hebron basic royalty, a preliminary assessment

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Hebron: Generic Royalty v. Williams’ Royalty A comparison A comparison of pre-simple payout phase of pre-simple payout phase August 2007 August 2007

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An assessment of the basic provincial government royalty for the Hebron project

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Page 1: Hebron basic royalty, a preliminary assessment

Hebron: Generic Royalty v. Williams’ Royalty

A comparisonA comparison

of pre-simple payout phaseof pre-simple payout phase

August 2007August 2007

Page 2: Hebron basic royalty, a preliminary assessment

OutlineOutline

Hebron BackgroundHebron Background Resource OwnershipResource Ownership Generic + Williams (Hebron) Royalty Generic + Williams (Hebron) Royalty

Regime Regime ScenarioScenario AssessmentAssessment ConclusionConclusion

Page 3: Hebron basic royalty, a preliminary assessment

Hebron BackgroundHebron Background

Discovered 1981Discovered 1981 Complex geology; 75% of resource is heavy oil Complex geology; 75% of resource is heavy oil Costly to developCostly to develop Commercially non-viableCommercially non-viable Fallow field = Red HerringFallow field = Red Herring Lower market price compared with light, sweetLower market price compared with light, sweet 400 to 700 million bbls possible400 to 700 million bbls possible Outside chance may be higherOutside chance may be higher

Page 4: Hebron basic royalty, a preliminary assessment

Resource OwnershipResource Ownership

In Canada, 100% owned by governmentIn Canada, 100% owned by government 1985 Atlantic Accord gave province 1985 Atlantic Accord gave province de de

factofacto ownership powers on revenues ownership powers on revenues ““Equity” is not ownershipEquity” is not ownership Royalty is rent to owner paid by developer Royalty is rent to owner paid by developer

for right to develop commerciallyfor right to develop commercially Royalty = 100% to provinceRoyalty = 100% to province Other revenues to province and fedsOther revenues to province and feds

Page 5: Hebron basic royalty, a preliminary assessment

Royalty RegimesRoyalty Regimes

GenericGeneric Hibernia, Terra Nova, White Rose regimes Hibernia, Terra Nova, White Rose regimes

similarsimilar One size does NOT fit all, although generic One size does NOT fit all, although generic

was supposed to or be basis forwas supposed to or be basis for Basic = 1% rising to 7.5% based on Basic = 1% rising to 7.5% based on

cumulative prod + time to simple payoutcumulative prod + time to simple payout Net royalty after payout in 2 tiers, with Net royalty after payout in 2 tiers, with

return allowance for operatorsreturn allowance for operators Williams (Hebron) = 1% basicWilliams (Hebron) = 1% basic

Page 6: Hebron basic royalty, a preliminary assessment

Basic InformationBasic Information

Sources: provincial news release, Sources: provincial news release, CNLOPB, Natural Resources (royalty CNLOPB, Natural Resources (royalty regime), news media, Sproule Assoc price regime), news media, Sproule Assoc price forecastforecast

150 thousand bpd = 50 mmbbl annual150 thousand bpd = 50 mmbbl annual Think Hibernia, but lower due to heavy oil Think Hibernia, but lower due to heavy oil Deals solely with resource owner royalty – Deals solely with resource owner royalty –

does NOT include energy corp does NOT include energy corp

Page 7: Hebron basic royalty, a preliminary assessment

Generic Basic RoyaltyGeneric Basic Royalty

Applies to gross revenueApplies to gross revenue Based on triggers, for Hebron:Based on triggers, for Hebron:

Y1,2 = 1%Y1,2 = 1% Y3,4 = 2.5%Y3,4 = 2.5% Y5,6 = 5% Y5,6 = 5% Y7-10 = 7.5%Y7-10 = 7.5%

Page 8: Hebron basic royalty, a preliminary assessment

Williams (Hebron) Basic Williams (Hebron) Basic

Flat 1% until simple payoutFlat 1% until simple payout Details of royalty regime after that Details of royalty regime after that

point not publicly available yetpoint not publicly available yet Tier 1,2 with new Tier 3Tier 1,2 with new Tier 3 Presumably still retain return Presumably still retain return

allowances on net royalty period but allowances on net royalty period but specifics unknownspecifics unknown

Page 9: Hebron basic royalty, a preliminary assessment

Scenario 1Scenario 1

All heavy oil All heavy oil First oil 2017First oil 2017 Oil price = US$45 per barrel (Heavy oil Oil price = US$45 per barrel (Heavy oil

discount)discount) Sproule forecast c. $38-40 per barrelSproule forecast c. $38-40 per barrel Total annual prod. = 50 million bblsTotal annual prod. = 50 million bbls Simple payout in 10 + years (Hibernia likely Simple payout in 10 + years (Hibernia likely

in 14 years, comparable)in 14 years, comparable)

Page 10: Hebron basic royalty, a preliminary assessment

Scenario 1: All heavy; US$45 per bblScenario 1: All heavy; US$45 per bbl

22.5

22.5

56.5

56.5

112.

511

2.5

168.

75

168.

75

168.

75

168.

75

22.5

22.5

22.5

22.5

22.5

22.5

22.5

22.5

22.5

22.5

0

20

40

60

80

100

120

140

160

180

Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10

Generic

Williams

Page 11: Hebron basic royalty, a preliminary assessment

Totals ComparisonTotals Comparison

0

200

400

600

800

1,000

1,200

Sc.1

Generic

Williams

Page 12: Hebron basic royalty, a preliminary assessment

Scenario 2Scenario 2

All light, sweet (200 million bbls)All light, sweet (200 million bbls) Price = US$53 (Sproule WTI forecast)Price = US$53 (Sproule WTI forecast) Annual production = 50 million bblsAnnual production = 50 million bbls Asset exhausted in 4 yearsAsset exhausted in 4 years Conversion to heavy oil, Y5 and beyondConversion to heavy oil, Y5 and beyond No payout on light onlyNo payout on light only

Page 13: Hebron basic royalty, a preliminary assessment

Scenario 2: All light; US$53Scenario 2: All light; US$53

26.5

26.5

66.2

566

.25

26.5

26.5

26.5

26.5

0

10

20

30

40

50

60

70

Y1 Y2 Y3 Y4

Generic

Williams

Page 14: Hebron basic royalty, a preliminary assessment

Totals ComparisonTotals Comparison

0

200

400

600

800

1,000

1,200

Sc.1 Sc 2

Generic

Williams

Page 15: Hebron basic royalty, a preliminary assessment

Scenario 3: 25/75; 53/45 Scenario 3: 25/75; 53/45

Blended production, based on estimatesBlended production, based on estimates 25% light, sweet + 75% heavy25% light, sweet + 75% heavy Total annual prod = 50 million bblsTotal annual prod = 50 million bbls Payout in 10 +Payout in 10 + Price = US$53/US$45Price = US$53/US$45

Page 16: Hebron basic royalty, a preliminary assessment

Scenario 1: All heavy; US$45 per bblScenario 1: All heavy; US$45 per bbl

23.5

23.5

23.5

57.6

57.5

115

115

176.

25

176.

25

176.

25

23.5

23.5

23.5

23.5

23.5

23.5

23.5

23.5

23.5

23.5

0

20

40

60

80

100

120

140

160

180

200

Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10

Generic

Williams

Page 17: Hebron basic royalty, a preliminary assessment

Totals ComparisonTotals Comparison

0

200

400

600

800

1,000

1,200

Sc.1 Sc 2 Sc. 3

Generic

Williams

Page 18: Hebron basic royalty, a preliminary assessment

AssessmentAssessment

$ values not key point$ values not key point Analysis shows value to treasury of progressive royalty Analysis shows value to treasury of progressive royalty

regime v. flat tax regime v. flat tax All scenarios, value of generic shown by Y3, increasing All scenarios, value of generic shown by Y3, increasing

over timeover time Government/Public price numbers are misleading Government/Public price numbers are misleading

(assumes light price for heavy)(assumes light price for heavy) Decision on project issues like cost, interests of partiesDecision on project issues like cost, interests of parties 100% provincial decision 100% provincial decision

Page 19: Hebron basic royalty, a preliminary assessment

Assessment (cont’d)Assessment (cont’d)

Trade guaranteed cash at front for possible cash Trade guaranteed cash at front for possible cash at back (Dunderdale) - at back (Dunderdale) -

Tier 3 Royalty tied to WTI but paid at real i.e Tier 3 Royalty tied to WTI but paid at real i.e discounted - prices (may be negligible/zero)discounted - prices (may be negligible/zero)

Tier 3 bets on prices in 2027 and beyondTier 3 bets on prices in 2027 and beyond Tier 3 bets on there being more oilTier 3 bets on there being more oil Tier 3 assessment needed (More info, more Tier 3 assessment needed (More info, more

detailed analysis)detailed analysis)

Page 20: Hebron basic royalty, a preliminary assessment

More information/discussion neededMore information/discussion needed

Tier 3 royalty structureTier 3 royalty structure Other royalty changes, if any (e.g. Dunderdale’s Other royalty changes, if any (e.g. Dunderdale’s

5% basic from 5% basic from Telegram Telegram interview)interview) How much recoverable oil?How much recoverable oil? Heavy price post 2017 and post simple payoutHeavy price post 2017 and post simple payout

Page 21: Hebron basic royalty, a preliminary assessment

A good project ?A good project ?

Yes. Good to get project underway. Both parties Yes. Good to get project underway. Both parties consider it good.consider it good.

For provincial treasury, cash value depends on For provincial treasury, cash value depends on unknowns (unknown to public + unknown until unknowns (unknown to public + unknown until happens)happens)

Industrial benefits package/conditionsIndustrial benefits package/conditions ““Give-away” = simplistic assessment as with Give-away” = simplistic assessment as with

Voisey’s BayVoisey’s Bay

Page 22: Hebron basic royalty, a preliminary assessment

ContactContact

Sir Robert Bond PapersSir Robert Bond Papershttp://bondpapers.blogspot.comhttp://bondpapers.blogspot.com

[email protected]@[email protected][email protected]