Merak Modeling

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Course
Welcome

Instructor: Samira Lakahal

House Keeping

Bathrooms

Breaks & break rooms

Lunch

Fire Exits and Procedures

Computers

Manuals / Slides
 Agenda
• Introduction
• Peep Refresher
• Fiscal Concepts Overview
• Peep Modeling Basis
• Peep modeling Reports
• Peep Modeling Advanced
PEEP Help Options
For Peep Help Press
F1 (context-sensitive)
See Fly-over Help & Status Bar
Via Peep Client Service Desk
1-866-829-0234
or
713-621-1165 (in Houston)
What does PEEP stand for?

Petroleum
Economic
Evaluation
Program
Peep

Is an application for: Enter

International EnterEngineering
EngineeringData
Data
Enter Engineering Data
Economic Evaluation

Decline Analysis and

Fiscal Modeling Calculate Economic
Case

Aids in the analysis and
calculation of the value
of oil and gas properties Report on the Outcome
 The PEEP System
Model
(Opex, Capex defs,
Tax, Royalties,
Cost Recovery)

Global Parm Well

Document (Prod. History,
Prod. Forecasts
(Escalation, Discounting,
Test Data, Decline Curves)
Common Pricing)
Reports
(Reports and graphs)
Price File
(Base Markers, Offsets,
Reference Prices) CASE
(Project Entries, Time Line,
Interests)
Currency File
(Conversions, Inflation)

Global Data
(Indexes, Tariff Rates etc.)
Dates in Peep

Evaluation Date

First available date for inputting data in case

Only opening balances can represent prior data

Discount Date

Parms tab in case / consolidation

NPVs discounted to this date

Escalation Date

Costs inflated from this date if parms file contains inflation

Report Start Date

Date report starts from – ensure it matches discount date!
Escalation

Escalation models the real increase (or decrease) of

the values and that is not related to any currency
effect. For instance, salaries tend to increase as
seniority of employees goes up, or a certain cost might
naturally decrease as the size of the operation
increases.
Inflation

On the other side is Inflation that causes the increase

(or decrease) in prices over time.

Inflation effects are currency specific and change over

time.
Peep Reports
 Classification of Fiscal Regimes

Petroleum Fiscal Regimes

Concessionary Systems Contractual Systems

(mineral title is transferred) (government retains mineral title)

Royalty / Tax Systems PSC (Production Sharing Contracts) Service Agreement

(compensation in kind / product) (compensation in cash)

Pure Service
Production Based Profit Based (State bears risk)

R Factor ROR
Risk Service
(Contractor bears risk)

Hybrids
Fiscal Regime Classification - Examples
Royalty/Tax Royalty/Tax (R Factor) Royalty/Tax (ROR)

UK
Peru
Australia PRRT

Brazil
Colombia
Ghana

Norway
Senegal
Nova Scotia
PSC (Prod Based) PSC (R Factor) PSC (ROR)

Nigeria
Libya
Angola

China
Malaysia
Azerbaijan

Trinidad
India
Tanzania
Service

Venezuela
where :

Iran R Factor = Cum Revenue / Cum Costs (Payout)

Chile
Typical Structure of Royalty / Tax Regime
Gross Revenue

Less

Royalties

Less

Capital and Operating Costs

Less

Surplus Profit Tax (Windfall)

Less

Income Tax

Equals

Net Cash Flow to Company

Fiscal Regime Analysis- Royalty Tax
Contractor Fiscal Government
Share Element Share

Revenue $30.00

Royalty 20% $6.00

$24.00

$10.50 Costs/Deductions $10.50

35%
$13.50

Asset Taxes 15% $2.03

$11.48

Fed Tax 30% $3.44

$8.03 After Tax Cash

$18.53 $11.47

61.8% Contr Share Gov't Share 38.2%

Proj Profit $19.50
41.2% Contr Take Gov't Take 58.8%
Typical Structure of Service Fee Contract
Gross Revenue

Less

Royalties

Less

Capital and Operating Costs

Plus

Service Fee $/boe

Less

Income Tax

Equals

Net Cash Flow to Company

Fiscal Regime Analysis- Service Fee
Contractor Fiscal Government
Share Element Share

Revenue $30.00

Royalty 10% $3.00

$27.00

$10.50 Costs
Cost /Rec
Deductions
Limit $10.50
35%
$16.50 $16.50

$3.00 Service Fee ($3.00)

($0.90) Income Tax 30% $0.90

$12.60 $17.40

42.0% Contr Share Gov't Share 58.0%

Proj Profit $19.50
10.8% Contr Take Gov't Take 89.2%
Typical Structure of PSC
Project Cash Flow State Cash Flow Contractor Cash Flow

Gross Revenue
Less
Royalties Royalties to State
Less
Cost Recovery Cost Recovery to Contractor
Equals Plus Plus
Profit Oil Profit Oil to Company

Profit Oil to State Less

Plus Other Taxes from Contractor

Other Taxes to State Less

Plus Income Tax from Contractor

Income Taxes to State Less

Equals Capital & Operating Costs

Net Cash Flow to State Equals
Net Cash Flow to Contractor
Fiscal Regime Analysis- Basic PSC
Contra ctor Fisca l Gove rnment
Share Ele ment Share

Reve nue $30.00

($10.50) Costs Royalty 15% $4.50

$25.50

$10.50 Cost Rec

Cost Recovery
Limit $10.50
35%
$15.00

$4.50 Contr Profit Share 30%

Gov profit Share 70% $10.50

Tax es 40%
($1.80) $1.80
$13.20 $16.80

44.0% Contr Share Gov't Sha re 56.0%

Proj Profit $19.50
13.8% Contr Ta ke Gov't Take 86.2%
PSCs – Characteristics of Cost Recovery

Revenue available for cost recovery:

% of net revenue (after royalty) available from 40% (Egypt, Myanmar
onshore) to 100% (many PSCs).

Order of recovery usually (but can vary):

Operating costs –- Exploration – Development - Other.

Interest payable on unrecovered balance in some contracts.

Allocation method by working interest, revenue interest, or less
frequently, FIFO (e.g. Gabon).
PSCs – Simple Profit Sharing Mechanisms

Brunei PSC (2001) – Production Rate-based Tranches

For a field < 200mmb,
If Production Rate Contractor Share of Profit Oil
<25,000 b/d 60%
25 – 50,000 b/d 40%
>50,000 b/d 20%

Pakistan PSA (2001) – Cumulative Production-based Tranches

For water depths < 200m,
If Cumulative Production Contr Share of Profit Oil
<200 mmboe 80%
200 – 400 mmboe 75%
400 – 800 mmboe 60%
800 – 1200 mmboe 40%
1200 – 2400 mmboe 30%
>2400 mmboe 20%
PSCs – R-Factor Profit Sharing Mechanism

Malaysia PSC (1998) - R-Factor based Tranches

For a field < 30mmb,
if R Contractor Share of Profit Oil
<1 80%
1.0-1.4 70%
1.4-2.0 60% Where R =
2.0-2.5 50% ( Contractor’s Cumulative Cost Recovery
2.5-3.0 40% + Unused Cost Recovery Revenue
>3.0 30% + Profit Oil
– Export Duty
– Windfall Petroleum Tax
– Research CESS )

Cumulative Costs
PSCs – ROR Profit Sharing Mechanism

Azerbaijan PSC (1994) – Real Rate of Return based Tranches

if RROR Contractor Share of Profit Oil

<16.75% 70%
16.75% - 22.75% 45%
>22.75% 20%

Where RROR is calculated using an economic model. In early

production years RROR is likely <16.75%. At some point in production
RROR will exceed 16.75% and the next period’s Profit Oil will be subject
to the 45:55 split. The profit split remains in the second tier until RROR
reaches 22.75%; the following period’s Profit Oil split be 20:80.
Production

For a Peep modeler, a production forecast is a vector

of future production values versus time. These values
will be volumes, although they might also include some
quality indicators that better describe the value of that
particular product (oil API, gas heat contents, etc).
Prices

Product Prices in Peep are also vectors. Predicting the

actual price for each product and date is called Price
Forecasting.

Oil prices are typically determined by applying an

offset (or adjustment) to a benchmark such as West
Texas Intermediate (WTI). So Peep calculates the final
prices using three components: A base price and two
possible offsets using this formula:
Net Price = Base Price – Offset 1 – Offset 2
An offset incorporates quality differences and other
similar alternatives.
Operating Costs

To keep a well producing, you will have to spend some

money regularly. These costs can be predicted (or
modeled) a lot easier when they are split in a few
separate categories, like fixed costs, variable costs per
product stream, variable costs per well, a percentage
overhead, tolls, tariffs, etc.

Estimates of operating costs are usually based on

historical average, overheads and/or experience.
Capital Investments
Capital Costs, Capital Investments or simply Capital or
Investments are similar to costs in the sense that they
are money expenditures. However, they are always
considered as a separate part because their nature
and tax treatment are usually
different.

An investment is a cost usually related to a certain part

of the project (like casing a well or a seismic job) and
they are rarely periodic. Also the way they are handled
is quite different when it comes to tax calculations.
Forecasted investments are sometimes even a
measure of [political] commitment of a company and
those figures are usually published, negotiated, etc.
Burdens

Burdens are like taxes in the sense that are costs that
a project will have to pay to authorities. The difference
is mainly that they are usually related to production,
while most taxes are related to economic performance.
For instance, you could be producing a well at loss and
still pay burdens. These types of taxes are usually
very different depending on the country. The main
burden’s objective is to find a way of making
governments a partner in the hydrocarbons production
and ensuring that some quota of them is guaranteed
for local consumption.
Taxes

You always have a partner in any economic activity:

Governments. Governments collect resources (usually
cash) through taxes and the way they do it varies
greatly. However, without entering into details, a
company will have to pay well defined amounts of
money to governments. In most countries,
governments will have some considerations and adapt
their fees to the economic performance. That means
that they will collect big money if a business does very
well, and reduce their quota when it does not. Taxes
are always paid in cash (and very often calculated on
annual results).
Peep Indicators

Operating Income = Products Revenue + Other Incomes

Operating Expenses = Operating Costs + Depreciations +
Burdens

EBIT: Earning Before Income Tax= Operating Result

Operating Result = Operating Income – Operating Expenses

= Products Revenue + Other Incomes – Operating Costs –
Depreciations – Burdens
Operating Cash Flow = Operating Result + Depreciations
= Products Revenue + Other Incomes – Operating Costs –
Burdens…(EBITDA)
Peep Indicators

Net Operating Result = Operating Result – Taxes

= Products Revenue + Other Incomes – Operating Costs
– Depreciations – Burdens – Taxes

• Before Tax Cash Flow = Operating Cash Flow –

Investments
• After Tax Cash Flow = Before Tax Cash Flow – Taxes
Your First Model

Create a new Global Parameters document, name it

Default.
Notice that BOE Factors don’t have units expressed in
the document but know that they are in Imperial units.
All products are in bbl, except gas that is in Mcf. So in
our example, we are specifying that 1bbl of oil is
equivalent to 6 Mcf of gas. Also that 1 bbl of oil is
equivalent to 1 bbl of Condensate and so on.
Your First Model
Your First Model
Your First Model
Your First Model
Your First Model
Your First Model
Your First Report

 Production\BOE Production
· Production\Oil Volume
· Prices\Oil Net Price
· Revenue\Total Revenue
· Revenue\Oil Revenue
· Working Interests\Total Before Tax Cash Flow
· Working Interests\Total After Tax Cash Flow
· Peep Indicators\After Tax NPV (M$)
· Peep Indicators\After Tax NPV at Discount Rate 1
(M$)
Peep defined Variables

Gas Shrinkage = Gas Volume * Gas Shrinkage % +

Shrinkage Volume

Gas Sales Volume = Gas Volume - Gas Shrinkage

Gas Heat Energy = Production Volume * Gas Heat

Content

Total Operating Income = Total Revenue – Total
Opcosts – Total Burdens
Practice

Create a new Model: Test Model 1

Currency: DA
Glabal Parms: SH global Parms
Production: 1000, 900,….., 100, Gas : 600
Price: SH Prices
Generate Report
Your Second Model

Save the First Model as Second Model

Create a new case called: Second Model Test Case

Check your different tabs

Your Second Model

 An OpCost that varies with Oil Production.

 An OpCost that varies with the number of Oil Wells.
 Abandonment costs
 A 20% royalty, payable in cash to the government.
 Two types of possible investments (Drilling and
Facilities) that will be linearly depreciated along three
years.
 A 20% Income Tax with carry forward credit logic.
Opcost Native Variables
Opcost Native Variables
Overhead
Type
Type

The last option Variable applies to BOE volume

allows you to define an opcost related to BOE
production. It is like a standard variable opcost, but the
unit will be in $/BOE and the input rate will be
multiplied by total
BOE production.
Capitalize
Capitalize

This opcost result will be considered as if the user

actually entered it in the capital tab, under the capital
type selected. It will be added to the Total Capital
variable, exactly as if it was entered there, and
depreciated as well.
Logic Variables
Working Interest
Example

Say that you are calculating a certain OpCost as a

percentage of the Oil API density. The higher the API
value is, the greater the cost, at a rate of 0.05$ per
barrel per API degree in excess of 40.
Anatomy of Capital Variable
Depreciation
Depreciation

This option does not only allows the rescheduling, but

This option does not only allows the rescheduling, but also dictates that the
also dictatesinvestment
thatvalue the investment
will be value
subtracted from the cash flow and addedwill be
to the Total
Capital Peep variable. It will also be added to the Total Abandonment Costs
subtracted from the cash Peep flow and added to the Total
variable.

Capital Peep variable. ItTreatwill also

as salvage value be added to the Total

Abandonment Costs Peep variable.

Salvage Value

Treat as salvage value

This option works exactly as the abandonment cost
(allowing the automatic rescheduling at the economic
limit date), but the investment is added to the cash
flow. Peep will add the values to the Total Salvage
Value Peep variable and subtract it from the Total
Capital one.
Bond Rate

Inflate (bond rate) from inv. date to start of production

When you select to delay the depreciation until the
production starts, there is a certain amount of time
(from the investment date to the start of the production
date) where the depreciation is not used. In some fiscal
regimes, the government allows to update (inflate,
compound) this value at a certain rate to account for
the time value of that investment during that dead
period. This correction can then actually be used as a
tax deduction as well.
Example

SL : 2YEARS
Bond Rate: 5%
Example
Example: Useful Life (enough room)
Example: Useful Life : Dumped in the
last year
Useful Life
Behavior Change
RATE Array
Depletion
Depletion
Half year rule
Half year rule
Anatomy of Custom Variables

Custom variables are variables that can be used for

many tasks.
The most common one would be to do something that
can’t be easily done in other tabs such as a place to
enter other incomes to a project not related to
production, or an amount in M$ of available tax credits.
Anatomy of Custom Variables
Custom Variables

The first four options (Data Only, Income, Expense and

Add-in Result) set the basic role of the variable result.
Data Only is a variable which results will not affect the
cash flow. An Expense variable result will be
subtracted from the cash flow and added to the Total
Burdens Peep variable. An Income variable will be
added to the cash flow and to the Total Revenue Peep
variable.
Logic Variables
Anatomy of Burden Variables

Burden variables are variables that can be used for

many tasks. The most common one would be to
calculate those taxes related to production (and not to
economic performance) that usually define the guts of
a fiscal regime and makes the greatest difference
between an oil-company and a toy-factory operating in
the same country. But these are just a small portion of
all the applications you can find for them.
Anatomy of Burden Variables
Anatomy of Burden Variables
Payable means that the results of this
variable (see the parts diagram) will be added to the
Peep Total Burdens48 variable and subtracted from
the cash flow.
Receivable means the opposite. It will be subtracted to
the Peep Total Burdens variable and added to the cash
flow.
Data Only does not affect the cash flow nor the Peep
Total Burdens variable,
Example
Deduction Calculation Period
Example
Month of Period End: (Closing Month October)
Bonus Payment
Example
Production Limit
Step
Interpolate
Interpolate
Incremental
Incremental
Price Limit
Payment
Monthly Payment
Quarterly Payment
Schedule
Examples
Schedule
Burden Logic Variable
Anatomy of Tax Variables
Tax Variable Treatment

Payable means that the payments of this variable will be

added to the Peep Total Taxes variable and subtracted
from the cash flow.
Receivable means the opposite. It will be subtracted to
the Peep Total Taxes variable and added to the cash
flow.
Data Only does not affect the cash flow or the Peep Total
Taxes variable,
Tax Native Variable
Standalone
Standalone
Tax Logic Variable
 Merak Peep
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