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HMRC internal manual

Oil Taxation Manual

Capital gains: valuation of oil assets including shares: the discounted cash flow methodology of valuing fields - inputs

The input needed falls into three categories: field data (reserves, the production profile, capex and opex), tax rates and the variables such as the gas or oil price, foreign exchange rate and the discount rate. They should be based on what was known or expected at the time.


There is a distinction between hydrocarbons in place and recoverable reserves. It will be the recoverable reserves that are included in the production forecast. Contemporary technical data/documentation may be available from plans and technical reports, and there may be third party data too. If it is considered that there are outlying reserves to be taken into account, then the full cost of getting those reserves must be factored in.

The production profile

The production profile is vital for the valuation. It is a product of the start-up date, the recoverable reserves and the rate of extraction. Anticipation of production will enhance the NPV. The anticipation of development may have a negative effect on the NPV where, for instance, the negative value of cash flows before production commences are enhanced by being brought forward. Again contemporary operator development/budget plans and technical reports and third party data may indicate the profile expected.