Question $1$

The Tano Oil Fields Company Limited is a $35\%$ partner in the XYZ Zanu Fields

license. There has been a discovery on the license that been proven tom be

commercial. However, Tano Oil is heavily committed to the development of

another field and does not have the finances to fund the development of this

field at the present time.

The Operator $($Tennessee Oil Company Limited$)$ is very keen to proceed with a

development as soon as possible and has offered to carry Tano Oil through the

development of the field. Tano Oil will reimburse Tennessee for the costs paid

on their behalf by assigning a percentage of their interest to Tennessee until

the carry has been repaid.

The full details of the carry arrangement are as follows;

a$.$ Tennessee will pay Tano Oil$$s $35\%$ equity share of total development

costs.

b$.$ When production from the field starts, Tano will assign $70\%$ of their equity

interest to Tennessee until the debt has been repaid in full.

c$.$ The amount of the debt repaid shall be the actual realized price of the

oil attributable to assigned interest less the average production costs per

barrel, calculated on an annual basis. $($That is to say, the net profit on

the barrels assigned by Tano Oil to Tennessee$).$

d$.$ Tennessee will pay the production costs directly associated with the

assigned barrels.

e$.$ During the period when the carried interest is being repaid, Tano Oil will

retain $30\%$ of his equity interest in the production from the field and will

pay the costs directly associated with this production.

f$.$ When the debt has been repaid in full, Tano Oil will be entitled to their

full equity interest and Tennessee will have no further claim on Tano Oil.

g$.$ Any unpaid carried amount at the end of each before taking the

assigned revenue will attract interest at the rate of $6\%$ per annum. A full

year$$s interest is to be paid at the end of the year on the outstanding

General

balance after offsetting the assigned net revenue. By agreement

interest charges will start accruing from the end of year one

h$.$ Should the revenues from the field fail to be sufficient for the repayment

of monies paid by Tennessee on behalf of Tano Oil, then Tennessee will

have no claim against Tano Oil for any balance that may be

outstanding.

i$.$ Based on the lifting schedule Tano Oil only lift once in a year and the

revenue from the sale of the product is only realized at the end of his

financial year which is $31$st December

j$.$ Tano Oil$$s bankers have approached the company to finance its share

of the development and production costs at an annual interest rate of

$7\%$ for the same $70\%$ revenue to be assigned until the debt is fully paid.

k$.$ Tano Oil is expected to pay an arrangement fee at a rate of $0\mathrm{.}5\%$ on all

facilities up to $ $1$ billion dollars. Any financing in excess of this amount

will attract an arrangement fees of $0\mathrm{.}35\%.$

l$.$ Based on the offer from the bankers$$ arrangement fees payable by Tano

Oil will be accrued at the beginning of year one and interest charges

would start accruing at the end of year two.

m$.$ Assume all annual development and production cost are to be paid in

advance at the beginning of January.

n$.$ The following are additional data relating to the field.

All figures are in thousands of dollars, except for oil price.

Year Capital

Expenditure

Operating

Costs

Production

Mmbbls

Oil Price

$1280,000$

$2450,000$

$3337,500$

$4255,00092,00031,00038$

$5105,00036,00040$

$6108,58041,00044$

$7104,00045,00046$

$899,80041,50048$

Required:

From the following data:

$1.$ Calculate when the carry will have been repaid $[18$ marks$]$

$2.$ Tano Oil$$s yearly net cash flow in the period in which the Company was

carried and the period after it was carried. $[6$ marks$]$

General

$3.$ As a Finance Director for Tano Oil Company, would you advise him to opt

for the bank financing? What will be the gain or loss if he opts for the bank

financing instead of being carried by Tennessee. Demonstrating this by

showing the yearly bank financing, repayment amounts and the net

cashflows $[16$ marks$]$

Question $2$

You are preparing the year$-$end accounts at the end of $2018$ for Nicoson Oil

Company Limited. You have been told that anticipated Decommissioning

Costs for the Edmonton Field is $$250$ million, and the work will take place in $2028.$

The company normally applies a $10\%$ discount factor to future cashflows when

converting them to a present$-$day value.

At the end of year $2021,$ it was realized that costs expected to be incurred to

decommission the field would increase to $$280$ million.

At the end of year $2021,$ it was realized that costs expected to be incurred to

decommission the field would increase to $$280$ million. In addition, at the yearend $2026,$ few years to the decommissioning, the