5. Oil price influence on financial estimation of the company
5.1. Analysis of different price situations
As it was mentioned above, now PLC sells oil on a foreign market (export, 35 %), near abroad market (Belarus, Ukraine, 8%), domestic market. Let’s consider oil prices influence on net cash and cash available for dividend payments for period from 2005 through 2017.
We shall take different price situations but provided that the prices would not vary during all period of time. The probability of success oil recovery is 50 %.
situation 1. The export price of Brent is 25 $/bbl, the price in domestic market is 3000 RUR.
situation 2. The export price of Brent is 35 $/bbl, the price in domestic market is 4000 RUR.
situation 3. The export price of Brent is 45 $/bbl, the price in domestic market is 5000 RUR.
situation 4. The export price of Brent is 55 $/bbl, the price in domestic market is 6000 RUR.
Apparently from figure 5.1 cash flow values would roughly grow through 2010 after that cash flow value would fall and would reach zero within the limits of 2014 - 2017. The schedule shows the NPV values for each case.
To provide the further existence of the company investment to geological exploration on an available licensed territory and then capital investment to well drilling, well development, gathering pipelines and other equipment are necessary.
Figure 5.1 Cash flow diagrams for different price situation
Variants of the oil prices with npv equal 0.
The basic conditions are probability of success recovery is 50 % and the internal price approximately in 1,5 times is less than price of Brent.
If the price of Brent is 16 $/bbl and internal price is 11 $/bbl (nearby 2300 руб/ton) value of NPV would be $ 6 MM.
If the price of Brent is 15 $/bbl and internal price is 10 $/bbl (nearby 2100 руб/ton) value of NPV would be negative (- $ 38 MM).
5.2. Analysis of npv sensitivity in at different markets
To precisely estimate oil prices sensitivity on NPV it is necessary to analyze export and domestic markets influence separately. The reason is the various structures of tax charges at realizations in these markets. Distinctions of the Russian Federation taxation should be taking into consideration at comparison of price changes influence on NPV.
Taxes
- export duty;
- oil production tax.
Let’s consider legislative requirements on these taxes.
export duty;
The government of the Russian Federation carries out monitoring the oil prices of grade "Urals" in the world markets of oil (Mediterranean and Rotterdam) with a view of definition of the average price for the monitoring period. The monitoring period of the oil prices are each two calendar months since November, 1st, 2001. Calendar year includes six periods of monitoring. Rates of the export duties are established for the term of two calendar months.
The new rate of the export duties on oil crude is established by the Government of the Russian Federation in view of the average oil price for grade "Urals for last period of monitoring and is put into operation from 1st of the second calendar month following the termination of the monitoring period.
Decisions of the Government of the Russian Federation on change of the export duties rate are published not later than 10 days before their introduction in action. Rates of the export duties on crude oil should not exceed limiting rate counted as follows:
at average oil price less than 109,5 US dollars for 1 ton the rate is 0;
at excess oil price of a level 109,5 US dollars for 1 ton, but no more than 146 US dollars for 1 ton the rate is not exceeding 35 percent from a difference between average price for 1 ton and 109,5 US dollars;
at excess oil price of a level 146 US dollars for 1 ton, but no more 182,5 US dollars for 1 ton the rate is sum of not exceeding 12,78 dollars and 45 percent from a difference between average price for 1 ton and 146 US dollars;
at excess oil price of a level 182,5 US dollars for 1 ton the rate is sum of not exceeding 29,2 US dollars and 65 percent from a difference between average price for 1 ton and 182,5 US dollars.
oil production tax;
The tax rate at an oil recovery is 419 roubles for 1 ton. Thus the specified tax rate is applied with the factor describing dynamics of the world oil prices, - Кp.
This factor is quarterly defined by the tax payer with the following formula:
Кp = (P - 9) х R/261,
where P - average price of grade "Urals" in US dollars for barrel for the tax period;
R - average value of dollar exchange rate to rouble of the Russian Federation established by the Central bank for the tax period.
The tax payers which carried out search and exploration of oil reserves due to own money pay the tax with coefficient 0,7.
The figure 5.2 shows diagrams of NPV changes depending on oil prices accordingly to the external and internal markets. Apparently from schedules, change of domestic price has greater influence on financial implications rather than changes of the export price. So for example, under condition of sale share 8 % near abroad and constant Brent price, change of the domestic price on 100 % causes increase of NPV almost by 200%.
Figure 5.2 Export and domestic price influence on NPV
Change of the export price (Brent) by 100 % (with a constant domestic) causes to change of NPV only by 25-30 %. Besides, in case of absence of sales near abroad market (i.e. export sales are within the limits of 35 - 38 %, the rest 62 - 65 % is in domestic market) value NPV would fall at increase of export prices. This paradoxical situation speaks imperfection of the Russian tax laws.
So, at increase of export price above 25 dollars for barrel oil companies give 90 % to the state as taxes, including:
- export duty of 65 %;
- oil production tax 22 %;
- profit tax of 3,12 %.
Besides, as it was indicated above oil production tax is paid for all produced oil. Thus, oil which is sold in domestic market also is assessed with raised rate of oil production tax. The figure 5.3 shows tax payment increase (tax duty, oil production tax, profit tax) at increase of export oil prices with different market proportion:
100% export;
35 % - export, 65 % - domestic market (at constant domestic price).
Apparently in case of export price increasing company would have losses. It is explained by raised oil production tax. So each 1 dollar of export price increase causes additional taxes of the company: export duty 0,65 dollars and oil production tax 0,62 dollars.
Figure 5.3 Export price influence on taxes
Some facts indicate on imperfection tax rules for a long time. In December, 2002 - January, 2003 oil production tax exceeded 90 % of company revenue. On the one hand the domestic price was decreased in 4 times in comparison with summer period of 2002 (to 1 thousand roubles / tonn), on the another hand the oil production tax was raised to 991 roubles / tonn due to high export prices. The revenue from oil realization on domestic market was hardly enough only for this tax payment.
It is expected that the legislation concerning to oil production tax would be changed in the future. Now oil recovery requires more and more capital expenses because of hard distant oil reserves. The current system of tax legislation blocks such investment and, as a consequence, blocks economy development. Russia can really remain without «the big oil ", with thousand thrown unproductive wells demanding huge investment and time for reanimation. The state should stimulate oil exploration and promote oil companies to invest money for full oil recovery from each reserve.