Analyzing Competitiveness Fiscal RegimesConsultant’s Perspective

Irena Agalliu, Managing DirectorJuly 30, 2013USAEE Conference, Anchorage

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Race to the ‘top” or race to the ‘bottom”?

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Why Competitiveness Review?

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

ColombiaTurkeyPakistanKazakhstanBelizeVietnamPortugalSpainUkraineIndiaPNGOmanNorwayPolandTanzania

RussiaUKMingoliaFalkland IslandsDenmarkPNGGreeceCambodia

FrenceAustraliaNew ZealandSenegalGuatemelaNigeriaAlgeriaLibyaRussiaEast TimorRomania

AlgeriaBeninPolandVenezuelaChinaArgentinaJordan Equatorial GuineaAlaskaBoliviaAlbertaEcuadorTurkey

BulgariaHungaryRomaniaUzbekistanAzerbaijanNetherlandsRussiaEast TimorCameroonT&TUKSouth AfricaOman

MexicoKyrgystanGermanyIrelandChinaArgentinaBelizeEcuadorAlaskaUkraineUS-GOMChadPolandVietnamThailandBoliviaGuinea Bissau

IndonesiaAngolaNigeriaPakistanLibyaIndiaAlbertaNewfoundlandGuinea BissauYemenCyprusDRCIcelandVenezuelaSri LankaNova ScotiaNiger

VenezuelaColombiaKazakhstanEgyptUS-GOMAngolaRussiaIndiaIndonesiaHungaryNew ZealandHungaryYemen

VietnamAlbaniaKyrgystanBangladeshBritish ColumbiaArgentinaFalkland IslandsTanzaniaSurinamePNGTurkmenistanSpainMozambique

UKIndiaAlbertaBruneiKazakhstanGermanyCzech RepublicQatarPakistanVietnam

AlbertaKazakhstanIndonesiaNetherlandsRussiaBrazilAlaskaUzbekistanHungaryPortugalUKVietnamEcuadorT&TIsraelYemen

RussiaAustraliaKazakhstanUKAlbertaColombiaUkraineAlaskaMalaysiaPakistanIsraelEgypt

ColombiaUKAustraliaBangladeshIndiaUkraineIndonesiaMyanmarPeruT&TIraq

UKArgentinaBrazilRussiaNorwayAlaskaItalyPolandSri LankaAlgeria

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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.

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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

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Market – The Best Indicator

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$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

2005 2006 2007 2008 2009 2010

Mill

ion

Dolla

rs

Fiscal Year

Bonus

Rents

Royalty

Source: IHS CERA, data from ONRR

2006 2007 2008 2009 2010Louisiana $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

$0

$500

$1,000

$1,500

$2,000

$2,500

Bonu

s Bid

per

Acr

e (U

S$)

Source: IHS CERA

Interior Revenue from OCS

ACES Introduced

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

2005 2006 2007 2008 2009 2010 2011 2012

Mill

ion

Cana

dian

Dol

lars

Year

Bonus Payments

Source: Alberta DOE and IHS CERA.

Alberta Royalty Review (2007)

RoyaltyInventives

Gas Price Drops to$2.26/MMBtu

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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

• market challenges• cost of development 7

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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• Netback pricing to for cost of transportation

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Selecting the Peer Group – E&P Activity Scorecard

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0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50

Germany

Poland

U.S. Wyoming

U.S. Alaska

U.S. Louisiana

U.S. GOM shelf

Colombia

Malaysia

Indonesia

Canada (British Columbia)

Kazakhstan

India

Australia (Queensland)

Canada (Alberta)

Libya

United Kingdom

Algeria

Australia offshore

U.S. GOM deepwater

Norway

U.S. Texas

Angola

China

Venezuela conventional oil and gas

Russia

Brazil

E&P Activity Score

Oil Production

Gas Production

No. of New-field Wildcats

Acreage Leased

No. of Operators

Oil Reserves Added

Gas Reserves Added

Reserves per NFW

Success Rate

High Production LevelsHigh E&P Activity

High Exploration Success

Source: IHS CERA

0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00

U.S. TexasU.S. Louisiana

U.S. GOM ShelfU.S. Wyoming

Canada (Alberta)U.S. Alaska

Poland conventional oil and gasAustralia (Queensland)

ColombiaIndonesia conventional gas

Venezuela heavy oilRussia

IndiaUnited Kingdom

AlgeriaKazakhstan

ChinaLibya

MalaysiaU.S. GOM deepwater

NorwayAustralia offshore

AngolaBrazil

Venezuela gas

Field Size per New Field Wildcat (MMboe)

Source: IHS CERA

Field Sizes per New-field WildcatsE&P Activity Scorecard

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Finding Common Ground

NPVIRR PI

EMV

GOVERNMENT TAKE

GOVERNMENTS

What should be the basis for comparison?

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Why not rely on Government Take alone?

Pretax Cashflow

Government Take

Bonus

Royalty

Income Tax

Investor Net Income

Capital Expenditure

Operating Expenses

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Project Cash Flow Government & Investor Split of Pretax Cashflow

Components of Government Take

Mill

ion

$

57%

Source: IHS CERA

Pretax Cashflow Government Take

Bonus

Royalty

Income TaxInvestor Income

Capital Expenditure

Operating Expenses

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Project Cash Flow Government & Investor Split of Pretax Cashflow

Components of Government Take

Mill

ion

$

78%

Source: IHS CERA

© 2013 IHS 12

Composite Index

Index VariablesIndex CategoriesTotal Jurisdiction Score

Jurisdiction Score

Fiscal Terms

Government Take

P/I

IRR

Progressivity/Regressivity

Revenue Risk Timing of Revenue

Fiscal Stability

Type of Change

Nature of Change

Degree of Change

Frequency of Change

Weighted Score40 % weight

30 % weight

30 % weight

25%

25%

25%

25%

100%

20%

30%

40%

10%

© 2013 IHS 13

Fiscal Terms Index

•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

• Progressive fiscal systems• direct relationship - government take increases as profitability goes up

Score 5Score 0

• Low Government Take• High IRR• High PI• Neutral Fiscal System

• High Government Take• Low IRR• Low PI• Regressive/Progressive

Fiscal System

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Ranking of Fiscal Systems

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- 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50

Canada (British Columbia)Poland onshore

Norway offshoreIndonesia coalbed gas

Indonesia conventional gas offshoreAustralia offshore

United Kingdom offshoreAlgeria onshore

India offshoreMalaysia offshoreColombia onshoreGermany onshore

Australia (Queensland) coalbed gasU.S. Louisiana onshore gas

U.S. Wyoming gasChina offshore

U.S. Alaska New TermsCanada (Alberta) conventional oil

U.S. GOM deepwaterBrazil offshore

U.S. GOM shelfLibya onshore

Angola offshoreU.S. Texas onshore

Kazakhstan offshoreVenezuela conventional gas

Canada (Alberta) oil sandsRussia onshore

U.S. Alaska onshoreVenezuela heavy oil

Index Score

Gov Take

PI

IRR

Progressivity/Regresivity

Revenue Risk

Type of Change

Applicability of Change

Degree of Change

Frequency of Change

Government Perspective

Investor Perspective

Source: IHS CERA.

Government Perspective

Investor Perspective

Source: IHS CERA.

© 2013 IHS

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.

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