tax production rig , page-7

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Thailand Na Sanun Taxability Review

Exponential Production Growth Drawback – SRB Tax Bites Profits
In light of the massive production growth that POE experienced at Na
Sanun (from 300 bopd to 6,000 bopd) in 2007 we have reviewed our
valuation model and found that the SRB tax impact is more significant than
initially estimated, especially in the face of strong expected future growth.
The SRB tax is essentially a “windfall” or “excess profits” tax that exists in Thai
production concessions granted since the 1980’s (known as the “Thai III”
regime). The SRB (Special Remuneratory Benefit) tax ranges from 0-75% and it
is in addition to the 50% corporate tax rate. The SRB tax is calculated on a pretax
basis and ultimately counts as a credit to offset income taxes payable. The
SRB tax depends most strongly upon oil prices and the resulting profitability of a
particular operation as measured in “revenue per metre drilled”, which we have
found works against Pan Orient as Na Sanun production ramps up. Our initial
model was based on a minimal SRB tax effect associated with significantly lower
production targets than what Pan Orient has achieved in a short period of time.
As a result of a review of our model we have found the SRB tax to be more
punitive than initially estimated with the SRB tax resulting in muted value
upside for additional reserves discovered in the Na Sanun field. In our view,
the nearest-term implications are with respect to possible future discoveries in
deeper volcanic zones within the Na Sanun East field. Our modeling suggests
that those new barrels would have a muted impact on the NPV of the Na Sanun
East asset due to the higher SRB rate on those new barrels. It should be noted
that the SRB tax is applied separately to separate production concessions, so new
reserves discovered outside of the Na Sanun East production license (e.g., in the
L53/48 Block, the L33/43 block, or outside of Na Sanun East proper) would be
expected to add more value than additional barrels discovered within Na Sanun
East. Pan Orient has indicated that the POE-9 and POE-9A wells, as well as any
wells in the Wichian Buri area, are exempt from the SRB tax. Unfortunately, the
SRB tax-free areas are expected to contribute only ~1,000 bopd (gross) to our
Pan Orient Energy Corp modeled 20,000 bopd (gross) peak Na Sanun production rate unless new
discoveries are made in these SRB-free areas.
Our updated modeling decreases core Na Sanun risked NPV/sh from $9.64
to $5.15 for the 18.9 mmbbls of net potential associated with the gross
production profile shown in Exhibit 1. We have, however, added 15 mmbbls
of net risked upside ($2.18/sh) to reflect the 50 mmbbls of net 3P upside
identified by Pan Orient’s reserve auditors. The SRB impact is most significant at
our modeled peak gross production rates of 20,000 bopd, which results in net
contractor take of ~17% versus the ~40% contractor take that we had initially
modeled. After having run a variety of hypothetical production profile scenarios
where we effectively double the Na Sanun East modeled resource base, we find
the risked NPV of incremental Na Sanun East barrels is approximately 60% of
the NPV of the barrels already accounted for in our model. We calculate an
NPV/bbl of $13.08 in our updated DCF model, which is about $2/bbl lower than
the value released by Pan Orient as calculated by their reserves auditors. We
attribute this difference to differences in price decks and production profile
assumptions. We assign an NPV/bbl of $7.00 for new barrels in the Na Sanun
East area