OCS Study BOEM 2011-xxx CERA Comparative Assessment of the Federal Oil and Gas Fiscal System Final Report U.S. Department of the Interior U.S. Department of the Interior Bureau of Ocean Energy Management Bureau of Land Management OCS Study BOEM 2011-xxx IHS CERA Comparative Assessment of the Federal Oil and Gas Fiscal System Final Report Author Irena Agalliu October 2011 Prepared under BOEM Contract M10PC00090 IHS Cambridge Energy Research Associates 55 Cambridge Parkway Cambridge, Massachusetts, 02142 Published by: U.S. Department of the Interior U.S. Department of the Interior Bureau of Ocean Energy Management Bureau of Land Management DISCLAIMER This report was prepared under contract between the U.S. Department of the Interior, Bureau of Ocean Energy Management, Regulation and Enforcement and Bureau of Land Management and IHS Cambridge Energy Research Associates. The opinions, conclusions, or recommendations expressed in it do not necessarily reflect the view and policies of BOEM and BLM, nor does mention of trade names or commercial products constitute endorsement or recommendation for use. REPORT AVAILABILITY Extra copies of the report may be obtained from the Public Information Office (Mail Stop 5034) at the following address: U.S. Department of the Interior Bureau of Ocean Energy Management 381 Elden Street Herndon VA 20170 CITATION Suggested citation: Agalliu, I. 2011. Comparative assessment of the federal oil and gas fiscal systems. U.S. Department of the Interior, Bureau of Ocean Energy Management Herndon. VA. OCS Study, BOEM 2011-xxx. 300 pp. ACKNOWLEDGMENTS Thanks are extended to David Hobbs who advised on this project, the expert reviewers Emil Sunley and Carole Nakhle, and the Department of Interior team led by Dr. Radford Schantz for their helpful suggestions and comments. The author would like to acknowledge Rick Chamberlain, Tim Zoba, Curtis Smith, Aube Plop Montero, Diane Betts, Gina Hsieh, Imre Kugler, Shawn Gallagher, Adebola Adejumo, Taner Sensoy, Horacio Cuenca, and Jim Watkins, for the cooperation, encouragement , support and the tremendous effort in collecting information and developing the cost and economic models for this study. iii ABSTRACT The competitiveness of oil and gas fiscal systems is often based on random ranking of jurisdictions without taking into consideration the relative prospectivity of the respective jurisdiction, the varying policy objectives, and socioeconomic drivers, not to mention the different investment environments, distance from markets, commodity prices, typical finding and development cost, relative size of discoveries, well productivity, and other factors. Analyses that focus solely on government take fail to account for the limitations of the government take statistic. A composite index that compares fiscal systems on government take as well as measures of profitability, revenue risk, and fiscal stability in relation to the relative prospectivity and policy objectives is a more objective and thorough approach to comparing fiscal systems. This report compares the oil and gas federal fiscal systems against a selected peer group of jurisdictions that compete for investment in the upstream oil and gas industry. iv TABLE OF CONTENTS ABSTRACT ................................................................................................................................ iv TABLE OF CONTENTS................................................................................................................ v LIST OF FIGURES ...................................................................................................................... ix LIST OF TABLES ....................................................................................................................... xii ABBREVIATIONS, ACRONYMS AND SYMBOLS ..................................................................... xvii EXECUTIVE SUMMARY ............................................................................................................ 1 1. Introduction ................................................................................................................ 1 2. Objective of the Study ................................................................................................ 2 3. About IHS CERA ........................................................................................................... 2 4. Approach ..................................................................................................................... 2 4.1 Finding the Right Peer Group.............................................................................. 3 5. Government Take on Federal Lands ........................................................................... 5 6. Fair Share .................................................................................................................... 6 6.1 What Is Fair Share? ............................................................................................. 7 7. Resource Endowment ............................................................................................... 10 8. Ranking of Fiscal Systems ......................................................................................... 11 8.1 Ranking of Fiscal Terms ..................................................................................... 13 8.2 Revenue Risk ..................................................................................................... 15 8.2.1 Revenue Risk Index....................................................................................... 18 8.3. Fiscal Stability .................................................................................................... 20 8.4 Composite Index ............................................................................................... 22 9. Alternative Fiscal Systems......................................................................................... 24 10. Conclusion ............................................................................................................. 28 1. CONTEXT AND SCOPE ................................................................................................... 31 1.1 Approach ............................................................................................................... 31 1.1.1 Size and Availability of the Oil and Gas Resources in Place .......................... 32 1.1.2 Finding and Development Costs ................................................................... 32 1.1.3 Price and Cost Scenarios ............................................................................... 33 1.1.4 Finding the Right Peer Group........................................................................ 36 1.1.4.1 Worldwide Approach ............................................................................ 36 1.1.4.2 Regional Comparisons .......................................................................... 36 1.1.4.3 Similar Cost Environments .................................................................... 36 1.1.4.4 IHS CERA Fiscal System Selection Criteria ............................................ 37 1.1.5 Ranking of Fiscal Systems ............................................................................. 41 1.2 Organization of the Report ................................................................................... 43 2. DESIGN OF PETROLEUM FISCAL SYSTEMS .................................................................... 45 2.1 Overview ............................................................................................................... 45 2.2 The Concept of Government Take ........................................................................ 47 2.2.1 Definition and Use of Government Take ...................................................... 47 2.2.2. Components of Government Take................................................................ 48 2.2.2.1 Ad Valorem, or Production-Based Levies ............................................ 48 v 2.2.2.2 Profit-based Levies ................................................................................ 50 2.2.2.3 Equity Participation ............................................................................... 52 2.2.2.4 Quasi-fiscal Instruments ........................................................................ 54 2.2.3 Limitations of Government Take .................................................................. 55 2.3 Literature Review .................................................................................................. 56 2.3.1 Government Take Referenced by GAO ......................................................... 56 2.3.2 The Government Take for New Acreage ...................................................... 60 2.3.3 Fair Share ...................................................................................................... 63 2.3.4 What Is Fair Share? ....................................................................................... 65 2.4 Features of U.S. Federal Oil and Gas Fiscal Systems............................................. 69 3. FACTORS INFLUENCING GOVERNMENT TAKE AND INVESTMENT DECISIONS ............. 71 3.1 Resource Endowment ........................................................................................... 71 3.2 Political and Commercial Risk ............................................................................... 74 3.3 Policy Goals and Constraints ................................................................................