Rovuma LNG Economics RES4DEV March 2016 · 2017-07-10 · Rovuma'LNG'Economics' March'2016'...

Rovuma'LNG'Economics' March'2016'

[email protected]' 1'

An'Introduc@on'to'Rovuma''LNG'Economics''

Don'Hubert,'PhD'March'2016'

[email protected]'

Resources'for'Development'Consul@ng'

Assist'ci#zens'of'resource'rich'developing'countries'to'secure'a'fair+share'of'government'revenue+from'petroleum'and'mining'projects.''



Na@onal'Benefits'from'Extrac@ves'

1.  Economic'Growth'

2.  Employment'

3.  Infrastructure''

4.  CSR'/'Community'Investment''

5.   Taxes(

East'Africa'Petroleum'

•  Four'countries'–'common'challenges'1.  Uganda:'oil'2006'2.  Kenya:'oil'2011'3.  Mozambique:'natural'gas'2010'4.  Tanzania:'natural'gas'2010'

•  Great'prospect,'massive'capital'investments'– Uganda'/'Kenya'need'a'pipeline(((– Mozambique'/'Tanzania'need'LNG((



RES4DEV'Approach''1.  Help'stakeholders'understand'the'principles'of'

“extrac@ve'economics”'2.  Country_specific'(resource,'@ming,'fiscal'terms)'3.  Public'domain'informa@on'4.  Cau@ous'about'company'claims'–'test'against'

experience'of'peer'countries'5.  'Not'just'life_cycle'–'use'simple'DCF'models'

(Belize,'Cambodia,'Chad,'Kenya,'Tanzania,'Uganda)'

The'Team'

•  Dr.'Don'Hubert'(President)'

•  Dr.'Gordon'Kirkwood'(30'years'BP)'

•  Daniel'Dumas'(Commonwealth,'IMF)'



Scope:'Revenue'Genera@on'

What'are'the'“revenue'genera@on”'ques@ons'that''you'think'are'most'important'to'answer?''

'

Why'Do'Revenue'Analysis'

1.  Fiscal'regime'design'

2.  Contract'nego@a@on'

3.  Tax'Administra@on'

4.  Budget'Planning''



Realis@c'Revenue'Projec@ons'

'Exis@ng'projec@ons'sugges@on'billions'of'dollars'to'Mozambique'in'early'2020s'

Two'Trains'–'Rovuma'LNG'

IMF'2012'



Gas'Master'Plan'2012'

Standard'Bank'



Columbia'Model'

•  Thomas'Mitro'of'the'University'of'Houston'and'Columbia'Centre'for'Sustainable'Investment'have'built'open'fiscal'LNG'model'

'•  Prepared'using'Mozambique'as'example'

•  Model'and'manual'in'documents'directory'

The'Risk'of'a'Fiscal'Gap''Declining'Aid'–'Delayed'LNG'Revenues''



Integrated'Economic'Analysis'

•  Revenue'projec@ons'are'based'on'scenarios'•  Scenarios'include'basic'assump@ons'about:'– Produc@on'@melines'and'volumes'– LNG'sales'price'– Project'costs''– Fiscal'terms''

•  Changes'cannot'be'understood'in'isola@on'– Analyze'through'a'“cash'flow”'model''

Distributed'Documents'

•  Background'Documents''•  Contracts''– 2006'Rovuma'EPCCS''– Model'EPCCs'

•  Economic'models''–  IMF'FARI'and'CCSI'LNG'

•  Revenue'Projec@on''– GMP,'IMF,'Standard'Bank'

'



Oil'Produc@on'Timeline'

Time'

Produc@on'Volume'Petroleum''

'Oil'–'barrels'per'day'/'per'year''Gas'–'GJ'/'mmbtu''

'Minerals'

'Coal'/'Copper'/''Zinc'–'tons''Aluminum'/'Uranium'_'pounds'''Gold'_'ounces''Diamonds'–'carats''

'



Proven'Natural'Gas'Reserves'(tcf)'1 'Russia ' ' '1688'2 'Iran ' ' '1201'3 'Qatar ' '' '872'4 'United'States '388'5 'Saudi'Arabia '294'6 'Turkmenistan '265'7 'UAE ' ' '215'8 'Venezuela' '197'9 'Nigeria' ' '180'10 ''China ' ' '164'

11 'Algeria' ' '159'12 'Iraq ' ' '112'13 'Indonesia ' '103'14 'Mozambique '100'15 'Kazakhstan '85'16 'Malaysia ' '83'17 'Egypt ' ' '77'18 'Norway ' '72'19 'Canada ' '72'20 'Uzbekistan' '65'

13'LNG'Plants'Under'Construc@on'19'Plants'Being'Planned'

30'Plants'Proposed'or'Under'Study'



Not'a'Ques@on'of'Reserves'

•  Too'much'emphasis'on'reserves'–'not'enough'on'challenges'of'produc@on'/'exports'

'Net'present'value'of'addi@onal'gas'finds'='?'

'•  Projec@ons'of'future'gas'exports'based'on'analysis'of'export'capacity'not'reserves'

Final'Investment'Decisions'FID'Drivers:'•  Government'Terms'and'Development'Plan'Approvals'•  Binding'LNG'Sales'Agreement'–'Volume'&'Price'•  Project'Financing'•  Company'Strategy'for'Changing'Petroleum'Sector'''

More'Chance'of'Delay'than'Accelera@on'



LNG'Produc@on'/'Export''•  Ques@on'of'@melines'and'volumes'

'2015' 2017?' 2022?'

+5'Years'

Timelines'and'Scale'of'Produc@on'

•  Having'a'resource'base'is'only'the'first'step'

•  Two'fundamental'ques@ons:''

1.  How'long'to'first'produc@on?'

2.  How'fast'can'produc@on'be'scaled'up?''



Compe@ng'Forecasts'Mozambique'LNG'Produc@on'

Wise'to'Project'Exports'from'Reserves?'

“Staff'assumes'that'produc@on'and'exports'of'LNG'will'start'in'2021.”''“In'total,'we'expect'that'13'onshore'trains'and'4'floa@ng'trains'will'be'built'for'the'gas'project.'The'total'produc@on'volume'of'the'LNG'could'reach'89'million'ton'per'annum'by'2028.”'

IMF'2015''''



Assump@on'1:'Produc@on'Volumes'and'Timelines'

'When'does'the'first'LNG'train'begin'exports''How'many'LNG'trains'are'assumed''When'do'they'begin'produc@on'

Step'2:'Gross'Revenue'

''

Gross'revenue'='produc@on'x'price''



Oil'price'is'“inherently'unpredictable.”''' ' '' ' '' '(John'Browne,'ex_CEO'BP)'

'



Diverging'Prices'



US:'LNG'Importer'to'Exporter'

!

LNG'Price'

•  High'prices'used'in'past'revenue'projec@ons'no(longer(exist(•  (IMF'$14'Japan;'Gas'Master'Plan'$13_17/mmbtu'Japan' '

'Standard'Bank'$12'Export'='$13.70'Japan)'



Natural'Gas'Price'Forecasts'

Gas'Sales'Agreements'

•  LNG'normally'sold'through'long'term'sales'agreements'(i.e.'+20'years)'

•  Necessary'for'massive'project'financing'•  LNG'in'Asia'tradi@onally'benchmarked'against'crude'(JCC)'with'a'coefficient'(e.g.'0.14)'and'an'S_curve'that'acts'as'a'weak'cap'and'collar'

•  Price'differen@al'with'US'weakening'link'to'oil;'increasingly'hybrid'agreements'(JCC'+'HH)'

'



Japanese'“S_Curve”'Formula'

•  Test'

!

Input'Assump@on'2:''LNG'Price'

•  Easy'to'make'government'revenues'bigger'by'assuming'a'higher'price'

•  Greater'uncertainty'now'in'LNG'market'than'at'any'@me'in'recent'decades.'

•  What'price'assump@on'for'analysis?''



Risks'to'Government'Revenue'_'Price'

Determining'fair'sale'value'for'petroleum'is'crucial'to'protect'government'revenues:'

1.  Alaska'2.  Yemen'3.  Equatorial'Guinea''4.  Trinidad'and'Tobago''

Hierarchy'of'Laws'/'Contracts'

''Petroleum'Act''Income'Tax'Act''Petroleum'Regula@ons''Produc@on'Sharing''Agreements'



Contract'Disclosure'

•  Contracts'historically'kept'confiden@al'

•  Disclosure'part'of'sector'good'governance''

•  Mozambique'among'few'to'publicly'disclose'

•  Valuable'for'cross'governmental'collabora@on'

ResourcesContracts.org'

•  Collec@on'of'publicly'available'extrac@ve'sector'contracts''

•  Useful'to'search'across'contracts'–'can'search'text'inside'PDFs'

•  Also'useful'to'compare'with'contracts'from'other'jurisdic@ons'



What'are'we'looking'for?'

Fiscal'terms'on'how'“divisible'revenue”'is'split''1.  Royalty'(Produc@on'Tax)'

2.  Corporate'Income'Tax'

3.  Produc@on'Sharing''

4.  State'Ownership'/'Par@cipa@on'''

Fiscal'Terms'Excluded'from'Analysis'

•  Produc@on'Bonuses'

•  Ins@tu@onal'Support'

•  Training'Support''

•  Social'Projects''



Rovuma'Area'1'–'EPCC'2006'

(v( Gross'Oil'Produc@on'

Net'Produc@on'(Gross'Produc@on'less'Royalty)'

(2)(Cost(Oil((Limit'of'65%)'

''''

(3)(Profit(Oil((Net'Produc@on'less'Cost'Oil)'(

'

(1)(Royalty'(2%)'

Government(Profit(Oil(10_60%'

Company(Profit(Oil('90_40%'

Company(Profit' ''Government(Revenue(

(5)(Corporate(Income(Tax'(24_32%)'

(4)(Joint(Venture(Revenue(Split('85%'

ENH(Share(15%'

Anadarko(( ENI(( Petronas(Royalty'' 2%' 2%' 6%'CRL' 65%'' 75%'' 85%'Profit'Gas' R_factor' (Government'Share)'

''1.0' 10%' 15%' 10%'''2.0' 20%' 25%' 25%'''3.0' 30%' 35%' 50%'''4.0' 50%' 45%' 60%'>4.0' 60%' 55%' 70%'

IRPC'First'8' 24%' 24%' 32%'

Awer'8'' 32%' 32%' 32%'



Explora@on'and'Development'Costs'Anadarko'2013'(~$15'billion)'

LNG'Plant'Capital'Expenditure'

'''''''''''''''''''''[Source'of'Data:'Oxford'Ins@tute'of'Energy'Studies'February'2014]'•  Upward'cost'pressure'on'LNG'plants'•  Plant'cost'of'$1,300/mtpa'used'(vs.'SB'$1,000/mtpa)'



Risk'of'Cost'Over_Runs'

•  Australia'LNG'(all'40%'over'budget)'

•  PNG'LNG'($11b'–'$19b)'

•  Angola'LNG'($4b'_'$10b)''

Es@ma@ng'Upstream'and'Midstream'2'LNG'Trains'Onshore'

•  Explora@on'($700m'–'$4b)'

•  Upstream'Development'($4b'_'$9b)'

•  LNG'Facili@es'_'2'trains'($8b'–'$15b)'



Cost'Recovery''

Cost'Recovery'Limit'

•  How'fast'companies'can'recover'their'costs'

•  Early'years'costs'exceed'revenues'

•  Contracts'limit'%'of'produc@on'for'costs''•  65%_75%'of'revenue'can'go'to'“cost'gas”'



Costs'–'Risks'to'Government'Revenue'

•  Cost'recovery'risks'are'underes@mated'

•  Major'area'of'poten@al'abuse'

•  Examine'case'studies''–  Indonesia,'India,'Timor'and'Uganda''

Fiscal'Regimes'_'Interac@on'Mul@ple'fiscal'instruments'''None'are'par@cularly'complicated''Interac@ons'can'be'complex''Focus'on'the'overall'package''



Anadarko(( ENI((Royalty'' 2%' 2%'Cost'Recovery'' 65%'' 75%''Profit'Gas'Split' R_factor' (Government'Share)'

''1.0' 10%' 15%'''2.0' 20%' 25%'''3.0' 30%' 35%'''4.0' 50%' 45%'>4.0' 60%' 55%'

Corporate'Tax'First'8'yrs' 24%' 24%'

Awer'8'yrs' 32%' 32%'

Royal@es'

•  Tradi@onally,'compensa@on'for'the'sale'of'a'non_renewable'asset'

•  Increasingly'it'is'seen'as'guaranteed'source'of'income'in'the'first'years'

•  Different'rates'onshore'/'offshore'&'oil'/'gas'

•  2%'for'Rovuma'EPCCs'(deep_water'offshore)''



Profit'Gas'

•  Part'I'was'“cost'gas”'and'cost'recovery'limit'

•  Now'we'focus'on'the'split'of'“profit'gas”'

•  Alloca@on'of'awer'costs'revenue'between'government'and'company'

'

R_factor'Division'

•  R_factor'is'a'measure'of'payback'

•  Cumula@ve'revenues'/'cumula@ve'capital'costs'

•  When'costs'exceed'revenues'r'is'less'than'1'

•  When'costs'equal'revenues'r'='1'“payback”''



R_factor'Division'

Area(1(Anadarko((

Area(4(ENI((

R_factor' (Government'Share)'

''1.0' 10%' 15%'

''2.0' 20%' 25%'

''3.0' 30%' 35%'

''4.0' 50%' 45%'

>4.0' 60%' 55%'

Corporate'Income'Tax'

•  Profit_based'tax'assessed'on'company'net'revenue'(revenue'awer'costs)'

•  Commonly'in'the'25_40%'range'

•  2006'EPCCs''– 24%'for'first'8'years'– 32%'awer'8'years''



Company'Profits'

What'is'lew'over'from'“gross'revenue”'awer:'

1.  Field'costs''' 'Explora@on,'Development,'Opera@ng'

2.  Fiscal'costs'–  Produc@on'Tax'–  Government'Profit'Oil'–  Corporate'Income'Tax''

Rovuma'LNG'Uncertain@es'

1.  Final'Investment'Decision'–'2017?'

2.  First'LNG'exports'–'2022?'

3.  Pace'of'poten@al'expansion?'

4.  Medium_term'Asian'LNG'prices?'



Revenues'Will'Come'Late'

1.  Long'@melines'to'produc@on''

2.  Massive'cost'recovery'(LNG'inside'EPCC)'

3.  Very'rear_loaded'fiscal'terms'

Risks'to'Revenues''

1.  Gas'sales'agreements'

2.  Cost'recovery'claims'

3.  Financing'/'thin'capitaliza@on'

4.  Financing'ENH'Stake'



Overall'Conclusions'

1.  Careful'of'company'claims'–'test'assump@ons'against'peer'country'experience'

2.  Manage'public'expecta@ons'on'@melines''

3.  Protect'future'revenues'now'–'e.g.'cost'audits'

4.  “achievable'projec@ons”'based'on'“year_by_year”'analysis'with'“plausible”'assump@ons'

Rovuma LNG Economics RES4DEV March 2016 · 2017-07-10 · Rovuma'LNG'Economics' March'2016'...

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