Financial estimation of capital investment in the oil company
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Financial estimation of capital investment in the oil company. Polar Lights Company - general review.

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Financial estimation of capital investment in the oil company

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Financial estimation of capital investment in the oil company

Financial estimation of capital investment in the oil company


Polar lights company general review

Polar Lights Company - general review

  • Polar Lights Company (PLC) was started in January, 1992 when the American company Conoco Inc and Russian partner OAO Arkhangelskgeoldobycha (AGD), formed one of the first Russian-Western oilfield development joint ventures in Russia. Rosneft, another notable Russian company soon after joined the joint venture. The present interest in the project is ConocoPhillips 50%, Rosneft 50%.

  • Activity of PLC is crude oil production. The licenses expire in 2017.First commercial oil production was in August, 1994. PLC has produced 18MM tons which is both exported and supplied to the Russian domestic market.

  • Investment in the project now totals nearly $500 million since the start-up of operations. It is notable that capital financing was originally obtained from well known western financial institutions EBRD, IFC and OPIC.

  • Polar Lights Company closely cooperates with the regions where it carries out its operations. It accounts over 40% of tax revenue to the Nenets Autonomous Okrug's budget and is a major taxpayer in Arkangelsk..The total amount of tax payments is $ 880 MM by 31.12.2006..

  • The Company sells its crude oil under general rules of export quotation (approximately 35 percent of production). The remaining production is sold on the Russian domestic and “near-abroad” oil markets.


Company plan

Company plan

Company future plan

  • Aggressive development of identified new areas to add new reserves;

  • Complete exploration of license areas;

  • Upgrade surface facilities to handle forecast water volumes and electrical requirements.


Net cash flow 2004

Net cash flow 2004


Balance gaap

Balance (GAAP)


Income statement

Income statement


Well drilling program

Well drilling program

The company plans the well drilling program on satellite reserves during 2006 - 2010.

  • Average cost of 1 well is $ 5-6 MM

  • Average recovery volume of 1 well is 250-350 thousands ton

  • Company uses 2 well rig

  • Total capital expenditures are $166MM

  • The company uses stochastic method for determination of oil volume in wells. This method provides with 3 variants of success probability, namely:

  • with probability of 10 %: best variant of oil recovery but with success probability of 10 %;

  • with probability of 90 %: worst variant of oil recovery, but with success probability of 90 %

  • with probability of 50 %: middle variant. Usually P-50 is used for analysis.


Oil production plan

Oil production plan


Oil production plan1

Oil production plan


Financial estimation of one well

Financial estimation of one well

  • Capital expenditures of the well - $6.32MM

  • Annual operating and overhead expenses - $150M


Financial estimation of one well1

Financial estimation of one well


Capital expenditures plan

Capital expenditures plan


Assumption on long term basis

Prices:

Price of Brent - $ 30 for barrel

Price at sale near abroad - $18 for barrel

Domestic price - 3500 rbl for ton.

Sale market:

Export - 35 %

Near abroad - 8 %

Domestic market - 57 %

Pipeline tariffs ($/bbl):

Export 3,5 $/bbl – 4,5 $/bbl

Near abroad 2,5 $/bbl – 3,3 $/bbl

Domestic market 0,6 $/bbl – 0,8 $/bbl

Production expenses ($ 27MM - $42 MM) include:

maintenance of production and injection wells;

energy expenses for liquid recovery;

gathering and preparation of oil;

water disposal expenses;

well workover;

depreciation;

ecology expenses.

The basic tax payments:

export duty - an ascending scale (the principle of calculation is considered below);

oil production tax - according to the current legislation with privilege coefficient 0,7 (the principle of calculation is considered below);

profit tax - the rate is 24 %;

property tax - rate is 2,2 % from balance cost of fixed assets;

payments to social funds of Nenetsk Okrug - according to the contract with Okrug administration ($ 500 M a year).

Mid-annual percent of depreciation of all fixed assets is 6 %. Company uses linear way of depreciation.

Other

Rate bbl / ton 7,44

Exchange rate RUR/USD 28 – 33

Interest rate 6,59%

Discount rate 10%

290 employees

Assumption on long-term basis


Financial estimation

Financial estimation


Financial estimation1

Financial estimation


Financial estimation2

Financial estimation


Financial estimation3

Financial estimation


Financial estimation4

Financial estimation


Oil price influence on finance estimate

Oil price influence on finance estimate


Oil price influence on finance estimate1

Oil price influence on finance estimate


Oil price influence on finance estimate2

Oil price influence on finance estimate


Oil price influence on finance estimate3

Oil price influence on finance estimate


Oil prices influences on taxes

Oil prices influences on taxes

1 case: export – 100%

At increase of export price above 25 dollars for barrel oil companies pay 90 % to the state as taxes, including:

  • export duty - 65 %;

  • oil production tax - 22 %;

  • profit tax - 3,12 %.

    2 case: export – 35%, domestic – 65% (constant price)

    At increase of export price above 25 dollars for barrel oil companies pay 127% to the state as taxes, including:

  • export duty of 65 %;

  • oil production tax for exported oil 22 %;

  • oil production tax for oil sold in the domestic market 40%

    Conclusion: to compensate losses from taxes oil companies have to increase domestic oil price and, as a consequence, gasoline prices.


Conclusion

Conclusion

  • the project allows to have positive cash flows under the planned assumptions for the period through 2014;

  • financing can be carried out by equity funds without any loans. Besides, schedule of cash flows shows opportunity to withdraw the loan according to the contract in 2009 without any losses for the company;

  • NPV for the period 2005 - 2017 is improved in 2 times;

  • NPV for the period 1991 - 2017 is improved in 8 times;

  • IRR for the period 1991- 2017 is improved by 13 %;

  • the Company has accounting profit through 2011;

  • before 2009 basic part of expenses are taxes, after 2009 the basic part of expenses are operating and overhead expenses;

  • NPV at various situations with oil prices (the best and the worst) are considered. Critical point of oil price with NPV = 0 is $16 for barrel of Brent and 2300 rubles for ton;

  • Tax burden on the oil companies Is considered: at the current tax system in our country the most sensitive factor is price change in domestic market.


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