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A Comparative Analysis of the Performance of Selected E&P Firms in the U.S. & Abroad

Professor Wumi Iledare, Ph.D.Senior Fellow, U.S. Association for Energy Economics

Distinguished Fellow, Nigeria Association for Energy EconomicsAssociate Editor, SPE Journal of Economics & Management

Professor, Petroleum Economics & Policy Research &Director, Energy Information Division

SPE ATCE 2009

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• Introduction• Research Objectives• Overview of FRS Companies• FRS E&P Firms’ Efforts & Outcomes• Modeling Approach & Results• Closing Remarks

Presentation Outline

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Objectives• Paper analyses quantitatively, FRS E&P firms

efforts and outcomes in the US and overseas• The paper evaluates and compares the

performance of these firms in an aggregate sense using Monte Carlo simulation process

• Determines the effect of tax regimes, prospectivity, and prices on empirical aggregate outcomes of EP efforts in the US and overseas

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Companies Reporting to the FRS, 1974-2009

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Companies Reporting to the FRS, 1998-2009

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Firms Reporting to the FR System• Original criteria was at least 1% of oil and gas

production or reserves in the U.S. or 1% of either refining capacity or petroleum product sales in the United States.

• In 1976 there were 27 FRS firms reporting domestic and foreign activities using Form EIA 28

• A simplified EIA was introduced in 1998 to make the survey more pragmatic because of the changing structure of the industry

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Role of FRS Firms in the U.S.

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Role of FRS Firms in the U.S.

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Liquid Production Dry Gas Production

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Role of FRS Firms in the U.S.

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Liquids Reserves Gas Reserves

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Role of FRS Firms in the U.S.

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FRS Firms’ Relative Reserves and Production in the US & Abroad

SPE ATCE 2009

FRS Firms’ Relative Performance in the US & Abroad –BOE Reserves Replacement

SPE ATCE 200912

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BOE Reserves per Efforts in the US and Abroad

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Model Specification

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On annual cash flow for a typical E&P venture :NCF = Gross Revenue - Royalty

- State & Local Taxes - Operating Expenses - Overheads (business & investment) - Capital Investments

- Bonus & Rentals - Net Taxes + Property Sales Price

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Model Specification

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Annual Taxable Income = Revenues – Royalties - Fiscal CostsFiscal allowable cost deductions include:OPEX, Royalty, Depreciation, Depletion Allowance,

Expensed InvestmentsRevenue (R) = Price (P) * Marketed Production (Q)

NCFATAX =NCFBTAX-TC(NCFBTAX-DD&A-I)PIR = 1+ [NCFATAX / (DD&A+I)]

NRE = (NCFATAX *SUCR)/CWELL

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Model Specification

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NCFBTAX= (1-β1-β2-β3)* RSUCR = successful completion rateI = interest payment on debt (loan) if allowedTC = the corporate tax rate, fractionΒi: (i=1,2,3) fraction of revenue for CAPEX,

OPEX, other CostR = annual Operating RevenueP= price of Output and Q=Output

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Descriptive Statistics of Data

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Descriptive Statistics of Data

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Deterministic Model Results--US

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Deterministic Model Results--FOR

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Deterministic Model Results

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Deterministic Model Results

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Stochastic Model Assumptions--US

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Stochastic Model Assumptions--FOR

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Stochastic Model Results--US

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Stochastic Model Results—Foreign

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Comparative Stochastic ResultsUS Foreign

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Stochastic Sensitivity Results

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Stochastic Sensitivity Results

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Summary & Conclusions

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This paper evaluates the sensiitvity of selected empirical indicators of global E&P industry dynamics to changes in crude oil prices, prospectivity, and drilling success rate and taxes using Monte Carlo simulation process. The simulation results are applied to evaluate whether investing in non-U.S. E&P ventures offers more promising rewards than investing in U.S. ventures using empirical modeling framework. The paper shows there is enough empirical evidence to suggest that positive changes in petroleum prices do matter much more than taxes and significantly and differentially across petroleum producing regions worldwide. Empirically, there is some empirical evidence to suggest that impact of tax burdens on E&P outcomes in the U.S. is significantly less than the outcomes abroad; but the impact of a higher tax burden, in a statistical sense, on the aggregate performance of E&P investments by FRS companies in the U.S. and abroad is significant.