Journal
INTERNATIONAL JOURNAL OF GLOBAL ENERGY ISSUES
Volume 35, Issue 1, Pages 43-63Publisher
INDERSCIENCE ENTERPRISES LTD
DOI: 10.1504/IJGEI.2011.039984
Keywords
valuation; separate cash flows; discounting; corporate finance; project valuation; tax design; tax structure; investments; investment decisions
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Oil project assessment using separate cash flow valuation (Jacoby and Laughton, 1992; Laughton and Jacoby, 1993; Emhjellen and Alaouze, 2002), presumes that the present value of the cost cash flow of oil projects can be calculated using a risk free rate. This paper examines whether this practise, at least to a first approximation, is reasonable. More specifically, the paper examines whether labour wage hours costs and steel prices - as cost factors in the investment cost stream - are systematic risk factors (i.e., have a beta different from zero). The paper also investigates whether oil price as a factor in the revenue stream is a systematic revenue factor. Separate cash flow evaluation has been discussed in relation to petroleum taxation. A petroleum tax commission in Norway stated that tax reductions due to depreciation should separately be discounted by a risk free rate. We discuss the role of partial cash flow discounting in tax design.
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