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Global tax and economic modeling

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An integrated approach to delivering customized tax and economic modeling services for the oil and gas industry

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Global tax and economic modeling

  1. 1. Global tax and economic modeling An integrated approach to delivering customized tax and economic modeling services for the oil and gas industry
  2. 2. Page 2 Global Tax and Economic Modeling EY’s global tax and economic modeling Informed business decisions in today’s economic environment require substantial quantitative analysis Numbers are at the core of determining how to optimize a transaction, how to capture the most favorable economics, how to respond to a taxing authority’s inquiry, and how to design tax and economic regimes to improve global competiveness. EY helps businesses and governments make informed decisions based on rigorous analysis applicable to any stage of a transaction, investment, or regime change. EY is appropriately positioned to assist with tax and economic modeling analyses by combining deep technical tax and economic expertise with in-depth oil and gas industry experience (upstream, midstream, downstream, petrochemicals and oilfield services (OFS)). Our customized modeling services Our integrated team Introduction and overview Our capabilities
  3. 3. Page 3 Global Tax and Economic Modeling Our leading-class tax and economic modeling capabilities EY can develop (and/or review) detailed financial and tax models that provide a wide variety of strategic analysis from both a tax and/or economic perspective to assist clients (both private and government) in considering investment, fiscal regime changes, capital allocation and other matters. Private companies 2 NOCs 4 Non- operators 6 IOCs 1 Private equity 3 Governments/ fiscal regimes 5
  4. 4. Integrated modeling approach Investor take (cash flow metrics) Analysis/ KPI reporting Withholding tax Impairments Owner taxes Accounting recognitionInvestment appraisal Financing Cash repatriation Treasury, finance and hedging Processes (advisory) 1 2 3 4 5 6 7 8 9 10 Government take 01 0203 Revenues Fiscal terms Costs Tax and economic modeling ► Timing ► Exploration success ► Production ► Selling price ► Export duties ► Global prices ► Contracts or differentials ► Benchmarking ► Customs duties, VAT, employment taxes ► Drilling optimization ► Decommissioning ► Operations ► Infrastructure
  5. 5. Page 5 Global Tax and Economic Modeling Modeling and strategy Strategic decisions — whether for investment, capital allocation, regime change or competiveness reviews, or any other purpose — require an in-depth quantitative analysis to understand the risks and rewards of certain changes or decisions related to direction. Fully understanding the tax and economic implications of potential actions can help shape and define the overall strategy. Tax and economic modeling thus goes hand in hand with overall strategic decisions, addressing business model disruption and opportunities for growth, and identifying pitfalls or areas of improvement, among others. EY’s Global Oil & Gas Tax and Economic Modeling practice can assist in an integrated, comprehensive tax and economic analysis. Our services are supportive, and many times supplementary, to the existing capabilities, and we work in tandem with investment banks and law firms, providing a key analytical and quantitative approach.
  6. 6. Our capabilities EY’s Global Oil & Gas modeling network Americas 150 professionals Europe, Middle East and Africa 140 professionals Asia-Pacific and Japan 20 professionals Houston London Aberdeen Moscow Delhi EY’s Global Oil & Gas modeling network consists of 300+ professionals deployed around the globe 300+ A fully integrated adviser ► A fully integrated oil and gas advisory, offering vast experience across tax and corporate finance, providing you with insights and coordinated advice ► A structure focused on the Global Oil & Gas sector, combining our tax and economic modeling expertise with the power of our complete offerings across transaction advisory, advisory, assurance and tax 03 An experienced team ► Successful track record and relevant experience in providing quantitative analysis for IOCs, governments, NOCs, private equity firms and private companies as they navigate the complexities of investment decisions, capital allocations, fiscal regimes, cash management and other key decisions in the oil and gas space 02 Global experience in energy ► 300+ tax and economic modeling professionals serving clients on a global basis and seamlessly coordinating with our 10,000+ energy professionals, providing a complete range of services to companies and governments operating in all sectors of the industry ► Market presence in all key oil and gas market areas and access to key decision-makers among the major industry players 01
  7. 7. Page 7 Global Tax and Economic Modeling Our customized modeling services With our customized suite of modeling services, we can develop (and/or review) detailed models that facilitate an evaluation of different alternatives and scenarios from both a tax and economic perspective. Our integrated approach focuses on the following key categories; however, in many cases, the analysis spans multiple categories. Our customized suite of tax and economic modeling services for the oil and gas industry Transaction and investment analysis Cash repatriation Government fiscal regimes Capital allocation decisions Agreement modeling and model review
  8. 8. Page 8 Global Tax and Economic Modeling Transaction and investment analysis Cash repatriation Government fiscal regimes Capital allocation decisions Agreement modeling and model review Transaction and investment analysis
  9. 9. Page 9 Global Tax and Economic Modeling Transaction and investment analysis Numbers are at the core of determining how to optimize a transaction, how to capture the most favorable economics or how to respond to a taxing authority’s inquiry. From evaluating production-sharing agreements to farm-in agreements and arrangements in light of the applicable petroleum laws and regimes, our team can assist you in evaluating transactions and investments. With its customized quantitative tax and economic modeling services, EY’s global team helps businesses make informed decisions based on rigorous analysis applicable to any stage of a transaction, including planning and structuring, implementation (pre- and post- closing) and potential taxing authority controversy. Our professionals combine technical knowledge in tax with substantial industry and capital markets experience and skill sets in economics, finance and modeling. This cross- disciplinary background uniquely positions EY to assist businesses in meeting their economic objectives. Scenario planning (and planning models) Constructing scenario analyses, such as Monte Carlo simulation, for key economic variables including interest rates, commodity prices, exchange rates and tax assumptions to test the impact of these drivers on a structure. Capitalization Multinational companies commonly use debt to finance internal or third-party transactions, implement reorganizations or modify their capital structure. We can assist in research and data gathering, cash-flow model construction, debt structuring, sensitivity and simulation analyses, and capital market analysis. We can also assist in impairment modeling and review. Capital raise We evaluate capital raise alternatives, including the preparation of illustrative examples to demonstrate the economics of various tax concepts to equity or debt investors and their financial advisors. We can also provide assistance with modeling the impact of alternative tax assumptions on projected cash flows and economic returns. Financial products Businesses often use financial derivatives to help achieve their desired tax planning and economic objectives. Quantifying the benefit(s) or cost(s) associated with such instruments is central to helping businesses achieve such objectives (interest-rate term structure models, warrants, swaps, hedges, puts and calls, among others).
  10. 10. Page 10 Global Tax and Economic Modeling Transaction and investment analysis: modeling to support an evolving project A robust economic and financial model which will meet the needs of the process and support decision-making is essential. Our Global Tax and Economic Modeling team has experience in both building and reviewing economic and financial models to support transaction and investment decisions. We will work with you to ensure that your model is able to support decision-making throughout the process from idea or concept through closing and beyond. Initial feasibility modeling Economic modeling Investment decision modeling Modeling for financial commitments High-level calculations with many options: ► General financing assumptions ► Broad-brush capex estimates ► High-level supply and offtake modeling ► Multiple options, e.g., with or without power station offtake, pipeline vs. vessel, alternative ownership options Reduced options and increased detail: ► Tax considerations ► More detail on appraisal costs, and indicative timing for development ► Illustrative financing ► Indicative financial statements Detailed modeling of locked-down contracts: ► Financing in line with proposed financing agreements ► Hedging ► Capital spend in line with Engineering, Procurement, and Construction (EPC) or purchase contracts ► Supply and offtake agreements to match contract details ► Scenarios to show key downside risks including Forex (FX), inflation and delays Further, with increased focus on risk and detailed investor returns: ► Shareholder tax consequences ► Equity structuring and guarantees ► Financial statements ► Impact of risks — cost overruns, delays, financing costs Evolving project
  11. 11. Page 11 Global Tax and Economic Modeling Transaction and investment analysis: select services Blueprinting and tax considerations Business modeling Tax modeling Evaluation of partners, counterparties or financial products Long-range planning Tax planning with respect to various tax considerations on a global basis Feasibility studies, blueprinting and design Provision of market insights on market rates of return or cost of capital for applicable structure or geography Review of current models and/or revenue income forecasts; development of base-case comparison model; and performance of compilation and analysis of results Development of tax and economic model that compares the benefits and risks of each investment identified during the blueprinting phase Determining acquisition value or price Evaluation of after-tax return on investment Capitalization strategies Evaluation of counterparty or partner economics, including the uses of various acquisition or transaction capital Identification and analysis of a variety of economic and financial instruments and products Comprehensive model providing insights and guidance with respect to future transactions, alternative investments, and the anticipated tax cost of alternatives and/or structure selection We understand the various structures and approaches required to represent your transaction. From capital costs to detailed contracts and precise financing, we can advise you on ways to structure the model to meet your requirements.
  12. 12. Page 12 Global Tax and Economic Modeling Capital allocation decisions Transaction and investment analysis Cash repatriation Government fiscal regimes Capital allocation decisions Agreement modeling and model review
  13. 13. Page 13 Global Tax and Economic Modeling Capital allocation decisions Determining the right allocation of capital among projects and investments Understanding total after-tax returns on projects Assessment of capital structure
  14. 14. Page 14 Global Tax and Economic Modeling Capital allocation decisions Determining the appropriate and optimal capital allocation is one of the most important and crucial responsibilities of senior management and leadership. To properly analyze the current state of capital allocation, as well as to properly analyze the strategy around future capital allocation decisions, a robust analysis ought to include both tax and economic factors, among others. EY’s Global Oil & Gas Tax and Economic Modeling team can develop interactive models that can aid in an evaluation of current capital allocation matters, as well as provide a flexible analysis for future capital allocation decisions, such as the following: ► Geography-based capital decisions ► Project-based capital decisions ► Timing-based capital decisions Whether a business is evaluating various investments in various geographies, or various forms of capital to fund internal or external projects, our team can supplement your analysis with our robust quantitative modeling services.
  15. 15. Page 15 Global Tax and Economic Modeling Transaction and investment analysis Cash repatriation Government fiscal regimes Capital allocation decisions Agreement modeling and model review Cash repatriation
  16. 16. Page 16 Global Tax and Economic Modeling Repatriation of stranded cash from global assets and operations Cash repatriation Scenario modeling to evaluate method and timing of repatriation, as well as optimal repatriation structure
  17. 17. Page 17 Global Tax and Economic Modeling Cash repatriation Chief financial officers and tax directors of multinationals are operating in an environment of intense scrutiny and challenge. Transactions, intercompany pricing, supply chains, structuring and funding are increasingly under the spotlight. More than ever, executives are looking to align their global tax position with their overall business strategy, to be competitive and provide value to shareholders. Our integrated and globally connected team can develop scenario planning and analysis to allow your business to evaluate global cash positions and avenues for cash repatriation. Using multidisciplinary teams, we work with you to help you manage global operational changes and transactions, and repatriation issues. We can develop robust scenario analyses to illustrate methods and avenues with respect to cash management and repatriation (as well as evaluation of a holding company structure).
  18. 18. Page 18 Global Tax and Economic Modeling Transaction and investment analysis Cash repatriation Government fiscal regimes Capital allocation decisions Agreement modeling and model review Agreement modeling and model review
  19. 19. Page 19 Global Tax and Economic Modeling Agreement modeling Verify that term sheets and transaction documents accurately reflect the desired transaction economics and highlight potential inconsistencies (along with recommendations for improvement) Analyze existing models to ensure that outputs are accurately calculated and properly projected (in line with the parameters of the legal or contractual agreement) Understand tax impact on overall economic results and provide solutions on alternative means of arriving at the desired outcome
  20. 20. Page 20 Global Tax and Economic Modeling Model review Financial models have become increasingly complex, and are often used to underpin more significant business decisions. In many cases, insufficient rigor is employed to ensure model integrity and models fail to meet the standards of governance applied to other business processes. We provide a range of modeling products and services that not only mitigate the risks in the use and reliance on financial models, but also support and augment strategic planning and decision- making. Mitigating model risk 1 EY is a leader among professional firms with an established team dedicated solely to the provision of business modeling services. Our modelers have a range of skills and backgrounds that enable us to effectively review a wide range of financial, tax and economic models. We have a wealth of experience in advanced modeling techniques, and diverse industry experience through our review of many hundreds of models. Experience in model reviews – our people 2 Our experience in reviewing models in the oil and gas sector shows that the vast majority contain significant errors and departures from modeling best practices. Such errors degrade model accuracy and place the decision quality at risk. It is inevitable that humans make errors. In a written document, this may manifest in an inconsequential typographical error. In a model, this can cause a critical flaw and result in an errant decision being made. Our experience tells us the types of errors that are frequently made and has led to the development of our tools and methodologies to locate model errors. Insights from our experience 3 We use proprietary tools that increase efficiency and let our teams focus on the more complex and risky areas of the review. While our findings are often large in number, they are categorized by the severity and nature that dramatically aids the modeler in their resolution. Using sophisticated analytical software and our in-depth modeling skills, we are able to provide corporations, banks, equity investors and other third parties with independent assurance that the relevant financial model is free from material errors. We are able to tailor our approach and services to address any specific needs. You can trust our reviews! 4
  21. 21. Page 21 Global Tax and Economic Modeling Risks and implications Our experience in performing many hundreds of model reviews has helped us identify many high risk indicators. These, together with the implications for model errors, are set out below. Flags for high-risk models ► Models attempt too much, get too complex ► Model is old and has grown from its original aim ► Spreadsheets bypass traditional system disciplines ► Model developed generically and not “custom-built” ► No segregation of inputs, calculations and outputs ► No data book or other documentation of assumptions ► Inconsistent formulae across rows ► Complex or non-transparent logic (e.g., nested IF statements) ► Circular references ► Inexperienced modeler ► Model constructed under time pressure Implications ► Management decisions are based on the model’s outputs. ► These decisions may, therefore, be based on inaccurate information. ► Wrong decisions can be made. ► In many cases, implementing decisions are expensive. ► This can affect the reputation and cause financial risk for the company and its management teams.
  22. 22. Page 22 Global Tax and Economic Modeling Transaction and investment analysis Cash repatriation Government fiscal regimes Capital allocation decisions Agreement modeling and model review Government fiscal regimes
  23. 23. Page 23 Global Tax and Economic Modeling Government fiscal regimes EY works with various stakeholders, including governments and public authorities, international organizations, such as the World bank, the European Bank of Reconstruction and Development, the United Nations, as well as national and international companies and industry associations. EY has strong experience and deep knowledge in designing and implementing government policies and fiscal regimes for the oil and gas industry, both for mature and emerging energy markets. We offer fully integrated services provided by our multidisciplinary team, which includes fiscal policy professionals, economists, business and tax modelers, and others, to provide our clients full-scope assistance with fiscal policy and government take matters. Our service delivery approach combines our core fiscal policy professionals team and geographical reach through our global network of experienced people with deep expertise in local markets, providing for tailored solutions and best-fit teams to suit specific client needs. EY has the experience and track record of successfully working both independently and also as a part of a broader project team (with technical advisors, investment bankers, strategic consultants and other third parties, including public relations teams). We provide a strong international brand that brings additional transparency, fairness and support to key decision-making processes.
  24. 24. Evaluate current government take and fiscal regime (including royalty regime) 1 Design or revise existing fiscal structures, whether sector-wide, for particular segments or classes of assets (e.g., conventional fields, unconventional resources, marginal fields, offshore fields, exploration activities, refining or petrochemicals) 2 Provide in-depth tax and economic analysis and modeling support for policy proposals, licensing matters, investment decisions, or fiscal regime design (including, but not limited to, benchmarking and competitiveness review and analysis, feasibility modeling and analysis, and implementation) 3 Provide support for policy representation and responses (including the development of responses or submissions or a review thereof); provide in-depth feedback, insight and recommendations to increase potential impact with policymakers and other key stakeholders Analyze potential impact certain policy proposals or changes may have on particular sector segments, companies, or businesses (or a combination thereof); design a framework to assess various impacts of such policy proposals, including tax and economic modeling analysis and support, qualitative support, and support with the development of responses and positions 54 We have deep knowledge in government take and fiscal regime modeling and analysis, and we have a business-oriented focus by working with upstream, OFS and downstream businesses. EY can assist you with respect to a vide range of fiscal regime and government-take-related analyses: How we can assist you Engage in discussions with key stakeholders and describe analysis, and provide support on technical matters, including international benchmarking — this can also include undertaking broader studies, research and analysis custom-made to fit your particular needs 6
  25. 25. Page 25 Global Tax and Economic Modeling Tax policy economics Tax policy development and analysis1 We work with organizations early in the process to develop and analyze tax policy proposals to achieve their objectives. Tax policy development includes identifying problems and noncompetitive features of the current tax system as they affect large firms or specific industries, quantifying the effects and providing tax policy options, or otherwise evaluating and analyzing important aspects of the tax system. Business tax competitiveness analysis to support a tax policy change 2 We provide organizations with detailed comparisons of their tax burdens with those of other types of firms or industries within a country or state, or across countries or states. This may help build the case for reducing or eliminating non-uniform taxation that places the organization at a competitive disadvantage. The competitiveness analysis can include comparisons of operating cost differences and selected taxes paid by employees. Revenue estimates 3 Organizations need to know the revenue effects of tax proposals before they publicly discuss their proposals. Given our experience, we can provide credible estimates before government estimates are available. Economic and fiscal impact analysis (of tax policy changes) 4 Our team provides organizations with detailed studies of the economic and fiscal importance of specific industries or facilities in a country or state’s economy. These analyses may include the impact of a significant new business investment on employment, income, revenues and economic growth in a jurisdiction, or the national and state macroeconomic impacts of major tax policy proposals. Our team assists organizations with: As part of a broad government fiscal regime analysis or a discrete, policy-focused engagement, specific tax or regulatory policies need to be addressed or analyzed often. We work with corporations, industry trade associations and business coalitions, to provide objective, empirical analyses of tax and nontax legislative and regulatory proposals and policies. We provide tax policy analyses, reports and modeling to help develop legislative strategies and to inform policymakers. Given our extensive government experience, we know the types of analyses which are highly effective with policymakers and their staff. We also provide empirical analyses for various state, local and national governments.
  26. 26. Page 26 Global Tax and Economic Modeling Government fiscal regime analysis Policy impact analysis Revenue estimation Economic and fiscal impact analysis Benchmarking and competitive analysis Estimation of economic impacts of changes in tax, trade and regulatory policy on the overall sector Estimation of the tax revenue that the government would receive from a change in tax policy (e.g., change in government take) Strategic planning Estimation of tax and economic impacts by project (e.g., execution of PSC, pipeline construction) Comparison of fiscal and tax regime competitiveness among peers and identification of methods for optimization Capital markets transactions Development of fiscal and tax framework for public market vehicles or other capital market instruments Cost-benefit analysis Estimation of the benefits of government tax incentives (jobs, tax revenue) vs. its costs Expenditure management and efficiency improvement
  27. 27. Page 27 Global Tax and Economic Modeling Our integrated team We have in-depth modeling knowledge in both developing and reviewing financial and tax models for a range of companies and within the oil and gas sector, as well as for governments and trade groups. Our tax and economic modeling professionals combine technical knowledge in tax with substantial industry and capital markets experience and skill sets in economics, finance and modeling. This cross-disciplinary background makes EY uniquely qualified to assist businesses in meeting their economic objectives.
  28. 28. Page 28 Global Tax and Economic Modeling ► Greg Matlock Global Tax and Economic Modeling Markets Leader greg.matlock@ey.com Partner, Global Oil & Gas Tax Leader dleith@uk.ey.com ► Derek Leith Partner, TAS, Valuation & Business Modeling CIS Lead anna.guseva@ru.ey.com ► Anna Guseva Associate Director, Business Valuation Group konstantin.kuryumov@ru.ey.com ► Konstantin Kuryumov Partner: EMEIA Head Oil & Gas Transaction Advisory Services jclark5@uk.ey.com ► Jon Clark Partner, Global Head of Tax Policy csanger@uk.ey.com ► Chris Sanger Assistant Director: Oil & Gas Transaction Advisory Services ecotton@uk.ey.com ► Emma Cotton Global Oil and Gas Tax Sector Resident aaron.puiszis@ey.com ► Aaron Puiszis EY National Tax – Transaction Economics Group amin.khalaf@ey.com ► Amin Khalaf Our Tax and Economic Modeling team members use their extensive knowledge and experience to recommend approaches that have been proven to be successful. EY National Tax – Transaction Economics Group kevin.richards@ey.com ► Kevin Richards EY National Tax – Transaction Economics Group andreas.pecher@ey.com ► Andreas Pecher
  29. 29. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2018 EYGM Limited. All Rights Reserved. EYG no. 00761-184GBL BMC Agency GA 1005085 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/oilandgas

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