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Manualforthe

OpenUpstreamGasandLNGModel

ByWolfgangMeinhart

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

SustainabilityattheUniversityofHoustonAnd

ColumbiaCenteronSustainableInvestmentatColumbiaUniversity

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TableofContents

1. Introductionandpurposeofthemodel........................................................................3a. Purposeofamodelingeneral.........................................................................................3b. PurposeoftheupstreamandLNGmodel.......................................................................4c. UseoftheupstreamandLNGmodelfordifferentparties..............................................4

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

3. Usingthemodel.........................................................................................................12a. Structure........................................................................................................................12b. CalculationsandOutputs...............................................................................................13

4. Assumptionsandinputvariables................................................................................175. Mozambiqueexample................................................................................................21a. Assumptionsandreferences.........................................................................................21b. AskingtherightquestionsregardingtheassumptionsandInterpretingtheresults....22

6. Whatthemodeldoesnotinclude..............................................................................25

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1. Introductionandpurposeofthemodel

a. PurposeofamodelingeneralA 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:

• Whatisthefairnessofthecurrentandpotentialdeals?• Whatistheequitabilityofthefiscalregimeforinvestorsandthegovernment?• Whatisthetrade-offbetween“quickmoney”throughfront-loadedpaymentssuchasa

signaturebonusascomparedtochargingback-loadedpaymentsuchasahigherprofittax?

• 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.Wenotehoweverthat inagreeingonassumptionsthegovernmentshouldrecognizethatthecompaniesusuallyhavemoreexperienceandinformation.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. PurposeoftheupstreamandLNGmodelThismodelhasbeendevelopedfortrainingpurposes. Itmodelsthegasvaluechainfromtheupstream project to the use of gas under the form of LPG, LNG or as feedstock for localindustrialorpowergenerationuses.ItallowsuserstoassessthedifferentLNGstructuresthatcan be considered when producing LNG: the tolling structure, the Independent PlantOwner/BuyerModelandtheRelatedPartyPlantOwner/BuyerModel.Itprovidesvariousfiscalregimeoptionsfortheupstreamandmid-streamsectorstounderstandtheimpactsofchangesonthegovernmenttakeandtheprivatesectorreturns.ItalsoallowsforuserstoaddadditionalupstreamfieldstotheLNGprojectandunderstandwhatimpactthishasontheLNGeconomicswhentheprocessingfacilitiesareshared.

c. UseoftheupstreamandLNGmodelfordifferentpartiesVarious interested parties use project economics models for sometimes related, but oftendifferentpurposes.Upstream Investors – Usually international oil companies and national oil companies areinvesting indeveloping theupstreamgasdiscoveries. Theyusemodels to reasonablyensuretheywill achieve an adequate return on their investments relative to the expected range ofgeologic,operational,andpoliticalandmarketrisksthattheytakeon.If they are required to “Carry” state oil company investments, they alsowant to assess thelikelihoodthatthosecarriescanberepaidunderavarietyofscenarios.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 economicallyviableandcontinuetoattract investors,butatthesametimeachievethemaximumfinancialbenefitsforthecountrygiventhattheirnaturalresourcesrepresentafiniteassetthatdepletesovertime.Governmentsneedtoplanhowmuchrevenuecanbeexpectedintothegovernmenttreasury,thetimingofthosereceiptsandthevolatilityoverthelifeoftheproject.Nationaloilcompaniesmayneedtoevaluatewhethertheirshareoftheprojectinvestmenthassufficientreturnstobefinancedbylenders.Financial sector – Private banks and multi-laterals lending directly to the project investorsutilizeprojecteconomicstoassesstheunderlyingabilityoftheborrowerstorepaytheirprojectloansandquantifytheriskfactorsthatcouldcausedelaysordefaultsinpayment.Financialinstitutionsmakinggeneralpurposeloanstothecountryortolocalbusinesseswillbeinterestedinknowinghowmuchadditionalrevenuesthegovernmentwillbecollecting,whichmayassistinrepayingloans.Credit rating agencies use economicmodels to forecast sources of government and countrywealthtoassistintheirassessmentsanddevelopingtheirratings.

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CivilSociety–Wanttoknowthatthedealbetweenthegovernmentandtheprivateinvestorsisreasonable and that it achieves themaximum returns for the countrywhile still encouragingnewinvestment. Themodelalsoservesasameansof independentlyevaluatingwhatshouldbecomingintothegovernmenttreasury inanyperiodandcomparingthattoactualreportedrevenues.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;consequentlythegastobesuppliedtoanLNGplantoftencomesfromseveraldifferentblocks,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”arequiteoftensplitbetweendifferententitiesorgroupsofinvestorsand not undertaken by the same group of investors. Commercial interests, tax and fiscaltreatmentmayvarybysegment.Upstream–Theownershipandlegalstructureareusuallydeterminedbythegovernmentwhodecideswhichpartiesareawardedtherightstoexploreandexploittheoilandgasreservesinaparticular 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.GasGatheringPipeline(s)–Thegasproducedintheupstreamsectormustbetransportedtoshoretobeprocessed.Ifonlyoneblockusesthispipeline,oftentheupstreamblockpartnersmayalsobuildandownthegaspipelineeitherthroughthesameJVorviaadifferentcompanythat they form. Ifmore thanoneblockuses thegaspipeline, then theremaybea separatecompanywiththesameordifferentownershipthatchargesatarifftotheupstreamproducers

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touseit(seeline95inthe‘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)providestheoptionofevaluatingeitherLPGinvestoralternative,ornoLPGextractionatall ifthegasstreamisnotconsideredtobe“wet”.LPGextractionrevenuestypicallywouldonlybereceivedbytheLNGplantownersiftheplantownerstooktitletothegasstream,whichisnotthecaseinanormaltollingscenario(seeTable2).LNGPlant–Theseplantsoftenrequireproductionfromseveraldifferentblocksinordertobeeconomicandentailverydifferenttechnicalandcommercialrisksthanupstreaminvestments.Inadditiontherecanbeclearcommercialconflictsof interestbetweenupstreamsuppliersofgasandtheLNGplantasthebuyerofgasandresellerofLNG. Becauseof thesefactors it ismost common that the LNG investors are a completely separate group than the upstreaminvestors,althoughit isnotuncommontoincludesomeoftheupstreaminvestorsintheLNGgroupaswell.TypicallytheLNGplantcommercialstructureisoneofthreeoptions:

1. TollingPlantModel–TheLNGplantinvestorspaythecapitalandoperatingcostsoftheplant, but the ownership of the produced gas remainswith the upstream producers.TheLNGplantownerschargeanegotiatedfeeperunitofgasprocessedastheirsourceofrevenues(Line97ofthe‘Assumptions&Results’sheetinthemodel).Afterpayingfortheprocessingofgas intoLNG,theupstreamownersmarketandsell thegas intotheexportmarket.

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

1Angolaisacaseinpoint:Aspartoftheoveralldealtheupstreamblockswererequiredtopayallcapitalcostsofthegaspipelines,andcouldincludethemintheirPSAcostrecovery.Uponcompletionofconstruction,thefullownershipwastransferredtoSonangol,theStateownedcompany.AlloftheLNGpartnerswerepartofthemanagementofthepipelineandsharedtheoperatingcosts,butultimatecontrolandownershipwaspassedtotheStateasitwasviewedasastrategicassetnecessarytoenablenewfieldstobeabletoaccesstheLNGplant.

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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.

The model permits the assessment of the three structures. The Independent PlantOwner/BuyerModelandtheRelatedPartyPlantOwner/BuyerModelstructuresareevaluatedin the worksheets called “LNG equity” and “Consolidated LNG equity”. The model wouldrequire the same items of input and would utilize the same computation. The differencebetweenthesetwostructureswouldbethatonewoulduseanarms-lengthmarketpriceandtheother would use an agreed transfer price.2 Even though the ownership structure may bedifferent,thefiscalandeconomicresultshouldbethesame.Usersofthemodelcanassesstheimpacton investorreturnsandgovernmentrevenuesunderdifferent transferpricescenarios(inthesensitivityanalysissectionofthe‘Assumptions&Results’sheet).The tolling plant structure is evaluated in the worksheets called “LNG Tolling” and“ConsolidatedLNGTolling”sheets.There can be variations in all of these forms, so the substance of the structure must bescrutinizedtoensuretherightoptionisselectedinthemodel,nottomentioninreviewingtheactualproposalsgivenbytheinvestor.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.Iftheproject uses amix of bothmethods, the usermust compute the average price and averagetankercostsoutsidethemodelbeforeinputtinginanyoneyear.

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

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c. Fiscal3ArrangementsbySegment• The upstream sector fiscal terms are determined by the PSA or legislation regarding

taxes and royalties. The information required for the input into the model can beobtainedfromthosedocuments.

• 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,thiswouldonlybepossibleinsituationswheretheLNGequityinvestorsarethesameastheupstreaminvestors.

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

investorsarethesellersoftheLNG.o WhentheLNGplantisownedbythesamegroupofinvestorsastheupstream,

thereisusuallyan“arms-length”typeoftransferpricingrequiredforthegasinordertodeterminethetaxandfiscaltreatmentandsplitbetweentheupstreamfiscalregimeandthedownstream.

Tables1,2,3below,summarizetheaboveexplanations.

3Notethatthemodelallowstousetwotypesofprofitsharingarrangements–R-Factorbasedandproduction-based

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Table1:GeneralcharacteristicsofthedifferentsegmentsofanLNGproject

GasProjects-AspectsbySegment

Upstream GasPipeline LNGPlant

Ownership GrantedbyLicenseAwardbyGovernment

Canbepartofupstream,orDifferent

Separatefromupstream

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)(ifnotaTollingplantonly)

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

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

RiskFactor: TollingStructure EquityStructure–LNGPlantownersaresameasupstream

EquityStructure–LNGPlantownersareseparate

LNGmarketpricerisks

Upstreambearsfullrisk LNGplantinvestorsbearfullrisk

LNGplantinvestorsbearfullriskunlesstransferpricefromupstreamislinkedtomarketprice

Gastransferpricetoplant

Notapplicablesincegasisnotsoldtoplant

Upstreamownerswantaslowaspossible

Upstreamownerswantashighaspossibleandplantownersaslowpossible–whichwillgetthepartiestoatruearm’slengthprice

Upstreamproductionandreservesrisks

BothupstreamandLNGinvestorsbearriskunlessthereisasend-or-payclausetoprotectplantinvestors

BothupstreamandLNGinvestorsbearrisk,butcouldentailashiftduetodifferentfiscalregimes.

BothupstreamandLNGinvestorsbearriskunlessthereisatake-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 composedof15worksheets,whichare linkedby formulas.Table4providesanoverview of the function of eachworksheet. Theworksheets are color coded,with the blueworksheet(‘Assumptions&Results’sheet)beingtheplacewhereusersmayinputallvariablesandcanobserve thecompiled results.This isalsowhere thesensitivityanalysis ispresented.Userswillspendmostofthetimeinthisworksheet.Theredworksheetsprovidetheuserwiththeupstreamprojecteconomicsandgovernment revenues for3 fields.Thegreenworksheetprovidestheuserwiththepipelineprojecteconomicsandgovernmentrevenues.TheorangeworksheetsprovidetheuserwiththeLNGprojecteconomicsandgovernmentrevenuesfortheLNG project under the three most common structures explained in section 2b. The blackworksheets consolidate the upstream, pipeline and LNG project economics under the threestructures.Table4:WorksheetsofthemodelNameofworksheet DescriptionofvariablesinworksheetAssumptions&Results AssumptionsareinputtedandkeyresultsarepresentedgraphicallyField1Depr DepreciationscheduleofthecapitalexpenditureofField1

Field1Fiscal ComputationofthefiscaltermspaidbyupstreamgasinvestorsofField1

Field1Investor CalculationofthefinancialreturnoftheinvestorandofthegovernmenttakeforField1

Field2Depr DepreciationscheduleofthecapitalexpenditureofField2Field2Fiscal ComputationofthefiscaltermspaidupstreamgasinvestorofField2

Field2Investor CalculationofthefinancialreturnoftheinvestorandofthegovernmenttakeforField2

Field3Depr DepreciationscheduleofthecapitalexpenditureofField3

Field3Fiscal ComputationofthefiscaltermspaidbyupstreamgasinvestorinField3

Field3Investor CalculationofthefinancialreturnoftheinvestorandofthegovernmenttakeforField3

GasPL Economics,financialreturnsandgovernmenttakeofthegaspipeline

LNGEquity

ComputationofLNGprojecteconomicsofEquity/buyerstructure,wherebyLNGownerstaketitletogasfromupstreamandsellto3rdparties(irrespectiveofwhethertheLNGplantownersaretheupstreamoperators)

LNGTollingComputationofLNGprojecteconomicsoftollingstructure,wherebytheLNGplantdoesnottaketitletogasandthegasownerspayatoll(i.e:afee)forprocessingpurposes

ConsolidatedLNGEquityConsolidationoftheeconomicsofall3elementsoftheprojects(upstream,pipelineandLNGfacility)undertheLNGEquitymodel

ConsolidatedLNGTollingConsolidationoftheeconomicsofall3elementsoftheprojects(upstream,pipelineandLNGfacility)undertheLNG-Tollingstructure

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

LightblueInputvariablesthatcanbechangedbytheuser.Price,production,costandfiscalinputsshouldallbeeditedinthe'AssumptionsandResults'worksheet.ThestructuretobeanalyzedcanbechosenincellC156ofthattab.

Lightgreen Sectiondividers

YellowChecksthatallowtheusertoseewhethererrorshaveoccurredinthemodel.Thiscolorhasalsobeenusedtohighlightwhichmodelstructureisactivatedandthereforewhichresultsarevalidandinvalid

Red Keyresults

WhiteFieldsthatarelinkedbyaformulainthemodelandshouldnotbechangedbyinexperiencedmodelers,aschangingthemmayresultinthemodelnotfunctioningproperly

Redfont ExplanatorynoteswithinthemodelItisimportanttonotethattheuserneedstopickthecommercialstructurethathe/shewantstoanalyzeinCellC156inthe‘AssumptionsandResults’worksheet.Iftheuserwantstoassessthetollingstructure,then“1”shouldbeinsertedincellC155.Iftheuserwantstoassesstheequitystructure,“2”shouldbeinserted.

b. CalculationsandOutputsUnderstandinghowthemodelislinkedAs 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.Thereare severalother cross-checks in themodel. If theword INVALID (orNOTAPPLICABLE in thechart area of the Assumptions &Results sheet) appears in any spreadsheet the user shouldcheckforstructurechosenincellC156and/oranyerrorsintheinputdataorformulas.

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Checkingandunderstandingtheresults• Checkingthatprojectandinvestorreturnsarereasonable–Usersshouldcheckthenet

present value (NPV) and internal rate of return (IRR) for each of the segment of theproject.4BoththeNPVandIRRindicatorstakeintoaccountthetime-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 arehigh, 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 orlegal structures, such as the equity option of selling the gas to the LNG plant, theinvestoreconomicsarenegativelyaffected.Inthistypeofcase,theupstreamoperatorsmayseekaninterpretationofthePSAthatwouldallowthemequivalencywiththeotherownership options. In this example, a means of achieving that parity would be to“netback”thefinalLNGFOBpricebynettingoutthetollingcosts.5Theseinterpretationscanbeverytechnicalandnoteasytofollow,butcanbecriticaltothefinancialreturnstoinvestorsandtotheGovernment.

4CellsC38andC39ofthe‘investor’worksheetsforfield1,2,3;cellsC37andC38ofthe‘GasPL’worksheet;cellsC44andC45ofthe‘LNGequity’worksheet,cellsC33andC34ofthe‘LNGTolling’worksheet;cellsC31andC32ofthe‘ConsolidatedLNGequity’worksheet’;andcellsC29andC30ofthe‘ConsolidatedTolling’worksheet.5ThisiswhatthismodeldoesinLines4-5ofthe‘FieldXFiscal’sheets.

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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.6Furthermore,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).

• Understanding the sensitivity analysis. It is important to test the resilience of theresults 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 notcompletely collapse when the gas prices moderately fall and that government takeincreases with a rise in gas prices. If either is the case, it is likely that there will bepressures for the contract to be renegotiated when commodity prices change. This

6Themodelgivesthispossibilityinlines61-65and77-85ofthe‘Assumptions&Results’sheet.

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modelprovides for sensitivityanalyses from line237 in the ‘AssumptionsandResults’worksheet.Apartfrompricechanges,thesensitivityanalysisteststheimpactsofvaryingassumptions regarding the production, capital expenditure, tolling fees and delay inproductionstart.

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.

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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:

• Directly linked toapublishednaturalgas indexpriceata largenaturalgasmarket,e.g.HenryHub(seefurtherexplanationbelow).

• Directly linked to a published crude oil index price for a widely traded crude type, e.g.Brent. This type of pricewould also require an adjustment to recognize the different energycontent,processingrequirementsandstandardofmeasurementofoilversusnaturalgas.

• 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,whichisthevirtualtradinglocationforthesaleandpurchaseandexchangeofUKnaturalgasandisthe pricing and delivery point for the ICE Futures Europe natural gas contract. LNG pricingreferencesandbenchmarksarestillevolving.For instance, the crude-price linked methodology was widely used in older long term LNGcontracts and still influences how LNG is priced. Newer sales contracts aremore frequentlyreferencingnaturalgasorLNGpricehubindicesasbenchmarks.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.7Withrespecttoproductlossduetoevaporationorrunningmachinery,intheTollingmodeltheupstreamgasownersbeartheimpactofanyproductlossorevaporationduringtheLNGplantprocessingastheywouldstillpaythetollbasedonproductgoingintotheplantandstillretainownershipofthegas.8IntheEquitymodeltheLNGplantownersbeartheeconomicimpactoftheproductlosssincetheytooktitletothegasattheLNGplantgate9(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.10Capitalcostsforecasts–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

7See‘Assumptions&Results’sheet,lines24and258See‘FieldXInvestor’sheet,line129See‘LNGEquity’sheet,line1310See‘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,11betweenthegovernmentandtheupstreaminvestors.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. LNG Plant capacity and LNG Tanker capacity are commonly measured in units ofweight,typicallyinMetricTons(MT)sincetheyareproducingortransportinggasinaliquidform.

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

4. InmanycasescapacityismeasuredasanamountPERDAYwhileinothersituationsvolumesarereferredtoasanamountPERANNUM.

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

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

7. MosttariffsortollsarereferencedinU.S.dollars.PipelinetariffsareusuallyapriceperMCF.LNGTollingtariffsmaybeapriceperMCForinmanycasesapriceperMT.

8. 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: 11Seeresourcecontracts.orgforadatabaseofpubliclyavailablecontracts.

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Table6:GeneralConversionFactorsforEnergy

Table7:AdditionalUsefulConversionFactors

Source:GAIL12

Whenusingconversiontablestoconvertfromgasvolumemeasures(suchasCForCM)togasenergymeasures (such as BTUor gigajoules) itmust be recognized that the degree of liquidcontentinthegasstreamcanaffectthoseconversionfactors.Inthesamewaywhenconverting

12http://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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fromliquidvolumemeasures(suchasbarrelsorMCF)toweightmeasures(suchasmetrictons)thespecificgravityoftheliquidswillaffectthatconversion.Theserangesareusuallyrelativelysmall, but can create differences from the conversions usedby a companyor government intheirmodels

5. MozambiqueexampleFor illustrative purposes, the input values in the model are based on publicly availableinformation on the Rovuma basin LNG project in Northern Mozambique. However noquantitative conclusions can be drawn from this analysis given that the data is still verypreliminaryand therewereanumberofdatagaps.Furthermore, someof thenumbershavebeen adapted to better show the impact of the different project structures. The secondupstream field has been included to illustrate the impact of additional volumes on the LNGeconomicsandhasthesamecharacteristicsasthefirstupstreamfield.

a. AssumptionsandreferencesFiscalTerms

• Upstream Fiscal Terms are based on Block 1 PSA from 2006, with some exception.BonusamountsindicatedinthePSAandwithholdingtaxarenotincluded.

• A$1Billionunrecoveredexplorationcostisincluded(outof$2Billiontotalunrecoveredexplorationcosts),basedontheStandardBankreport.13 Itwasassumedthatsomeofthatamountisnotrecoverableastheywouldbeoutsidetheringfence.

• For the gas pipeline segment the standard corporate income tax of 32%with no taxrelieforinvestmentuplift(suchaswasprovidedforthePandeTemareproject)isused(PetroleumLawNo27/2014).

• For the LNG segment the standard corporate income taxof 32%withno tax relieforinvestmentupliftisused(PetroleumLawNo27/2014).

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.

• Basedonthereviewedmaterial,themodelusesthetollingstructureasthebasecase.• Thecapitalcostandtimingofexpenditurefiguresarebasedoneducatedguessesand

adapted toprovide reasonable return rates for thedifferent segmentsof theproject.Excludingthefinancingcostandcapitalizedinterest,thesefiguresarerelativelyclosetotheStandardBankreportestimates.

13 Standard Bank (2014) Mozambique LNG: Macroeconomic Study

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• No LPG or Condensate production is assumed. There may be some condensateproducedbytheupstreamprojects,whichwouldincreasetheprofitability.

• 2% domestic gas sales are assumed. This would have to be adjusted when theGovernment’srequirementfordomesticsalebecomesclearer.

• DuetodatagapsregardingtheLNGtollingratesandoperatingcosts,thesefiguresarebasedoneducatedguesses.Thetollingratewillinvolveacommercialnegotiation.

• UndertheLNGtollingarrangementitisassumedthatthegaspricetobeusedunderthePSA termsare tobe interpretedas theFOBExportprice less the LNG toll itself. Thisimpactsthecostrecoverycap.Itmaybearguedthata"Wellhead"typeofpriceforgasisreallyNETofthetollthatwouldneedtobe incurredpriortobeabletosellthegas(eventhoughthewellheadconceptisnotusedinthePSAperse).AcommercialreasonisthatcompaniesmaynotbewillingtoagreetoaninterpretationofthePSAwherebypaying a toll to a third party to process/liquefy the gas would put them in a worsesituationthansellingthegasdirectlytoaplantowneratthesamenetbackpricestrictlyduetothemechanicsofhowtheCostRecoverycapfunctions.

Themaindocumentsreviewedforthepurposeofthismodelinclude:• 2006PSABlock114• Mozambique’sPetroleumLawNo27/2014• ICF International (2012) Natural Gas Master Plan for Mozambique: Draft Report

ExecutiveSummary• StandardBank(2014)MozambiqueLNG:MacroeconomicStudy• TheOxfordInstituteforEnergyStudies(2014)Mozambique’sLNGRevolution:Apolitical

riskoutlookfortheRovumaLNGventures

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

FiscalTermsThe Fiscal Terms are based on an existing PSA and existing tax laws inMozambique, but doincludeanassumed“agreedinterpretation”regardingthenetbackoftolling. Somequestionsthatmightbeaskedare:

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

governmentthatwerenotmodeledthatmightcreateadifferentresult?

CommercialAssumptions• IsaconstantFOBexportpriceof$8.50perMCFrealistic 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?

14http://www.resourcecontracts.org/contract/ocds-591adf-MZ0646925511RC/view

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• Does a LNG toll of $4.00 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?

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?

Total capital costs for all project sectorswere$28billion, including$16.8billion for the LNGplant.

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

• Arecoststoohighandconsequentlyunderstatetherealreturnstoinvestors?• Arethereanybenchmarkstocomparecosts?• Havetheappropriaterangeofsensitivityanalysesbeenrunandevaluated?

NoCondensateorLPGhasbeenincluded.• If indeedtherewouldbesomecondensateorLPGextractedfromthegasstreamboth

thecapitalcostsandtheresultantnetrevenueswouldbehigherandprojecteconomicresults would likely improve.15 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 2,185 100 3,274 7,745

15Partoftheliquidscanbesoldonthesamepricetermsasoilandbeprocessedbythesamefacilitiesasoil.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)

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IRR 19% 11% 13% 15%TotalGovernmentrevenuesundiscounted,$Millions

27,349*2 1500 23,446 78,447

GovernmentTake,undiscounted 50% 32% 30% 49%FirstYearthatGovtrevenuesexceed$2Billionp.a.

2026

FirstYearthatInvestorNetCashFlowsexceed$2Billionp.a.

2021

Somequestionsthatmightarisefromtheseresults:

• AretherelativeIRRsforeachprojectsector(e.g.upstream15%,gaspipeline11%,LNGplant15%)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 inflowsandspendingormanagingofsovereignwealthfunds.Itcanalsobeinstructiveinevaluatingthedistributionbetweenthegovernmentandtheinvestors.LookingatthebasecasethefirstyearofsignificantNETcashflowstoinvestorsis2021whentheyearnover$2billionnet,whereasthegovernmentdoesnotreach$2billionayearuntil2026.TherealityisthattheGovernmentdoesnotreceivemuchoftheirinflowsuntilthelasthalfoftheprojectlife,whereastheinvestorsreachtheirnetinflowsrightafterproductionstart.

• 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,oraninternationalorganizationsuchastheWorldBank.If completely reliable engineering detailed level data is not available, it becomes evenmoreimportant to test theeconomic resultsby running scenarioswithwide variation in the inputdata.

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.Differentiation of investor equity shares - Themodel does not differentiate between therespective investorequity shares in thevarious segments.Theyare treatedasonegroup foreachsegment.However,inmanycasesthegovernmentmayhavetheoptiontotakeanequityshareinanyorallofthesegments.Inthatcase,attentionmustbepaidtovariousfactorsandimpacts,suchas:

• Theamountofcapitalcoststhatwouldhavetobefinancedbythegovernmentfromitsownsourcesorfromlenders.

• Thereturnsthatcanbeexpectedbythegovernment(anditslenders)fromitsequityinvestment.

• Howmuchproductionoroutputwillbeavailabletothegovernmenttomarketorutilizeforincountryneeds.

• HowtheseresultsareimpactedbypossiblechangesintheLNGmarket,transferprices,tolls,projectstructure,recoverablereservesorcostoverruns.

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5.CarryoftheState'sinterestduringexplorationordevelopment-ThisisacommonoptioninPSA's especially as ameans of the foreign investors “lending” to the state oil company; buttherearemanyvariationsonhowtherepaymentsworkandarequitecomplextomodel.AndinmanycasesthecarryandrepaymenttermsendupvaryingfromthebasicPSArequirementsonceaproject involves LNGand the carrybecomespartof amuch larger government sharefinancing discussion and negotiation. Inmost respects carrying or financing the state sharebecomesaseparatefinancingnegotiationanddecisionratherthananintegralpartofthebasicgasvaluechaineconomics.Butacarryoftenentailshighcoststothegovernmentsinceacarryoftenrequirestheoilcompaniestakingoncertainadditionalrisks.ThetermsofthesecarriesmustbecarefullyanalyzedandmodelledtodeterminetheirimpactontheGovernmentunderavarietyofassumptionsandcostconditions.6.Financing-Borrowingandfinancingcaninsomecaseshaveanimpactifinterestondebtispermitted as a tax deduction. But a common analytical mistake is to focus on leveragedeconomics,soitisrecommendedthatfinancingeffectsnotbeconsideredinamodelinordertoavoidconfusingtheimpactsandcompromisingtheanalyticalvalidityofthemodel.Financingisofcourseahugefactor inmega-projectssuchasLNG,especiallythegovernmentshareorforthe smaller independent companies; but itmust be clearly segregated as a separate type ofanalysis.Ifinterestcostsonloansfromaffiliatedpartiesarepermittedastaxdeductions,greatcare must be taken to ensure they are not excessive.(http://www.afr.com/business/energy/gas/chevron-claimed-gorgon-bonanza-would-pay-for-tax-for-cuts-for-everyone-20151116-gl0jo1)7.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.8.NonQuantifiableFinancialResults–Economicsmodelstypicallyfocusonlyonquantifiablefinancial results of a project. Most agreement and regulatory provisions do have financialimpactsandthesecanbereflected.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.