Fundamentals of Oil & Gas Accounting 5th Edition by Rebecca Gallun, Charlotte Wright

Exercise 8

Fortune Company enters into a risk service agreement with the Chilean government.
Fortune pays the government, in U.S. dollars, a $5,000,000 signing bonus and also
agrees to pay all of the costs associated with exploration, development, and production.
[The contract defines costs incurred in the exploration and development phase of each
project area as being capital costs (CAPEX), and all costs incurred in the production
phase as being operating costs (OPEX).]
Each year in which production occurs, the government agrees to pay Fortune a fee
comprised of the following:
a. All OPEX incurred in the current year
b. 1/10th of all unrecovered CAPEX
c. $0.40/bbl on production from 0 to 4,000 bbl/day, $0.60/bbl on production from
4,001 to 10,000 bbl/day, and $0.90/bbl on production above 10,000 bbl/day.
The maximum total fee that will be paid in any year is $1.20/bbl times the total number
of barrels produced. Any unrecovered OPEX or CAPEX (unrecovered due to the
maximum fee) can be carried forward to future years.
Assume that in 2012, production commences on the Llama Field. At that time, Fortune
had spent $10,000,000 on CAPEX, and during 2012, spends $3,000,000 in OPEX.
Production equals 5,000,000 barrels or 5,000,000/365 = 13,699 bbl/day.
REqUIRED: Compute the fee that Fortune Company would receive for 2012.