There is a 50%
likelihood that NPV ranges between $210 million and
$1.7 billion under the PFS considered. NPV as a
profitability indicator shows that value will be added to
E&P investments in these countries’ existing fiscal
regimes. From the Monte Carlo simulation results there
is 50% certainty level that IRR of projects in the GOG
lies between 14.14% and 35.7%, while at 90% certainty
level IRR is relatively higher than the assumed
discounted rate of 12.5% for the PFS modelled. This
indicates there will be returns on every dollar invested.
Comparing Growth Rate of Return (GRR), the IRR of
all the countries modelled are sufficiently greater than
the GRR, indicating there will be greater return on
investments if invested in these countries. The
discounted payout (DPO) period indicates an average of
9 years or 4 years after production starts. All the
economic indicators results from stochastic simulation
show that the GOG region’s PFS relative profitability
of ventures having about the same project life and cash
flow patterns is high.
Conclusions
This paper compares upstream fiscal system in four
Gulf of Guinea countries, Angola, Equatorial Guinea,
Gabon and Nigeria. We reviewed and evaluated 8 PSCs
to characterize PFS performance in the system.
Using deterministic indicators we derived from a
generic cashflow model, we observed that Equatorial
Guinea 1998 PSC has the least government take which
means highest contractor take. Nigeria PSC 2005 has
the highest government take and hence lowest
contractor take.
The analysis also shows that the PFS in these Gulf of
Guinea countries offer a statistically equal payout time
for E&P investment. Further all the PSCs reviewed
added significant value to project investments at the end
of the project life.
Our results also indicate that Equatorial Guinea is the
least regressive from contractor’s viewpoint and
Nigeria PSC 2005 is the most regressive relatively
speaking with a FLI index of 9%.
Finally, our results show that at 50 percent confidence
level, one can expect to earn as low as 14.14% under
Gabon PSC 1997 terms and as high as 35.7% under
Equatorial Guinea 1998 PSC terms, ceteris paribus.
There is, however, at least a ten percent chance that a
project under Gabon PSC 1997, Nigeria PSCs, and
Angola PSC 1990 would not add significant value at
the assumed hurdle rate.
References
1. ADB/AU., Oil and Gas in Africa. 2009. Joint study
by the African Development Bank and African
Union, New York City: Oxford University press.
2. BP world energy statistics, 2008.
3. Campbell, Jr., Campbell J. M., and Campbell R.
A., 2001 Analyzing and managing risky investments,
Oklahoma, USA.
4. Dharmadji T. and Parlindungan T. 2002. Fiscal
regimes competitiveness: Comparison of Oil and Gas
Producing Countries in the Asia Pacific regions;
Australia, China, India, Indonesia and Malaysia.
Paper SPE 77912 presented at the SPE Asia Pacific
Oil and Gas Conference and Exhibition held in
Melbourne, Australia, 8 – 10 October.
5. Iledare O. O., 2004. Analyzing the Impact of
Petroleum Fiscal Arrangements and Contract Terms
on Petroleum E&P Economics and the Host
Government Take. Paper SPE 88969 presented at the
SPE Nigeria Annual Technical Conference and
Exhibition held in Abuja, Nigeria, 2 – 4 August.
6. Iledare O. O., 2010. Evaluating the Impact of Fiscal
Provisions in the Draft Petroleum Industry Bill on
Offshore E&P Economics and Take Statistics in
Nigeria. Paper SPE 136972 presented at the 34th
Annual SPE International Conference and Exhibition
held in Tinapa-Calabar, Nigeria, 31 July – 7 August.
7. Mbendi (2011);
http://www.mbendi.com/indy/oilg/af/ga/p0005.htm
(accessed 7 October 2011)
8. Merak Documentation on Fiscal Regime.
9. Mian M.A., 2002. Project Economics and decision
Analysis vol. 1, PennWell Corporation
10. NNPC Group 2008; www.nnpcgroup.com (accessed
10 November 2008)
11. OPEC 2011;
http://www.opec.org/opec_web/en/data_graphs/330.h
tm (accessed 17 October 2011)
 SPE 162990 9

Table 1: Oil field development data

Input Variables
STOIIP 1000.00 MMBBL Reserves 250.00 MMBBL
Recovery 25.0 % Minimum rate 10.00 MBOPD
Time to plateau 4.00 Years Plateau rate 68.49 MBOPD
Plateau ends at 8.50 Years Build up production 50.00 MMBBL
Production period 17 Years Plateau production 112.50 MMBBL
Decline factor 0.2440 Fraction Exploration period 5 Years
Average Well cost 80.00 $MM Unit Technical Cost 7.82 $/bbl
Wells to drill 15 Unit CAPEX 6.02 $/bbl
Initial Oil Price 70.00 $/bbl Unit OPEX 1.79 $/bbl
Capped Oil Price 180.00 $/bbl Escalation 2 %
Plateau ends at 65.0 % of reserves Discount factor 12.50 %
Plateau rate is 10.0 % of reserves annually

Table 2: Parameters distribution for stochastic analysis

Input Variables Stochastic Distribution MIN MEAN MAX

STOIIP (MMBBL) Lognormal 502.27 599.98 2284.32
Recovery (%) Normal 14.7 25 34.5
Exploration costs ($MM) Triangular 13.51 15.17 16.99
Well rate (MBOPD) Normal 6.03 10 13.79
Development costs ($MM) Triangular 67.60 75 82.40
Discount factor (%) Lognormal 10.04 11.25 33.19
Well cost ($MM) Triangular 72.06 80 87.93
Initial Oil Price ($/BBL) Triangular 30.46 66.67 99.67
Final Oil Price ($/BBL) Triangular 100.54 140 179.44

Table 3: Deterministic Govt NCF, Undiscounted Take statistics and Proved Reserves
Proved
Undiscounted Undiscounted GOVT NCF
KEY PFS Reserves
GTake CTake ($MM)
(Bbbl)

1 ANGOLA PSC (1990) 79.86% 20.14% $ 14,327.90 < 12.2

2 ANGOLA PSC (2004) PSA 79.28% 20.72% $ 14,519.11 12.2
3 EQUATORIAL GUINEA PSC (1998) 47.02% 52.98% $ 9,523.39 1.78
4 EQUATORIAL GUINEA PSC (2006) 56.88% 43.12% $ 11,501.76 1.78
5 GABON PSC (1997) 76.36% 23.64% $ 15,011.08 2
6 NIGERIA PSC (1993) 64.18% 35.82% $ 12,708.51 < 25.93
7 NIGERIA PSC (2000) 68.64% 31.36% $ 13,590.13 25.93
8 NIGERIA PSC (2005) 91.63% 8.37% $ 27,277.11 37.2
 10 SPE 162990

Table 4: Summary of Deterministic Economic Indicator Indices

EQUATORIAL
ANGOLA GABON NIGERIA
GUINEA

PSC PSC PSC PSC PSC PSC PSC

PSC (1998)
(1990) (2004) (2006) (1997) (1993) (2000) (2005)
Undiscounted
79.86% 79.28% 47.02% 56.88% 76.36% 64.18% 68.64% 91.63%
GTake
Discounted
82.98% 81.43% 47.21% 59.11% 82.56% 67.98% 73.33% 99.72%
GTake
Contractor's
30.07% 35.04% 45.88% 39.44% 24.26% 31.67% 28.90% 12.76%
IRR
Payout
8.12 8.21 8.12 8.76 7.85 7.99 8.05 8.41
(years)
Contractor's
697.24 790.97 2,455.62 1,920.58 762.05 1,399.40 1,165.52 12.37
NPV ($MM)
ERR 30.29% 30.29% 16.02% 18.06% 41.38% 17.90% 22.25% 26.85%
Savings Index 22.21% 22.21% 60.01% 52.01% 29.82% 39.20% 34.30% 33.95%
PVR 0.75 0.85 2.65 2.07 0.82 1.51 1.26 0.01
PI 1.75 1.85 3.65 3.07 1.82 2.51 2.26 1.01
GRR 15.41% 15.70% 19.32% 18.39% 15.61% 17.31% 16.75% 12.57%
CONTR
DNCF 784.40 889.84 2,762.57 2,160.65 857.31 1,574.33 1,311.21 771.80
($MM)
ROI/ PIR 0.40 0.46 1.41 1.11 0.44 0.81 0.67 0.39
FLI 0.04 0.03 0.00 0.04 0.08 0.06 0.07 0.09
SPE 162990 11

Table 5: Summary of Stochastic Economic Indicator Indices

GABON
ANGOLA EQUATORIAL GUINEA NIGERIA
PSC PSC PSC PSC
PSC (1998) PSC (2006) PSC (1997)
(1990) (2004) (1993) (2000)
225.00 329.00 921.00 598.00 172.00 280.00 210.00
P(50)

Min
NPV ($MM)

Max 522.00 625.00 1,707.00 1,257.00 560.00 805.00 682.00

23.00 131.00 443.00 197.00 (84.00) 16.00 2.00
P(90)

Min
Max 762.00 863.00 2,438.00 1,879.00 869.00 1,358.00 1,572.00
11.98% 12.44% 14.82% 13.76% 11.98% 12.75% 12.18%
P(50)

Min
GRR (%)

Max 13.42% 13.79% 16.86% 15.82% 13.68% 14.71% 14.13%

11.12% 11.66% 13.23% 12.15% 10.64% 11.25% 10.67%
P(90)

Min
Max 15.15% 15.54% 18.52% 17.50% 15.15% 16.36% 15.78%
0.13 0.19 0.54 0.35 0.10 0.20 0.12
P(50)

Min
0.30 0.36 0.99 0.73 0.33 0.50 0.40
ROI

Max
0.01 0.08 0.26 0.12 (0.05) 0.01 0.00
P(90)

Min
Max 0.44 0.50 1.40 1.08 0.50 0.78 0.91
75.37% 74.12% 44.14% 56.05% 71.65% 64.00% 68.69%
P(50)

Min
GTake (%)

Max 76.77% 75.89% 45.49% 57.92% 72.70% 64.46% 69.58%

74.26% 72.52% 43.34% 55.37% 71.27% 63.87% 68.43%
P(90)

Min
Max 78.26% 77.53% 46.75% 61.24% 74.80% 65.33% 71.33%
17.22% 21.07% 27.10% 21.90% 14.14% 16.90% 14.80%
P(50)

Min
IRR (%)

Max 23.74% 28.09% 35.70% 29.90% 19.42% 23.60% 21.20%

12.22% 15.78% 20.50% 15.70% 10.10% 12.00% 10.10%
P(90)

Min
Max 28.03% 32.75% 41.90% 35.70% 22.99% 28.50% 25.90%
8.90 9.08 8.94 9.57 8.60 8.75 8.71
P(50)
DPO (Years)

Min
Max 9.96 10.25 10.07 11.07 9.66 9.85 9.82
8.36 8.48 8.37 9.11 8.11 8.19 8.27
P(90)

Min
Max 11.75 12.29 11.95 14.24 11.20 11.67 11.86
12 SPE 162990

Congo Bra, 2.08 (44%)
CIV, 0.1

Angolla, 9.5 (17%)
BBenin, 0.01
Chad, 1.5 (1%)
Cam, 0.3

EQG, 1.78 (3%
%)
Ghana, 1 (2%)
Gabon, 2 (4%
%)

Niggeria, 37.22 (67%)

Figure 1: GOG Proved

d Reserves (bb
bl)

PSC GTTake Comp
ponents
100%

90%

80%

70%
60%
Percentage

50%

40%

30%

20%

10%

0%
1 2 3 4 5 6 7 8
Taxes 3,612.2
$3 $‐ $3,585..2 $5,156.6 $‐ $$7,842.5 $6,7
798.1 $9,669
9.8
PO/Govt $1
10,694. $10,698. $4,078..1 $3,987.0 $13,460. $$3,848.2 $5,7
774.3 $15,69
93.
FLGT $20.69
$ $26
6.19 $1,860..2 $2,358.0 $1,551.1 $$1,017.7 $1,0
017.7 $1,913
3.7

Figure 2: PSC undiscounted GTak ke showing tax xes, PO/Govtt. and FLGT (Please note iin the table thaat a comma
‘,’sign ind
dicates a thousand divisor. Taable 3 shows th
he key to absciissa)