Question
WWD Oil Company operates under a PSC agreement in the South China Sea. WWD has 40% of the working interest and Local Oil Company (which
WWD Oil Company operates under a PSC agreement in the South China Sea. WWD has 40% of the working interest and Local Oil Company (which is owned by the Chinese government) has 60% of the working interest. The agreement calls for annual gross production to be split in the following order: a. VAT equal to 5% of annual gross production b. Royalty of 10% of annual gross production c. Cost oil is limited to 70% of annual gross production, with costs to be recovered in the following order: 1) Operating expenses 2) Exploration expenditures (WWD Oil Company, 100%) 3) Development costs (WWD Oil Company 40%, and Local Oil Company, 60%) d. Annual gross production remaining after cost recovery becomes profit oil and is split: 1) The government receives 15% of profit oil. 2) The remaining 80% is shared by WWD and Local based on their working interests. During 2015: 1) Recoverable operating costs equal $3,000,000 2) Unrecovered exploration costs equal $7,000,000 3) Unrecovered development costs equal $70,000,000 4) The annual gross production for the year 1,400,000 barrels of oil. Assuming the price to be used to convert costs into barrels is $100/bbl, allocate the production to Local Oil Company. Identify each element of the allocation.
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