presentacin tony paul y todd arena

7/30/2019 Presentacin Tony Paul y Todd Arena

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Upstream Natural Gas

Some Considerations in

Accelerating Exploration


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Objectives

1. Strategies for Increasing Natural Gas Reserves

2. Balancing Country Perspective with the Need to

Attract Investors

3. Role of Natural Gas in National Development

4. Approaches used (Examples from Other Countries)

1. Petroleum Agreements

2. Fiscal Regimes


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Key Strategic Questions

1. Is there more gas to be found? If so, where will it come

from?

Are there attractive areas that are yet to be explored?

How can production and reserves be increased in existing areas?

2. Do we have the capacity to do it all by ourselves? Capital, Technology, Experience

3. Why do we want this gas?

How can gas help Bolivia?

What are the most important national goals for the gas sector?

4. How do we get others to help us find the gas?

What are the investors objectives?

How do they fit with the countrys objectives?

How do we attract the right ones?


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Where will the gas come from?

Gas growth potential New Exploration areas

Enhanced production from existing fieldsCompression

Small Reservoirs/Fields (e.g. near existing infrastructure)

Linking exploration acreage with existing production or proven reservesTo reduce revenue risk and provide early cash flow

Converting Potential to RealityGeology of the area and the Maturity of the province

Amount of Exploration/Capital being conducted/spent,Technology, its availability and application in the identification and development

of oil and gas pools,

Access to Markets, particularly for developing and tropical countries, in the case

of natural gas

Taxation levels and the system of taxation


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Attracting Investment- Some Key Questions

1. How good is the geology?

o What are the chances of making hydrocarbon discoveries, large enough to be commercially exploited?

o Does this fit my capability?

2. What are the technical challenges?

o Do I have access to the technology needed to discover, evaluate and produce the resource economically?

o Are these affordable in the given environment?o What is the level of skills and services available?

3. Does the petroleum agreement give the freedom to operate efficiently ?

o License terms and commitments

o Capacity of the Regulator/State Company Partner

4. Do the fiscal terms give an adequate return on capital in a success case?

o Development and operating costs

o Timing of returns

o Government take

5. What are the political risks?

o Expropriation risk, disruption to operations,

o

security and safety,o Stability of the contract, legislation, government policies

o Is corruption a significant factor?


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Reducing Key Risks

Reducing Technical Risk

Improve Data Quality

Seismic Data Geological Modeling

Access to Infrastructure

Access to Services

Drilling, Engineering, Construction


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Reducing Commercial Risk

Lower Costs Local Availability of Goods and Services

Improved Access to Market Access to Off-Takers

Access to infrastructure

Clarity of Pricing Pricing Models and Different Markets

Domestic vs. Export?

Fiscal Terms Suitable to make the economics of the specific field or set of fields

attractive Flexible to address changing circumstances,

Strategic Business Links Tying Exploration Risk to Preferred Access to Off-take or

Market/Pricing

Access to Existing Production/Cash Flow


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Reducing Social and Administrative Risk

Transparency Strong reporting produces stability

Administrative Roles and Oversight Clear roles and responsibility of actors; Rule-bound and accountable oversight; Strong and capable regulator; Consistency of policies

Avoiding Social Upheaval Regular consultation with affected communities; Strong environmental protection


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Why does Bolivia want this gas?

Meeting Current Needs Satisfying Contractual Agreements

Budgetary Needs

Growth

Increasing reserves and production Maximizing Value from Existing Infrastructure and Assets

National Development Revenue for Development and Poverty Reduction

Technology and Capacity Development

Industrialization

Get more value out of the resource


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10

Oil & Gas Value Chain


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Natural Gas Utilization Options

Syncrude

LNG

Natural GasProduction Ammonia

Urea

Hydrogen

DME

Acetic AcidMethanol

Olefins

Gasoline

MTBE

Formaldehy

deFormaldehyde Resins(e.g. UFC)

OtherChemical

Derivatives

Power

Reducing

AgentFuel

Metal OreExtraction

Aluminum

Iron


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Converting Natural gas to ProductsTechnologies are available to convert natural gas into products to reduce

imports or get new export markets


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Small to mid-scale LNG is viable despite

land deliveries

Xinjiang LNG Project , P.R. China

Key elements:

- Remote gas deposit in Shan Shan region, NW

China, with >20 years gas reserve.

- Gas Pre-treatment & Liquefaction plant located

next to gas field

- Liquefaction operational since 2004, proving MRC

technology at 400,000tpa

- LNG distributed by road in containers ~2000km, to

satellite vaporization stations for industrial and

residential consumers


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Selecting the Right Partner

- Some considerations1. Companies who operate in:

Similar geological basins In country or region

2. Companies who want access to product

For mid- or downstream use, including power To service existing markets To grow existing or new markets, including locally

3. Companies who want to deploy new technologies or approaches: Exploration or production (upstream) Downstream

4. Companies for one of many strategic reasons, such as: they have lots of cash They want to diversify into a new country/region They have a strategy to add natural gas to their portfolio


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Exploration Contractor Profiles

How do they fit with the country?

High

Low

Low High

Investment

Risk

Complex technology

Deep drilling

Complex geology

L Majors, large integratedcompanies

M Medium sized independents

S Smaller independents/ LateField Life

Shallow

Less complex technology

S

Shallow

Simple technology

Simple geology L

M


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Attracting Investors

- Critical Consideration

In attracting investors, there are always

trade-offs, and the choice of incentives

offered should be linked to the primary

national goals for the sector.

This requires a strategic look at the entire

industry value chain.


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Example of Value-Trade Off: Local

Content and Participation Local Participation

Local Content

Local Capability Development

These things have short-term costs, but may confer long-term benefits


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Petroleum Agreements&

Fiscal Regimes


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The Purpose of a Petroleum Agreement

Apetroleum agreementis the instrument by which the State

grants the right to exploit oil and gas and codifies the rights and

responsibilities of the parties to the agreement.

Forms part of the legal frameworkincluding laws, regulations

and sometimes court decisions.

In countries with parliamentary approval and oversight of

petroleum agreements, they form part of the legislative

framework

In countries with a strong executive, i.e. Peru, much of the

legal framework comes from executive orders.


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Types of Petroleum Agreements

e.g. UK, US, Peru, Australia

e.g. Indonesia, Colombia,

Angola, Trinidad y Tobago

e.g. Iran, Iraq, Mexico,

Ecuador, Bolivia


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Types of Agreements

Concession (Royalty/Tax System) Right to produce and sell

petroleum from a license area with a fixed royalty on

production and tax on profit

Production Sharing Contract Right to produce and sell

sufficient petroleum to recover costs and an agreed share of

profit oil. Government has right to lift and sell its own share

of production

Service contract Companies are paid a fixed fee per barrel(or cost recovery fee) to cover costs and an agreed margin


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Fiscal Instruments Common in Extractives

Gross Revenue To Investor

Profit

After-Tax Profit

After-WPT Profit

Investors

Dividend

W/H

tax

Government Revenue

Revenue From Hydrocarbons or Mining

Royalty

Production Cost

Profit Tax

WPT[WPT = Windfall

Profit Tax]

Govt.

Equity

Dividend

(minus W/H)

[W/H =

withholding]

Investor

Return


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Angola PSA Structure

Total Oil Extracted

Cost Oil Profit Oil

Sales by PrivateCompanies

Sales by Sonangol

Profit Tax: 50% of

their Profits

SonangolKeeps 10% ofits Revenues

90% ofRevenues Goto Treasury


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Bolivia Operating Contract (2006)

After-Royalty Net (50%)

Distributable Profits

C/F

P/T

Government Revenue

Crude Gas Sales by YPFB

IDH (32%) + Royalty (18%)

Recoverable Costs

YPFBShare*

After-

Tax

Profit

Investor

Return

[C/F =

Contractor Fee(Retribucin al

Titular)]

[P/T =

Company

Profits Tax(25%)]

* YPFB Share in Profits rangesfrom 1 72%, based on a formulaincorporating profitability,production levels, and price

Source: Daniel


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US OCS DeepwaterNew ZealandUKTrinidad Deepwater

PhilippinesWorld AverageGabonAzerbaijan AIOCMalaysia DeepwaterIndonesia 3rd Gen

Russia Sakhalin IIEgypt OnshoreNigeria ShelfUAE OPEC TermsLibya Avg 2005Venezuela 1996

Libya Block 124

000

0-25

03010101510

00060

81.535

89

050

25+

13.520220135

63818

12.581.535

89

40%50%60%70%80%90%Participation % ERR %

Government Take @ $20/BBL & $60/BBL

R/T

PSC

SA

World Avg

$20 $60 Oil Price

Few systems areprogressive today

Government Take changes are a function of design

Source: DanielJohnston (1994)


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Petroleum Agreements Key Elements vary

depending on local laws and regulations Duration and extensions

Work programme obligations

Contract area and relinquishments

Contractor rights, obligations and liabilities

Discovery and appraisal

Development and production

Cost recovery, Fiscal terms/production sharing

Measurement and valuation of petroleum

Natural gas

Management of Operations

Approval of work programmes

Confidentiality

Change of ownership

Environmental protection and safety

Training

Local content

Bonus payments

Abandonment of wells and

installations

Accounting procedures

Company Guarantees

Termination

Governing law and arbitration

Stabilisation

Best practice is to include as

much as possible in statutory

regulation that apply across all

licenses


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Incentives&

Disincentives


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GOVERNMENT CAN INFLUENCE THE RISK

REWARD EQUATION

Minimising the risk premium maximises the value for

the State

Government policy can impact the perception of risk

and therefore the required return from providers of

capital

1. Reduce Technical Risk

2. Reduce Commercial Risk3. Fiscal Incentives (and awareness of disincentives)

4. Reduced Social and Administrative Risk


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Some Fiscal/Taxation Considerations

The Total Picture Matters

Reduced Tax Rates can

Serve as Incentive

Investors want share of

Upside Benefits can be

linked to Risk

Investors want Flexibility

Regimes Should Be Robust

for Different Economic

and Field Characteristics

Reducing Commercial Risk


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Service Contract Incentives inInternational Comparison


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Country Case Study: Ecuador

Background:

Onshore heavy crude oil

Long-term decline in production; halted investmentand fall in private production since 2007

Existing/captive IOC presence (PetroOriental/CNPC,Petrobras, Repsol y Agip)

Heavily subsidized domestic gasoline market

Goals:

Increase private production;

Increase investment, both exploration &exploitation;

Decrease environmental risk from activities

Maintain sovereign control of sector

Results:

66% of contracts renegotiated, complete Feb 2011,increase in planned investment

Petrobras, CNPC, EDC (USA), Canada Grandereturned contracts

Contract Forms:

Hybrid Service Contract

State Benefits Company Incentives

Physical ownership of

subsoil rights

Margin of sovereignty

(Royalty) 25%;

Corporate tax 25%;

Contractor must develop

project with own economic

resources;

Strong provisions on

domestic content/training;

Guaranteed investment

obligations;

Environmental

remediation fund & best

technology and methods

Buy-Back clause;

Lowered corporate tax

(from 44.4%);

Pipeline rate fixed by

regulation, considering

costs, spending, and a

reasonable profit;

Two-tiered tariff rate: low-

risk and another for high-

risk;


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Country Case Study: Iraq

Background:

Onshore Oil and Gas

Very Fertile Fields, LowTechnical/Geographic Risk

Extremely High Political Risk

Goals:

Reversing Decline in Production atMajor Fields;

Revenues from Production Led by

Private Partners; Develop State Capacity

Contract Form:

Risk Service Contract

State Benefits Company

Incentives

Competitive and

transparent auctions

to pick partners 3

parameters:

-Enhanced

Production;

-Service Fee;

-Supplemental Fee;

NOC controls

transport, delivery;

Incremental

remuneration goes

down as profitability

rises (R-Factor);

25 % state interest

Company gets higher

fee for production

above baseline;

Contractor can

choose to receive

payment in Export Oil

Full cost recovery

quarterly;

20-year contract

term (longer than

previous Iraqi

contracts)


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Country Case Study: Mexico

Background:

On & offshore oil; Pemex w/ exclusivecontrol across the value chain (incl.petrochemicals).

Diminishing production and reserves;maturity of fields.

Federal Budget dependency on oilincome >30%

Goals:

Increase oil and gas reserves.

Reinvigorate marginal fields and

increase exploration. Meet the high requirements for

investment capital needed fordeepwater & complex new fields.

Contract Forms:

Pure Service Contracts

Government Benefits Company Incentives

Physical ownership of

subsoil rights and

production;

Strong and integrated

National Oil Company;

Revenues collected via

taxes on Pemex 79%

annual tax + special taxes

for Scientific Fund and

Auditora Superior;

Two windfall profits tax

(one determined by base

price and one determined

by percentage);

Minimum local content

25% of JV control;

Penalties for negative

environmental impact.

Payment for services,

determined through

formulas via unit pricing,

variable pricing, or a mix);

For multi-year contracts,

annual revisions in the

remuneration for

technological advances,

variations in market prices,

other changes that improve

efficiency, adjusting

according to prices andcosts;

Additional compensation

for faster execution,

appropriation of new

technologies or profit;

Annual buy-outs of SMEs.


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Incentives

Risk-Remuneration

Iraqs progressive remuneration

Ecuadors two-tier remuneration

Types of Service Fee Fee-per-barrel

Cost Remuneration Fee

Buy-back clause

Variable fees

Philippines FPIC paid out of Gross Revenue

Capital Allowances

Accelerated v. non-accelerated depreciation

Uplift

Ring Fencing

SUMMARY OF FISCAL INCENTIVES AND DISINCENTIVES

Neutral

Rent-Skimming devices

Progressive Remuneration Fee

Equity participation (from a purely fiscal

perspective)

Disincentives

Equity Participation (from an operational control

and operational efficiency perspective)

High Royalties


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Preguntas

Muchas Gracias

Tony Paul Todd Arena

[email protected] [email protected]

[email protected]

Patrick Heller

[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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