1

Manualforthe

OpenUpstreamGasandLNGModel

ByWolfgangMeinhart

Developedby:T.M.Mitro,Co-DirectorGraduateCertificateinGlobalEnergy,Developmentand

SustainabilityattheUniversityofHoustonAnd

ColumbiaCenteronSustainableInvestmentatColumbiaUniversityJune2017

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TableofContents

1. Introductionandpurposeofthemodel.....................................................................................3a. Purposeofamodel......................................................................................................................3b. PurposeofthisupstreamandLNGmodel...................................................................................4

2. Explanationofthedifferentstructures......................................................................................5a. NaturalGascomparedtoCrudeOilProjects................................................................................5b. GasProjectSegments,OwnershipStructures,RisksandFinances..............................................5c. FiscalArrangementsbySegment.................................................................................................8

3. Usingthemodel......................................................................................................................12a. Structure.....................................................................................................................................12b. CalculationsandOutputs...........................................................................................................14

4. Assumptionsandinputvariables.............................................................................................195. Applicationofthemodel.........................................................................................................23

a. Assumptionsandreferences......................................................................................................23b. Askingtherightquestionsregardingtheassumptionsandinterpretingtheresults.................24

6. Whatthemodeldoesnotinclude...........................................................................................27

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1. Introductionandpurposeofthemodel

a. PurposeofamodelA financial/fiscal model provides forecasted returns of a project to the investor andgovernment. These estimates are based on fiscal, market, technical and corporate inputvariables,many ofwhich are forward looking assumptions. Investors use financialmodels todetermine whether to go ahead with a particular investment. Governments use models tocompare their fiscal regimeswith their peer countries and to assess howmuch revenuewillflowintothestatecoffersfromaparticularproject.Amodelisfundamentaltohelpanswerthefollowingquestions:

• Whatisthe“fairness”ofthecurrentandpotentialdeals?• Whatistheequitabilityofthefiscalregimeforinvestorsandthegovernment?• Whatisthetrade-offbetween“quickmoney”throughfront-loadedpaymentssuchasa

signaturebonusascomparedtochargingback-loadedpaymentssuchasahigherprofittax?

• Whatistheefficiencyoftaxincentives?• Whatimpactdotaxregimechangeshaveonthefinancialflowstobothparties?• Howdoesthefiscalregimecomparewithothers?• Howdochangesintheownershipandcommercialstructureaffectthefinancialflowsto

bothparties?• Whatareexpectedrevenueflowsfromextractiveindustryprojectsandwhatlong-term

publicinvestmentpoliciescanbefundedandplanned?• Howdorevenueflowsalterifmarketfactors(forexample,changesinpricesorcosts)or

technicalfactorschange?

Tosupportprojectnegotiations,itiscrucialforgovernmentstousefiscalmodelstoassesstheimpactof thenegotiated fiscal termson the returns to the investorand the revenues to thegovernment. Ideally the company and government share their respective models to ensurefiscalnegotiationsareundertakenonacommonunderstanding. Itmaybe, forexample, thatthe parties use different assumptions regarding future prices, costs, new discoveries orfeedstocksourcestoaplant,etc;whichmayleadtoanimpasseinnegotiationsgiventhatthegovernment revenues and investor returns are highly affected by these assumptions. Byagreeingontheunderlyingassumptionsandwaysofcalculatingthefinancialflows,bothpartiescannegotiateonthesamebasis.Wenotehoweverthatinagreeingonassumptions,thegovernmentshouldrecognizethatthecompaniesusuallyhavemoreexperienceandinformation.Soacomprehensivedescriptionanddiscussion of the assumptions is a vital step to assure a balanced understanding andidentificationofriskstothegovernment.Given that civil society groups normally do not have access to fiscal models, the use of anindependent ‘open’model suchas thisonemaybe theonlyalternative forassessingprojectreturns and government revenues. They key challenge becomes gaining access to the mainassumptionsthatarenecessaryinordertoperformsuchamodelingexercise.

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b. PurposeofthisupstreamandLNGmodelThismodelhasbeendevelopedfortrainingpurposes. Itmodelsthegasvaluechainfromtheupstream project to the use of gas under the form of LPG, LNG or as feedstock for localindustrialorpowergenerationuses.ItallowsuserstoassessdifferentLNGstructuresthatcanbeconsideredwhenproducingLNG:theTollingStructure,theIndependentPlantOwner/BuyerModel,theRelatedPartyPlantOwner/BuyerModelandtheOneRingFencemodel(seesection2 for an explanation of each structure). It provides various fiscal regime options for theupstreamandmid-stream sectors to understand the impacts of changes on the governmenttakeandtheprivatesectorreturns. ItalsoallowsforuserstoaddupstreamfieldstotheLNGproject and understand what impact this has on the LNG economics when the processingfacilities are shared. Furthermore, there is an option to test the impact of a National OilCompany (NOC)’s equity (on a paid equity or carry interest basis); and the impacts fromgrantingfiscalincentivestofinancetheprojectcanbeassessed.Differentactorstendtousefinancial/fiscalmodelsfordifferentpurposes–someofwhichcanalsobeservedbythismodel:Upstream Investors – Usually international oil companies and national oil companies areinvesting indeveloping theupstreamgasdiscoveries. Theyusemodels to assess if theywillachieve an adequate return on their investments relative to the expected range of geologic,operational, and political andmarket risks that they take on. If they are required to “Carry”stateoilcompanyinvestments,theyalsowanttoassessthelikelihoodthatthosecarriescanberepaidunderavarietyofscenarios.Investors in the LNG Plant – Usually these are international oil companies and national oilcompanies and oftenmay include international gas buyers, construction companies or localutilitycompanies.Theyareinterestedinassessingtheeconomicviabilityoftheirinvestmentsunderarangeofoperationalandmarketrisksandevaluatingthereliabilityofgassupply.Governments and National oil companies – Want to ensure the projects are economicallyviableandcontinuetoattractinvestors,butatthesametimeachievethemaximumrevenuesforthecountrygiventhattheirnaturalresourcesarefiniteandaredepletedovertime.Forplanningandbudgetingpurposes,governmentsalsoneedto forecasthowmuchrevenuecan be expected from the project/sector, the timing of those receipts and the potentialvolatility over the life of the project. This is particularly important for countries where thenationalbudgetishighlyreliantonrevenuesfromthesectororaparticularproject.Nationaloilcompaniesmayneedtoevaluatewhethertheirshareoftheprojectinvestmenthassufficientreturnstobefinancedbylenders.Financial sector – Private banks and multi-lateral agencies lending to the project investorsutilizeprojecteconomicstoassesstheunderlyingabilityoftheborrowerstorepaytheirprojectloansandquantifytheriskfactorsthatcouldcausedelaysordefaultsinpayment.

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Financialinstitutionsmakinggeneralpurposeloanstothecountryortolocalbusinesseswillbeinterestedinknowinghowmuchadditionalrevenuesthegovernmentwillbecollecting,whichmayassistinrepayingloans.Credit rating agencies use economicmodels to forecast sources of government and countrywealthtoassistintheirassessmentsanddevelopingtheirratings.CivilSociety–Wanttoknowthatthedealbetweenthegovernmentandtheprivateinvestorsisreasonable and that it achieves themaximum returns for the countrywhile still encouragingnewinvestment. Themodelalsoservesasameansof independentlyevaluatingwhatshouldbecomingintothegovernmenttreasurywhenandcomparingthattoactualreportedrevenues.Gas Buyers – International LNG buyers or local utility companies want to assess the basicviability and reliability of the projects andwhether they can continue to operate and supplythemwithgasunderavarietyoffuturemarketconditions.

2. Explanationofthedifferentstructures

a. NaturalGascomparedtoCrudeOilProjectsNaturalgasprojectsaredifferentthanoilprojects,becauseofthefollowingfactors:

• Natural gas cannotbeeasily storedandcostsof transportation (pipelineand tankers)andtreating(separationofliquidsandliquefactionandregasification)aremuchhigherthan for oil. Each segment of transportation and treating of natural gas entails verydifferentcosts,technologiesandriskscomparedtotheupstreamextraction.

• Greatereconomiesof scaleareoften required for LNGplants tobeeconomically andoperationallyviable;consequentlythegastobesuppliedtoanLNGplantoftencomesfromseveralblocks,eachwithdifferentinvestors.

• Marketsforgasaresmallerandmoresegmentedthanforoil.

b. GasProjectSegments,OwnershipStructures,RisksandFinancesBecause of the above variations in risks and technical processes various segments of gasprojects often take a different legal and ownership form. Activities and investments in thenaturalgas“valuechain”areoftensplitbetweendifferententitiesorgroupsof investorsandnotundertakenbythesamegroupofinvestors.Commercialinterests,taxandfiscaltreatmentmayvarybysegment.Upstream–Theownershipand legalstructure isusuallydeterminedbythegovernmentthatdecideswhichpartiesareawardedtherightstoexploreandexploittheoilandgasreservesinaparticular block. Usually this is a group of companies comprising an unincorporated jointventure(JV),oftentimesincludingthenationaloilcompany.Theremaybemorethanoneblockthat produces gas in a region and each of those blocks will have a different set ofowners/investors. Due to thehigh risks of not finding exploration success or reserves beinguneconomic, successful upstream projects often earn higher rates of returns than the othersegmentsofthevaluechain,e.g.15%orhigher.

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GasGatheringPipeline(s)–Thegasproducedintheupstreamsectormustbetransportedtoshoretobeprocessed.Ifonlyoneblockusesthispipeline,oftentheupstreamblockpartnersmayalsobuildandownthegaspipelineeitherthroughthesameJVorviaadifferentcompanythat they form. Ifmore thanoneblockuses thegaspipeline, then theremaybea separatecompanywiththesameordifferentownershipthatchargesatarifftotheupstreamproducerstouseit(seeline96inthe‘Assumptions&Results’sheetinthemodel).UnlessitispartoftheupstreamJV,thegaspipelinedoesnottakeownershipofthenaturalgas–itisconsideredtobeashipperonly.Itiscommontohavemostoftheupstreampartnersalsobepartnersinthegaspipeline.Butitisimportanttonotethatthispipelineisastrategicassetandhasthepotentialtobemonopolizedbecauseanyonesetofownersmaydecidetorestrictitsuseorchargeveryhightariffstoanynewblocksthatwanttouseit.Consequently,manycountriesregulatethesepipelinesortakeownership1throughthegovernmenttoensurethatitscapacityremainsopenandreasonablypricedtoanynewproducers.Sincepipelineshaverelativelylowtechnicalandcommercialrisk,theyoftenearnonlymediumlevelofreturn–typicallyintherangeof8-12%.LPGExtraction–Dependingonthe“richness”(carboncontent)ofthenaturalgasproduced,itmaybemoreeconomictoextractandseparatelyselltheliquidsfromthenaturalgasstreamasLiquefied Petroleum Gas (Butane, Propane, etc.) prior to the liquefaction process. TheinvestmenttoextractliquidsfromthegasstreamcanbemadebytheupstreamgroupormaybemadebytheLNGplantowners.Thismodel(CellC14inthe‘Assumptions&Results’sheet)providestheoptionofselectingtheLPGseller,ornoLPGextractionatall ifthegasstreamisnot considered tobe“wet”. LPGextraction revenues typicallywouldonlybe receivedby theLNGplantowners if theplantowners took title to thegasstream,which isnot thecase inanormalTollingscenario(seeTable2).LNGPlant–Theseplantsoftenrequireproductionfromseveralblocksinordertobeeconomicand entail very different technical and commercial risks than upstream investments. InadditiontherecanbeclearcommercialconflictsofinterestbetweenupstreamsuppliersofgasandtheLNGplantasthebuyerofgasandresellerofLNG.BecauseofthesefactorsitismostcommonthattheLNGinvestorsareaseparategroupthantheupstreaminvestors,althoughitisnotuncommontoincludesomeoftheupstreaminvestorsintheLNGgroupaswell.TypicallytheLNGplantcommercialstructureisoneoffouroptions:

1. TollingPlantModel–TheLNGplantinvestorspaythecapitalandoperatingcostsoftheplant, but the ownership of the produced gas remainswith the upstream producers.TheLNGplantownerschargeanegotiatedfeeperunitofgasprocessedastheirsourceofrevenues(Line99ofthe‘Assumptions&Results’sheetinthemodel).Afterpayingfortheprocessingofgas intoLNG,theupstreamownersmarketandsell thegas intotheexportmarket.

1Angolaisacaseinpoint:Aspartoftheoveralldealtheupstreamblockswererequiredtopayallcapitalcostsofthegaspipelines,andcouldincludethemintheirPSAcostrecovery.Uponcompletionofconstruction,thefullownershipwastransferredtoSonangol,theStateownedcompany.AlloftheLNGpartnerswerepartofthemanagementofthepipelineand

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2. IndependentPlantOwner/BuyerModel-SeparateLNGplantownersarethebuyersoftheunprocessedgas.Underthisstructure,aseparategroupofLNGplantinvestorspaysthecapitalandoperatingcostsoftheLNGplant,andthoseLNGinvestorspurchaseandtaketitleofthegasonanarms-lengthbasisfromtheupstreamownersasitenterstheplant“gate”fromthegaspipeline.TheLNGinvestorsthenselltheLNGintotheexportmarket.

3. Related Party Plant Owner/BuyerModel - Upstream investors own and operate the

LNGplant.Thisissimilartothemodeloptionabove,buttheownershipoftheLNGplantis the same as the upstream ownership group. Due to separate tax regimes thattypically treat upstream activities differently than an LNG plant, there is usually arequirementtoestablishatransferprice(Line4ofthe‘Assumptions&Results’sheetinthemodel) from the upstream to the related parties in LNG plant. TheGovernmentwouldnormallybethearbiterofwhatconstitutesafairtransferpricefortaxpurposes.

4. OneRing FenceModel –Upstream investors own and operate the pipeline and LNG

plant.Thereisnoseparatefiscalregimefortheseandallelementsofthevaluechainfallundertheupstreamfiscalregime.Revenuesandcostsareconsolidatedalongthevaluechain.

Themodelpermitstheassessmentofthefourstructures.TheIndependentPlantOwner/BuyerModel and theRelatedPartyPlantOwner/BuyerModel structures arebothevaluated in theworksheetscalled“LNGEquity”and“ConsolidatedLNGEquity”.Thedifferencebetweenthesetwo structures is that one would use an arms-lengthmarket price and the other an agreedtransferprice.2Eventhoughtheownershipstructuremaybedifferent,thefiscalandeconomicresultshouldbethesame.Usersof themodelcanassessthe impacton investorreturnsandgovernment revenues under different transfer price scenarios (see the sensitivity analysissectionofthe‘Assumptions&Results’sheet).The Tolling plant structure is evaluated in the worksheets called “LNG Tolling” and“ConsolidatedLNGTolling”sheets.The One Ring Fence structure is evaluated in the worksheet called “Consolidated One RingFence.”There can be variations in all of these forms, so the substance of the structure must bescrutinizedtoensuretherightoptionisselectedinthemodel,nottomentioninreviewingtheactualproposalsgivenbytheinvestor.

2Forthepurposeofthemodel,nodistinctionismadebetweenasaletoanunrelatedorarelatedparty.Thereisonly1)thefinalexportpriceoftheLNG,and2)thepricethattheLNGplantownerspaytotheupstreamownerstoacquirethegas("transferprice").Themethodsfordeterminingeitherofthosepricescanvaryconsiderably(dependingonsuchfactorsasthecostandscopeandnumberoftrainsoftheLNGplant,whetherthegasiswetordry,thedistanceandcosttotransportthegastotheplant,andwhatmarkettheLNGisbeingsoldinto).Toderivethetransferprice,asimplisticpercentageformulaisused,irrespectiveofwhethertheLNGownerswererelatedtotheupstreamowners.Itwouldalwaysbeuptothegovernmenttocontinuallyreviewortrytoadjustanypricesproposedbetweenrelatedpartiesduringthelifeoftheplant.

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LNGTankers–Thereareseveraloptionsforownershipandcontrolofthehighcostspecializedrefrigerated LNG tankers. Inmany cases LNGbuyersownor charterhire andmanage theseLNGtankers(Line8ofthe‘Assumptions&Results’sheetinthemodel);andtheLNGissoldonanfreeonboard(FOB)basisfromtheLNGplant(Line7ofthe‘Assumptions&Results’sheetinthemodel).InothercasestheLNGsellersthemselvesmayownorcharterhiretheLNGvessels;andinthosecasestheLNGmaybesoldonaDeliveredex-Ship(DES)basispriceasdeterminedatmarketattheregasificationreceivingterminalcountry(Line9ofthe‘Assumptions&Results’sheetinthemodel).ThereareoftenvariationswherebytheLNGownersmayownorcharterhiresomevesselsandsellthosecargoesonaDESbasis,butwillselltheremainderoftheLNGtobuyersonaFOBbasisunderanarrangementwherethebuyersarrangeandpaythecostsoftheirownLNGvessels.ThemodelallowsuserstoeitherchoosetheFOBorDESmethod.3Iftheproject uses amix of bothmethods, the usermust compute the average price and averagetankercostsoutsidethemodelbeforeinputtinginanyoneyear.

c. Fiscal4ArrangementsbySegment• TheupstreamsectorfiscaltermsaredeterminedbytheProductionSharingAgreement

(PSA) or legislation. These documents can be used to input the fiscal terms into themodel.

• Thegaspipelinecostsusuallyareeitherconsideredpartoftheupstreamcostsforfiscalpurposes, or if a separate entity, would typically be part of the country’s corporateincometaxregime.

• TheLNGplantisusuallypartofthecountry’scorporateincometaxregime,butinmanycasestheplantownersnegotiatefiscaltermsthatcouldincludefeaturessuchas:

o Permitting some capital costs from LNG tobe taken as deductions against theupstreamfiscalregime.Typically,thiswouldonlybepossibleinsituationswherethe LNG equity investors are the same as the upstream investors (in the OneRingFencemodelallthecapitalcostswouldbeallowedasdeductions).

o Aspecifiedperiodoftaxholidaysortaxexemptionso Special levy imposed if gasprices rise abovea certain level and the LNGplant

investorsarethesellersoftheLNG.o WhentheLNGplant isownedbythesamegroupof investorsastheupstream

andthefiscalregimeisnotintegrated(i.enotinthecaseoftheOneRingFencemodel),thereisusuallyan“arms-length”typeoftransferpricerequiredforthegasinordertodeterminethetaxtreatmentandsplitbetweentheupstreamanddownstreamfiscalregime.

Tables1,2,3below,summarizetheaboveexplanations.

3ThemodelonlyprovidestheDESoptionfortheLNGequitycasewheretheLNGplantownerspurchasethegasfromtheupstreamsector.Thisisbecausetheupstreamgasownersareunlikelytomanagetankerchartersandmarinelogistics;andtheyareunlikelytowanttoriskcomplicatedtaxauthorityreviewsrelatedtoupstreamtransferpricesthatwouldneedtobecalculatediftheysoldonaDESbasis.4Notethatthemodelallowstousetwotypesofprofitsharingarrangements–R-Factorbasedandproduction-based

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Table1:GeneralcharacteristicsofthedifferentsegmentsofanLNGproject

GasProjects-AspectsbySegment

Upstream GasPipeline LNGPlant

Ownership Grantedbylicenseawardbygovernment

Canbepartofupstream,ordifferent

Canbepartofupstream,ordifferent

ParticipationbyNOC Commonlythecase Varies VariesLegalForm Typically

unincorporatedJVPartofupstreamJV,orInvestorspurchasessharesinaseparatecompany

Sharescompany(InvestorsthatcanbethesameasintheupstreampurchasesharesinaseparateLNGcompany)

SourceofRevenues SalesofnaturalgastoLNGplant,orsalesofLNGtoexportbuyers

Tariffsfromupstream,orpartofupstreamCosts

Tollsfromupstream,orsaleofLNGtoexportbuyers

MainRisks Geologic,market(gasprices)successfulexploration,completion,andoperational

Completion,andoperationalonly(maintainingfullcapacity)

Completion,operational(maintainingfullcapacity),andmarket(gasprices)(ifnotaTollingplant)

FiscalRegime PSA,orupstreamroyalty/petroleumtaxregime

Partofupstreamfiscalregime,orcorporatetax

Corporatetax,oftenwithspecialincentivesortaxes

RatesofReturn(typicalrange)

15%+ 7-13% 11-16%

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Table2:Overviewofwhere the title to gasand LNGpassesunder thedifferentownershipstructures

InthecaseoftheOneRingFencemodel,theinterpretationofthepassageofthetitleissimilaraswiththeTollingstructure(i.e.thetitleispassedatthepointofexportaftertheLNGplant).However,whileintheory,alltheactivitiesfromexplorationthroughLNGarecarriedoutbyonesinglecompanythatfilesonetaxreturn,inpracticetherewilllikelybeseparatecompaniessetup foreachcomponentof thevaluechain (i.e.upstreamcompany,pipelinecompanyandanLNG company). This is oftentimes due to national tax systems (such as that of the UnitedStates), which require a formal splitting of foreign income between extractive and non-extractivebusinesses.Thentherewouldeitherbeaconsolidationintoasingleparentcompanythatfilesthetaxreturn,orsimplysomesortofallocationofcostsandrevenuesbetweentheentitiesdependingonthetaxset-uptoachievethesameneteffectofasingleringfencetaxreturn. In such case the gas title transfer may actually take place between the relatedcompaniesinthecountry.

Independent Plant Owner/Buyer: LNG Plant Investors purchase gas from Upstream. Title passes to different LNG Plant Investors.

Related Party Plant Owner/Buyer: LNG Plant Investors purchase gas from Upstream. Title passes to LNG Plant Investors who are the same owners as Upstream, but a different legal entity.

Tolling Structure: Upstream retains title to Gas/LNG until point of export; LNG Plant Investorsjust receive a toll.

= Point where title is passed

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Table3:Overviewofwhich segment isbearing the risk factoraccording to the commercialstructure

InaOneRingFencemodel,allthecompanies(orthesinglecompany)wouldsharetheserisksandtheallocationoftheriskwouldnotberelevantsincealltheinvestorsandtheirequityshareswouldbethesameandthecostorbenefitoftheriskwouldhavethesametaximpactirrespective.

RiskFactor: TollingStructure EquityStructure–LNGPlantownersaresameasupstream

EquityStructure–LNGPlantownersareseparate

LNGmarketpricerisks

Upstreambearsfullrisk LNGplantinvestorsbearfullrisk

LNGplantinvestorsbearfullriskunlesstransferpricefromupstreamislinkedtomarketprice

Gastransferpricetoplant

Notapplicablesincegasisnotsoldtoplant

Upstreamownerswantaslowaspossible

Upstreamownerswantashighaspossibleandplantownersaslowpossible–whichwillgetthepartiestoatruearm’slengthprice

Upstreamproductionandreservesrisks

BothupstreamandLNGinvestorsbearriskunlessthereisasend-or-payclausetoprotectplantinvestors

BothupstreamandLNGinvestorsbearrisk,butcouldentailashiftduetodifferentfiscalregimes.

BothupstreamandLNGinvestorsbearriskunlessthereisasend-or-payclausetoprotectplantinvestors

LNGplantoperabilityanddowntimerisks

BothupstreamandLNGinvestorsbearriskunlessthereisatake-or-payclausetoprotectupstreaminvestors

BothupstreamandLNGinvestorsbearrisk

BothupstreamandLNGinvestorsbearriskunlessthereisatake-or-payclausetoprotectupstreaminvestors

LNGplantcapitalcostrisks

LNGplantinvestorstakefullrisk,unlesstollingtariffformulaislinkedtocosts

LNGplantinvestorsbearfullrisk

LNGplantinvestorsbearfullrisk

LNGevaporationproductloss

Upstreambearsfullcost

LNGplantinvestorsbearfullcost

LNGplantinvestorsbearfullcost

Upstreamcapitalcostrisks

Upstreambearsfullrisk Upstreambearsfullrisk

Upstreambearsfullrisk

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3. Usingthemodel

a. StructureThemodel is composedof21worksheets,whichare linkedby formulas.Table4providesanoverview of the function of eachworksheet. Theworksheets are color coded,with the blueworksheet(‘Assumptions&Results’sheet)beingtheplacewhereuserscaninputallvariablesandcanobserve thecompiled results.This isalsowhere thesensitivityanalysis ispresented.Userswillspendmostofthetimeinthisworksheet.Theredworksheetsprovidetheuserwiththeupstreamprojecteconomicsandgovernment revenues for3 fields.Thegreenworksheetprovidestheuserwiththepipelineprojecteconomicsandgovernmentrevenues.TheorangeworksheetsprovidetheuserwiththeLNGprojecteconomicsandgovernmentrevenuesunderthe four structures explained in section 2b. The blackworksheets consolidate the upstream,pipeline and LNG project economics under the four structures. The grey sheets show thecalculations for the One Ring Fence model. The yellow sheet calculates the impact of debtfinancing on government payments, and the purple sheet the returns to the national oilcompany(NOC)andinternationaloilcompanies(IOCs).Table4:WorksheetsofthemodelNameofworksheet Descriptionofvariablesinworksheet

Assumptions&Results Assumptionsareinputtedandkeyresultsarepresentedgraphically

Field1Depr DepreciationscheduleofthecapitalexpenditureofField1

Field1Fiscal ComputationofthefiscaltermspaidbyupstreamgasinvestorsofField1

Field1Investor CalculationofthefinancialreturnoftheinvestorandofthegovernmenttakeforField1

Field2Depr DepreciationscheduleofthecapitalexpenditureofField2

Field2Fiscal ComputationofthefiscaltermspaidupstreamgasinvestorofField2

Field2Investor CalculationofthefinancialreturnoftheinvestorandofthegovernmenttakeforField2

Field3Depr DepreciationscheduleofthecapitalexpenditureofField3

Field3Fiscal ComputationofthefiscaltermspaidbyupstreamgasinvestorinField3

Field3Investor CalculationofthefinancialreturnoftheinvestorandofthegovernmenttakeforField3

GasPL Economics,financialreturnsandgovernmenttakeofthegaspipeline

LNGEquityComputationofLNGprojecteconomicsofEquity/buyerstructure,wherebyLNGownerstaketitletogasfromupstreamandsellto3rdparties

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(irrespectiveofwhethertheLNGplantownersaretheupstreamoperators)

LNGTolling

ComputationofLNGprojecteconomicsofTollingstructure,wherebytheLNGplantdoesnottaketitletogasandthegasownerspayatoll(i.e:afee)forprocessingpurposes

ConsolidatedLNGEquityConsolidationoftheeconomicsofall3elementsoftheprojects(upstream,pipelineandLNGfacility)undertheLNGEquitymodel

ConsolidatedLNGTollingConsolidationoftheeconomicsofall3elementsoftheprojects(upstream,pipelineandLNGfacility)undertheLNG-Tollingstructure

OneRingFenceDepr DepreciationschedulefortheconsolidatedmodelOneRingFenceFiscal Fiscalcomputationsfortheconsolidatedmodel

ConsolidatedOneRingFenceConsolidationoftheeconomicsofall3elementsoftheprojects(upstream,pipelineandLNGfacility)undertheconsolidated–OneRingFencemodel

FinancingforFiscalTermsonlyComputationofthedebtscheduletocalculatethefinancialincentiveresultingfromleveragingtheproject

NOCandIOCsharespluscarryComputationoftheNationalOilCompany(NOC's)andInternationalOilCompany(IOC’s)shareswhentheNOChasanequity

Thecells in themodelarealsocolor coded to facilitate thenavigationof themodel.Table5explainseachcolorcodedcellusedinthemodel.Table5:Color-codingofcellsinthemodelColor Descriptionofcolorcoding

LightblueInputvariablesthatcanbechangedbytheuser.Price,production,costandfiscalinputsshouldallbeeditedinthe'AssumptionsandResults'worksheet.ThestructuretobeanalyzedcanbechosenincellC172ofthattab.

Lightgreen Sectiondividers

YellowChecksthatallowtheusertoseewhethererrorshaveoccurredinthemodel.Thiscolorhasalsobeenusedtohighlightwhichmodelstructureisactivatedandthereforewhichresultsarevalidandinvalid

Red Keyresults

WhiteFieldsthatarelinkedbyaformulainthemodelandshouldnotbechangedbyinexperiencedmodelers,aschangingthemmayresultinthemodelnotfunctioningproperly

Redfont ExplanatorynoteswithinthemodelItisimportanttonotethattheuserneedstopickthecommercialstructurethathe/shewantstoanalyzeinCellC172inthe‘AssumptionsandResults’worksheet.Iftheuserwantstoassessthe

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Tollingstructure,then“1”shouldbeinserted.IftheuserwantstoassesstheEquitystructures,“2” shouldbe inserted (in case the LNGplant owners are the sameas theupstreamowners,governmentsshouldbe involved inapprovingthetransferpricetoavoidthecompanyshiftingprofits into the less onerous tax regime). If the user wants to assess the One Ring Fencestructurewherebyallsegmentsareconsolidatedunderonetaxregime,“3”shouldbeinserted.

b. CalculationsandOutputs UnderstandinghowthemodelislinkedAs explained above, the white fields (themajority of the fields in themodel) are linked byformulas and should only be edited bymore experiencedmodelers, given that changing theformulasmightbreakthemodelandleadtowrongresults.Tounderstandhowaparticularfieldis linkedwithin themodel, the “traceprecedents”and“tracedependents” functions inExcelcanbeused.Thesewillprovideinsightsintowhatcellsarecalculatingthefieldandwhatothercellsareaffectedbythefield.CheckingforerrorsAsexplainedabove, the yellowbackground cells provide theuserwith feedbackonwhethertherearemistakesinthemodelandwhichresultsarevalidandinvalidbasedonthestructurethathasbeenchosen.Thisshouldhelptheusertomakesurethatthecorrectworksheetsareused for the structure that is being analyzed. For example, if the user selects the Tollingstructure in the assumptions page, then only the ‘LNG Tolling’ and the ‘LNG TollingConsolidation’ worksheets are VALID and the ‘LNG Equity’ and ‘LNG Equity Consolidation’worksheetsINVALID.Thiswillbeflaggedinthetopleftcornerofthesefourworksheets.Thereareseveralothercross-checks in themodel. If theword INVALIDappears inanyspreadsheettheusershouldcheckforstructurechosenincellC172and/oranyerrorsintheinputdataorformulas.Checkingandunderstandingtheresults

• Checkingthatprojectandinvestorreturnsarereasonable–Usersshouldcheckthenetpresent value (NPV) and internal rate of return (IRR) for each of the segment of theproject.5BoththeNPVandIRRindicatorstakeintoaccountthetime-valueofmoney.Ahigher discount rate used for the NPV calculation means that later cash flows arediscounted at a higher rate (i.e. that later cash flows are worth less). The IRR is thediscount rate atwhichNPV=0. Table 1 of this guideprovides a rough reference as towhatrangeofreturns(IRR)arerequiredforeachsegment(theseratesareonlyballparkfigures and need to be risk adjusted). All of the segments need to be commerciallyviable in order for thewhole project to go ahead and attract investors. If the resultsshow that the individual segments are earning much lower or much higher rates ofreturn, itmaybeasignthattheassumptionsneedtobereviewed,thattheproject isnot economic and/or that the fiscal system is too onerous. If the rates of return are

5CellsC39andC40ofthe‘investor’worksheetsforfield1,2,3;cellsC39andC40ofthe‘GasPL’worksheet;cellsC49andC50ofthe‘LNGequity’worksheet,cellsC39andC40ofthe‘LNGTolling’worksheet;cellsC31andC32ofthe‘ConsolidatedLNGequity’worksheet’;cellsC29andC30ofthe‘ConsolidatedTolling’worksheet;andcellsC29andC30ofthe‘ConsolidatedOneRingFence’worksheet.

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high, the commercial terms may be unduly skewed to the investors with thegovernmentbeingabletoincreasetaxesandstillattractinginvestors.

• CheckingthattheGovernmentTake(GT)isreasonable-AnotherfactortolookatistheGT,whichisdefinedasallpaymentsgoingtothegovernment(royalties,Government’sshareofproductionunderaPSA,incometaxes,etc)dividedbythepre-taxprojectcashflows.Giventhehigherreturnsontheupstreamsegment,GTtendstobehighertherethanforthepipelineandLNGsegment.ApartfromreviewingtheGTfortheindividualprojects, the consolidated GT should also be reviewed to assess whether subsidies,incentivesorfiscalreliefsgrantedinoneormoresegments(necessarytoreachtheNPVandIRRtomakethosesegmentsattractiveforinvestors)areworthitonaconsolidatedbasis.

• Checking the interpretation of the fiscal terms, assessing the impacts of differentstructuresandpotentialforprofitshifting-Whendecidingonthecommercialandlegalownershipstructurefortheproject it is importanttounderstandhowthefiscal termsare interpreted, as different interpretationsmay have a large impact on the revenueflows. For instance,when considering a Tolling structure the upstream investorsmayfindthattreatingthetollingcostsassimpleoperatingcostsubjecttocostrecoverymaycreate a disadvantage by displacing or deferring recovery of costs from the otherupstream operations and capital spending. When compared to other commercial orlegalstructures,suchastheOneRingFenceoptionorEquityoptionofsellingthegastotheLNGplant,theinvestoreconomicsarenegativelyaffected.Inthistypeofcase,theupstream operators may seek an interpretation of the PSA that would allow themequivalencywith theotherownershipoptions. In thisexample,ameansofachievingthat parity would be to “netback” the final LNG FOB price by netting out the tollingcosts.6These interpretationscanbevery technicalandnoteasy to follow,but canbecriticaltothefinancialreturnstoinvestorsandtotheGovernment.

Another interpretation example comes from countries where the government allowstheinvestorstointerpretthePSAinsuchawaytopermitsomeoftheLNGcapitalcoststobeconsidered“upstream”innatureandtherebybecomepartofPSACostRecovery.SinceeffectiveGovernmentTakeisgenerallyhigherintheupstream,thishastheimpactofimprovingtheinvestor’srateofreturnbyreducingprofitgasandtaxes.Thiscanbealegitimatemeansof incentivizingLNGinvestment,butmustberecognizedasbeing, ineffect,asubsidybythegovernment. ThislattertypeofinterpretationwouldnormallynotbeconsideredunlesstheprojectstructurewastheRelatedPartyPlantOwner/BuyerModelwhere the upstream investorswere the same as the LNGplan investors. ThemodelprovidesoptionstoallowforthepipelineandLNGexpenditurestobedeductedfromtheupstreamproject.7IntheOneRingFencestructure,thissituationistakentotheextremesinceallcapitalcostsandrevenuesacrossthevaluechainareconsolidatedundertheupstreamfiscalregime.

6ThisiswhatthismodeldoesinLines6-7ofthe‘Field1,2&3Fiscal’sheets.7Themodelgivesthispossibilityinlines62-65and76-83ofthe‘Assumptions&Results’sheet.

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Furthermore,themodelalsoallowsforthetransferpricefromtheupstreamtotheLNGprojecttobeadjusted.Ifthetransferpriceisreduced,theupstreamprojectwillappearlesseconomic,while theLNGprojectappearsmoreeconomic. This impact shouldbeviewedwithcautionasareductionofthetransferpricewillalsoresultinafallinoverallgovernment revenues given that the LNG segment is taxed at a lower rate than theupstreamsegment.IfupstreamownersalsoowntheLNGplanttheywillhaveanaturalbenefitandincentivetoshiftrevenuestoalowertaxregime,whichmeanslessforthegovernment.

• Understanding the timingof government revenues. Asnotedabove, early returns totheinvestorwillincreasetheIRRandNPVoftheproject.Giventhehighlevelsofcapitalexpenditure required for oil and gas projects, it is common for countries to allow forcost recovery and depreciation in the fiscal terms. This will result in governmentrevenueflowsbeingdelayed.Theconsolidatedworksheetsprovidethegovernmentandcivilsocietywithanindicationofwhenrevenuesfromthevarioussegmentsshouldbeexpected,whichmayhelpgovernments in fiscalplanningandmanageexpectationsofcivilsociety.

• Checkingthecompetitivenessofthefiscalterms. Inordertotestthecompetitivenessofthefiscalterms,itmaybeworthwhilerunninga“benchmarking”evaluationofsimilarprojects in the same country or in another country (See sources of data andassumptionssectionofwheredataforsimilarprojectsmaybefound).

• Checking the impact of financing incentives: Borrowing and financing can have animpactontheinvestors’returnsiffiscalincentivesallowforinterestdeductionsorcostrecovery. The model does provide the option for evaluating the impact of suchincentive on investor returns.8 But since investors will borrow or pay returns toshareholder capital irrespective of the tax treatment of interest, it would be ananalytical mistake to focus on leveraged economics. So it is recommended thatfinancingeffectsarenotconsideredtoassessthebasicviabilityofprojects.Financingisofcourseahugeissueinmega-projectssuchasLNG,especiallyifthegovernmenthasapaid up equity share or for smaller independent companies; but it must be clearlysegregated as a separate type of analysis. If interest costs on loans from affiliatedpartiesarepermittedastaxdeductions,greatcaremustbetakentoensuretheyarenotexcessive.9

• Checking the impact of leasing a floating LNG plant (if there is one) rather thanbuilding it: In lines85-87of theAssumptionssheet, themodelprovides theoptionto

8Seeline128ofthe‘Assumptions&Results’sheet.9Seeforexample:http://www.afr.com/business/energy/gas/chevron-claimed-gorgon-bonanza-would-pay-for-tax-for-cuts-for-everyone-20151116-gl0jo1

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assess the implications of a leased floating LNG plant.10 Leasing an LNG plant woulddiminishthecapitalexpenditureavailablefordepreciation.However,theannualleasingfeesaregenerallytaxdeductible.11Oftentheinvestor’staxpositionimprovesasaresultofoffsettingthetaxableincomewithannualleasingfeesovertheyearsratherthanwithcapitalexpendituredepreciation(whichwouldbethecaseiftheinvestorownstheLNGplant).InvestorsmayalsoarguethatleasingischeaperandfasterthanbuildinganLNGfacility.Forthenationaloilcompanythismayalsoprovebeneficial,asitwillnothavetomobilize such large up-front expenditures if it has a paid up equity. The downside ofsucharrangementforthegovernmentmayinclude1)lossoftaxes,2)itisdifficultandexpensivetoaddcapacityatalaterdateiftherearenewdiscoveries,3)itinvolveslesslocalcontent,and4)offshorefacilitiesarehardertoinspectandaudit.

• CheckingtheinvestmentrequirementsandreturnstotheNationalOilCompany:The

modelallowstheusertotesttheimpactsofvaryinggovernmentequitysharesandthecapitalcoststhatwouldhavetobefinanced(eitherbythegovernmentorfromlenders).The model assumes the same equity percentage share throughout all phases of thevaluechain(upstream,gaspipeline,andLNGPlant).ThereisanoptionfortheIOC’stocarrytheNOC’sshareofupstreamcapitalcosts,whichisanoptiontypicallyestablishedunderthetermsofProductionSharingAgreements.Themodelassumesthatanycarrywouldbelimitedtoupstreamcapitalcostsonly,andadditionallyassumesrepaymentofthecarryislimitedtotheNOC’sshareofCostRecoverygas.TheinterestonthiscarrywillalterthereturntoboththeIOCsandtheNOC.ThetermsofthesecarriesmustbecarefullyanalyzedandmodeledtodeterminetheirimpactontheGovernmentunderavariety of assumptions and cost conditions. Leveraged financing is not typicallyconsidered inthemodelasexplainedabove,butanNOCcarrycanbeanexception inthat it is a requirement under the PSA that affects entitlement to gas, and the carryrepaymentrisksassumedbytheIOCsaretobefactoredininaprojectdecision.

• Understanding the sensitivity analysis. It is important to test the resilience of the

results under a range of circumstances. This exercise is called “sensitivity analysis”.Whiletheresultsfortheinvestorsandforthegovernmentmaylookreasonableinthebasecase,itisimportanttoensurethattheseresultsholdundermodifiedassumptions.For example, it should be tested that the investor IRR and NPV indicators do notcollapsewhen gas prices fall slightly and that government take fallswith a rising gasprices. If either is the case, there will likely be pressures for the contract to be

10TheinterestratefortheFLNGleaseisassumedtobe8%11Themodelassumesthatiftherewasadeductiblecapitalleaseallowedtherewouldbenodeductionsallowedforfinancingcostsinasmuchastheleaseitselfisaformoffinancingandtheleasecoststhemselveswouldbedeductible.Theremaybecircumstanceswhereataxauthoritymightallowinterestonthenon-leasedportionoftheLNGinvestmentorsomeothercombination,butthemodelcouldn’tanticipatethiscomplexity.

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renegotiated when commodity prices change. This model provides for sensitivityanalyses from line 225 in the ‘Assumptions and Results’ worksheet. Apart from pricechanges,thesensitivityanalysisteststheimpactsofvaryingassumptionsregardingtheproduction,capitalexpenditure,tollingfeesanddelayinproductionstart.

o The sensitivity analyses are calculated using the ‘data table’ function in Excel,whichcannotbetracedbythe‘traceprecedents’function.Ifaparticularresultinthe sensitivity analysis is surprising and the user is unfamiliar with the ‘datatable’ function, it is recommended to re-run the model with the revisedassumptionstobetterunderstandtheresults.

o Totestthesensitivityoflowerproductionvolumesandproductionstartdelays,themodelincludesadditionalinputvariablesfortheupstreamgasfield1,whichhavenotbeenreplicatedforfields2and3.Thisisforillustrativepurposes.Thesame sensitivities should be performed for these two other fields once moreinformationisavailable.

o We included the same sensitivity percentages for all factors to help identifywhich factor has the biggest impact. Users can adapt these percentages tohis/herneeds.

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4. AssumptionsandinputvariablesInputassumptionshaveasignificantimpactonthemodeledresults.Iftheinputassumptionsarewrong,theresultswillalsobewrong.Thereforeacarefulreviewneedstobeundertakenoftheavailableinformation.Themostsignificantinputassumptionsanddataareasfollows:Forecast prices – LNG prices typically are agreed with individual buyers under a contractformula.Theseformulaecanvary,buttypicalmethodsinclude:

• Directlylinkedtoapublishednaturalgasindexpriceatalargenaturalgasmarket,e.g.HenryHub(seefurtherexplanationbelow).

• Directly linkedtoapublishedcrudeoil indexpriceforawidelytradedcrudetype,e.g.Brent. This typeofpricewouldalso requireanadjustment to recognize thedifferentenergy content, processing requirements and standard ofmeasurement of oil versusnaturalgas.

• Anagreedblendedmixoftheabovetwobasicmethods.

ThesepricesareusuallyonaDESbasis(atthemarket)andmaybefurtheradjustedtoanFOBbasistorecognizetransportationcoststoreachsuchreferencemarkets,energyorBTUcontentofthegas,andwhetherthecontractisshortorlongerterminnature.GenerallyLNGandnaturalgasthat isproducedandsoldfromanycountry ispricedbasedoninternational markets. Those markets are divided into three regional markets: 1) NorthAmerica,wherethepricingpointiscalled“HenryHub”andistheprimarypricefornaturalgasfuturescontractstradedontheNewYorkMercantileExchangeandtheover-the-counter(OTC)swaps tradedon the IntercontinentalExchange (ICE);2)Asiawhere thepricingbenchmark iscalledJapanCustoms–clearedCrude(JCC),which istheaveragepriceofcrudeofthesecondlargestAsianimporterandisacommonlyusedindexinlongtermLNGcontractsinJapan,KoreaandTaiwan;and3)EuropewherethetradingpointiscalledtheNationalBalancingPoint,whichisthevirtualtradinglocationforthesaleandpurchaseandexchangeofUKnaturalgasandisthepricinganddeliverypointfortheICEFuturesEuropenaturalgascontract.LNGpricing references andbenchmarks are still evolving.For instance, the crude-price linkedmethodologywaswidelyusedinolderlongtermLNGcontractsandstillinfluenceshowLNGispriced.Newer sales contracts aremore frequently referencing natural gas or LNGprice hubindicesasbenchmarks.Markets are affected by general growth in energy consuming economies and its effect ondemand forenergy,easeof substitutionofone typeof fuel foranother,andcompetingLNGprojects in other parts of theworld.Often itmaybebest to use as a base case a generallyrecognized forecast of prices, such as those from the World Bank (seehttp://www.worldbank.org/en/research/commodity-markets). All that we know about anypriceforecastisthatitwillbewrong,sotestingarangeofsensitivitycasesforpricesisessentialtobetterunderstandtherisksandupsidesandhowtheymayaffectthekeyresults.

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Productionforecasts–Notonlyareupstreamproductionratesandreservesneededtorunthemodel,itisalsoimportanttonotethatfornaturalgasprojectsthereisalwaysacertainamountof“productloss”asthenaturalgasmaybeusedasafuelinrunningmachineryorequipment,plusintheprocessofbeingcooledtoaliquidformorbeingwarmedbackintoagaseousformandstoredusuallyentailsa certainamountofevaporation. Keep inmind that fullupstreamproductioncapacitywillalwaysconstrainedbytheLNGplantdesignedcapacitytotakethegasand by any LNG plant downtime for maintenance or emergency shut-ins. Consequently,upstreamproductionforecastsmusttakethisintoaccount.Themodelincludesinputforthesefactors.12Withrespecttoproductlossduetoevaporationorrunningmachinery,intheTollingmodeltheupstreamgasownersbeartheimpactofanyproductlossorevaporationduringtheLNGplantprocessingastheywouldstillpaythetollbasedonproductgoingintotheplantandstillretainownershipofthegas.13IntheEquitymodeltheLNGplantownersbeartheeconomicimpactoftheproductlosssincetheytooktitletothegasattheLNGplantgate14(seeTable3).Domesticsupplyofgas–SincenaturalgasandLPGcanbeusedrelativelycheaplyandeasilydomestically for electrical power generation or direct industrial or consumer purposes,mostLNGprojectscontainsomerequirementfornaturalgasorLPGtobesuppliedtolocalmarkets.Thenegotiationofthevolumestobededicatedforthispurpose,thedeterminationofthesalespriceand the tax treatmentcanbecomecritical issues to investorsand thegovernment.Thechallengeisthattheamountactuallyutilizedinthedomesticmarketmaybuildorvaryannuallyas the gas markets are being developed whereas investors are locked-in in long-term gascontractswithgasbuyers.Themodelpermitsarangeofassumptionstobeincorporated.15Capitalcostsforecasts–Sincecapitalcostsoccurintheverybeginningofaprojecttheyhaveamuch greater impact on discounted value indicators. In addition, cost overruns have adisproportionateimpactonhostgovernmentsduetotheinterplayofgovernmenttakefactorsandthemorerestrictedoptionsfor financingtypicallyavailabletogovernment. Also,severalstudies indicate that most companies tend to greatly underestimate the capital costs onmegaprojects.Thesefactorstakentogethermeanthattestingcapitalcostsensitivityanalyses,especially testing for large overruns, are especially important for any host government ornational oil company (the model allows this in the sensitivity analysis section of the‘Assumptions&Results’sheet).Formoreinformationonwhysuchanalysisiscrucial,see:http://www.spe.org/ogf/print/archives/2012/02/02_12_08_Feat_Cost_Est.pdfhttp://www.costandvalue.org/download/?id=2047http://www.ogdeestimating.com/services/field-development/type-of-estimatehttp://www.ey.com/GL/en/Industries/Oil---Gas/EY-spotlight-on-oil-and-gas-megaprojects#.VhlIRexViko

12See‘Assumptions&Results’sheet,lines24and2513See‘Field1,2&3Investor’sheet,line1214See‘LNGEquity’sheet,line1315See‘Assumptions&Results’sheet,lines10-11and26-28

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Fiscal terms and taxes – As explained above, this information should be available frompublished petroleum and tax laws of the country, plus any agreements, such as ProductionSharingAgreements,16betweenthegovernmentandtheupstreaminvestors.Oftentimes,thedetailsoftheLNGfiscaltermsarenotagreeduntilrightbeforetheFinalInvestmentDecisionismade.Unitsofmeasurement –Extremecaremustbe takenwhenenteringdata intoaneconomicsmodel to ensure that the units of measure are known and are made consistent within themodel,andthatconversionsareperformedwherenecessary.Thefollowingindustryconventionshouldbetakenintoaccount:

1. Naturalgasproduction,gasreservesandpipelinecapacityaretypicallymeasuredinunitsofvolume,suchasThousandsofStandardCubicFeet (MCF)orThousandsofCubic Meters (MCM). When referring to gas reserves it is common to use ameasurementofTrillionofCubicFeet(TCF).

2. LNGPlantcapacityiscommonlymeasuredinunitsofweight,typicallyinMillionsofMetricTons(MT)sincetheyareproducinggasinaliquidform.

3. LNGTankercapacityoften isoftenstated inCubicMetres (CM),ameasurementofsize.

4. Condensate (liquids present in wet gas fields) is commonly measured in Barrels,whileLPGmaybemeasuredinBarrelsorMetricTons.

5. InmanycasescapacityismeasuredasanamountPERDAYwhileinothersituationsvolumesarereferredtoasanamountPERANNUM.

6. Insomecaseswherethereisahighliquidscontentinthenaturalgasstreamthegasmay be measured or referenced in units relating to its energy content, typicallyThousandsofBritishThermalUnits(MBTU)orinsomecasesasGigajoules.

7. Most natural gas and LNG sales prices are quoted and paid in U.S. Dollars. AcommonlyreferencedunitinpricequotesfornaturalgasisDollarsperMCFandmaybeconvertedtoapriceperMTforLNG.

8. MosttariffsortollsarereferencedinU.S.dollars.PipelinetariffsareusuallyapriceperMCF.LNGTollingtariffsmaybeapriceperMCForinmanycasesapriceperMT.

9. Also, attentionmust be paid to the “thousands” conventions. In the petroleumindustry, “M” typically is used to refer to one-thousand and “MM” refers to one-million (or a thousand thousands). The economics model itself usually refers toinputandoutputamountsexpressedinmillions,orMM.

Thebelowtablescanhelpuserswithconversionswherenecessary: 16Seeresourcecontracts.orgforadatabaseofpubliclyavailablecontracts.

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Table6:GeneralConversionFactorsforEnergy

Table7:AdditionalUsefulConversionFactors

Source:GAIL17

17http://www.gailonline.com/final_site/energyconversionmatrix.html

1SCM(StandardCubicMeter)1CubicMetre =35.31Cubicfeet1BCM(BillionCubicMetre)/Yearofgas(consumptionorproduction) =2.74MMSCMD 365DaysaYear1TCF(TrillionCubicFeet)ofGasReserve =3.88MMSCMD

100%Recoverablefor20years@365days/Annum)

1MMTPAofLNG =3.60MMSCMD Mol.Weightof18@365days/Annum)1MTofLNG =1314SCM Mol.Weightof18GrossCalorificValue(GCV) 10000Kcal/SCMNetCalorificValue(NCV) 90%ofGCV

1MillionBTU(MMBTU) =25.2SCM @10000Kcal/SCM;1MMBTU=252,000Kcal)

SpecificGravityofGas =0.62MolecularWeightofDryAir=28.964gm/mole)

DensityofGas =0.76Kg/SCM Mol.WeightofGas18gm/mol

Gasrequiredfor1MWofPowergeneration =4541SCMperDay

StationHeatRate(SHR);~1720Kcal/Kwh-NCV(50%ThermalEfficiency);N.GasGCV-@10000Kcal/SCM

PowerGenerationfrom1MMSCMDGas =220MWH

StationHeatRate(SHR);~1720Kcal/Kwh-NCV(50%ThermalEfficiency);N.GasGCV-@10000Kcal/SCM

=1cubicmetre@1atmospherepressureand15.56°C

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Whenusingconversiontablestoconvertfromgasvolumemeasures(suchasCForCM)togasenergymeasures (such as BTUor gigajoules) itmust be recognized that the degree of liquidcontentinthegasstreamcanaffectthoseconversionfactors.Inthesamewaywhenconvertingfromliquidvolumemeasures(suchasbarrelsorMCF)toweightmeasures(suchasmetrictons)thespecificgravityoftheliquidswillaffectthatconversion.Theserangesareusuallyrelativelysmall, but can create differences from the conversions usedby a companyor government intheirmodels

5. ApplicationofthemodelFor illustrative purposes, this section runs through a hypothetical case based on the inputspresentedbelow.

a. AssumptionsandreferencesFiscalTerms

• ThePSAisbasedonanR-Factor.• A$1Billionunrecoveredexplorationcostisincluded.Itwasassumedthatsomeofthat

amountisnotrecoverableastheywouldbeoutsidetheringfence.• For the gas pipeline segment the standard corporate income tax of 32%with no tax

relieforinvestmentuplift.• For the LNG segment the standard corporate income taxof 32%withno tax reliefor

investmentupliftisused.• Interestondebtisnotdeductible• NOChasanequityshareof10%andiscarriedbytheinvestoratan8%interestrate.

TechnicalandCommercialInputs• TheLNGproductionvolumesareestimatedbasedonfourLNGtrainsat6milliontonnes

perannumeach.ThisisequivalenttoatotalLNGplantoutputofapproximately1,062millioncubicfeetperday(MMCFD). Theupstreamproduction isassumedtobe1650MMCFD per field before taking account for LNG production losses of LNG plantdowntime.

• ItisassumedthattwoupstreamprojectsaresupplyingtheLNGplant.Figuresforbothfieldsarethesame.

• The pipeline construction has been scheduled to conclude one year before start ofoperations to allow for line testing, inspections and potential modification prioroperation.

• ThemodelusestheTollingstructureasthebasecase.• Thecapitalcostandtimingofexpenditurefiguresarebasedoneducatedguessesand

adaptedtoprovidereasonablereturnratesforthedifferentsegmentsoftheproject.• NoLPGorCondensateproductionisassumed.• 2%domesticgassalesareassumed.• Under theLNGTollingarrangement it isassumedthat thegasprice tobeusedunder

thePSAtermsaretobeinterpretedastheFOBExportpricelesstheLNGtollitself.Thisimpactsthecostrecoverycap.Itmaybearguedthata"Wellhead"typeofpriceforgasisreallyNETofthetollthatwouldneedtobe incurredpriortobeabletosellthegas(eventhoughthewellheadconceptisnotusedinthePSAperse).Acommercialreason

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isthatcompaniesmaynotbewillingtoagreetoaninterpretationofthePSAwherebypaying a toll to a third party to process/liquefy the gas would put them in a worsesituationthansellingthegasdirectlytoaplantowneratthesamenetbackpricestrictlyduetothemechanicsofhowtheCostRecoverycapfunctions.

b. Asking the right questions regarding the assumptions and interpreting theresults

FiscalTermsWhenyoubasedyourmodelassumptionsonacontractandthelaw,somequestionsthatmightbeaskedare:

• Willthesetermscontinuefor30+yearsevenifcostsandmarketsandproductionvary?• Arethereanyother“interpretations”thatendupbeingagreed(ornotagreed)withthe

governmentthatwerenotmodeledthatmightcreateadifferentresult?

CommercialAssumptions• IsaconstantFOBexportpriceof$8.75perMCFrealistic intoday’smarket,orwhat is

anticipatedforthe lifeof theproject? Ifpriceassumptionsarechanged,what impactmightthathaveoncosts,tariffsorotherinputassumptions?

• Is an assumed domestic gas price of $2.50 consistent with other terms andassumptions?

• Does a LNG toll of $4.50 reasonable and commercially viable to all parties? Will itchange over time if world markets change or new projects come into the plant asfeedstock?

• DoesthisLNGtolloptionyieldsignificantlydifferentresultsthanutilizinganLNGEquityoption?Ifso,whatcausedthedifferenceanddoesthatcauseanyconcern?

• DoestheprojectincludeafloatingLNGfacility,andifso,isitleased?

TechnicalAssumptionsTheeconomicsassumerecoverablereservesof34TCF.

• Are there sufficient reserves already discovered in this area to provide this level ofproduction to constantly feed into the LNG plan on an uninterruptable basis, that is,more than 34 TCF in reserves in order to cover unexpected shut-ins or some fieldsperformingatlessthanexpectations?Aretheinvestorsandthegovernmentrelyingtoomuchonthehopethatadditionalreserveswillbediscoveredinthefuture?

• Arereservessohighthatitindicatesthatitmightbelessthanefficienttobuildonlya4-TrainLNGplant?

Totalcapitalcostsforallprojectsectorswere$28.5billion,including$16.8billionfortheLNGplant.

• Areestimatedcapitalcoststoolow?SomesingletrainLNGplantshavecostsmorethanwhat was assumed for this 4-Train plant. A high proportion of energy sector“megaprojects”overruntheiroriginalbudgetsbyasizablepercentage.

• Arecoststoohighandconsequentlyunderstatetherealreturnstoinvestors?• Arethereanybenchmarkstocomparecosts?• Havetheappropriaterangeofsensitivityanalysesbeenrunandevaluated?

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NoCondensateorLPGhasbeenincluded.• If indeedtherewouldbesomecondensateorLPGextractedfromthegasstreamboth

thecapitalcostsandtheresultantnetrevenueswouldbehigherandprojecteconomicresults would likely improve.18 What would these look like and what fiscal terms(upstreamorLNG)wouldbeapplied?

AnalyzingandEvaluatingtheResultsBelowareafewselectedkeyindicatorsfromthebasecase:SelectedItem Upstream Gas

PipelineLNGPlant Consolidated

CapitalCosts,$Millions 5,290*2 1190 16,768 28,538GasProduction 34TCF NPVat10%,$Millions 3,655 -83.419 4,472 7,745IRR 19% 9% 14% 15%TotalGovernmentrevenuesundiscounted,$Millions

28,216*2 1119.6 26,030 83,582

GovernmentTake,undiscounted 50% 32% 31% 50%FirstYearthatGovtrevenuesexceed$2Billionp.a.

2026

FirstYearthatInvestorNetCashFlowsexceed$2Billionp.a.

2022

Somequestionsthatmightarisefromtheseresults:

• Aretherelative IRRsforeachprojectsector (e.g.upstream19%,gaspipeline9%,LNGplant14%)reasonablecomparedtotheirrisksandtoothersimilarinvestmentsaroundtheworldortheregion?

• DotheNPVsat10%seemreasonableforeachprojectsectorrelativetothesizeoftheinvestmentandtherisk?Arethesesufficienttoattracttheinvestmentbutatthesametimenotyieldingtoomuchoftherent?

• Howdo these IRRsorNPVschangeusingdifferentassumptions?Check thesensitivityanalysistoseewhethertheseindicatorscollapseduetochangesintheassumptions.

• Thetimingofcash flows iscritical indeterminingNPVand IRR.Check the impactofaproductiondelayoffield1inthesensitivityanalysis.

• Timingofcash flows isalso important to thegovernment in termsof thegovernmenttreasury’soverallbudgetingfor inflowsandspendingormanagingofsovereignwealth

18Partoftheliquidscanbesoldonthesamepricetermsasoilandbeprocessedbythesamefacilitiesasoil.Someotherliquidsneedadditionalprocessingthatisalittlemoreexpensiveinordertobesold.Howevertheycanstillberelativelyeasilyexportedasliquidsusingarangeofwidelyavailablevesselsintoquiteafewopenmarkets.Thereforehighliquidscontentinanaturalgasproject significantly enhances its profitability and can enable producers to charge a lower price for gas. This canmake thedifferencebetweenagasprojectbeingeconomicallyviableornot. Whentheliquidsare liabletoahightaxrate(e.g.oiltaxrates),thiseconomicbenefitcanbeminimizedforinvestors.Therefore,itisimportanttoconsiderhowcondensateistreatedunder differentiated fiscal terms, as this can influence the pace of development of the gas industry (See:http://ccsi.columbia.edu/files/2014/03/Overview-APG-Utilization-Study-May-2014-CCSI1.pdf)19TheNPVofthepipelineisnegativebecausewesetadiscountrateof10%abovetheIRRoftheproject(9%).Pipelinesgenerallymakealowerreturngivenlimitedoperationalandmarketrisks.WhenpipelinesareownedbythesameinvestorsastheupstreamortheLNGfacility,theymightevenbeacostcentermakingalowerreturn.

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funds.Itcanalsobeinstructiveinevaluatingthedistributionbetweenthegovernmentandtheinvestors.LookingatthebasecasethefirstyearofsignificantNETcashflowstoinvestorsis2022whentheyearnover$2billionnet,whereasthegovernmentdoesnotreach$2billionayearuntil2026.TherealityisthattheGovernmentdoesnotreceivemuch of their inflows until the second half of the project life, whereas the investorsreachtheirnetinflowsrightafterproductionstart.

• Overall percentage split of government take is another important indicator. In theupstreamsectorthegovernmenttakeis50%ofthetotalnetcashflows,butisonly31-32%forthegaspipelineandLNGsector.Thisisareflectionofthefiscalandtaxtermswhicharetypicallymuchhigherintheupstream.Butwhenthesearecomparedtoothersimilar projects with similar risks in other countries to evaluate, do they look to becompetitiveandconsistent?

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6. Whatthemodeldoesnotinclude1.Technical InputData -Themodeldoesnotcreate forecastsofproduction,costsorprices.Thesemustbeobtainedfromareliablesourcesuchasoneofthecompaniesthatareinvestingin the projects, the government or an assessment from an independent party such as anengineeringfirm,aconsultant,abank,oraninternationalorganization.Ifsuchdetaileddataisnot available, it becomes even more important to test the economic results by runningscenarioswithwidevariationintheinputdata.

2. Exploration costs– Thismodel focuses on thedecisions to bemade after a discovery hasbeenmade,soexplorationcostsarenot included(onlysomeof itasrecoverablecostsunderthePSAareincluded).However,fiscaltreatmentofexplorationcostscouldbecomeafactorifpast “sunk” exploration costs are permitted to break the “ring fence” to be used in costrecovery. At somepoint thismaybecomeanegotiatingpoint inprojects going forwardandhaveanimpactontheeconomics.3.FullDecommissioningCostsFunctionality–Decommissioningcostshavebeen includedasanupstream input item. However, thiscanbecomplex foracoupleof reasons. One is thatthese costs are often required to be pre-funded by the upstream partners accordingly to acomplex and sometimes arbitrary formula, and the related cost recovery or tax deductibilitytreatment can vary significantly. If the costs takeplace at theendof the field life then losscarryback provisions must be considered, which creates an added complexity. Anddecommissioning is not straightforward for fields that are feeding into an LNG plant.Oftentimesanindividualfieldmaystopproducing,yetitsinfrastructuremayendupbeingusedor leased for many years by other suppliers to the LNG plant as processing, compressionstations, transportation, treating or even gas storage. This means the ultimatedecommissioningfromanyonefieldmaybedelayedbyyears. Consequently,themodelonlyincludes provision for a very simple pay as you go cash basis funding and no loss carrybackprovisionsfortaxorproductionsharing.4.Differentiationofinvestorequityshares–WiththeexceptionoftheNOC,themodeldoesnotdifferentiatebetweentherespectiveinvestorequitysharesinthevarioussegments.Theyaretreatedasonegroupforeachsegment.

5.WithholdingTaxonDividends–Noprovisionhasbeenmadeinthemodelsincewithholdingtax inmany cases is really just aminor timing difference on payment of corporate taxes. Inothercaseswithtaxtreatiesthecompaniesgetafullrelieforcreditforwithholdingtaxes.Inthe event that theWHT in any place does not have these types of “relief” features and itbecomesarealfinaltax,themodelcancoverthisthroughutilizingtheothertaxcomponents(surchargeorspecialtax)thathavebeensetupinthemodel.6.NonQuantifiableFinancialResults–Economicmodels typically focusonlyonquantifiablefinancial results of a project. Most agreement and regulatory provisions do have financial

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impactsandthesecanbereflected.However,manyotherprojectagreementsandpetroleumregulationshaveconsequencesthatcannotbeeasilymodeled.Someofthoseinclude:

• Controlofprojectdecisions, suchas:approvingprojectsgoingahead,moving into thedevelopmentphase,relinquishment,salesofinterest,contractingandprocurement.

• Localcontentandlocalemploymentrequirementsandpolicies• Environmentalregulationsandstandards,• Communityengagementandconsultation• Controlandcomplianceofoilfieldservicescontractorsandtheirimpact• TheSaleandPurchaseAgreement itselfmayprotect theupstreamand theLNGplant

investors froma varietyofmarket andoperationsdisruptions through send-or-payortake-or-payclause.