The Waterloo Oil Company has entered into a Production Sharing Contract with the government of Insiders for the Deep Water concession. The contract is for a 25-year period and the Deep Water concession is in a desert 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 Waterloo 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 Waterloo relinquish the license, Waterloo will not be entitled to make any claims on the government of Insiders. 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.

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 rates below

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, Waterloo Oil will have no liability for the payment of any taxes on the profits they make on the Deep Water Concession. As the profit oil take by the government is so high, Waterloo will have no liability for the payment of any taxes on the profits they make on the Deep Water concession. Should Waterloo 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 Insiders for the unrecovered amount. Waterloo undertakes an intensive work programme and discovers a significant oil field, which results in a development. Production from the field starts on 1ST January in year 9. Data relating to the discovery and development of the field is as follows:

Operating costs for year 9 was $193.5 million and increased to rise by 5% per annum during the subsequent two years and rise by 8%, thereafter. Included within the opex for 13 was an interest equivalent to 10% of the opex amount. This was waived and not paid by the contractor company. 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 $750 million in 11. 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 field for both the government and the Waterloo Oil Company and express these as a percentage of the total field revenues. [20 Marks]

Calculate the split of profit between the government and the contractor at the end of years 9 to 13. [5 Marks]

Crude Oil Production (BOPD) Royalty Rate Up to 100,000 7.5% of Crude Oil Production 100,001 to 125,000 10% of Crude Oil Production 125,001 to 150,000 12.5% of Crude Oil Production 150,001 to 175,000 15% of Crude Oil Production Over 175,000 20% of Crude Oil Production NOTE: BOPD is barrels of oil per day The revenues remaining after deduction of royalty is defined as 'Distributable Oil'. Company Share of Profit Government share of profit Crude Oil Production (BOPD) Up to 100,000 100,001 to 125,000 125,001 to 150,000 150,001 to 175,000 Over 175,000 40% 35% 30% 25% 20% 60% 65% 70% 75% 80% Exploration expenditures Appraisal expenditures Development $ 91.5 million $ 98.7 million $915.5 million The forecast of production and oil price for the field is as follows: Year 9 Year 10 Year 11 Year 12 Year 13 39,800 45,250 49,950 59,850 66,900 Annual Production Thousands Barrels (000) Oil Price $ 45.00 48.00 52.00 50.00 48.00 Crude Oil Production (BOPD) Royalty Rate Up to 100,000 7.5% of Crude Oil Production 100,001 to 125,000 10% of Crude Oil Production 125,001 to 150,000 12.5% of Crude Oil Production 150,001 to 175,000 15% of Crude Oil Production Over 175,000 20% of Crude Oil Production NOTE: BOPD is barrels of oil per day The revenues remaining after deduction of royalty is defined as 'Distributable Oil'. Company Share of Profit Government share of profit Crude Oil Production (BOPD) Up to 100,000 100,001 to 125,000 125,001 to 150,000 150,001 to 175,000 Over 175,000 40% 35% 30% 25% 20% 60% 65% 70% 75% 80% Exploration expenditures Appraisal expenditures Development $ 91.5 million $ 98.7 million $915.5 million The forecast of production and oil price for the field is as follows: Year 9 Year 10 Year 11 Year 12 Year 13 39,800 45,250 49,950 59,850 66,900 Annual Production Thousands Barrels (000) Oil Price $ 45.00 48.00 52.00 50.00 48.00