The Role of Fiscal Regimes in Determining Competitiveness

of Company InvestmentsMarianne Kah

32nd USAEE/IAEE North American ConferencePetroleum Fiscal Regimes

July 30, 2013

Company Capital Allocation and Fiscal terms

Companies allocate capital to those opportunities that offer the most attractive returns with the highest capital efficiency at an acceptable level of risk

Project attractiveness is determined by a number of key metrics Net present value and probabilistic expected value (EMV) Profitability index Rate of return Net operating income Cash breakeven Return on capital employed

Fiscal terms impact the attractiveness of project returns

Instability of fiscal terms are a major project risk and impact the risk-weighted expected value of the project

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Factors Considered in Oil & Gas Company Investments

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Economic Attractiveness

Fiscal Terms - % gov’t take - Stability

Strategic - Fit with portfolio - Materiality

Cost - Complexity - Remoteness

Doability - Location constraints - Infrastructure

Prospectivity - Resource size- Probability of success

Commercial - Access to markets - Crude quality

Cycle Time - Time to production

Legal & Regulatory

Political Risk - Rule of law - Gov’t stability

Health, Safety, Environment & Sustainability - Personal & process safety - Environmental sensitivity & stakeholder issues

Characteristics of Fiscal Regimes That Encourage Investment

Government take commensurate with the commercial discovery size and cost of developing and operating in that country

Simple and transparent system

Stable regime

Not overly progressive such that extinguishes upside

Contains special incentives for challenged and mature basins

Minimizes distortions such that pre-tax and post-tax returns should result in the same project rankings

Recognizes revenue per barrel differences between oil and natural gas developments

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Relationship of Field Size and Cost to Pre-Tax Net Cash Flow

26.50 27.00 27.50 28.00 28.50 29.00 29.50 30.00 30.500

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000500 MM Barrel Field

155 MM Barrel Field

75 MM Barrel Field

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Total Development Cost per Barrel of Oil Equivalent

Tota

l Pre

-Tax

Net

Cas

h Fl

ow*

($M

M)

Field size and cost will determine how much room there is for investor returns and government take

Example from U.S. Gulf of Mexico

*Undiscounted, cumulative

Value Sensitivity in Balanced and Progressive Government Take Regimes

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Oil Price

Reserves

Capital Cost

Operating Cost

Schedule

(200) (100) 0 100 200 300

Balanced Tax Regime Progressive Tax Regime

A progressive tax regime reduces potential upside for oil price

$ Millions

Oil Price

Reserves

Capital Cost

Operating Cost

Schedule

(200) (100) 0 100 200 300

Balanced and Progressive Value Uncertainty Comparison

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ProgressiveGovernment Take

EMV = $(-36.8) MM

BalancedGovernment TakeEMV = $62.5 MM

In this example:• Under a balanced

government take the project would be developed

• Under the progressive government take the project would not go forward.

-500 -400 -300 -200 -100 0 100 200 300 400 5000%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Value

Cum

ulati

ve F

requ

ency

20132015

20172019

20212023

20252027

20290

5

10

15

20

25

30

0

10

20

30

40

50

60

70

80

90

100

8

Productionw/o continued

investment

OperatingCost per Barrel

As mature fields decline, their unit cost of operations increases

Mature Fields Face Many Challenges

Assumptions• 10% /yr. production decline• $135 MM / yr. operating cost

20132015

20172019

20212023

20252027

20290

5

10

15

20

25

w/o continued investment

With continued investment

of $228MM /yr.(if resource available)

Production

Mature fields need substantial investmentto slow the production decline

Production vs. Operating Cost

Thou

sand

Bar

rels

per

Day

Prod

uctio

n (T

hous

and

Barr

els p

er D

ay)

Operating Cost ($ / Barrel)

SB21 Improves Alaska’s Competitiveness

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Industry Share Improves Under SB21

Cost Structure Adversely Impacts Alaska Competiveness

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$/boe Unconventional-Bakken-North

Dakota

Mid-High Cost Development

Alaska

Revenue 100.00 100.00

Capex 17.50 25.00

Opex 5.00 15.00

Divisible Income 77.50 60.00

70% Government Take / Royalty

54.25 42.00

30% Industry Keep

23.25 18.00

Lower government take is required to provide competitive $/boe values in higher cost environments

40% 50% 60% 70% 80% 90% 100%0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

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United States

China

Brazil India

CanadaAustralia

Indonesia

Venezuela AngolaNigeria

United Kingdom

Qatar

NorwayMalaysiaRussian Federation Algeria

Libya Iraq

Countries With Lower Tax Takes Receive More Investment

Total Tax Take

Drill

ing

and

Com

pleti

on S

pend

ing

($M

M /

ene

rgy

outp

ut)

Total Government Tax Take vs. Industry Oil and Gas Spending

Source: Goldman Sachs Global Economics , Commodities and Strategy Research, June 2013

CHANGED COMPETITIVE LANDSCAPE

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The North America Shale Revolution Turns to Oil

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2000 2003 2006 2009 20120.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

Texas

North Dakota

States with Shale Liquids Leading Crude Oil Production Growth

Mill

ion

Barr

els p

er D

ay

Texas exceeded 2 MMBD for the first time since June 1988

Bakken, Eagle Ford, Permian & others pushed U.S. production over 7.0 MMBDSource: U.S. Department of Energy, Energy Information Administration

Tight Oil Drives Substantial Growth in U.S. Oil Production

14

0

1

2

3

4

5

6

7

8

9

10

11

U.S. Tight Oil

Pre-2005 Base Decline

U.S. Offshore

U.S. Onshore Conventional

~4 MMBD increase in total U.S. production between 2013-2020

U.S. Lower 48 Crude Production

Mill

ion

Barr

els p

er D

ay

20042007200920122014201720190

1

2

3

4

5

6

Bakken

Other Perm.

Eagle Ford

Spray., Wolf., Bone Spring

DJ

Miss. Lm.

Gulf CoastOther L48

Utica

U.S. Tight Oil Production

Source: COP Analytics; Rystad Energy; U.S. DOE Statistics

North America Oil Demand, Supply, and Net Imports

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North America will likely become oil independent by 2020Source: PIRA Energy Group

-5

0

5

10

15

20

25

30

1990 1995 2000 2005 2010 2015 2020 2025 2030

Demand

Net Imports

Mill

ion

Barr

els p

er D

ay

Global Oil Demand vs. Non-OPEC Oil Production* Growth

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Demand Non-OPEC Supply

Non-OPEC supply growth outpacing global oil demand growth

Mill

ion

Barr

els p

er D

ay

Demand GrowthOutpacing

Non-OPEC Supply Growth

Non-OPEC Supply GrowthOutpacing

Demand Growth

Source: International Energy Agency *Non-OPEC oil production includes NGLs (including OPEC), biofuels and refinery process gain

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Attractiveness of U.S. Tight Oil Investments

Relatively low breakeven oil prices (for resources accessible to IOCs)

Relatively low risk Low exploration risk Strong rule of law

Close to markets with high crude quality

Fast pay-back period Complements long lead-time projects in portfolio

Flexibility of varying investment levels to smooth out cash flow

High doability (service industry, infrastructure)

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Summary

The underlying attractiveness of the project will determine how much room there is for investor returns and government take

Overly progressive tax regimes discourage investment Changes to Alaska’s tax system should draw more investment

The shale revolution is increasing competition for company investment.

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