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Abstract
The economic and system measures associated with hydrocarbon development are subject to various levels of private and market
uncertainty. The purpose of this paper is to develop an analytic framework to quantify the inuence of private and market uncertainty
under a concessionary scal system. A meta-modeling approach is employed to develop regression models for take and investment
criteria in terms of various exogenous, scal, and user-dened parameters. The critical assumptions involved in estimation, the
uncertainty associated with interpretation, and the limitations of the analysis are examined. The deepwater Gulf of Mexico Na Kika
development is considered as a case study.
r 2007 Elsevier Ltd. All rights reserved.
Keywords: Computational modeling; Contract negotiation; Fiscal regimes; Meta-modeling
1. Introduction
The economics of the upstream petroleum business
is complex and dynamic. Each year a dozen or more
countries offer license rounds, introduce new model
contracts or scal regimes, or revise their tax laws. There
are more scal systems in the world than there are
countries producing oil and gas because numerous vintages
of contracts may be in force at any one time and contract
terms often change as countries gain experience in
licensing, global economic conditions shift, or as the
perception of prospectivity in a region change.
Governments decide whether resources are privately
owned or whether they are State property. Under a
concessionary (royalty/tax) arrangement, the contract
holder secures exclusive exploration rights from a private
party or government for a specied duration, as well as an
exclusive development and production right for each
commercial discovery. The concession was the rst system
used in world petroleum arrangements and can be traced to
silver mining operators in Greece in 480 B.C. [1]. The
earliest petroleum concessionary agreements consisted
only of a royalty. As governments gained experience and
Tel.: +1 225 578 4554; fax: +1 225 578 4541.
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investment criteria in terms of various exogenous (externally derived), scal, and user-dened (internally derived)
parameters. In meta-modeling, a model of the system is
constructed, and meta data is generated for variables that
are simulated within a given design space. Meta-modeling
is not a new construct, but as applied to scal system
analysis, is new and useful, being an especially good way to
understand the structure and sensitivity of scal systems to
various design parameters.
The outline of the paper is as follows. In Section 2,
background material on the basic stages of an oil and gas
venture is briey described, and in Section 3, the general
framework of cash ow analysis under a royalty/tax scal
regime is developed. Economic and system measures are
dened in Section 4, and in Section 5, the meta-modeling
approach is outlined. The basic elements of analysis are
illustrated on a hypothetical oil eld in Section 6. In
Section 7, the Gulf of Mexico deepwater eld development
Na Kika is presented as a case study. Conclusions complete
the paper.
2. The stages of an oil and gas venture
Oil and gas ventures are classied according to the
stages: leasing, exploration, appraisal, development, production, and decommissioning. In the United States, an oil
company acquires mineral rights from the government or
private landowner, either through auction or private
negotiation, while outside the US, an operator will
bid on a license (lease, or block area) or enter into a
contractual arrangement with a government without
retaining the right of the mineral resources. The contractor
or operator refers to an oil company, contractor group, or
consortium. The host government is represented by a
national oil company, an oil ministry, or both, with
additional input from government agencies responsible
for taxation, environment, planning and safety.
After acquiring leasing rights, the oil company will carry
out geological and geophysical investigations such as
seismic surveys and core borings using service subcontractors. The companys geophysical staff process and interpret
the data in-house or it may be contracted out to another
contractor or the same contractor who acquired the data. If
a play appears promising, exploratory drilling is carried
out. Offshore a drill ship, semi-submersible, or jack-up will
be used depending on the location of the eld, rig supply
conditions, and market rates.
If hydrocarbons are discovered, additional delineation
wells may be drilled to establish the amount of recoverable
oil, production mechanism, and structure type. Development planning and feasibility studies are performed and the
preliminary development plan forms the basis for cost
estimation.
If the appraisal is favorable and a decision is made to
proceed, nancial arrangements are made and the next stage
of development planning commences using site-specic
geotechnical and environmental data. Studies are carried
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M.J. Kaiser / Energy 32 (2007) 21352147
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k
X
t1
NCF
1 Dt1
PV f ; F
.
PV TC
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M.J. Kaiser / Energy 32 (2007) 21352147
where, PV x CT
Px
CT t
t1 1Dc t1
2139
i 1; . . . ; kg.
k
X
ai X i
i1
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M.J. Kaiser / Energy 32 (2007) 21352147
2140
6. Illustrative example
6.1. Development scenario
An oil eld with reserves estimated at 40 Mbbl and a
projected 11-year life is under development. The production capital and operating expenditures are depicted in
Table 1 and extracted from Johnston [3]. Total capital costs
are $101 M distributed as (20%, 13%, 43%, 25%) over
the rst four years of the projects cash ow. Capital
expenditures are assumed to comprise 18% intangibles
(services) and 82% tangibles (facilities, equipment, etc.).
The tangible capital costs are depreciated straight line over
ve years. Estimated operating costs during the life of the
project are $117 M which represents on average about
$3/bbl full cycle cost. OPEX is initially stable at around
$2.5/bbl and is forecast to increase with the life of the eld.
Royalty is calculated as a percentage of gross revenues,
and the income tax is calculated as a percentage of taxable
income. Tax losses are carried forward if negative. The
scal terms are described by the royalty and tax rate. There
are no royalty/tax holidays, domestic market obligations,
government participation, or negotiated terms. Ination is
assumed to be zero, and the oil price and discount factors
are assumed constant across the life of the eld. The
conversion factor describing the quality of the oil is
assumed to be unity and the allowance is set equal to zero.
Table 1
Projected production, capital expenditures, and operating expenditures for
a hypothetical 40 MMbbl eld
Year
Oil
production
(MMbbl)
CAPEX/I
($M)
CAPEX/T
($M)
OPEX
($M)
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0
0
0
4.500
7.000
5.600
4.760
4.046
3.439
2.923
2.485
2.087
1.732
1.427
0
10
5
3
0
0
0
0
0
0
0
0
0
0
0
0
10
8
40
25
0
0
0
0
0
0
0
0
0
0
0
0
0
0
11.5
14.0
12.6
11.8
11.0
10.4
9.9
9.5
9.1
8.7
8.4
0
Total
40.000
18
83
117.0
R2 0:93,
R2 0:98.
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Table 2
Regression models for contractor take, present value, and internal rate of return for a hypothetical 40 MMbbl eld
F(f)
Iterations
a1
a2
R2
a3
a4
a5
6(*)
43.1(3)
21.7(1)
50.0(5)
0.70
0.75
0.65
0.73
tc(f)
100
500
1000
5000
44.5(2)
36.1(7)
28.8(6)
29.1(10)
3.1(7)
2.8(30)
2.9(34)
2.8(56)
72.6(2)
84.5(10)
77.1(9)
81.2(17)
89.1(2)
71.7(8)
51.0(6)
56.6(11)
216.3(6)
163.4(21)
174.1(26)
165.2(41)
PV(f)
100
500
1000
5000
76.7(4)
74.3(16)
76.2(21)
74.6(47)
5.3(16)
5.2(61)
5.4(86)
5.4(95)
132.8(5)
129.2(16)
146.5(22)
135.0(49)
111.7(3)
99.1(12)
98.5(15)
101.1(37)
331.1(13)
318.1(46)
325.4(65)
316.0(145)
64.3(1)
21.0(1)
0.3(*)
1.7(*)
0.93
0.93
0.93
0.93
IRR(f)
100
500
1000
5000
18.1(13)
16.9(26)
17.9(37)
18.2(54)
1.8(73)
1.7(153)
1.8(218)
1.8(311)
40.7(15)
44.1(40)
43.7(52)
44.3(79)
30.5(14)
30.7(28)
31.3(38)
31.7(55)
89.1(47)
85.3(90)
87.4(139)
86.2(189)
2.3(1)
2.3(1)
0.5(*)
0.6(*)
0.98
0.98
0.99
0.99
V F R; T PV f ; F .
Example. For P $20/bbl, Dc 15%, and Dc 10%, the
present value of eld f under the development scenario is
computed as
PV f ; F 132:7 129:2R 99:1T.
The scal regime dened by F(R, T) (0.1667, 0.20)
yields the present value PV(f, F(0.1667, 0.20)) $91.3
million.
6.4. Fiscal equivalence
To compare a eld under two scal regimes, the
contractor will compare the present value functionals.
Denition. For eld f, the scal regime F(R, T) is preferred
T
if
to the scal regime F R;
T
PV f ; F R; T
V F R; T; F R;
T40.
PV f ; F R;
T)o0,
If V(F(R, T), F R;
the contractor will prefer
T)
0, then
F R; T to F(R, T), and if V(F(R, T), F R;
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Fig. 2. The Na Kika Host Platform and Subsea Well Conguration. Source: Shell.
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2143
Table 3
Projected production, capital expenditures, and operating expenditures for the Na Kika eld development
Year
Oil production
(bbl/day)
Gas production
(MMcf/day)
CAPEX/T ($M)
CAPEX/I ($M)
OPEX ($M)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0.0
0.0
100,000.0
95,177.5
95,177.5
82,002.8
55,538.0
37,514.4
25,279.5
16,683.1
11,694.0
0.0
0.0
0.0
325.0
312.0
312.0
304.2
235.5
171.9
125.2
91.5
66.8
48.8
52.83
350.13
475.33
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
19.24
263.98
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
5.66
25.30
30.09
30.09
30.09
30.09
37.28
37.28
37.28
106.47
878.29
283.22
369.65
Total
Source: MMS.
For lease sales held after November 28, 2000, the water
depth categories and value of Q(f) is specic to the lease
sale.
R2 0:99;
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Table 4
The design space of the Na Kika system parameters
Parameter (unit)
Model I
Model II
Model III
Model IV
Po ($/bbl)
Pg ($/Mcf)
R (%)
Q (MMBOE)
T (%)
Dc (%)
Dg (%)
U(20, 30)a
U(2, 5)
U(0.10, 0.20)
U(0, 100)
U(0.35, 0.50)
U(0.15, 0.40)
U(0.05, 0.15)
LN(25, 5)b
LN(3.5, 1.5)
U(0.15, 0.18)
U(0, 100)
U(0.40, 0.50)
U(0.05, 0.15)
U(0.00, 0.05)
LN(25, 5)c
LN(3.5, 1.5)c
U(0.15, 0.18)
U(0, 100)
U(0.40, 0.50)
U(0.05, 0.15)
U(0.00, 0.05)
LN(25, 5)c
LN(3.5, 1.5)c
U(0.15, 0.18)
U(0, 100)
TR(0.38, 0.44, 0.50)d
U(0.05, 0.15)
U(0.00, 0.05)
Table 5
The impact of royalty relief on contractor take, present value, and internal rate of return for the Na Kika eld development
F(f)
Model
j(f)a0+a1P+a2Pg+a3R+a4Q+a5T+a6D+a7Dg
a0
a1
t(f)
I
II
III
IV
80.0(161)
86.7(369)
86.8(123)
86.7(30)
PV(f)
I
II
III
IV
1460.7(33)
2113.6(29)
2252.5(12)
2088.8(4)
IRR(f)
I
II
III
IV
63.4(54)
72.9(40)
82.8(6)
83.9(2)
a2
a3
0.2(18)
0.2(26)
0.1(4)
0.1(1)
0.5(13)
0.1(21)
0.1(2)
0.1(*)
38.2(40)
56.9(98)
52.6(12)
74.2(14)
131.5(42)
232.0(119)
226.5(14)
212.9(13)
2.6(145)
2.8(185)
2.9(9)
3.4(8)
8.6(103)
5.6(196)
8.4(7)
7.71(6)
R2
a4
53.0(50)
54.1(51)
53.3(21)
54.6(12)
1259.8(79)
2200.6(7)
1957.1(3)
3285.9(4)
58.9(24)
68.4(8)
68.5(1)
169.1 (3)
0.04(42)
0.04(121)
0.03(50)
0.04(30)
a5
a6
79.1(112)
77.4(243)
78.6(99)
76.0(12)
1.1(12)
1.8(17)
1.2(6)
2.2(9)
1856.1(30)
3404.8(35)
3414.2(17)
3632.6(3)
0.1(49)
0.2(50)
0.1(7)
0.2(9)
126.2(76)
150.0(61)
167.2(10)
152.1(2)
84.3(198)
108.6(337)
107.9(145)
108.9(81)
3699.4(99)
8294.5(83)
8086.6(42)
8407.1(34)
131.5(131)
171.5(65)
160.0(11)
186.8(9)
a7
86.2(78)
107.9(164)
107.0(70)
106.8(40)
79.8(1)
27.6(*)
609.8(2)
212.1(*)
2.2(1)
2.2(*)
1.6(*)
19.8(2)
0.99
0.99
0.98
0.95
0.97
0.98
0.84
0.75
0.99
0.99
0.44
0.34
R2 0:97,
R2 0:99.
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Table 6
Statistical Data for the Na Kika Regression Models
Functional (unit)
Model
P5
Mean
P95
tc (f) (%)
I
II
III
IV
15.1
31.8
31.4
33.3
31.6
38.6
38.4
39.4
53.4
45.7
46.2
45.9
I
II
III
IV
483
1178
1321
1339
939
1809
1756
1818
1540
2745
2324
2331
I
II
III
IV
42.1
64.8
69.9
70.9
62.7
89.7
87.7
90.8
95.2
125.6
112.7
120.7
PV(f) ($M)
IRR(f) (%)
PV f ; Q PV f ; 0 1:1Q
0:092Q;
PV f ; 0
1192
2145
tc f ; Q tc f ; 0 0:04Q
0:00105Q;
tc f ; 0
38:0
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