DID YOU KNOW a change in 1% in the corporate income tax can negatively impact an E&P contract's Net Present Value by 8%?

1. 1.- SENSITIVITY ANALYSIS
AftermodellingdifferentscenariosofCITrates,wefoundthatchangingtheCITratebyonepercentage
point, (from 30 to 31) impacts negatively the Net Present Value by 8% (see table). This same variation
displaces the curve the cash flow curve to the dotted line (see graph).
2.- MITIGATING INSTABILITY
Contractors should be aware of the instability of CIT including its allowable deductions which are
contained in article 32 of the Hydrocarbons Revenue Law. Any change in the tax regime that affects the
original project economic balance (revenues – costs) at the time of awarding may be mitigated by the
contracts’stabilizationclauses.However,asmentionedinthelastpublication,SHCPhasnotpublished
yet the rules for applying the restoration of the economic balance.
alejandro suárez
provides specialized
assessment in oil contract's
fiscal regulations, modeling,
planning and reporting. He has
experience in analysis and
financial simulation of
petroleum fiscal systems for
the public and private sector.
alejandro.suarez@talanza.energy
marco cota is the founder
and CEO of Talanza where he
assists international energy
companies in the design and
implementation of
tailor-suited strategies for
their regulatory compliance
adjusted to the applicable
geopolitical context,
considering current and
upcoming regulations.
marco.cota@talanza.energy
contact
Paseo de la Reforma 483,
06500, Mexico City.
T. +52 (55) 7316 2228
1200 Smith St, 77002,
Houston, Texas.
T. +1 (713) 353 3952
www.talanza.energy
ANALYSTS
In our last publication, we highlighted the risks derived from an adjustment to the fiscal terms in
Exploration and Extraction contracts and the available protection mechanisms to mitigate such risks.
We said that fiscal elements can be defined by its legal stability (“stable” if they can be changed only
with contractors’ consent and “unstable” if they can be changed unilaterally by the government). In
thisnewdocument,wemoveastepforwardasweanalyzedifferentscenariostoestimatetheeconomic
impact of a variable fiscal regime over a typical E&P project lifetime.
The following two graphs show government take distribution and its behavior in a License Contract
(“LC”) and its fiscal elements. We marked with (*) the Additional Royalty (stable) and the Corporate
IncomeTax(“CIT”)(unstable)astheyarethemainfiscalcontributionsofanE&Pproject(38%and29%,
respectively).
Other sensitivity examples
Thesamescenarioanalysiswasappliedto
the Additional Royalty (stable element),
in which the impact on the net present
value of the project ranges from
-3% to -16%.
LC
Royalty
22%
Additional
Royalty
38%
Corporate
Income Tax
29%
Contractual fee
for the exploratory
phase 0.25%
E&E activity tax
11%
*
*
january 2019
Scenarioanalysisforfiscalregime
andstability
CIT % CIT NPV
30
31
32
33
34
35
3%
7%
10%
13%
17%
-8%*
-14%
-22%
-30%
-36%
Sensitivity
64
3%
7%
10%
13%
17%
62
60
58
56
54
-3%*
-6%
-9%
-13%
-16%
20
15
10
5
0
-5
-10
-15
-20
-25
mmusd
Royalty
Contractual fee for the exploratoy phase
Coporate Income tax
Additional Royalty *
E&E activity tax
Net Cash flow
Change in net Cash flow*
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
years
20
15
10
5
0
-5
-10
-15
-20
-25
mmusd
Royalty
Contractual fee for the exploratoy phase
Coporate Income tax *
Additional Royalty *
E&E activity tax
Net Cash flow
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
years
Comprehensiveenergyregulatory
consultancygivenbyformerkey
officialsthatparticipatedinthe
designandimplementationofthe
newenergymodel.
InTalanzaweprovideservicesof
advancemodellingforfinancial
evaluationintheMexican fiscal
regime,developedbyformerofficials
inchargeofthedefinitionand
evaluationofcontracts’fiscal
behavior.Thishasbenefittedour
clients’cashflow-relateddecision
makingprocesses.
1.
For the Exploration and Extraction
Activity tax (unstable element) there is a
lower impact applying the same scenari-
os. The variation goes from
-0.6% to -3.2%.
2.
Royalty NPV mmusd Sensitivity
63.98
3%
7%
10%
13%
17%
63.62
63.14
62.77
62.41
61.93
-0.6%*
-1.3%
-1.9%
-2.5%
-3.2%
NPV mmusd Sensitivity
E&E
Activity
tax