April 11th 2011 Gustavo Montenegro PETROLEUM TAXATION PSA vs. TAX/ROYALTY REGIMES …A 15 MINUTES PERSPECTIVE / ONE MESSAGE April 11th 2011 Gustavo Montenegro

PETROLEUM TAXATION DIFFERENT NAMES Tax / Royalty PSA EPSA THE BASICS CHARACERISTICS DIFFERENT NAMES Tax / Royalty PSA EPSA Service Contracts COMMON ELEMENTS TAX RATE COMPLICATED MECHANISM Depreciation Uplift Interest State Participation Loss carried forward

SYSTEMS AROUND THE GLOBE PETROLEUM TAXATION PETROLEUM TAXATION Image source

MARGINAL TAX SAMPLE PETROLEUM TAXATION Image source

MARGINAL TAX SAMPLE PETROLEUM TAXATION Image source

THE MESSAGE THE MORE THE MERRIER BETTER NOW THAN LATER PETROLEUM TAXATION DEDUCTIONS TIMING THE MORE THE MERRIER BETTER NOW THAN LATER

TIMING PETROLEUM TAXATION ASSUMPTIONS DEPRECIATION TOTAL CAPEX = MUSD 400 YEARLY DISBURSEMENT = MUSD 100 MARGINAL TAX NORWAY (NOR) = 78% PSA = 78% DEPRECIATION PERIOD NOR = 6 YEARS PSA = 6 YEARS DEPRECIATION START NOR = On disbursement PSA = Production start YEAR MUSD (10%) 55 MUSD / 253 MUSD = 22% 78% Marginal Tax = 17% lower NPV terms* * 22% x 78% = 17%

PSA SYSTEMS -BASICS Cost oil Production COST OIL PROFIT OIL Cost oil Part of the production which is allocated to cover the contractors costs CAPEX & OPEX Profit oil Part of production to be distributed betweeen government and contractor

PSA SYSTEMS -EXAMPLE Net Revenues 40% 60% COST OIL PROFIT OIL X KBPD Y …if excess money after paying CAPEX OPEX carried forward to next year X KBPD Y 60% 00-25 40% 75% 25-50 30% 85% 50+ 20% NO Loss YES x% y% Government Contractor * 22% x 78% = 17%

SIMPLIFIED COMPARISON TAX ROYALTY PSA 40% Cost Oil 60% Profit Oil at 75% Tax 78% Net tax YEAR MUSD (10%) 55 MUSD / 253 MUSD = 22% difference 78% Marginal Tax = 17% lower NPV terms*

SUMMARY PSA ARE WORKABLE SYSTEMS MARGINAL TAX IS RELEVANT BUT DEDUCTIONS & TIMING ARE THE VALUE DRIVERS CURRENT PSAs UNDER-INVESTMENT ON GREEN FIELD DEVELOPMENTS NO INCENTIVE TO VALUE FUTURE FLEXIBILITY FOCUS ON BIG FIELDS SMALL & MARGINAL RESOURCES NOT MATERIAL EOR MIGHT NOT BE ATTRACTIVE BETTER NOW THAN LATER BUT THE ONE WITH THE INVESTOR SHOULD BE PRIORITIZED

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