31st International Conference of the System Dynamics Society Developing a Fair and Robust Energy Policy Frank Blaskovich Blaskovich Services, Inc

31st International Conference of the System Dynamics Society

Developing a Fair and Robust Energy Policy

Frank Blaskovich

Blaskovich Services, Inc.


AGENDA

Slide 2

• Goals & Approach

• Model Design & Features

• Policy Development

• Example

• Summary


GOALS & APPROACH

Slide 3

• Fair, robust policy

• Uncertainty difficult to quantify

• Technical and non-technical factors

• Start simple, add complexity

• Process most important


MODEL DESIGN & FEATURES

Slide 4

• System Dynamics & Feedback

• Oil Production & Economics

• State & Producer

• Maximize NPV


SYSTEM NARRATIVE

StateProducer

Energy Production

Slide 5


SYSTEM NARRATIVE

HIGHER Taxes & Royalties => Higher State Revenue =>Higher State NPV

LOWER Taxes & Royalties => Higher Producer Profits =>

Higher Producer NPV

Higher Production => Higher Revenue =>

Higher NPV

Slide 6


SYSTEM NARRATIVE

ProducerDevelopment Plan

Wells to drill

Facilities

Field Development(3 yr min)

Economicforecast

Production

Exponential declinebased on oil reserves

Producer Net Revenue(Gross Revenue - State

Royalty)

Producer Cash Flow(Net Revenue - Opex -

State Taxes)

Producer CashFlow Positive?

Yes

NoEnd of Field Life(Abandonment)

Essential Logic of Current Model

Slide 7


SYSTEM MODEL

Slide 8

Oil Reserves Cum Oil

ProductionOil Rate

Decline RateInitial Oil Reserves

Max Well Oil Rate

Active WellsOil Price

Gross Oil Revenue

Discount Rate

Decline Point

<Decline Point>

Success Rate

Failure Factor

<INITIAL TIME>

<Time>

Drilling Cost PerWell

OPEX Cost Rate

Producer TotalCosts

Producer Net OilRevenue

State Royalty Rate

State Oil Revenue

Producer NPVState NPV

Time Conv Factor

CAPEX Costs

Facility CostRate

Development Time

<INITIAL TIME>

<Time>

Pipeline Tariff

<Oil Rate>

Pipeline OPEXCosts

State Prod Tax

<Producer TotalCosts>

OPEX Costs

Producer NetIncome Before Tax

State Income Tax

State Income TaxRate

Producer NCFBefore Tax

Producer NCFAfter Tax

<Producer NCFAfter Tax>

<State IncomeTax>

State RoyaltyIncome

<State RoyaltyIncome>

<DevelopmentTime>

Producer NCF AfterTax Last Year

End Of Field LifeEOFL Flag

<EOFL Flag>

Pipeline OPEXCorrelation

State Cum OilRevenue

Producer CumNCF After Tax

Wells DrilledEach Year

Total WellsDrilled

Drilling Rate PerYear

<Total WellsDrilled>

<Wells Required>

<Total WellsDrilled>

<Max Well OilRate>

Max Field OilRate

<Max Field OilRate>

<CAPEXDepreciation>

<UndepreciatedCAPEX Expensed>

<Field AbandonmentCost>

<Active Wells>

<CAPEXExpensed>

<State Prod TaxRate>

Oil Production

State Economics Producer Economics

Field Operations


State NPV Producer NPV

SENSITIVITY RESULTS

Slide 9

Levers

Drivers


REGRET ANALYSIS

Slide 10

• Uncertainties difficult to define

• Minimize impacts of “worst case” scenarios

• Regret = difference between best and actual outcomes

• Multiple futures, wide probability distributions


REGRET DEFINITIONS

Slide 11

• Regret(s,f) = Maximum NPV(f) – NPV(s,f)

• Relative Regret(s,f) = Regret(s,f) / Maximum Regret(f)

• Equivalent Regret(s,f) = |State Relative Regret(s,f) – Producer Relative Regret(s,f)|

s = scenario (lever(s))

f = future (driver(s))


REGRET EXAMPLE

Slide 12

Ta

x R

ate

State NPV

Maximum NPV

Failure

Decreasing NPV Increasing Regret

Minimum Regret

Maximum Regret

Future


REGRET EXAMPLE

Slide 13

Future Oil Price = $100/stbInitial Oil Reserves = 200 mmstb

0.36

State NPV

3.8

(0.2)

3.1 Regret = 3.8 – 3.1 = 0.7

Regret = 3.8 – 3.8 = 00.72

0.80

Ta

x R

ate

0 Regret = 3.8 – 2.3 = 1.5

State Regret

2.3


REGRET EXAMPLE

Slide 14

0.36

State Regret

0

0.7 Relative Regret = 0.7 / 1.5 = 0.4

Relative Regret = 0 / 1.5 = 00.72

0.80

Ta

x R

ate

Relative Regret = 1.5 / 1.5 = 1.00

State Relative Regret

1.5



REGRET EXAMPLE


Possible Solution

0.36

State Rel Regret

0

0.4

0.72

0.80

Ta

x R

ate

0

Prod Rel Regret

0.4

0.8

01.0

0.0

0.8

1.0

Equiv Regret

Slide 15


STATE RELATIVE REGRET

Slide 16

Non-optimal solutions


PRODUCER RELATIVE REGRET

Slide 17

Non-optimal solutions


EQUIVALENT REGRET

Slide 18

Equivalent regret solutions


NPV vs PRICE & RESERVES

Slide 19

State NPV Results Producer NPV Results


SUMMARY

Slide 20

• Fair & robust policies require compromise and consideration of unexpected events

• System Dynamics & Regret Analysis are useful policy development & analysis tools

• Other factors also need to be considered


Slide 21

Questions or Comments?

Documents

31st International Conference of the System Dynamics Society Developing a Fair and Robust Energy Policy Frank Blaskovich Blaskovich Services, Inc