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Bureau of Economic Geology, The University of Texas at Austin
The elusive optimal fiscal regime for an extra- heavy oil resource: a case study
©CEE, Bureau of Economic Geology, UT Austin, 2
Outline
• Background• Evolution of fiscal regime• Uncertainty• Final comment
©CEE, Bureau of Economic Geology, UT Austin, 3
The Faja• The Faja is one of the largest oil deposits in the
Western Hemisphere and is now economically viable, over 70 years after its discovery.
• Hydrocarbon ranges from 5 to 12 API and 125m to 1600m of depth.
• Why did production finally take off?
©CEE, Bureau of Economic Geology, UT Austin, 4
Development of Unconventional Resources
• Geostatistical and production uncertainty– Where should wells be located?– How much will wells cost to build?– How will they perform?– For how long?– How much oil? Gas? Water? Sand?
• And let us not forget– For how much will the oil be sold?
• Historically blended with lighter crude oil.
©CEE, Bureau of Economic Geology, UT Austin, 5
Impact of Fiscal Regime
• 1976– Royalty Relief: No– Long run royalty: 16.67%– Taxes: 66.7%– Private participation: No
• 1990’s– Royalty Relief: 1% – Long run royalty: 16.67%– Taxes: 34%– Private participation: 50%
• Price Level– $8-$20 per barrel
©CEE, Bureau of Economic Geology, UT Austin, 6
HEAVY OIL PRODUCTION
200600
1200
2000
3000
0
500
1000
1500
2000
2500
3000
3500
1980 1985 1990 1995 2000
Initi
al P
rodu
ctio
n <B
PD
>
VERTICAL WELLS. IGP, OHGP BASAL
SANDS
BETTER SUCKER-ROD
PUMPS
HORIZONTAL WELLS 1500’,
ESP AND DILUENT
INJECTION
HORIZONTAL WELLS 4000 - 5000’, HIGH
CAPACITY ESP AND PCP
MULTIPHASE PUMPS
MULTILATERAL WELLS
$5000/BPDi
$1666/BPDi
$400/BPDi
©CEE, Bureau of Economic Geology, UT Austin, 8
Original Production Plan of the Faja
092 108 129 129 129 129 129 129
0
79105
105 105 116 116 116 116 116
0
0
130150 154 159 186 186 186 186
0
0
08
170 170170 180 208 208
129
169
317
461507
622 639671 681
711 711
0
100
200
300
400
500
600
700
800
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Synt
hetic
Cru
de <
KB
PD>
AmerivenSincorOCNPetrozuataCrude Oil
639
©CEE, Bureau of Economic Geology, UT Austin, 9
Investment in the Faja
Up to2000 2001
20022003
2004
1163
6666
660
1564
657455
100455
77
0
1000
2000
3000
4000
5000
6000
7000
8000In
vesm
ent <
Mill
ion
$>
Partners PDVSA
©CEE, Bureau of Economic Geology, UT Austin, 15
Tax – Royalty with depreciation schedule
• In the simple case– Company pays royalty– Company pays taxes on
profits after considering depreciation
Revenue
Royalty
Costs
Cash Flow=(Revenue – Royalty – OPEX – Dep.) * ( 1 - tax) + Dep.
TaxableDepre.
TaxTax
Net Profit
©CEE, Bureau of Economic Geology, UT Austin, 20
Expected Project Value 2006 (1998 $)
P50 $7,786.79
Considers price evolution between 1998 and 2006.
©CEE, Bureau of Economic Geology, UT Austin, 26
How was the value distributed?
• 1990’s– Royalty Relief: 1% – Long run royalty: 16.67%– Taxes: 34%– Private participation: 50%
©CEE, Bureau of Economic Geology, UT Austin, 28
In 2006 Temptation wins!
• 1990’s– Royalty Relief: 1% – Long run royalty: 16.67%– Taxes: 34%– Private participation: 50%
• Price Level– $8 - $12 per barrel
• 2006– Royalty Relief: None– Royalty: 33%– Taxes: 50%– Private participation: 50%
• Price Level– $50-60 per barrel
©CEE, Bureau of Economic Geology, UT Austin, 31
What is the status today?
• Incumbents did not add investments during transition of fiscal regime and some have been removed
• Add on investments still seem attractive– Lessons learned are in jeopardy of being lost– New operators versus Associations
• New projects will need market for Syncrude– Brasil will likely be the likely market for next project
©CEE, Bureau of Economic Geology, UT Austin, 32
Final Comments and Open Questions
• The value of the Faja is mostly untapped and will likely not be tapped in the short term. And Alberta?
• Should royalty change once uncertainty is resolved? Low initial royalty and then one that captures extra rents? Wouldn’t a corporate tax do the same?