Introduction
Exxon Mobil Corporation is a multinational corporation that deals with oil and gas production. Having its headquarters located in Irving, Texas, Exxon Mobil Corporation has its shares enlisted in the New York Stock Exchange. The company as well trades its shares in Dow Jones and S&P 500 Component. The company reserves an average of 70 billion oil barrels every year.
Exxon Mobil Corporation has about 40 oil refineries brances in about 20 countries in the world. Having been formed in 1870, the company has emerged as one of the largest refiner in the world. Averagely, Exxon Mobil produces about 3.9 million barrels of oil. Exxon Mobil Corporation majorly markets its products through the brands of Mobil, Esso and Exxon (Casper & Matraves 2003, p. 112).
Global operating divisions
The company has a range of divisions, which helps the firm to carry out its activities effectively. The first category is upstream, which majorly deals with oil exploration, wholesale operations, shipping of diverse oil products as well as extraction. The upstream division is located in Houston, Texas.
The downstream division is located in Fairfax, Virginia and chiefly deals with retail operations, refining and marketing. The chemical division is as well located in Houston, Texas and mainly deals with a range of chemicals produced by the company for different purposes (Peteraf 1993, p. 7).
African National Oil Corporation
African National Oil Corporation is amongst the largest oil companies, which dominates the large part of Sub-Saharan desert. The company is based in Tripoli, Libya and merely deals with upstream and downstream products.
Founded in 1970, the company has grown to own several subsidiaries in the continent such as Zawia Refining, RASCO, Brega, North African Geophysical Exploration Company and National Oil Fields among others. Although the company is state-owned, its chairperson Nuri Berruien and Abdulrahman Ben Yezza have enabled the company emerge as one of the very competitive oil companies in the world.
African National Oil Corporation output accounts for over 70% in Libya (Wittner 2003, p. 12). Indeed, Libya is said to have the largest oil reserve in Africa. Other countries that have almost equal reserves include Nigeria and Algeria. As is the case with other countries in Africa, Libya is a member of OPEC (organization of petroleum exporting countries).
The Sirte Basin province was ranked 13th amongst other provinces in the world as having high-level of petroleum. The province is chiefly known to have reserves of 37.8 trillion cubic feet of gas and 0.1 Gbbl of natural gas in liquid form.
Libya has managed to bring its economy into control through manipulation of the oil resources policies. It has been estimated that oil products generates about 95% of the total export earnings and contributes about 50% of the GDP computed to stand at about $50.2 billion in the year 2006.
Onshore gas field
After exploring and carrying out an appraisal program in a potential oil field, which is about 200km south of the Mediterranean Sea, it was confirmed that the field needs about 150 wells, although the field will also need pipelines. The pipeline facilities would include condensation recovery facilities, as well as dehydration plants.
A pipeline of 220 kilometers would be laid somewhere in the land from the coast. In addition, a new liquefied natural gas terminal would be built. The appraisal program also confirmed that specialized LNG vessels would be built, as it would help to ship gas to a given terminal along the U.S. coast (Amable 2003, p. 46).
Exxon Mobil Power Production Sharing Contract Proposal
As scholars define it, Production Sharing Contract is a kind of contract that is signed between companies that desire to extract resources, especially oil firms and governments that own natural resources and wishing to attract contractors. Mostly, governments usually give a contractor some powers to conduct exploration related activities as well as production.
In this situation, a company always bears all risks associated with exploration and developing the field to become significant in production of a given natural resource. After a company is through with development, it may start producing a natural resource such as oil. In many circumstances, a company is always allowed to use profit from the resource in recovering its capital in addition to operating expenditures.
The amount associated with recovering the costs is widely recognized as cost oil while the profit left after allocating revenues to all oil costs is referred to as profit oil. The oil profit is normally shared between the government and the contractor. Previously, most companies have been earning 20% of the profit while government goes with a whopping 80% of the oil profit.
Production sharing contract has become effective for countries that lack expertise in oil production as well as capital required for oil exploration and development (Hollingsworth 2000, p. 45).
Most countries in Africa often attract foreign companies in production of oil related products with a view that it would be able to own production facilities after a given period. It is also apparent that most African countries lack expertise in oil production and sometimes they end up producing substandard products. Therefore, it is advisable for foreign companies to be given a chance as far as oil exploration is concerned.
Signature Bonus
Because it is mostly used in oil producing countries, the signature bonus system tends to make an upfront payment to the country owning resources. The upfront payment enables a foreign company to begin its operations within a designated locality of in the host country. Frequently, this system has been accepted because a given company has the right to exploit natural resources in an approved region.
Exxon Mobil will embrace the signature bonus initially by paying $0.1 billion before beginning its operations. The 0.1 billion is assumed that it would strongly attract ANOC in considering Exxon Mobil as the best foreign company in exploring and producing gas that will be shipped to the East coast of the U.S.
However, this figure is much high as compared to what other companies would have proposed (Kanniainen & Keuschnigg 2005, p. 145). Nevertheless, the company is hopeful that 0.1 million will be recovered within a short period. In fact, it would be more reasonable to sign for such huge bonuses given the fact that Sirte Basin province was ranked 13th amongst other provinces in the world.
Therefore, the reserves of 37.8 trillion cubic feet of gas and 0.1 Gbbl of natural gas in liquid form assures that Exxon Mobil will certainly stand a chance of compensating all expenditure expended in oil production in all fields.
The signature bonus amount is expected to put off other companies from getting the contract of producing liquefied natural gas in a field of length 220 kilometers south of Mediterranean Sea. The company expects date of operation to begin from February 15 2012 and probably stop its operation on February 15 2037.
This duration is anticipated to remain unchanged unless unpredictable events that are binding for the termination of operation occur within the duration of operation.
Exxon Mobil will comply with all requirements signed under the signature including exploiting only designated area, bringing its technology of production in the area, proving enough it has more than minimum capital requirement of 8 billion US dollars. Exxon Mobil has a good reputation of not breaking terms and conditions provided on the contract.
Royalties
Royalty is very important in power sharing contract since at this point title of ownership passes on to contractor. For the ownership to pass on to a contractor, a licensee must pay a certain amount of money commonly known as royalty fee. After a licensee have paid the royalty fee he/she is given go ahead of using natural resources provided by licensor.
In this regard, Exxon Mobil will acquire ownership for 25 years by offering an upfront payment of $.1 billion. The payment will be made before the commencement of operations. The upfront payment of $.1 billion is anticipated to give Exxon Mobil a competitive advantage over other petroleum and gas producing companies such as Galana Oil Company.
However, the company will later pay stream of a given ratio of the revenue received from operations. Nevertheless, Exxon Mobil will begin distributing annual 15% of total revenue at the end of 5th year. Exxon Mobil anticipates that it will be able to generate total revenue of 3,202,580,645 pounds at an annual basis.
Exxon Mobil believes that the remaining 85% of revenue will be able to pay for other costs associated with investment such as exploration costs, development cost and production costs, which are specifically incurred before commencement of selling of liquefied natural gas. Exxon Mobility will however, embrace sliding royalty scale, which is as shown below in order to reap optimally from the gas production.
Production per day Royalty percentage
8,000 bbl per day and below 10%
8001 bbl-15,000bbl per day 15%
15,000 bbl per day and above 20%
The above sliding scale denotes that when the production level is low royalty payment will be low. This will defend Exxon Mobil from high level of losses incurred during low level of productions (Michael & McGahan 2007, p. 231).
Cost recovery
Cost recovery is a very important aspect in power sharing contract especially with production of liquefied gas at the field, which is estimated at 200 kilometers south of the Mediterranean Sea. The cost recovery part of Exxon Mobil and ANOC contract will enable both parties to understand clearly, which costs are recoverable and which will be recovered within a designated period.
In particular, Exxon Mobil will face partly exploration costs, development costs as well as the production costs. However, production costs are only counted up to the period when a product will be able to sell in the market. Exxon Mobil will be able to determine the period within which it would be able to recoup all investment costs aimed towards producing liquefied natural gas.
Exxon Mobil will comply with 100% payment policy of all costs incurred in the operation. Exxon Mobil will be free to allow ANOC to participate in production of liquefied natural gas up to the percentage of 45%. Exxon Mobil will be ready to recover all expenditures if production of liquefied natural gas will be sufficient.
This means that the gas produced should be able to meet a target of average revenue of 3,202,580,645 pounds every year. In addition, Exxon Mobil will agree with ANOC that it facilitate recovery of annual costs with maximum of 60% of the revenue generated during the period.
Allocation of profit gas between ExxonMobil and the African National Oil Company
From the Exxon Mobil perception, it is wise to pay royalties first, although it is a law for the companies to pay royalties first. From the royalties, Exxon Mobil will as well be required by law to pay all taxes including both local and state taxes. The final payment will be charged for all costs associated with the explorations, development and production activities.
The remaining amount after the subsequent charges is normally referred as profit gas, which will be available for both ANOC and Exxon Mobil. The amount is expected to be distributed at the ratio of 6:4. To calculate the amount, which will directly go to the government, it would be necessary to get all costs.
In the case of Exxon Mobil, it is anticipated to pay annual production tax of 4%, 15% of royalty in addition to maximum (cost gas cap) of 60% of annual revenue. In this circumstance, a profit gas of 21% [100 %-( 60%+15%+4%)] will be distributed between the government of Libya and Exxon Mobil at the ratio of 6:4. This means that Exxon Mobil will only make away with 4%of the 21% average annual revenue.
However, the government of Libya will share the remaining 6% of the 21% revenue with the state-owned company at the ratio of 7:3. The percentage allocated to the state-owned company is meant to improve facilities owned by ANOC in different regions of Libya and abroad.
The government is expected to depend on the revenue for various government expenditures such as ensuring high level of education. This can be judged in such a manner given the fact that Libya oil industry makes 90% of exports (Ghemawat 1999, p. 10).
Profit taxes
Exxon Mobil will pay taxes in accordance with the law taxes provided in Libya. Libya requires that all domestic companies pay corporate tax of 30% while foreign companies will be charged at the rate of 40%. In addition, the charges are imposed at both the local level and state level. All-inclusive, it is expected that every foreign company will have to pay the entire 40% of its before-tax revenue.
The tax before revenue will be perceived as all revenues collected less all costs associated with investment and production, as well as royalty fee and the upfront bonus signature fees. In addition, the liquefied natural gas, which will consequently be transported to the East coast of the U.S.A., will as well be charged export taxes at the rate of 9%.
Accounting standards and foreign exchange
Exxon Mobil has dedicated itself towards using the full cost method in analyzing its expenses and revenues. For this reason, the company will frequently allocate its entire expenses to the balance sheet regardless of whether the firm would successfully locate the natural gas reserves or not.
The exploration costs are always indicated in the balance sheet as long-term costs although the GAAP requires all costs to be charged against the generated revenue for the specified financial period since the assets are used on a daily basis. The company is expected to convert the US dollar into sterling pounds at the rate of US $1.5 for every one sterling pound.
Export rights
Exxon Mobil will enter into contract with ANOC to allow it to export most of its unrefined liquefied natural gas to the East coast of the U.S. for further processing. Exxon Mobil will however pay the export tax of 9% of the total cost of entire liquefied natural gas shipped to the U.S.
Duration of contract phases and relinquishment
The contract is expected to last within the duration of 25 years. The 25 years include the 4 years, which ultimately do not generate any revenue. The four years will also include the payment of the yearly investment cost of US$2 billion, which will total to US$8 billion for the 8 years. In the remaining 21 years, the company expects to generate3, 202,580,645 pounds on an annual basis.
Nevertheless, termination of the contract may occur before the expiry date of the contract given that Exxon Mobil will fail to comply with the rules outlined on the contract such as failure to pay royalty fees or other costs negotiated between the government and Exxon Mobil’s directors.
Meeting predetermined objectives of ANOC
Technology Transfer
Exxon Mobil is expected to transfer sophisticated methods of productions to Libya. This will include bringing experts in gas exploitation in Libya as well as advanced facilities that would help in production of liquefied natural gas.
Exxon Mobil is focused towards training the local residents in a bid to empower them with sufficient knowledge concerning gas production as well as oil products exploitation (Besanko & Dranove 1996, p. 67).
Development Local content
Exxon Mobil will as well plan to improve the society of Libya by offering several incentives.
Infrastructure development
Exxon Mobil is focused towards helping Libya in improving its infrastructure. Exxon Mobil will particularly improve electricity in the north part on Libya. Exxon Mobil is as well planning to improve road network throughout the country with a grand of US$20 million.
Apart from roads and electricity, Exxon Mobil is dedicated towards improving the level of education by pumping in US$30 million (Gompers & Lerner 2004, p. 58).
Laying 225 kilometer pipeline
Exxon Mobil is planning to lay a pipeline approximately 225 kilometers south of Mediterranean coast. The pipeline is budgeted at US$1million for every kilometer. It is also expected that Exxon Mobil will spend 2% of the planned operational expenditure. Exxon Mobil will contract a more competitive firm.
In this respect, it would be wise for Exxon Mobil to choose PIPECO for the development as well as laying of 225-kilometer pipeline south of Mediterranean sea. The PIPECO has more competitive services as well as cost effective services that would help the entire work carried out during the production of gas effectively. The PIPECO covers the following scope.
Engineering Design
PIPECCO mostly imports its pipeline products from Germany, which are perceived to be stainless. PIPECO will help Exxon Mobil to lay pipes across the field in a manner that will run through areas, which are highly expected to have high level of gas. The company is also expecting to install about 30 natural liquefied gas terminals. The pipelines are expected to serve the area within the duration of 30 years before replacement.
Procurement
The pipeline, which will be laid on the ground, will be imported from Germany. The stainless steel pipe will be purchased at the cost of US$100 for every meter. The terminals will also be equipped with special terminals that will be purchased from France. All terminal equipments are expected to be purchased at a cost of US$1 million.
Pipeline construction
The pipeline construction will involve a number of issues including trenching, welding as well as reconstituting the route. The company will dig about 0.5 meters to 3 meters below the ground in order to lay the pipes, which will transport natural liquefied gas towards the coast to be shipped to the U.S. Welding will be done in order to allow the joining of laid down pieces of pipes across the 225 kilometer route.
The construction will begin from the inland and finalize with terminals that would be situated at the coast. The construction of pipelines is estimated to cost US$1 million for very kilometer. PIPECO is expecting that Exxon Mobil would consider this affordable as compared to what other companies might be offering (Hall & Soskice 2001, p. 89).
5 years operation
PIPECO is expecting to run and maintain the laid down pipes for about 5 years from the time of construction. PIPECO realized that it would take Exxon Mobil 4 years to execute all activities pertaining to investment during this period and therefore, it will hardly earn anything from the investment.
Exxon Mobil is expected to start generating revenue on the 5th year. Due to this, PIPECO will remain on the ground to ensure the pipes remain effective for gas production within the designated period of 5 years.
Before the installment of the pipes, PIPECO will dedicate its time in advising Exxon Mobil on the best pipes to lay on the ground, which perhaps will remain effective for over 30 years without the need for replacement. In addition, PIPECO will advice Exxon Mobil in areas that would prove efficient for pipes to be laid, which would include avoiding hilly areas that might require a lot of pressure to pump the liquefied natural gas.
Most importantly, Exxon Mobil should avoid populated areas and rather lay the pipes across regions with less population to avoid leakage of pipes through road construction and other underground activities that might interfere with the pipelines. Populated areas are also risky areas as they are more exposed to criminal cases such as banditry.
However, PIPECO is determined towards negotiating the price of laying down the pipes, although PIPECO will not accept any amount below US$800,000 due to risks associated with losses or facing increased cost of labor as well as procurement of the pipes. Exxon Mobil will mostly pay attention to services of PIPECO considering that laying of pipelines for various companies, which transport liquids, is its core business.
Payment associated with performance and equity investment
PIPECO will propose for a contract that will be based on performance. PIPECO would like to be rewarded in terms of its performance as well as equity investment. Payment based on performance would most likely attract Exxon Mobil since PIPECO would be paid less if its services are considered ineffective.
This means that PIPECO will endure to produce the best services followed by best engineering products. However, equity investment might not be attractive considering that Exxon Mobil might fail to perform in the market. Therefore, its shares would depreciate in value leading to losses (Oster 1994, p. 36).
List of references
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Ghemawat, P 1999, Games Businesses Play: Cases and Models, MIT Press, Cambridge.
Gompers, P & Lerner, J 2004, The Venture Capital Cycle, MIT Press, Cambridge.
Hall, PA & Soskice, W 2001, Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford University Press, Oxford.
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