Comparative Assessment of the Federal Oil and Gas Fiscal ... · • New fiscal terms and incentives...
Transcript of Comparative Assessment of the Federal Oil and Gas Fiscal ... · • New fiscal terms and incentives...
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
Comparative Assessment of the Federal Oil and Gas Fiscal SystemsGoM Report PresentationContract # GS-10F-0318K
Order # 140M0118F0028
November 16, 2018
Washington, D.C.
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
Contents
2
Changes in Fiscal Systems2
Comparative Analysis of Current Fiscal Systems 3
Alternative Fiscal Systems 4
Comparative Analysis of Alternative Fiscal Systems5
Discretionary Royalty Relief6
Conclusions7
U.S. GoM Activity and Yet-To-Find Overview1
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US GoM Activity and Yet-To-Find Overview
3
Shallow Water
Deepwater
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Macondo Macondo
U.S. shallow water exploration and development have decreased dramatically since 2003
4
0
100
200
300
400
500
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
18YT
D
Shallow water (0-200m) exploration wells (2003-YTD)
Source: IHS Markit © 2018 IHS Markit
Num
bero
f Wel
ls
0
100
200
300
400
500
Shallow water (0-200m) development wells (2003-YTD)
Source: IHS Markit © 2018 IHS Markit
Num
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f Wel
ls
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In addition, U.S. shallow water GoM is the most mature of peer group regions
5
18.0
6.4
41.5
31.6
39.9
8.8
9.8
10.9
14.0
4.8
3.2
23.7
2.6
4.1
2.7
0 10 20 30 40 50 60
Brazil SW
Norway SW
Australia SW
United States SW
Mexico SW
United Kingdom SW
Volumes Produced Remaining proven and probable reserves Yet-to-find volumes
Shallow water: Discovered and yet-to-find volumes (Billion boe)
Source: IHS Markit © 2018 IHS Markit
Billion Boe
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Low yet-to-find volumes imply limited upside potential in U.S. shallow water GoM
6
2.6
2.7
3.2
4.1
4.8
23.7
0 5 10 15 20 25
United States SW
United Kingdom SW
Norway SW
Mexico SW
Brazil SW
Australia SW
Yet-to-find volumes
Shallow water: Discovered and yet-to-find volumes (Billion boe)
Source: IHS Markit © 2018 IHS Markit
Billion boe
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US GoM Activity and Yet-To-Find Overview
7
Shallow Water
Deepwater
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Macondo
U.S. deepwater GoM has similarly witnessed declines in exploration and development wells…
8
0
20
40
60
80
100
120
Deepwater (+200m) development wells (2003-YTD)
Source: IHS Markit © 2018 IHS Markit
Num
bero
f wel
ls
0
20
40
60
80
100
120
140
160
Deepwater (+200m) exploration wells (2003-YTD)
Source: IHS Markit © 2018 IHS Markit
Num
bero
f Wel
ls
Macondo
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…However, the region has yet to “mature” and has more upside potential as evidenced by yet-to-find volumes
9
-
5.3
6.5
10.7
12.0
7.1
16.4
17.3
63.7
7.6
20.0
9.2
6.8
18.0
55.9
0 20 40 60 80 100 120 140
Canada
United Kingdom
Guyana
Mexico
Norway
Angola
United States
Brazil
Volumes Produced Remaining proven and probable Yet-to-find volumes
Deepwater discovered and yet-to-find volumes (billion boe)
Source: IHS Markit © 2018 IHS Markit
Billion boe
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Brazil, Mexico and the U.S. deepwater basins are among the peer group regions with the highest yet-to find volumes
10
0.4
1.0
6.8
7.6
9.2
18.0
20.0
55.9
- 10 20 30 40 50 60
Canada
United Kingdom
Angola
Guyana
Norway
United States
Mexico
Brazil
Yet-to-find volumes
Deepwater: Yet-to-find volumes (Billion boe)
Source: IHS Markit © 2018 IHS Markit
Billion boe
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However, ~40% of the YTF barrels in U.S. Deepwater GoM are in the Lower Tertiary, which presents significant technical challenges and low productivity
11
Deepwater GoM: Yet-to-Find Barrels (40 Year Forecast)
Source: IHS Markit
7.3
18.0
6.8
3.6
PleistocenePlioceneMioceneLower Tertiary Jurassic
0.3 0.0
Total
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Contents
12
Changes in Fiscal Systems2
Comparative Analysis of Current Fiscal Systems 3
Alternative Fiscal Systems 4
Comparative Analysis of Alternative Fiscal Systems5
Discretionary Royalty Relief6
Conclusions7
U.S. GoM Activity and Yet-To-Find Overview1
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Governments tend to react to changes in oil price, adjusting fiscal terms to maintain competiveness
13
• Governments have both given incentives or tightened fiscal terms in reaction to variations in oil prices
• Historically, government take has increased during periods of rising and high oil prices
• Over the past 4 years, most countries that have changed fiscal terms have improved them, in response to lower oil prices
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Most of the jurisdictions in the peer group improved fiscal terms in the last 4 years…
14
2018201720162015
• Reduces SC from 32% to 20%
• Reduce PRT from 50% to 35%
• Reduces Supplementary Charge from 32% to 20%;
• Introduces basin wide investment allowance for SC;
• Reduces rate of PRT from 50% to 35%
UK
• Reduces Supplementary Charge from 20% to 10%;
• Permanently reduces PRT to 0%
UK
BR• Changes from
mandatory to optional participation by Petrobras in pre-salt
• Reduces corporate income tax
• First year bonus depreciation of 100%
• Offers lower royalty rate for shallow water
• Repeals royalty valuation rule
US
BR• Extending the validity
of the temporary import regime by 20 years
NL• New Generic Royalty
– increased rates and no uplift
BR • Reduced royalty for marginal fields
• Transferable tax history for late-life assets
UK
UK • Funding geological surveys
AU • Diverted Profits Tax introduced
AO• New gas law offering
lower tax for gas• New fiscal terms and
incentives for marginal zones
• Royalty valuation rule
US
AO• Incentives for
marginal fields
HigherGOV Take
Lower GOVTake
Source: IHS Markit © 2018 IHS Markit
Changes in E& P fiscal terms (2015-18)
NL• Increases provincial
income tax from 14% to 15%
• Lowered uplift for exploration expenditure for PRRT
AU
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…and these changes typically amounted to reduced government take in an effort to increase competitiveness
15
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The United Kingdom has been one the most pro-active peer group members and is starting to witness the first impact of its policies on E&P Activity• The UK government launched an independent review of
the oil and gas fiscal regime in 2013, which ultimately led to the following policy changes:
• Reduced supplemental charge from 32% to 20% in 2015 and further from 20% to 10% in 2016
• Reduced rate of Petroleum Revenue Tax from 50% to 35% in 2015 and further from 35% to 0% in 2016
• Basin-wide investment allowances granted in recognition of significant capital costs of North Sea projects
• Decommissioning Relief Deeds in 2013 to provide tax relief on decommissioning costs
16
0%
10%
20%
30%
40%
50%
60%
70%
2011 2018
UK: Government Take (2011 vs. 2018)
%G
over
nmen
t Tak
e
Source: IHS Markit © 2018 IHS Markit
62%
40%
0100,000200,000300,000400,000500,000600,000700,000800,000
2011 2012 2013 2014 2015 2016 2017
UK: Offshore oil and gas production
Source: IHS Markit © 2018 IHS Markit
Mbo
e
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Brazil has enacted fiscal reforms that have been well-received by operators, reflected in higher bid round bonuses in 2017• Brazil introduced reforms from 2016-18 to attract
investment in oil & gas from private operators
• As a result of the reforms, the following changes were introduced that impact oil and gas fiscal terms:
• Elimination of Petrobras mandatory participation
• Relaxation of local content, which helped reduce frequent cost overruns and schedule delays
• Extension of REPETRO import exemption regime
• Lowering of royalty rates on incremental production for mature fields (announced September 24, 2018); rates range from 5.0% to 7.5% based on field size
• The Brazil reforms were well-received operators, as the 2017 ANP bid-rounds collected $3.9 billion in bonuses versus $2.4 billion in 2013; it is too early to judge their impact on exploration and appraisal
17
0.0
1.0
2.0
3.0
4.0
5.0
2013 2017
Brazil: ANP Bid-Round Bonuses
Source: IHS Markit © 2018 IHS Markit
$Bill
ions
Legend: ANP - National Petroleum, Natural Gas and Biofuels Agency of Brazil
$108 $73Avg. Brent Crude Price ($/bbl)
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The United States decrease in corporate tax and royalty rate contributed to a moderate increase in the interest in the Gulf of Mexico
• Both the corporate income tax and the royalty rate reduction in the shelf were introduced in 2017
• The Tax Cuts and Jobs Act of Dec 2017 reduced the corporate income tax from 35% to 21%
• The shallow water royalty rate was decreased from 18.75% to 12.5% in 2017 for new leases
• Difficult to assess full impact of these initiatives given it takes 2-3 years to assess impact of policy decisions
• Licensing activity recovered moderately from lows in 2016, reaching 6,500 square kilometers in 2018
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0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2011 2012 2013 2014 2015 2016 2017 2018
U.S. Gulf of Mexico leased acreage
Source: IHS Markit © 2018 IHS Markit
Squa
re k
m
Royalty Rate Reduction & Corporate Income Tax Reform
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Contents
19
Changes in Fiscal Systems2
Comparative Analysis of Current Fiscal Systems 3
Alternative Fiscal Systems 4
Comparative Analysis of Alternative Fiscal Systems5
Discretionary Royalty Relief6
Conclusions7
U.S. GoM Activity and Yet-To-Find Overview1
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Comparative analysis of current fiscal systems
20
Shallow Water Gas
Shallow Water Oil
Deepwater Gas
Deepwater Oil
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The U.S. government take is the third lowest after the UK and Australia for shallow water gas projects
21
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In the U.S. Fiscal Regime, only 8% of the discounted barrel flows to the operator for a 30MM boe gas field at base case prices
22
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Operators IRRs for the shallow water peer group confirm the challenging economics of gas fields in the US GoM
23
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The NPV/boe benchmarking for base case prices, shows the limited value that could be created for large and mid-size gas fields in the U.S. GoM
24
6.2
4.13.2
1 0.90.2
0
1
2
3
4
5
6
7
$/bo
e
NPV/Boe 100 MMboe Gas field
© 2018 IHS Markit
2.1 1.5 1.1
-3.9
-7.8
-13.4-16-14-12-10-8-6-4-2024
$/bo
e
NPV/boe 30 MMboe Gas field
© 2018 IHS Markit
-2.6 -2.6
-6.6
-11.3 -12.2
-14.8-16-14-12-10-8-6-4-20
$/bo
e
NPV/boe 10 MMboe Gas field
© 2018 IHS Markit
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
Most of the recent shallow water GoM discoveries are small and returns for small fields are not attractive enough to trigger activity
25
0
10
20
30
40
50
60
70
80
30-100 Mmboe 10-30 Mmboe 0-10 Mmboe
Num
ber o
f Fie
lds
2003-2018 - U.S Shallow water GoM discovery distribution
© 2018 IHS Markit
16%
13%
3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
100 MMboe 30 MMboe 10 MMboe
IRR: Shallow water base case - gas fields
Source: IHS Markit © 2018 IHS Markit
Inte
rnal
Rat
eof
Ret
urn
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Comparative analysis of current fiscal systems
26
Shallow Water Gas
Shallow Water Oil
Deepwater Gas
Deepwater Oil
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The U.S. government take is the second lowest after the UK for shallow water oil projects
27
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U.S. Gulf of Mexico shallow water fiscal system is the most competitive for a 30 MMboe oil field at base case prices
28
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Operators IRRs for the shallow water peer group confirm the competitiveness of the U.S. fiscal system
29
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Comparative analysis of current fiscal systems
30
Shallow Water Gas
Shallow Water Oil
Deepwater Gas
Deepwater Oil
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U.S. deepwater gas government take is the second-highest; combined with reservoir depths and low gas prices, economic potential is challenging
31
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Only 1% of a “discounted barrel” of a gas field in U.S. GoM Deepwater, flows to the operator
32
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IRRs for U.S. Deepwater GoM gas projects are below typical operator hurdle rates
33
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Comparative analysis of current fiscal systems
34
Shallow Water Gas
Shallow Water Oil
Deepwater Gas
Deepwater Oil
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For deepwater oil projects, U.S. government take is the third lowest after the UK and Mexico
35
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U.S. government take ranks fourth among peers with respect to share of revenue that flows to operators
36
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U.S. GoM Deepwater IRRs are not competitive, particularly with Brazil, Angola, Guyana and Mexico
37
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The IRRs benchmarking for large oil fields highlights the limited competitiveness of U.S. Deepwater GoM fiscal terms
38
32%
27%25% 25%
22% 21%
16%
6%
0%
5%
10%
15%
20%
25%
30%
35%
Deepwater - Oil - 500 MMboe - Base Case
Inte
rnal
Rat
e of
Ret
urn
43%
36% 36% 36%38%
29%
25%
15%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Deepwater - Oil - 500 MMboe - High Case
Inte
rnal
Rat
e of
Ret
urn
18%
16%
0%
9%
0%
11%
0% 0%0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Deepwater - Oil - 500 MMboe - Low Case
Inte
rnal
Rat
e of
Ret
urn
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
The NPV/boe benchmarking confirms the limited competitiveness of US GoM
39
18.3
13.1
10.1 9.5 9.0 8.7
4.12.9
02468
101214161820
NPV/boe Deepwater 500 MMboe oil field - High Case
Source: IHS Markit © 2018 IHS Markit
$/bo
e
8.1
6.3
4.0 3.72.8 2.5
1.8
-1.8-4
-2
0
2
4
6
8
10
NPV/boe Deepwater 500 MMboe oil field - Base Case
Source: IHS Markit © 2018 IHS Markit
$/bo
e
1.8 1.6
0.2
-0.2
-1.8 -2.1-2.8
-5.8-7-6-5-4-3-2-10123
NPV/boe Deepwater 500 MMboe oil field - Low Case
Source: IHS Markit © 2018 IHS Markit
$/bo
e
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
Contents
40
Changes in Fiscal Systems2
Comparative Analysis of Current Fiscal Systems 3
Alternative Fiscal Systems 4
Comparative Analysis of Alternative Fiscal Systems5
Discretionary Royalty Relief6
Conclusions7
U.S. GoM Activity and Yet-To-Find Overview1
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Seven fiscal system alternatives have been defined and evaluated
41
Shallow Water
Deep Water
Categorical Royalty Relief
Sliding Scale Royalty (12.5% to 22.5%)
S.1.
S.2.
Reduced Royalty to 12.5% FixedD.1.
Increase Royalty to 20% FixedD.2.
Increase Royalty to 22.5% FixedD.3.
Sliding Scale Royalty (12.5% to 22.5%)D.5.
Categorical Royalty ReliefD.4.
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Shallow water alternative S.1. is a water-depth-driven categorical relief system – relief increases with water depth
42
• Applies to all leases in water depth less than 200m
• A Royalty Suspension Volume (RSV) of 5 MMboe is granted for each qualifying lease when oil prices are less than $85/bbl
• Field-level RSV determined by total number of relevant qualifying leases
Improves investor economics for marginal field sizes that might otherwise not be developed
Since most of recent discoveries and prospects are marginal in the shallow waters, it could stimulate activity
• Could affect royalty volumes payable to the U.S. government and thus total government take, but will create opportunities to generate tax revenue from marginal projects and increased lease bonuses
Description Pros & Cons
Categorical Royalty ReliefS.1.
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Shallow water alternative S.2. is a sliding scale royalty system where the prevailing royalty rate is determined by prevailing oil prices
43
• Lessees pay a variable royalty rate based on oil and condensate sales prices
• Under this royalty alternative, only gas production is subject to the statutory royalty minimum of 12.5%.
• This scale is intentionally more onerous than the current statutory minimum of 12.5% in the shallow water Gulf of Mexico.
• Overall increases the U.S. government take, potentially enabling more revenue, depending on how much activity is affected
• Activity likely to be negatively affected, due to reduction of the upside potential for operators
Description Pros & Cons
Sliding Scale Royalty (12.5% to 22.5%) S.2.
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Deep water alternative D.1. is a fixed royalty rate lower than the currently applicable rate
44
• This alternative lowers the oil production royalty rate to the statutory minimum of 12.5%
• Makes producer economics better while also making the U.S. system more competitive
• Improves regional competitiveness by lowering and narrowing range of government take, and makes the regime less regressive
• Provides incentive for exploration and development activity
• Could reduce the government revenues if the additional income due to increased activity and improved licensing bonuses do not offset the reduced revenue from royalties
Description Pros & Cons
Reduced Royalty to 12.5% FixedD.1.
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Deep water alternatives D.2. and D.3. are fixed royalty rates higher than the currently applicable rate
45
• These alternatives increase the oil production royalty rate to 20% or 22.5%
• Reduces producer expected returns
• Potentially increases the government revenue, depending on how much activity and licensing bonuses are affected
• Increases and expands the range of government take, and makes the regime more regressive
• Reduces attractiveness of U.S. GoM for operators, could lead to reduced activity and future production
Description Pros & Cons
Increase Royalty to 20% or 22.5% FixedD.2. D.3.&
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
Deep water alternative D.4. is a water depth driven categorical relief system –relief increases with water depth
46
• Applies to all leases in more than 200m of water depth
• The Royalty Suspension Volumes (RSVs) of 20, 40 or 60 MMboe per qualifying lease is granted depending on water depth, applied when oil prices are less than $85/bbl
• Total project RSV determined by number of relevant leases and field water depth
Description Pros & Cons
Improves investor economics for marginal field sizes that might otherwise not be developed, including:
Miocene tiebacks Lower Tertiary Fields
• Powerful incentive to increase activity
• Could affect royalty volumes payable to the U.S. government and thus total government take, but will create opportunities to generate tax revenue from marginal projects.
Categorical Royalty ReliefD.4.
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Deepwater alternative D.5. is a sliding scale royalty system where the prevailing royalty rate is determined by prevailing oil prices
47
• Lessees pay a variable royalty rate based on oil and condensate sales prices
• Under this royalty alternative, gas production is subject to the statutory royalty minimum of 12.5%
• Provides cash flow protection for investors in periods of low oil price, while retaining upside for government revenues in periods of high oil price
• Activity likely to be negatively affected, due to reduction of the upside potential for operators
Description Pros & Cons
Sliding Scale Royalty (12.5% to 22.5%)D.5.
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Contents
48
Changes in Fiscal Systems2
Comparative Analysis of Current Fiscal Systems 3
Alternative Fiscal Systems 4
Comparative Analysis of Alternative Fiscal Systems5
Discretionary Royalty Relief6
Conclusions7
U.S. GoM Activity and Yet-To-Find Overview1
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
Comparative Analysis of Alternative Fiscal Systems
49
Shallow Water
Deepwater
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The two alternatives provide the government flexibility based on its goals for shallow water oil fields
50
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Australia Brazil Mexico Norway United Kingdom United States CategoricalRoyalty Relief
Sliding ScaleRoyalty
Government take: Peer group v. Royalty alternatives - Shallow water oil fields - low, base and high cases
© 2018 IHS Markit
Gov
ernm
ent T
ake
%
Source: IHS Markit
Note: The distribution of values from all cases are represented here. The boxes show the upper and lower quartile ranges of the government take in the respective jurisdictions. The whiskers show the extreme ranges. The lines in the middle represent the median
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
Categorical relief would make the U.S. the most competitive shallow water gas fiscal regime; sliding scale would increase take
51
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Australia Brazil Mexico Norway United Kingdom United States Categorical RoyaltyRelief
Sliding ScaleRoyalty
Government take: Shallow water gas fields - low, base and high cases
© 2018 IHS Markit
Gov
ernm
ent T
ake
%
Source: IHS Markit
Note: The distribution of values from all cases are represented here. The boxes show the upper and lower quartile ranges of the government take in the respective jurisdictions. The whiskers show the extreme ranges. The lines in the middle represent the median
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
However, the Categorical Relief does not improve the IRR of small gas fields projects enough to exceed typical hurdle rates
52
3
7
2
United States -Sliding Scale
United States - Current United States -Categorical Royalty Relief
IRR: Small gas field IRR alternative comparison (%)
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Comparative Analysis of Alternative Fiscal Systems
53
Shallow Water
Deepwater
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
The 20% and 22.5% fixed royalty alternatives would increase government take, but all other alternatives would increase DW GoM competitiveness
54
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
United States U.S. DW 12.5% U.S. DW 20% U.S. DW 22.5% U.S. DW Categorical Relief U.S. DW Sliding Scale
Government take: Deepwater oil fields - low, base and high cases
Source: IHS Markit © 2018 IHS Markit
Gov
ernm
ent t
ake
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
The categorical relief − the alternative that improves the most the competiveness of the DW GoM
55
32
2725 25
22 21
6
16 1618 17 16 15
0
5
10
15
20
25
30
35
Brazil
Inte
rnal
Rat
e of
Reg
urn
(%)
CanadaNorwayGuyana U.S. DW 22.5%
Angola United States Current
Mexico United Kingdom
U.S. DW Sliding Scale
U.S. DW Categorical
Relief
U.S. DW 12.5%
U.S. DW 20%
IRR: 500 MMboe deepwater oil field IRR alternative comparison
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
Deep water gas competitiveness would improve under most alternatives, but is not likely to drive material activity due to low expected returns
56
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
United States U.S. DW 12.5% U.S. DW 20% U.S. DW 22.5% U.S. DW Categorical Relief U.S. DW Sliding Scale
Government take: Deepwater gas fields - low, base and high cases
Source: IHS Markit © 2018 IHS Markit
Gov
ernm
ent t
ake
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
Contents
57
Changes in Fiscal Systems2
Comparative Analysis of Current Fiscal Systems 3
Alternative Fiscal Systems 4
Comparative Analysis of Alternative Fiscal Systems5
Discretionary Royalty Relief6
Conclusions7
U.S. GoM Activity and Yet-To-Find Overview1
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
Two discretionary royalty relief programs have also been evaluated
58
End of Life Royalty Relief
BSEE Special Case Royalty Relief
R.1.
R.2.
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
The existing End of Life royalty relief program intends to extend the life of fields to increase ultimate resource recovery, but its impact is limited
59
• Can be granted (at BSEE discretion) when royalty payments over a 12-month period exceed 75% of net revenues
• If granted, stipulates a 50% reduction of royalty payable on relief volume
• Goal: Extend the economic life of the field to increase the ultimate resource recovery
• To date, rarely used by operators
Can theoretically lengthen project lifecycles by improving marginal production economics
Current requirements push application date for relief so late in the asset lifecycle that few projects have taken advantage of the program
Limited impact in extending the life of fields (Less than one year)
The criteria for granting the relief should be relaxed (e.g. when royalty payments over a 12-month period exceed 50% of net revenues) to maximize the potential impact of the program
Description Pros & Cons
End of Life Royalty ReliefR.1.
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End-of-life royalty relief had no measurable impact on shallow water fields
60
Primary Production
Reserve size (MMboe)
Production life (Years)
Stranded reserves (MMboe)
Asset life increase (Years)
Production increase (MMboe)
High Case
Oil10 8 0.3 0 030 7 0.1 0 0
100 9 1.2 0 0
Gas10 8 0.6 0 030 7 0.1 0 0
100 12 3.8 0 0Base Case
Oil10 7 0.7 0 030 6 0.3 0 0
100 8 2.2 0 0
Gas10 8 0.6 0 030 6 0.3 0 0
100 11 5.6 0 0Low Case
Oil10 6 1.5 0 030 5 0.7 0 0
100 7 4.2 0 0
Gas10 7 1.6 0 030 5 0.8 0 0
100 10 8.2 0 0Source: IHS Markit © 2018 IHS Markit
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
End-of-life royalty relief had no measurable impact on deepwater fields
61
Primary Production
Reserve size (MMboe)
Production life (Years)
Stranded reserves (MMboe)
Asset life increase (Years)
Production increase (MMboe)
High case
Oil250 13 2.8 0 0500 19 0.0 0 0
Gas250 19 4.5 0 0500 19 6.8 0 0
Base case
Oil 250 12 4.7 0 0500 19 2.2 0 0
Gas 250 13 21.5 0 0500 13 32.4 0 0
Low case
Oil250 10 11.9 0 0500 13 31.2 0 0
Gas 250 13 26.9 0 0Source: IHS Markit © 2018 IHS Markit
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The BSEE Special Case Royalty Relief provides fiscal incentives for the development of fields with marginal economics
62
• Can be granted (at BSEE discretion) when two of the following criteria are met:
a) A royalty relief would allow recovery of significant additional resources
b) There is a substantial risk another lessee would not recover the resources
c) Valuable facilities exist on the lease which a successor would be unlikely to use
d) The lessee made substantial efforts to reduce operating costs, but it is too late to take advantage of other royalty relief programs
e) Circumstances beyond lessee’s control preclude reliance on one of the existing royalty relief programs.
• Goal: Incentivize development of fields with marginal economics
Allows flexibility for operators and BSEE to collaborate to increase probability of development of fields with marginal economics
Requires significant royalty relief to improve economics enough to justify investment for the cases evaluated
The process could to be perceived by operators as complex and cumbersome given lack of guidance
Description Pros & Cons
BSEE Special Case Royalty ReliefR.2.
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IHS Markit developed a royalty relief case for incremental development of existing field types, assuming 50% of the statutory rate
63
• Application of the following criteria:• A royalty relief would allow recovery of
significant additional resources• Valuable facilities exist on the lease which a
successor would be unlikely to useThis is a hypothetical special case Royalty Relief targeted at improving the economics of tying-back nearby discoveries to existing facilities to access additional reserves.
• Goal: Increase production and extend the life of field “clusters” (and associated infrastructure)
• Assumes 50% of the statutory rate for all new reserves
Creates financial incentive to develop small, nearby discoveries that can utilize existing infrastructure
Maximizes development potential of existing fields and infrastructure life
Enable potential fiscal revenue from project that tend to be uneconomical, without fiscal incentives
If the application requires a complex process, it could be perceived as less attractive by some operators
Description Pros & Cons
Special Case Royalty Relief:
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Under all scenarios evaluated, Special Case Royalty Relief enables the extension of the life of the “cluster” and the production of additional reserves
64
6
8
11
12
19
3
2
3
5
5
0 5 10 15 20 25
100 Mmboe Gas Field
30 Mmboe Oil Field
17
14
100 Mmboe Oil Field
250 Mmboe Oil Field
500 Mmboe Oil Field
9
10
24
Base Production Additional from Special Case
2
6
5
2
9
9
9
39
37
0 5 10 15 20 25 30 35 40 45
100
11
15
44
39
Shal
low
Wat
er
(<20
0 m
)D
eep
Wat
er
(> 2
00m
)
Cluster of Fields Economic Life (Years) Additional Reserves (Mmboe)
6.7
7.2
8.1
10.4
9.9
0 3 6 9 12
Avg Rate on Additions (%)
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Contents
65
Changes in Fiscal Systems2
Comparative Analysis of Current Fiscal Systems 3
Alternative Fiscal Systems 4
Comparative Analysis of Alternative Fiscal Systems5
Discretionary Royalty Relief6
Conclusions7
U.S. GoM Activity and Yet-To-Find Overview1
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Conclusions – Shallow Water GAS
66
Current Fiscal System
Alternatives
The current fiscal system is competitive for large gas fields However, most of the recent shallow water GoM discoveries are small and returns for
small fields are not attractive enough to trigger activity Small fields have IRRs of 3% at base prices
Low gas prices are a key factor limiting returns If the policy goal for shallow water gas is to maximize resource recovery, production,
life of the fields, and activity levels, significant reductions of fiscal terms will be needed
Of the alternatives evaluated, the Categorical Royalty Relief offers the best results to improve operators’ expected returns and spur activity, but is unlikely to be enough for small gas fields Small gas fields could achieve IRRs of 7% with the categorical relief at base
prices The Sliding Scale Royalty alternative has limited impact on shallow water gas, given
that it is designed to impact liquids royalties
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Conclusions – Shallow Water OIL
67
Current Fiscal System
Alternatives
The current fiscal system is very competitive for large and mid-size shallow water oil fields
Small fields, at base prices, have negative NPV / boe and IRRs below 10%; therefore, they tend to be uneconomical
The Categorical Royalty Relief helps improve the expected returns of small fields; therefore, the categorical relief could provide incentives for a recovery of the activity levels in shallow water GoM
The Sliding Scale Royalty increases the fiscal load and reduces operator upside at high prices; given the very mature nature of shallow water GoM (It is the most mature basin among peers), the implementation of the sliding scale royalty alternative will likely further suppress the activity levels in shallow water GoM
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Conclusions – Deepwater GAS
68
Current Fiscal System
Alternatives
Deepwater gas fields tend to be uneconomical or offer marginal returns
High cost of deepwater development combined with low gas prices (driven by shale gas in the L48) are the key structural factors that limit gas returns
Improvements in the competitiveness of the deepwater gas fiscal regime will likely have only limited impact in deepwater gas activity, given the other limiting structural factors (low price / high cost)
Any tightening of the fiscal conditions will make deepwater gas even less attractive to operators
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Conclusions – Deepwater OIL
69
Current Fiscal System
Alternatives
The current US deepwater GoM fiscal system offers IRRs above the hurdle rates for most operators
However, the US GoM rates of return are not as attractive as Guyana, Brazil, Angola, United Kingdom and Mexico, which offer rates of return above 20% under the base case scenario; therefore, international players are likely to prioritize these jurisdictions over US GoM
The Categorical Royalty Relief has the highest impact in improving the expected returns to operators and the competitiveness of deepwater GoM
The 12.5% royalty alternative lowers the government take and increases the IRR in all cases, but not to the degree of categorical royalty relief
As expected, the 20% and 22.5% royalty alternatives have the potential to generate more revenue for the Federal government but increase the regressivity of the fiscal system and will likely reduce activity levels
The sliding scale royalty offers a more balanced approach by lowering the royalty rate at low prices and increasing it at high prices; this alternative softens the degree of regressivity of the fiscal system.
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Conclusions – Discretionary Royalty Reliefs
70
The current discretionary end-of-life relief does not extend the life of the tested fields long enough to benotable in our annual models. Perhaps a revision of its timing and condition of application would generate amore impactful life extension
A discretionary special case relief on significant reserves addition would work well to incentivizeincremental production with a royalty rate reduction of 50%. This would benefit both the tie-back and thecentral processing facilities. This could also help slow down the retirement rate of the shelf infrastructure inthe U.S. GoM
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Appendix
71
Confidential. © 2018 IHS MarkitTM. All Rights Reserved.
The selected IHS base case scenario is lower than the EIA forecast but is used as a mean to derive variances not as a true forecast
72
0
20
40
60
80
100
120
2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040
Base Case - WTI $/bbl EIA - WTI Reference Case
Low Case- WTI High Case - WTI
Crude oil price scenarios (2017$/bbl)
Source: IHS Markit © 2018 IHS Markit
Year
$/bb
l
• The selection of crude oil prices for this analysis is not intended as a forecast, • It reflects the relatively wide range between the high and low commodity price ranges that have prevailed in the past decade.• The wide spread among the low, base and high case is useful to analyze the performance of alternative fiscal systems under
depressed and high commodity prices alongside the base case scenario which is reflective of the current market conditions
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NPV/Boe for Shallow Water Oil and Gas Fields ($)
73
JurisdictionHigh case Base case Low case
100 MMboe
30 MMboe
10 MMboe
100 MMboe
30 MMboe
10 MMboe
100 MMboe
30 MMboe
10 MMboe
Crude OilAustralia 12.7 9.3 7.9 6.9 3.1 0.7 3.0 -2.8 -8.2Brazil 17.7 11.7 2.2 9.0 2.0 -9.3 3.1 -4.9 -17.5Mexico 18.4 7.7 3.1 9.6 -0.4 -5.0 3.8 -6.2 -14.7Norway 4.8 1.4 -8.4 1.9 -1.9 -17.8 -0.1 -5.4 -31.6United Kingdom 17.2 14.4 5.9 8.9 5.3 -4.0 3.3 -1.0 -14.0
United States 18.6 17.5 8.5 9.0 7.0 -2.3 2.6 -0.1 -10.6Natural Gas
Australia 7.5 6.3 3.3 3.2 1.5 -6.6 0.2 -4.6 -15.8Brazil 9.8 -1.3 -6.8 4.1 -7.8 -14.8 0.3 -13.6 -21.9Mexico 3.9 -8.0 -5.6 0.2 -13.4 -11.3 -2.0 -19.0 -15.6Norway 3.1 -1.1 -5.9 0.9 -3.9 -12.2 -0.7 -9.3 -22.6United Kingdom 12.3 8.7 5.1 6.2 2.1 -2.6 2.2 -2.8 -9.0
United States 5.9 6.9 3.6 1.0 1.1 -2.6 -2.8 -3.0 -7.9
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NPV/Boe: Deepwater Oil and Gas Fields ($)
74
JurisdictionHigh Case Base Case Low Case
500 Mmboe 250 Mmboe 500 Mmboe 250 Mmboe 500 Mmboe 250 Mmboe
Crude OilAngola 8.67 8.35 3.65 3.09 -1.84 -3.04Brazil 13.1 10.8 6.3 3.5 1.6 -1.6Canada 2.88 4.70 -1.83 0.24 -5.79 -3.22Guyana 18.28 16.22 8.05 5.97 1.84 -0.15Mexico 10.1 8.1 4.0 1.1 -0.2 -4.0Norway 4.1 3.6 1.8 1.2 0.2 -0.5United Kingdom 9.5 9.7 2.8 2.5 -2.8 -3.9United States 9.0 10.8 2.5 2.8 -2.1 -2.8
Natural GasAngola 5.44 5.22 2.23 1.87 -0.12 -0.58Brazil 8.1 7.5 3.9 3.3 1.0 0.4Canada 0.66 -1.55 -1.71 -4.23 -3.66 -6.95Guyana 19.02 17.64 10.07 8.87 4.54 3.41Mexico 2.6 0.8 -0.9 -2.7 -3.2 -5.8Norway 2.3 1.9 0.8 0.2 -0.3 -1.1United Kingdom 9.4 8.3 5.0 3.9 2.0 0.9United States 3.7 2.3 0.1 -1.2 -2.6 -4.0