Analyzing
Competitiveness
Fiscal Regimes
Consultant’s Perspective
Irena Agalliu, Managing Director
July 30, 2013
USAEE Conference, Anchorage
Race to the ‘top” or race to the
‘bottom”?
© 2013 IHS
Why Competitiveness Review?
Frence
Australia
New Zealand
Senegal
Guatemela
Nigeria
Algeria
Libya
Russia
East Timor
Romania
Russia
UK
Mingolia
Falkland Islands
Denmark
PNG
Greece
Cambodia
2003
© 2013 IHS
Mexico
Kyrgystan
Germany
Ireland
China
Argentina
Belize
Ecuador
Alaska
Ukraine
US-GOM
Chad
Poland
Vietnam
Thailand
Bolivia
Guinea Bissau
2004
Colombia
Turkey
Pakistan
Kazakhstan
Belize
Vietnam
Portugal
Spain
Ukraine
India
PNG
Oman
Norway
Poland
Tanzania
2005
2006
Algeria
Benin
Poland
Venezuela
China
Argentina
Jordan
Equatorial
Guinea
Alaska
Bolivia
Alberta
Ecuador
Turkey
Indonesia
Angola
Nigeria
Pakistan
Libya
India
Alberta
Newfoundland
Guinea Bissau
Yemen
Cyprus
DRC
Iceland
Venezuela
Sri Lanka
Nova Scotia
Niger
2007
Bulgaria
Hungary
Romania
Uzbekistan
Azerbaijan
Netherlands
Russia
East Timor
Cameroon
T&T
UK
South Africa
Oman
2008
Venezuela
Colombia
Kazakhstan
Egypt
US-GOM
Angola
Russia
India
Indonesia
Hungary
New
Zealand
Hungary
Yemen
Russia
Australia
Kazakhstan
UK
Alberta
Colombia
Ukraine
Alaska
Malaysia
Pakistan
Israel
Egypt
UK
India
Alberta
Brunei
Kazakhstan
Germany
Czech
Republic
Qatar
Pakistan
Vietnam
2009
Vietnam
Albania
Kyrgystan
Bangladesh
British
Columbia
Argentina
Falkland Islands
Tanzania
Suriname
PNG
Turkmenistan
Spain
Mozambique
2010
Alberta
Kazakhstan
Indonesia
Netherlands
Russia
Brazil
Alaska
Uzbekistan
Hungary
Portugal
UK
Vietnam
Ecuador
T&T
Israel
Yemen
2011
UK
Argentina
Brazil
Russia
Norway
Alaska
Italy
Poland
Sri Lanka
Algeria
2012
2013
Colombia
UK
Australia
Bangladesh
India
Ukraine
Indonesia
Myanmar
Peru
T&T
Iraq
3
Objective of Review
• Most common objective
• “Fair share” or “Fair return”
• There is universal consensus that the government and the public
should receive a fair share of the revenue from the oil and gas
resources.
• There is no standard or benchmark as to what that means
• Wade Locke – “fair share is a judgment or opinion that can neither be refuted
nor proven”
• Alberta Royalty Review 2007 – recognized the inherently subjective nature
of the fair share concept.
• Yet - concluded that Alberta was not receiving its fair share - without
properly defining the benchmark or justifying the reasoning for such a
conclusion.
© 2013 IHS
4
Effective Competitiveness Review
•
The review is accompanied with market analysis
•
The peer group is properly identified
•
Actual finding and development costs are being
used
•
There is a realistic perception of the resource
potential
© 2013 IHS
5
Market – The Best Indicator
$20,000
Interior Revenue from OCS
Bonus Payments
Bonus
$18,000
$4,000
Rents
Royalty
$16,000
Alberta Royalty
Review (2007)
Million Canadian Dollars
Million Dollars
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
Gas Price
Drops to
$2.26/MMBtu
Royalty
Inventives
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$2,000
$0
$0
2005
2006
2007
2008
2009
2010
2005
Fiscal Year
2006
Source: Alberta DOE and IHS CERA.
Source: IHS CERA, data from ONRR
2007
2008
2009
2010
2011
2012
Year
Bonus Bid per Acre (US$)
$2,500
ACES Introduced
$2,000
$1,500
$1,000
$500
$0
2006
2007
2008
2009
2010
Louisiana
$377.33
$527.94
$2,321.65
$1,107.16
$1,239.17
British Columbia
$358.54
$691.33
$1,383.37
$902.27
$871.16
Texas
$413.74
$267.66
$366.16
$277.97
$869.21
Alberta
$214.91
$149.28
$182.28
$165.31
$243.66
Wyoming
$46.67
$62.06
$77.44
$24.64
$167.85
Alaska
$22.86
$15.72
$25.00
$25.89
$14.78
© 2013 IHS
Source: IHS CERA
6
Peer Group Selection
•
•
•
•
•
•
Similar government objectives
Whether the jurisdiction competes for investment
in the global or regional market
Type of resources
Success of the particular jurisdiction in attracting
investment
Types of investors: global versus small regional
investors
Common characteristics with respect to
•
© 2013 IHS
•
market challenges
cost of development
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Reserves and Price and Cost
Assumptions
• Size and availability of remaining recoverable reserves
• Looking at actual fields in each jurisdiction versus hypothetical oil and gas
fields
• Reliance on hypothetical models
• Limited applicability – mainly theoretical
• Finding and development costs – mirror each investment environment
• Actual costs
• Technological challenges associated with each resource type
• Well productivity
• Water depth
• Distance from market, etc.
• Varying Commodity Prices
• Different market prices for gas
• Price differentials to account for quality of crude
© 2013
• IHS
Netback pricing to for cost of transportation
8
Selecting the Peer Group – E&P
Activity Scorecard
E&P Activity Scorecard
Field Sizes per New-field Wildcats
Brazil
High Production Levels
High E&P Activity
High Exploration Success
Russia
Venezuela conventional oil and gas
China
Angola
U.S. Texas
Norway
U.S. GOM deepwater
Australia offshore
Algeria
United Kingdom
Oil Production
Libya
Gas Production
Canada (Alberta)
Australia (Queensland)
No. of New-field Wildcats
India
Acreage Leased
Kazakhstan
Canada (British Columbia)
No. of Operators
Indonesia
Oil Reserves Added
Malaysia
Colombia
Gas Reserves Added
U.S. GOM shelf
Reserves per NFW
U.S. Louisiana
Success Rate
U.S. Alaska
U.S. Wyoming
Venezuela gas
Brazil
Angola
Australia offshore
Norway
U.S. GOM deepwater
Malaysia
Libya
China
Kazakhstan
Algeria
United Kingdom
India
Russia
Venezuela heavy oil
Indonesia conventional gas
Colombia
Australia (Queensland)
Poland conventional oil and gas
U.S. Alaska
Canada (Alberta)
U.S. Wyoming
U.S. GOM Shelf
U.S. Louisiana
U.S. Texas
Poland
0.00
Germany
0.00
Source: IHS CERA
© 2013 IHS
0.50
1.00
1.50
2.00
E&P Activity Score
2.50
3.00
20.00
40.00
60.00
80.00
100.00
120.00
Field Size per New Field Wildcat (MMboe)
3.50
Source: IHS CERA
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140.00
What should be the basis for
comparison?
GOVERNMENT
TAKE
GOVERNMENTS
EMV
IRR
© 2013 IHS
NPV
COMPANIES
PI
Why not rely on Government Take
alone?
$3,500
$3,500
$3,000
$3,000
Operating
Expenses
$2,500
$2,500
$2,000
Investor
Net Income
$1,500
$1,000
Pretax Cashflow
Government
Take
Project Cash Flow
$2,000
$1,500
Capital
Expenditure
$1,000
Investor Income
Income Tax
$500
Pretax Cashflow
Royalty
Bonus
$-
© 2013 IHS
Income Tax
57%
$500
Source: IHS CERA
Million $
Million $
Capital
Expenditure
Operating
Expenses
Government & Investor Split Components of Government
of Pretax Cashflow
Take
78%
Government
Take
Royalty
Bonus
$Project Cash Flow
Government & Investor Split Components of Government
of Pretax Cashflow
Take
Source: IHS CERA
11
Composite Index
Total Jurisdiction
Score
Weighted Score
Index Categories
40 % weight
Fiscal Terms
30 % weight
Jurisdiction Score
Revenue Risk
30 % weight
Fiscal Stability
© 2013 IHS
Index Variables
Government Take
25%
P/I
25%
IRR
25%
Progressivity/Regressivity
25%
Timing of Revenue
100%
Type of Change
20%
Nature of Change
30%
Degree of Change
40%
Frequency of Change
10%
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Fiscal Terms Index
Score 0
•
•
•
•
Low Government Take
High IRR
High PI
Neutral Fiscal System
Score 5
•
•
•
•
High Government Take
Low IRR
Low PI
Regressive/Progressive
Fiscal System
• Combines government take with measures of profitability
• Examines the relationship between project profitability and
government take
• Regressive fiscal systems
• relationship is inverse – government take declines as profitability increases and vice
versa
© 2013 IHS
• Progressive fiscal systems
• direct relationship - government take increases as profitability goes up
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Ranking of Fiscal Systems
Venezuela heavy oil
U.S. Alaska onshore
Russia onshore
Canada (Alberta) oil sands
Venezuela conventional gas
Kazakhstan offshore
U.S. Texas onshore
Angola offshore
Libya onshore
U.S. GOM shelf
Brazil offshore
U.S. GOM deepwater
Canada (Alberta) conventional oil
U.S. Alaska New Terms
China offshore
U.S. Wyoming gas
U.S. Louisiana onshore gas
Australia (Queensland) coalbed gas
Germany onshore
Colombia onshore
Malaysia offshore
India offshore
Algeria onshore
United Kingdom offshore
Australia offshore
Indonesia conventional gas offshore
Indonesia coalbed gas
Norway offshore
Poland onshore
Canada (British Columbia)
Government Perspective
Gov Take
PI
IRR
Progressivity/Regresivity
Revenue Risk
Type of Change
Applicability of Change
Degree of Change
Frequency of Change
Investor Perspective
-
Source: IHS CERA.
© 2013 IHS
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Index Score
14
Is Ranking Sufficient?
• Ranking eliminates fields with zero IRR
• Perhaps such resources will not be developed
• In-depth analysis needs to consider under what terms such fields may
become profitable – if at all
• Ranking assumes there will be a market for the stranded gas
• Is being in the middle of the pack incentive enough to develop the needed
infrastructure?
• Should the same terms apply to oil and gas?
• While ranking provides a measure for comparison, it does not
necessarily offer confidence that the system is perceived to be fair
by the market forces
• . The market test is often the best test for the fairness of a fiscal
system – such test is not without risk.
© 2013 IHS
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