4. Potential Revenue Cost
The net revenue cost of the various measures discussed above will in principle comprise the present value of the royalties that would have been paid had the royalty regime not been amended, less royalties actually paid.
Even ex post, it will not in practice be possible to determine the present value of the royalties that would have been paid had the royalty regime not been amended, since this will require knowledge of the amendments' precise impact on exploration activity.
More generally, the quantum and timing of the revenue cost will depend on a wide range of factors, including the nature of future discoveries (at one extreme the revenue cost would be nil if there were no commercial discoveries within the relevant timeframe).
We have however undertaken some indicative calculations that provide some indication of the potential numbers involved. These are summarised below.
Calculation 1: Maximum Revenue Cost of Allowing Deduction for Explorations Costs against Current APR Liabilities
Exploration expenditure totalled $173m in 2000 and $203m in 2001 and, we understand, has been around these levels in subsequent years.
The figure below shows the maximum net annual revenue cost of allowing current exploration expenditure to be deducting in calculating APR payable on current production, under the extreme assumption that all exploration expenditure would end up being offset against an APR liability in the year the expenditure was incurred. The calculations reflect several factors that will reduce the net cost, viz:
- The increase in company tax payable if royalties are reduced (for a company in a tax paying position, a $100 reduction in royalties will result in a $33 increase in company tax)
- The AVR's role as a floor on royalty payments
- The future increase in APR payable since exploration expenditure deducted now will not be available to reduce future APR liabilities.
Assumptions| Percentage of exploration expenditure never deductible against APR | 50% |
| Average present value of AVR as % of present value of APR | 30% |
| Average years before exploration expenditure deductible in calculating APR | 10 |
| Company tax rate | 33% |
| Government discount rate | 7% |
| Annual Exploration Expenditure $m | Current Revenue Cost | PV of future revenue gain | Net cost $m |
| 200 | 18.8 | 4.8 | 14.0 |
| 300 | 28.1 | 7.2 | 21.0 |
| 400 | 37.5 | 9.5 | 28.0 |
Calculation 2: Cumulative Impact
The following table shows the net impact on annual royalty and tax flows under various assumptions about the package's impact on annual exploration expenditure.
| | % Increase in Exploration Spend |
| 0% | 20% | 50% | 100% |
| 2005 | 0.0 | -6.6 | -16.5 | -33.0 |
| 2006 | 0.0 | -6.7 | -16.8 | -33.7 |
| 2007 | 0.0 | -6.9 | -17.2 | -34.3 |
| 2008 | 0.0 | -7.0 | -17.5 | -35.0 |
| 2009 | 0.0 | -0.2 | -0.4 | -0.9 |
| 2010 | -8.1 | -7.1 | -5.6 | -3.0 |
| 2011 | -8.3 | -8.1 | -7.8 | -7.4 |
| 2012 | -33.1 | -15.8 | 10.1 | 53.4 |
| 2013 | -37.1 | -17.3 | 12.5 | 62.1 |
| 2014 | -26.6 | -3.9 | 30.1 | 86.7 |
| 2015 | -40.8 | -7.2 | 43.1 | 127.0 |
| 2016 | -70.0 | -35.5 | 16.3 | 102.6 |
The table reflects the following assumptions:
- "Base" annual exploration expenditure of $200m
- A 50 / 50 split between onshore and offshore projects
- All projects are identical to our "model" onshore and offshore projects
- All fields are marginal (the additional royalties payable on any fields that would not have been discovered in the absence of additional exploration activity will reduce the net cost).
- All fields discovered come on stream at the same time (onshore in 2009, offshore in 2011).
- A 50 / 50 split between perfectly "integrated" explorers (who can use tax losses in the year they arise) and "standalone" explorers (who must carry forward tax losses until commercial production).
These assumptions are obviously unrealistic and the results should therefore be regarded as being no more than indicative of the numbers potentially involved.
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