Exploration and Development Strategies Governments Role. Assistant Director General Mr. Gaute Erichsen

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1 Exploration and Development Strategies Governments Role Assistant Director General Mr. Gaute Erichsen The Petroleum Policy and Management Project 4th Workshop of the China Sichuan Basin Case Study 30 May 3 June 2006 Beijing, China Presentation Outline 1. Norwegian oil and gas a success story? 2. Making oil and gas an engine for growth 3. Oil and gas policy 4. Attracting investment and competence 5. Pinpointing challenges and finding solutions 6. Promoting opportunities 7. R&D and the role of governments

2 Make it an epoch not an episode The activities should benefit the whole society Government need to use terms that lead to a high government take But remain attractive for the leading oil companies and new investors Competence in focus Saving for future generations Norwegian Economy at a Glance (2004) Population 4,6 million GDP Unemployment billion NOK (USD 250 bn) 4,8 percent Inflation (CPI) 2 percent Sources: Statistics Norway, White Paper no.1 ( ), OECD

3 The Largest Industry in Norway (2005) 25 % 33 % The petroleum sector s share of GDP The petroleum sector s share of State revenues 52 % 24 % The petroleum sector s share of total investment The petroleum sector s share of total exports Sources: Statistics Norway, Ministry of Finance due to a vast resource base 26 % 33 % 41 % Produced and sold Undiscovered resources To be produced Total resource base = 81 billon barrels of oil equivalents

4 ...making Norway a world leading producer Source: Petroleum Economics Ltd....providing income for future generations Oil and gas has become an epoch in Norwegian History

5 Presentation Outline 1. Norwegian oil and gas a success story? 2. Making oil and gas an engine for growth 3. Oil and gas policy 4. Attracting investment and competence 5. Pinpointing challenges and finding solutions 6. Promoting opportunities 7. R&D and the role of governments The world at night...

6 Gobal demand for energy is increasing......driven by developing economies

7 ...while product prices are soaring 100,00 90,00 80,00 70,00 USD/barrel 60,00 50,00 40,00 30,00 20,00 10,00 0, Nominal price Real price But be aware of pitfalls; Nigeria has seen no benefits USD/per capita constant value Indonesia Malaysia Mexico Nigeria Source: IMF, SNF s study on Nigeria

8 Neither has Gabon, now appraching the end GDP/capita oil value/capita Why is the oil sector such a challenge? Oil revenues provide governments with a source of revenue independent of its citizens Diminishing the need for accountability Diminishing the need for governance Oil wealth may lead to high level of corruption Oil revenue transparency is of fundamental importance

9 Considerable CCOP-potensial Oil: Proved reserves at end 1984 at end 2004 Thousand Thousand million million Share barrels barrels of total Norway 4,9 9,7 0,8% China 16,3 17,1 1,4% Indonesia 9,6 4,7 0,4% Malaysia 2,9 4,3 0,4% Thailand 0,1 0,5 Vietnam - 3,0 0,2% TOTAL WORLD 761,6 1188,6 100,0% Of which OECD 118,7 82,9 7,0% OPEC 510,0 890,3 74,9% Non-OPEC 170,6 177,4 14,9% Former Soviet Union 81,0 120,8 10,2% Natural Gas: Proved reserves at end 1984 at end 2004 Trillion Trillion cubic cubic Share metres metres of total Norway 0,56 2,39 1,3% China 0,89 2,23 1,2% Indonesia 1,70 2,56 1,4% Malaysia 1,39 2,46 1,4% Papua New Guinea - 0,43 0,2% Thailand 0,21 0,43 0,2% Vietnam - 0,24 0,1% TOTAL WORLD 96,39 179,53 100,0% Of which: European Union 25 3,62 2,75 1,5% OECD 15,62 15,02 8,4% Former Soviet Union 37,50 57,41 32,0% Source: BP Statistical Review making an historic opportunity, to make oil and gas an engine for growth

10 Discussion Could your country gain from more transparency? If yes, in which areas? Presentation Outline 1. Norwegian oil and gas a success story? 2. Making oil and gas an engine for growth 3. Oil and gas policy 4. Attracting investment and competence 5. Pinpointing challenges and finding solutions 6. Promoting opportunities 7. R&D and the role of governments

11 What s the objective? Maximize the value of national petroleum resources Secure welfare Secure employment Regional distribution Environmental perspective Develop competence Developing a national petroleum industry Long term benefits... How do you reach your objectives... Do it yourself? or Involve international companies with technical expertise and comprehensive experience?

12 ...and how are roles and responsabilities defined? NATIONAL AUTHORITY National plans Legal basis Resource management Licencing OIL COMPANIES Exploration Field development Contracting Operation Marketing DELEGATED AUTHORITY Supervison Data management Assessments and proposals Audits... providing for the right decision makers? President Parliament Government Ministry The NOC

13 Different policies for different phases Opening of new areas Seismic surveys Award Exploration Field Development Field operation Removal Licencing Operations Decommissioning Licencing Opening of new areas Seismic surveys Award Exploration Field Development Field operation Removal What areas to award Governance principles Work program requirements Relinquishment rules

14 Development and operations Opening of new areas Seismic surveys Award Exploration Field Development Field operation Removal Which procedures should apply? How do you assess possible impacts? Which steps ensure a transparent process? Who should be involved? Are conditions required? Decommissioning Opening of new areas Seismic surveys Award Exploration Field Development Field operation Removal Leave in place? Leave no footprints?

15 Etablishing an oil and gas framework Define objectives Define an overall philosophy Define policies for different phases Implement policies in a legal sheme Legislation Contracts Enforcement Discussion What s your main objectives? What s your approach to achieve them? What s the role of your NOC?

16 Presentation Outline 1. Norwegian oil and gas a success story? 2. Making oil and gas an engine for growth 3. Oil and gas policy 4. Attracting investment and competence 5. Pinpointing challenges and finding solutions 6. Promoting opportunities 7. R&D and the role of governments Finding the right balance... Governmental objectives Maximise government take Taxation State participation versus Company objectives Maximise shareholders interests Avoid political/economical uncertainty

17 Fiscal systems Fiscal systems can be characterized by: - The tax level - The tax system Fiscal systems can create disincentives to exploration and exploitation of petroleum resources due to either the tax level or the tax system Fiscal systems should be means to fulfil national objectives Fiscal policies Government objective The bargaining relationship depends mainly on the profitability and the risk - Geological potential must be taken into acount - Competition from other petroleum provinces Crucial to designe fiscal systems based on geological potential and maturity

18 Fiscal Policies - Implications Government take imply that companies pay a part of the cost and get a part of the income If the effects of taxation are such that the company s share of income equals the company s share of costs the tax system is said to be neutral The relative relation between income and cost in the after-tax cash-flow will not differ from the pre-tax cash flow With a neutral taxation, the after-tax decisions in relation to exploration, development, production and abandonment are identical to the pre-tax decisions. Case 1 neutral fiscal system Cash-flow: Total costs = 50 mill US$ (discounted) Total Income = 75 mill US$ (discounted) NPV before tax = 25 mill US$ Introduction of neutral taxes α = β = 80% NPV after tax = 5 mill US$ Government take = 20 mill US$ Tax share of marginal income = α Tax share of marginal costs = β

19 Case 2 non-neutral fiscal system Cash-flow: Total costs = 50 mill US$ (discounted) Total Incomes = 75 mill US$ (discounted) Introduction of non neutral taxes; α = 80% and β = 60% NPV before tax = 25 mill US$ NPV after tax = - 5 mill US$ Government take = 30 mill US$ Tax share of marginal income = α Tax share of marginal costs = β Economic oil and gas will remain unexploited Case 3 neutral tax and state participation EMV before tax EMV = (- A)(1-p) + (NPV)(p) EMV = (-40) = 60 mill US$ EMV after tax EMV= (- A)(1-p)(1-β) + (NPV)(p)(1-α) EMV= (-50)*0,8*0,2 + (500)*0,2*0,2 EMV = (-8) + 20 = 12 mill US$ A = Exploration costs = 50 mill US$ P = prob of discovery = 20% NPV of field dev = 500 mill US$ Tax on marginal income = α = 80% Tax on marginal costs = β = 80% Gov participation share = G =60% Government participation 1: State enters post discovery EMV post tax = (- A) (1-p)(1- β) + (NPV)p(1-α)(1 G) EMV post tax = (-50)*0,8*0,2 + (500)*0,2 *0,2*0,4 EMV post tax = (-8) + 8 = 0 Government participation 2: State enters prior to discovery EMV post tax = (- A) (1-p)(1- β) (1 G) + (NPV)p(1-α)(1 G) EMV post tax = (-50)*0,8*0,2*0,4 + (500)*0,2 *0,2*0,4 EMV post tax = (-3,2) + 8 = 4,8

20 Fiscal incentives key messages Minimize distortions cased by fiscal systems Maximize government take, given your objectives Presentation Outline 1. Norwegian oil and gas a success story? 2. Making oil and gas an engine for growth 3. Oil and gas policy 4. Attracting investment and competence 5. Pinpointing challenges and finding solutions 6. Promoting opportunities 7. R&D and the role of governments

21 Challenges ahead of Norway Challenges: Mill Sm3 oe/yr Fields 5 billion boe by 2015 Enhanced Recovery Discoveries 1. success within exploration 2. enhanced recovery 3. reduced costs Undiscovered resources Presentation Outline 1. Norwegian oil and gas a success story? 2. Making oil and gas an engine for growth 3. Oil and gas policy 4. Attracting investment and competence 5. Pinpointing challenges and finding solutions 6. Promoting opportunities 7. R&D and the role of governments

22 Promoting Opportunities What s the message What can you offer? How do you promote? Passive Promotion Web-site Access to data Active Promotion Who s the target? Were to go? When to go? Good resource base Why the NCS? Well developed Infrastructure Proximity to gas markets Predictable regulatory framework Award of Production licenses based on the applicant's qualifications in petroleum related areas Skilled workforce and world class supply industry Ministry of Petroleum and Energy Discussion Any success stores on promotion?

23 Presentation Outline 1. Norwegian oil and gas a success story? 2. Making oil and gas an engine for growth 3. Oil and gas policy 4. Attracting investment and competence 5. Pinpointing challenges and finding solutions 6. Promoting opportunities 7. R&D and the role of governments How to pass the Valley of Death What can the industry do? What should governments do? Cash flow + The Valley of Death High Risk Area Time

24 OG 21 Technology Target Areas Technology Target Areas Environm entally sound operations Exploration and reservoir characterization Enhanced recovery Cost efficient drilling and intervention Integrated operations and real tim e reservoir m anagem ent Subsea processing and transport Deep water and subsea production technolog y Gas Technologies Lead Parties Shell Norwegian Petroleum Directorate Hydro ExxonMobil C onocop hillips Statoil Shell Hydro Ministry of Petroleum and Energy Revised Strategy, 2005 w w w.m pe.dep.no