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(https://www.stonecapsecurities.com/PDFs/Reports/2012/November/Mart=Resources=Inc.%28Report11012012%29.pdf)
Mart Resources Inc.
November 1, 2012
16
Production Economics
Mart and its partners sell oil to Ente Nazionale Idrocaburi (ENI) under a Crude Sale
and Purchase Agreement. Umusadege field crude realizes a Brass River price, which
is slightly higher than Brent because of it
s lighter gravity and low sulfur content.
ENI takes delivery and title of the oil at the
time of a lifting (at least once a month) at
the Brass River terminal. Each month Mart
and its JV partners nominate the quantity of
oil to be delivered to ENI in the following month. ENI pays JV the price for the
nominated oil, whether or not the same
quantity was delivered. A delivered quantity
higher (underlift) or lower (overlift) than t
he nomination creates accounts receivable or
an account payable.
Production allocation
Mart’s share of the Umusadege field production after royalties, taxes and expenses
varies between 82.5% and 50%, depending on the size of capital expenditure during
the period. With ongoing exploration and development expenditure, we have estimated
a 65% allocation of field production.
Royalties and taxes
Marginal Field operators pay two types of produ
ction royalties: 1) government royalties
are payable to the Nigerian government; and 2) a “Farmout Royalty” is payable to the
original owners who released the particular field to the marginal field program. Both
royalties are based on a sliding scale formula whereby increasing production from the
field escalates royalty rates. At current level
of production, Mart’s effective royalty rate
is ~10% of gross crude oil sales.
Figure 10: Royalty rates
T otal field production (bpd) Government royalty Farmout royalty T otal
0 - 2,000 2.5% 2.5% 5.0%
2,001 - 5,000 2.5% 3.0% 5.5%
5,001 - 10,000 7.5% 5.5% 13.0%
10,001 - 15,000 12.5% 7.5% 20.0%
15,000 - 25,000 18.5% 7.5% 26.0%
Source: Company reports, Stonecap Securities Inc.
Oil and gas companies in Nigeria are subjected to two types of taxes. The Petroleum
Profit Tax (PPT) rate is generally 85%, but
applies at a 65.75% rate for marginal field
producers. Income taxes are payable at 32%
. Corporate income tax (CIT) on the risk
service fees is payable at 30% (a further 2% education tax is applied to all taxable
income (both in the PPT and CIT domains).
Although Mart receives its allocation of rev
enue after payment of PPT, this tax is in
reality payable by the operator (Midwestern/
Suntrust). The advantage to the operator
of an FPSA or an RSA contract is that payment
to the service contractor such as Mart
is deductible for PPT purposes, wh
ich reduces the effective rate.