hebron basic royalty, a preliminary assessment
DESCRIPTION
An assessment of the basic provincial government royalty for the Hebron projectTRANSCRIPT
Hebron: Generic Royalty v. Williams’ Royalty
A comparisonA comparison
of pre-simple payout phaseof pre-simple payout phase
August 2007August 2007
OutlineOutline
Hebron BackgroundHebron Background Resource OwnershipResource Ownership Generic + Williams (Hebron) Royalty Generic + Williams (Hebron) Royalty
Regime Regime ScenarioScenario AssessmentAssessment ConclusionConclusion
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
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
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
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
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%
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
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)
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
Totals ComparisonTotals Comparison
0
200
400
600
800
1,000
1,200
Sc.1
Generic
Williams
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
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
Totals ComparisonTotals Comparison
0
200
400
600
800
1,000
1,200
Sc.1 Sc 2
Generic
Williams
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
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
Totals ComparisonTotals Comparison
0
200
400
600
800
1,000
1,200
Sc.1 Sc 2 Sc. 3
Generic
Williams
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
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)
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
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
ContactContact
Sir Robert Bond PapersSir Robert Bond Papershttp://bondpapers.blogspot.comhttp://bondpapers.blogspot.com