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Scenario analysis for fiscal regime and contract stability

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DID YOU KNOW a change in 1% in the corporate income tax can negatively impact an E&P contract's Net Present Value by 8%?

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Scenario analysis for fiscal regime and contract stability

  1. 1. 1.- SENSITIVITY ANALYSIS AftermodellingdifferentscenariosofCITrates,wefoundthatchangingtheCITratebyonepercentage point, (from 30 to 31) impacts negatively the Net Present Value by 8% (see table). This same variation displaces the curve the cash flow curve to the dotted line (see graph). 2.- MITIGATING INSTABILITY Contractors should be aware of the instability of CIT including its allowable deductions which are contained in article 32 of the Hydrocarbons Revenue Law. Any change in the tax regime that affects the original project economic balance (revenues – costs) at the time of awarding may be mitigated by the contracts’stabilizationclauses.However,asmentionedinthelastpublication,SHCPhasnotpublished yet the rules for applying the restoration of the economic balance. alejandro suárez provides specialized assessment in oil contract's fiscal regulations, modeling, planning and reporting. He has experience in analysis and financial simulation of petroleum fiscal systems for the public and private sector. alejandro.suarez@talanza.energy marco cota is the founder and CEO of Talanza where he assists international energy companies in the design and implementation of tailor-suited strategies for their regulatory compliance adjusted to the applicable geopolitical context, considering current and upcoming regulations. marco.cota@talanza.energy contact Paseo de la Reforma 483, 06500, Mexico City. T. +52 (55) 7316 2228 1200 Smith St, 77002, Houston, Texas. T. +1 (713) 353 3952 www.talanza.energy ANALYSTS In our last publication, we highlighted the risks derived from an adjustment to the fiscal terms in Exploration and Extraction contracts and the available protection mechanisms to mitigate such risks. We said that fiscal elements can be defined by its legal stability (“stable” if they can be changed only with contractors’ consent and “unstable” if they can be changed unilaterally by the government). In thisnewdocument,wemoveastepforwardasweanalyzedifferentscenariostoestimatetheeconomic impact of a variable fiscal regime over a typical E&P project lifetime. The following two graphs show government take distribution and its behavior in a License Contract (“LC”) and its fiscal elements. We marked with (*) the Additional Royalty (stable) and the Corporate IncomeTax(“CIT”)(unstable)astheyarethemainfiscalcontributionsofanE&Pproject(38%and29%, respectively). Other sensitivity examples Thesamescenarioanalysiswasappliedto the Additional Royalty (stable element), in which the impact on the net present value of the project ranges from -3% to -16%. LC Royalty 22% Additional Royalty 38% Corporate Income Tax 29% Contractual fee for the exploratory phase 0.25% E&E activity tax 11% * * january 2019 Scenarioanalysisforfiscalregime andstability CIT % CIT NPV 30 31 32 33 34 35 3% 7% 10% 13% 17% -8%* -14% -22% -30% -36% Sensitivity 64 3% 7% 10% 13% 17% 62 60 58 56 54 -3%* -6% -9% -13% -16% 20 15 10 5 0 -5 -10 -15 -20 -25 mmusd Royalty Contractual fee for the exploratoy phase Coporate Income tax Additional Royalty * E&E activity tax Net Cash flow Change in net Cash flow* 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 years 20 15 10 5 0 -5 -10 -15 -20 -25 mmusd Royalty Contractual fee for the exploratoy phase Coporate Income tax * Additional Royalty * E&E activity tax Net Cash flow 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 years Comprehensiveenergyregulatory consultancygivenbyformerkey officialsthatparticipatedinthe designandimplementationofthe newenergymodel. InTalanzaweprovideservicesof advancemodellingforfinancial evaluationintheMexican fiscal regime,developedbyformerofficials inchargeofthedefinitionand evaluationofcontracts’fiscal behavior.Thishasbenefittedour clients’cashflow-relateddecision makingprocesses. 1. For the Exploration and Extraction Activity tax (unstable element) there is a lower impact applying the same scenari- os. The variation goes from -0.6% to -3.2%. 2. Royalty NPV mmusd Sensitivity 63.98 3% 7% 10% 13% 17% 63.62 63.14 62.77 62.41 61.93 -0.6%* -1.3% -1.9% -2.5% -3.2% NPV mmusd Sensitivity E&E Activity tax

DID YOU KNOW a change in 1% in the corporate income tax can negatively impact an E&P contract's Net Present Value by 8%?

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