The Philadelphia Oil Company has entered into a Production Sharing Contract with the Government of Homeland for the Deep Water concession. The contract is for a $25-$year period and the Deep Water concession is in a deep sea location. The concession must be relinquished if no declaration of commerciality has been made by the end of the fifth year after the start of the contract period.

The contract specifies that Philadelphia Oil will be entitled to recover all expenditures on the Deep Water Concession in exploration, appraisal, development and production activities by receiving a share of the production in any calendar year. If the block is uncommercial and Philadelphia Oil relinquish the license, Philadelphia Oil will not be entitled to make any claims on the Government of Homeland.

The value of oil won and saved on the concession shall be calculated by reference to an independent marker crude price, which shall be based on the daily price, averaged in order to calculate the official monthly price.

The Government will take a royalty on gross sales revenues from the field in accordance with the following agreed rates.

Crude Oil Production $($ BOPD$)$

Royalty Rate

Up to $50,000$

$7\mathrm{.}5\%$of Production

Crude

Oil

$50,001$ to $75,000$

$10\%$of

Production

Crude

Oil

$75,001$ to $100,000$

$12\mathrm{.}5\%$of

Production

Crude

Oil

$100,001$ to $125,000$

$15\%$of

Production

Crude

Oil

Over $125,000$

$20\%$of

Production

Crude

Oil

NOTE: BOPD is barrels of oil per day

The revenues remaining after deduction of royalty and any applicable production bonuses is defined as $$Distributable Oil$.$

Cost recovery shall be restricted to maximum of $40\%$ of the Distributable Oil in any year and the oil so calculated shall be referred to as Cost Oil. Any shortfall in cost recovery, i$.$e$.$ an unrecovered balance, will be carried forward to the next calendar year.

The balance of revenue remaining as Distributable Oil after the deduction of cost oil, is defined as Profit Oil and will be apportioned based on the agreed percentages based on the average daily production for any year as shown in the table below:

Crude Oil Production

$($BOPD$)$

Contractor

Government

Up to $75,000$

$45\%$

$55\%$

$75,001$ to $100,000$

$40\%$

$60\%$

$100,001$ to $150,000$

$35\%$

$65\%$

Over $150,000$

$30\%$

$70\%$

In addition, where production in a particular year exceeds forty million barrels, the contractor shall be entitled to pay to the government a production bonus equivalent to $20\%$ of the excess. As the profit oil take by the government is so high, Philadelphia Oil will have no liability for the payment of any taxes on the profits they make on the Deep Water Concession.

Should Philadelphia Oil not recover all of the expenditures made on the Deep Water Concession by the end of the contract period, it will not be entitled to make any claim on the Government of Homeland for the unrecovered amount.

Philadelphia Oil undertakes an intensive work programme and discovers a significant oil field, which results in a development. Production from the field starts on $1$ST January in year $2019.$

Data relating to the discovery and development of the field is as follows:

Exploration expenditures $ $68\mathrm{.}7$ million

Appraisal expenditures $ $93\mathrm{.}5$ million

Development $ $888\mathrm{.}5$ million

The forecast of production, operating costs and oil price for the field is as follows:

$2019$

$2020$

$2021$

$2022$

$2023$

Opex

$$(000)$

$171,500$

$182,800$

$196,500$

$253,300$

$205,900$

Annual

Production

Thousands

Barrels $(000)$

$39,500$

$44,700$

$50,500$

$57,800$

$58,900$

Oil Price $

$44\mathrm{.}00$

$46\mathrm{.}00$

$51\mathrm{.}00$

$48\mathrm{.}00$

$46\mathrm{.}00$

The contractor agreed to employ enhanced recovery mechanisms to increase production in the field. In line with this, the government has approved for the contractor to spend $$550$ million in $2022.$ This would be allowed for cost recovery purposes. Any amount spent will be classified as capital expenditure and will be subject to the normal cost recovery procedures.

Required:

Calculate the share of the revenues arising from the production from the Deep Water Concession for both the Government and the Philadelphia Oil Company Limited and express these as a percentage of the total field revenues for the years $2019$ to $2023.[23$ Marks$]$

Calculate the split of profit between the government and the contractor at the end of years $2019$ to $2023.[7$ Marks$]$