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Information | Analytics | Expertise © 2014 IHS / ALL RIGHTS RESERVED BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS JUNE 2014.

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Presentation on theme: "Information | Analytics | Expertise © 2014 IHS / ALL RIGHTS RESERVED BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS JUNE 2014."— Presentation transcript:

1 Information | Analytics | Expertise © 2014 IHS / ALL RIGHTS RESERVED BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS JUNE 2014

2 © 2014 IHS Contents: BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE Scope Peer Group Selection and IHS indices Fiscal Benchmarking Political Risks Benchmarking CO2 Tax and Policy Benchmarking IHS Expert View IHS Assumptions and Methodology

3 © 2014 IHS Scope: BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE The scope of this study is to assess Norway’s attractiveness for the international investor through the benchmarking its: Fiscal attractiveness for the E&P investment; Political risk and related issues; Carbon tax and overall carbon policy for the petroleum industry. This has been carried out through comparison with those of countries that are also competing with Norway for international investment. Benchmarking was carried out using: IHS proprietary tools and services; Collation of the opinions of IHS subject matter experts with particular expertise in the three areas summarised above.

4 Peer Group Selection and IHS Indices 4 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

5 © 2014 IHS Peer Group Countries Selection (Fiscal and Political Benchmarking): BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE In order to identify Peer Group countries for fiscal and political benchmarking, IHS has focused on countries with similar parameters to Norway by analysing: Maturity of the country’s E&P sector: Majority of portfolio should be predominantly mature exploration countries with subsurface parameters and E&P activity levels comparable to Norway. Include 1-2 partly explored countries, with existing development & production, recent discoveries, and potentially several frontier/unexplored basins. Geography: The portfolio should include countries that have exploration and production operations offshore and more specifically in the water depth similar to Johann Sverdrup development (120 m.) Type of fiscal regime: Type of fiscal regime should not be used as a limiting factor – i.e. Peer Group should include both Tax and Royalty and PSC regimes. Within the identified group of countries, consider regimes that attract the highest level of investors as an indication of appropriate risk/reward for Governments and Investors and a sound benchmark for comparison purposes.

6 © 2014 IHS Peer Group Countries Selection (CO2 Tax and Carbon Policy Benchmarking): IHS developed a selected group of countries to serve as benchmarks for the stringency of Norway’s CO2 taxes and climate policy and their implications for Norway’s investment attractiveness. Countries were selected take into account: Oil and gas exploration and production characteristics Upstream investment activity levels Carbon intensity and absolute GHG emissions trends Climate policy and regulation Significance to international energy system 6 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

7 © 2014 IHS Peer Group Countries BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE Fiscal and Political Benchmarking UK USA Australia CO2 Tax and Carbon Policy Benchmarking UK USA Australia Canada Brazil Canada Brazil Nigeria Indonesia Angola Mozambique Israel Nigeria Indonesia Mexico China Netherlands Denmark Russia UAE Saudi Arabia Malaysia Countries common for fiscal, political and carbon policy benchmarking Countries specific for fiscal, political and carbon policy benchmarking

8 © 2014 IHS INDICES In the execution of work, IHS used the following Indices: 1. IHS Country Risk – Political, Economical, Legal, Tax, Operation, Security Risk (PELTOS) ; 2. IHS Overall Oil and Gas Risk Service Rating (OGRS); 3. IHS Petroleum Economics and Policy Solutions (PEPS); 4. IHS Carbon Policy Indices (CPI). 8 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

9 Fiscal Benchmarking 9 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

10 © 2014 IHS Summary of Assumed Fiscal Terms: BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE CountryFiscal Regime Contr act Type Bonus es / Other Payme nts State Participation Royalty Cost Recovery/Tax Depreciation Cost Recovery Ceiling Contractor Profit Share Income Tax Rate Additional Taxes Norway Norway - Royalty Tax Terms R/TNone20%*None TAX (Exploration: XPS; Development: 6 yrs) SPT (Exploration: XPS; Development: 6 yrs; 22% Uplift on Development 4 yrs) N/A 27%SPT (51%) Angola Angola Model PSA Terms Offshore (Shelf & Deep Water less than 1000m) PSA S*, T*, F* 65% *None CRC (Exploration: XPS; Development: 4 yrs, 10% uplift); TAX (n/a) 50% of PDN (rising to 65% after 5 years) 70% - 10%50%None Australia Australia - PRRT Terms Offshore (except NW Shelf) R/TNone TAX (Exploration: XPS; Development: 8 yrs) N/A 29% PRRT (40%); WTH (15%) Brazil Brazil - Royalty Tax Terms Offshore less than 400m (non-pre salt areas) R/TS*, FNone10% SPF (Intangible: XPS; Tangible: 10 yrs); TAX (10 yrs) N/A 34% SPF (0% - 40%); ISS (5%)*; IPI (10%)*; ICMS (22%)*; PIS (1.65%); COFINS (7.6%); II (15%)*; RDE (1%) Canada Canada - Nova Scotia Generic Offshore Royalty Tax Terms R/TS*None2% - 35% TAX (Exploration: XPS; Development: Intangible - 30% db, Tangible - 25% db) N/A Provincial (16%); Federal (15%) WTH (25%) Indonesia Indonesia Bidding Rounds PSC Terms PSA S*, P*, A 20% CRC & TAX (Exploration: XPS; Development: Intangible - XPS, Tangible - 25% db 5 yrs) 100% of (PDN - FTP) Oil: %; Gas: % 25% (40% effective tax rate incl. withholding tax) DSO (14.58% of oil 25% market price after 5 yrs of production); WTH (20%) Israel Israel Royalty Tax Terms R/TNone 12.5%TAX (10 yrs)*N/A 22% (reducing to 18% by 2016) Petroleum Profits Levy (0% - 50%); WTH (25%) Mozambique Mozambique Model PSA Terms PSA P*, T*, F* 10%* Oil: 10%; Gas: 6% CRC & TAX (Exploration: XPS; Development: 4 yrs) 70%* of (PDN - ROY) 95% - 50%*32%WTH (20%)

11 © 2014 IHS Summary of Assumed Fiscal Terms (cont.): BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE CountryFiscal Regime Contract Type Bonuses / Other Payment s State Participation Royalty Cost Recovery/Tax Depreciation Cost Recovery Ceiling Contractor Profit Share Income Tax Rate Additional Taxes Nigeria Nigeria Royalty Tax Terms On & Off- shore less than 200m R/TS*, P*None* 16.5% - 20% CRC & TAX (Exploration: XPS; Development: Intangible - XPS, Tangible - 5 yrs) N/A 67.75% - 85% Local Content Development Levy (1%); Indirect Taxes (1% - 20%) (Oil); Education Tax (2%) United Kingdom United Kingdom - Royalty Tax Terms R/TNone TAX (XPS)N/A 30% Supplementary Charge (32%) United States United States - Gulf of Mexico Royalty Tax Terms Offshore less than 200m R/TS*None18.75% TAX (Intangible: XPS; Tangible: 150% db over 10 yrs) N/A 35%WTH (30%) Terms marked with an asterisk (*) represent biddable and /or negotiable terms, for which no specific figures are provided in the Model Contracts. For the purposes of fiscal models used in the benchmarking, IHS made assumptions for such terms, as reflected in the table above and on subsequent slides. Where possible, IHS indicated terms from the most recent actual contracts or bidding rounds, based on the publicly available data. Surface rental fees are not modelled because they are usually tied to contract area size ($/acre or $/km), which varies widely and does not warrant a generic assumption. Abbreviations used in the table : S: Signature Bonus D: Discovery Bonus P: Production Bonus T: Training fees A: Administration Fees F: Fund payments CRC: Cost Recovery Ceiling XPS: costs are expensed & recovered /deducted immediately PDN: Gross Production ROY :Royalty Source: IHS PEPS

12 © 2014 IHS Average Undiscounted State Take* % for Oil and Gas Fields in the Peer Group 12 Source: IHS PEPS Norway has the third highest average Undiscounted State Take % under the current assumptions (hypothetical fields and assumed fiscal terms) after Nigeria and Angola among the selected Peer Group Countries. * State Take measures % share of the gross project net cash flow before state participation which accrues to the host country over the life of the field as a result of royalty, production shares, taxes, and participation in the project by the National Oil Company. BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

13 © 2014 IHS Average Undiscounted State Take for Marginal, Economic and Upside Oilfields in the Peer Group 13 Norway has the third highest average Undiscounted State Take % for marginal, economic and upside fields under current assumptions (hypothetical fields and assumed fiscal terms) after Nigeria and Angola among the selected Peer Group Countries. Source: IHS PEPS BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

14 © 2014 IHS Undiscounted State Take for Offshore Oil Fields vs Remaining Offshore Oil Resources 14 IHS compared the level of Undiscounted State Take in the Peer Group countries for selected regimes with IHS estimates of their remaining level of oil reserves for specific areas relevant to the fiscal terms. Norway has a relatively high Undiscounted State Take % vs remaining oil resources among the Peer Group countries. Remaining resources are an estimate of discovered hydrocarbons, which IHS considers could be recovered under existing technical and economic conditions, which have yet to be produced (specific to areas where fiscal terms apply). Note: Remaining resources are specific to offshore areas but not specific to fiscal terms Source: IHS PEPS, IHS Edin C BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

15 © 2014 IHS Undiscounted State Take for Offshore Gas Fields vs Remaining Offshore Gas Resources 15 IHS compared level of Undiscounted State Take in the Peer Group countries with estimates of their remaining level of gas reserves for specific areas relevant to the fiscal terms. Norway has a relatively high State Take % vs remaining oil resources among the Peer Group countries. Remaining resources are an estimate of discovered hydrocarbons, which IHS considers could be recovered under existing technical and economic conditions, which have yet to be produced. Note: Remaining resources are specific to offshore areas but not specific for fiscal terms. Source: IHS PEPS, IHS Edin BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

16 © 2014 IHS E&P Activity Rating of Peer Group Countries (Q2 2014) scale, lower score represents higher investor attractiveness Norway ranks third best in the Peer Group countries and sixth in the IHS PEPS E&P attractiveness rating of 129 countries. Note: PEPS Ranking and Rating database only captures regimes with E&P activity over the period from 2008 onwards. Source: IHS PEPS BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

17 © 2014 IHS Fiscal Rating of Peer Group Countries (Q2 2014) scale, lower score represents higher investor attractiveness Norway ranks third to last in the Peer Group countries and one hundred and second in the IHS PEPS Fiscal Rating of 129 countries. Note: For this chart Undiscounted State Take was calculated taking into account the Peer Group countries’ fiscal terms selected specifically for the fiscal benchmarking. However the overall Norway’s fiscal rating is the IHS PEPS Fiscal rating which is calculated for the regime that represents most E&P activity in the country. Source: IHS PEPS BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

18 © 2014 IHS E&P Activity Rating vs Fiscal Rating 18 Higher score => lower attractiveness as perceived by investors Low E&P Attractiveness (~5) and Fiscal Attractiveness (>3), i.e. Frontier exploration with untested prospectivity and more severe fiscal terms Higher E&P Attractiveness ( 2.5) Average E&P score (just above 2.5) and more attractive fiscal terms (around or below 2.5 ) Norway falls in the second attractive group of countries with high E&P attractiveness but tougher fiscal terms. Source: IHS PEPS C BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

19 © 2014 IHS Norway Passed: CO2 tax Reduction of uplift on capital allowances. Canada Newfoundland: No recent proposals Fiscal Developments and Watch-Points across the Peer Countries Indonesia Cap on cost recovery imposed then withdrawn; concern about domestic supply obligations Mozambique Gas legislation planned. Fiscal terms under review for new projects, Australia Plans for reduction in corporate tax from mid under a royalty/tax framework Brazil First ever PSA contract awarded, Supreme Court decision on validity of new royalty distribution law still pending US offshore: Multi-year debate on reduced drilling allowances but action blocked by political impasse Angola: occasional dispute over contract interpretation of contracts. No new proposals. Israel Changes to gas export policy, 2013.Current focus: gas export tariff. Nigeria: 6 th year of discussion on Petroleum Industry Bill which proposes retroactive fiscal changes. UK: Introduction of HPHT field allowances, regular tweaks through budget. Source: IHS Oil & Gas Risk Service

20 Political Risks Benchmarking 20 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

21 © 2014 IHS Macro Benchmarking – Overall Political, Economical, Legal, Tax, Operation, Security Risk (PELTOS) 21 Risk score Rank from lowest risk to highest Norway ranks second best in the Peer Group countries and seventh in the overall PELTOS rating of 207 countries 1-5 scale, 1.0 indicates minimum risk and 5.0 maximum risk Rating from 1.25 to 1.74 is classified as Negligible Source: IHS Country Risk Rating BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

22 © 2014 IHS Macro Benchmarking – Political Risk 22 Risk score Norway’s political risk is ranked third lowest in the Peer Group countries after USA and Australia. The Political score takes into account a country's institutional permanence, representativeness, and internal and external political consensusThe Political score takes into account a country's institutional permanence, representativeness, and internal and external political consensus Rank from lowest risk to highest Rating from 1.25 to 1.74 is classified as Negligible 1-5 scale, 1.0 indicates minimum risk and 5.0 maximum risk Source: IHS Country Risk Rating BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

23 © 2014 IHS Macro Benchmarking – Economic Risk 23 Norway’s economical risk is ranked third lowest in the Peer Group countries after Australia and USA. The Economic score takes into account a country's degree of market orientation, policy consistency and forward planning, the economy's diversity and resilience, and macroeconomic fundamentalsThe Economic score takes into account a country's degree of market orientation, policy consistency and forward planning, the economy's diversity and resilience, and macroeconomic fundamentals. Risk score Rank from lowest risk to highest Rating from 1.75 to 1.99 Is classified as Low 1-5 scale, 1.0 indicates minimum risk and 5.0 maximum risk Source: IHS Country Risk Rating BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

24 © 2014 IHS Macro Benchmarking – Operational Risk 24 Norway’s operational risk is ranked fifth in the Peer Group countries. The Operational score takes into account a country's attitude to foreign investment, infrastructural quality, labour relations, and bureaucracy and corruptionThe Operational score takes into account a country's attitude to foreign investment, infrastructural quality, labour relations, and bureaucracy and corruption Risk score Rank from lowest risk to highest Rating from 1.75 to 1.99 is classified as Low 1-5 scale, 1.0 indicates minimum risk and 5.0 maximum risk Source: IHS Country Risk Rating BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

25 © 2014 IHS Oil & Gas Sector Benchmarking – Overall Oil and Gas Risk Service Rating 25 Risk score Norway ranks second best in the Peer Group countries and third in the overall OGRS rating of 131 countries. Source: IHS Oil & Gas Risk Service Rank from lowest to highest 1-10 scale, 10 indicates low risk and 1 high risk This rating corresponds to low risk BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

26 © 2014 IHS Oil & Gas Sector Benchmarking – Export Risk 26 Risk score Norway’s Export Risk is ranked first along with United Kingdom in the Peer Group The Export Risk score is an assessment of constraints on the export of hydrocarbon resources, including physical infrastructure constraints, domestic and international political interference, and security risks. Source: IHS Oil & Gas Risk Service Rank from lowest to highest 1-10 scale, 10 indicates low risk and 1 high risk This rating corresponds to low risk 1-10 scale, 10 indicates low risk and 1 high risk BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

27 © 2014 IHS Oil & Gas Sector Benchmarking – Sanctity of Contract 27 Source: IHS Oil & Gas Risk Service Norway’s Sanctity of Contract Risk is ranked first along with United State, Canada and Australia in the Peer Group. The Sanctity of Contract score measures the strength of a country's historical willingness to abide by contractual agreements. Rank from lowest to highest Risk score This rating corresponds to the low risk 1-10 scale, 10 indicates low risk and 1 high risk BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

28 © 2014 IHS Oil & Gas Sector Benchmarking – Ministerial/Policy Volatility 28 Risk score Norway’s Ministerial/Policy Volatility Risk is ranked second in the Peer Group. The Ministerial/Policy Volatility score measures the risk to foreign operators of frequent or unpredictable changes in government policies affecting the hydrocarbon sector and/or in the sector’s leadership. Source: IHS Oil & Gas Risk Service Rank from lowest to highest This rating corresponds to a low risk 1-10 scale, 10 indicates low risk and 1 high risk BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

29 CO2 Tax and Policy Benchmarking 29 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

30 © 2014 IHS IHS Carbon Policy Index (CPI) benchmarks climate policy, with higher scores indicative of more stringent regulations 30 Sources: IHS Energy 4.0 <= CPI <= <= CPI <= <= CPI <= 2.0 CPI <= <= CPI <= 3.0 CPI Scores IHS Carbon Policy Index heat map by country score — Summer 2014 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

31 © 2014 IHS IHS Carbon Policy Index (CPI) 31 Norway stands out and ranks first when IHS benchmarks the relative stringency of national climate policy environments 1-10 scale, 10 indicates low risk and 1 high risk 0-5 scale, Maximum CPI score is 5.00 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

32 © 2014 IHS Norway’s overall climate policy index score tops this peer group, with policy clarity, ambition and scope key drivers 32 Source: IHS Energy Carbon Policy Index ratings for country peer group by component and total scores Peer RatingCountry NameClarityAmbition Carbon EmissionsGovernance Policy ScopePrioritizationTotal 1. Norway United Kingdom Denmark Netherlands USA Mexico China Brazil Canada Australia Indonesia United Arab Emirates Russia Nigeria Malaysia Saudi Arabia BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

33 © 2014 IHS Norwegian carbon tax rates are higher than most carbon- related charges in the peer group countries 33 California 11 Quebec 10 3 New England States* 4-11 Chinese Provinces** Norway 4-69 Denmark 31 UK 16 Netherlands Alberta 15 Quebec 3 28 British Columbia 1-4 Mexico Australia 22 © 2014 IHS _0613 * Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont ** Beijing, Chongqing, Guangdong, Hubei, Shanghai, Shenzhen, Tianjin Source: IHS using The Climate Group data Carbon prices in peer group countries May 2014 (2013US$/tCO2e) Carbon taxes Carbon markets Market in effect Market planned Market and tax in effect Tax in effect Tax planned BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

34 IHS Expert View 34 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

35 © 2014 IHS Macro Political Risk Expert View Norway is overall politically and operationally stable Norway compares favorably to the peer group countries regarding Political, Economic and Operational Risk. Recent developments affecting the oil and gas industry have not led to changes in the overall IHS Political or Operational Risk ratings of the country. The Political Risk rating was last changed in Q to reflect the change from a majority to a minority government and concurrent reduction in policy predictability and government stability. The Political Risk rating of 1.50 out of 5 is the second-lowest rating in the world, and Norway ranks 7 th lowest in the world on the overall PELTOS risk rating, at BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

36 © 2014 IHS Macro Political Risk Expert view (cont.) The government is positive towards new oil and gas development The centre-right coalition government that came to power in October 2013 is generally favourable towards increased oil and gas development and reductions in taxes and regulations. Its platform commits it to review the tax regime for the sector with a view to encourage increased exploitation, but not to revise its predecessor’s tax increases. The government has so far been constrained by working within the budgetary framework set by its predecessor, prioritising election promises, and its lack of a parliamentary majority. The government’s intentions for the sector and ability to implement its own policies will become clearer with the presentation of the 2015 budget. 36 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

37 © 2014 IHS Macro Political Risk Expert view (cont.) The parliamentary composition increases policy unpredictability regarding environmental policy The minority government’s reliance on one or two of the Liberals and Christian Democrats for a majority creates policy uncertainty, given these parties’ more ambitious environmental policies. This was primarily reflected in the request for power-from-land for Johan Sverdrup from The Green Party is actively working to create a united “environmental opposition” of the five smaller parliamentary parties, but this will depend on Labour Party support for a majority. The Liberals and Christian Democrats are unlikely to consistently side with the opposition, but instead use the threat of doing so to extract compromises from the government. 37 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

38 © 2014 IHS Macro Political Risk Expert view (cont.) The Labour Party is likely to become gradually more “green” The Labour Party’s support for the Utsira High electrification request and for pulling the sovereign wealth fund out of carbon investment indicate a move towards a “greener” profile. This is driven partly by the personal conviction of its new leader, Jonas Gahr Støre, partly by the gradual rise of a more environmentally-minded generation of party politicians, and partly by strategy – the Green Party’s rise has demonstrated the voter appeal of green policies. In the current parliamentary period, an additional driver of Labour policy will be the desire to inflict defeats on the government. However, the party is still heavily influenced by labour unions and a concern for what it deems “responsible” economic policies, and is likely to temper any “green” policies where these come into direct conflict with job creation or industry concerns. 38 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

39 © 2014 IHS Oil & Gas Sector Risk Expert View There are few watch points for possible changes in OGRS risk rating Despite that Norway has a fairly demanding fiscal and regulatory framework it has shown a high degree of policy and regulatory stability over the years – therefore it has a consistently low risk score in terms of the hydrocarbon sector. The increased CO2 tax, reduction of uplift in allowances are a concern but haven’t materially changed IHS scores under the specific categories of hydrocarbon sector entry, hydrocarbon sector shocks and hydrocarbon sector operations. They however provide a watch-point for future score changes if such interventions are repeated and applied retroactively – the specific scores of concern are contract sanctity and ministerial/policy continuity. 39 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

40 © 2014 IHS Oil & Gas Sector Risk Expert View (cont.) There are few watch points for possible changes in OGRS risk rating One particular watch-point which could result in a downgrade in Norway’s score for the monetization of resources (reflected in export risk) – is if parliament repeats it’s attempt to intervene on field development plans in a way which extends the timeline for development (and with it, the costs). The compromise on Johan Sverdrup has been noted in this regard, but the precedent provides a watch-point for future action in this regard. 40 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

41 © 2014 IHS Fiscal terms expert view Fiscal Terms, Attractiveness and Fiscal Risks Norway ranks third to last in the Peer Group countries and one hundred and second in the IHS PEPS Fiscal Rating of 129 countries. However, Norway ranks third best in the Peer Group countries and sixth in the IHS PEPS E&P attractiveness rating of 129 countries. As a result Norway falls in the second attractive group of countries with high E&P attractiveness but tougher fiscal terms. IHS assessment of the risk of a retroactive change in fiscal terms has actually been reduced as a result of the changes as IHS see them less likely to be repeated in the 1 year time horizon. 41 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

42 © 2014 IHS CO2 Tax and Policy Expert View Norway has the world’s most stringent climate policy framework in place today Of the 80 countries regularly assessed by IHS for their climate policy stringency, and of the 16 peer countries benchmarked for this study, Norway ranks number one. The key factors accounting for this rank are Norway’s long-term climate policy ambition and the scope of carbon regulations the government has adopted across the economy to date. Norway’s CO2 tax is the highest carbon tax levied on the upstream oil and gas industry within the group of countries covered by this study. The impact of the CO2 policy, as well as the features of the broader climate policy environment, create higher operational costs and regulatory constraints that may temper the appeal of new upstream investments. 42 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

43 © 2014 IHS CO2 Tax and Policy Expert View (cont.) Norway’s aggressive long-term climate policy goals make next steps in domestic emissions reduction program higher cost Norway’s policy mix has been notably effective at reducing national carbon intensity over time and much of the country’s low hanging emissions reduction fruit has now been picked. The commitment to carbon neutrality by 2050 points to the need for the government to continue to expand and direct climate regulations to secure further emissions savings going forward. At this stage in the country’s decarbonisation programme, further emissions cuts from the Norwegian offshore sector are likely to come at a particularly high cost. Alternative sources of emissions reductions in other sectors of the Norwegian economy, including manufacturing and transport, as well as the use of carbon offsets, may be more cost effective. 43 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

44 IHS Assumptions and Methodology 44 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

45 © 2014 IHS IHS Country Risk Methodology IHS’s country risk-rating system enables clients to compare and contrast the investment climate in 207 countries around the world. The system separately rates the political, economic, legal, tax, operational, and security environments in each country. All 207 countries' overall Country Risk Ratings aggregate six component ratings—Political, Economic, Legal, Tax, Operational, and Security. The principal quality these ratings are measuring is stability. Additionally however, businesses require adequate conditions in the first place; governments must ensure the right policies and safeguards are in place to allow businesses to operate effectively. A country with a high risk rating is where businesses face continual threats to their operations, either from direct physical intervention, or because of the poor underlying conditions and stability. The Political Risk Rating assesses the overall framework of the country’s political situation—whether the institutions are stable and democratic, whether the government is able to pursue its policy programme without continual political deadlock, and whether the country’s political life is sufficiently settled and secure. The Economic Risk Rating again looks at conditions and stability at the macro level—whether the economy provides a secure market and base for investors, and whether the government’s policies are beneficial or harmful. The Operational Risk Rating looks directly at the conditions on the ground for businesses. It assesses the bureaucratic and physical obstacles that businesses and their staff face in going about their work. The Political, Economic and Operational ratings were chosen to give a more granular assessment of the operating environment as well as the political and commercial challenges facing investors. 45 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

46 © 2014 IHS IHS Country Risk Methodology (cont.) Every country is given a risk rating of between 1 and 5 for each of the six factors (political, economic, legal, tax, operational, and security); 1.0 indicates minimum risk and 5.0 maximum risk. The minimum increment for risk ratings is The overall country risk is then calculated by aggregating the six ratings according to their individual weightings. 46 Overall Risk Rating Risk Description Insignificant Negligible Low Moderate Medium Significant High Very high Extreme BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

47 © 2014 IHS IHS Oil & Gas Risk Service (OGRS) Methodology The OGRS model consists of five categories: Politics, Economics, Hydrocarbon Sector Entry, Hydrocarbon Sector Operations and Hydrocarbon Sector Shocks. Each category is in turn comprised of several risk factors, which are accorded grades from “A” (lowest risk) to “F” (highest risk). There are a total of 21 risk factors making up the five categories. Each category comprising the model is the weighted average of the individual normalized factor scores. In other words, each individual factor is ranked on a scale from 10 (corresponding to “A”) to 1 (corresponding to “F”), and these normalized scores are then weighted and summed to produce the category score. The five category scores themselves are then weighted and summed to produce the OGRS Overall Score. To provide granularity, each individual factor’s letter grade is associated with a number that denotes whether it is strong or weak within its given score range. For example, a score of 6 is given to a risk factor that is a strong “C” based on the criteria for the grade – that is, it is likely to move up to a “B” score or is more resilient compared to how that risk factor is scored for peer countries. Rankings A: 10, 9 B: 8, 7 C: 6, 5 D: 4, 3 F: 2, 1 47 BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

48 © 2014 IHS Oil & Gas Risk Service (OGRS) – Ratings Model 48 Total OGRS Score Country Politics (20%) Country Economics (20%) Hydrocarbon Sector Entry (20%) Hydrocarbon Sector Operations (25%) Hydrocarbon Sector Shocks (15%) Country Politics (20%) State Capacity (25%) Political Legitimacy (25%) Political Violence (25%) Geopolitical Risk (25%) Hydrocarbon Sector Operations (25%) Sanctity of Contract (25%) Regulatory Burden (25%) Civil Society Risk (20%) Corruption (15%) Rule of Law (15%) International Openness (30%) Government Take (30%) Expeditiousness of Contract (20%) State/NOC Role (20%) Hydrocarbon Sector Entry (20%) Hydrocarbon Sector Shocks (15%) Export Risk (30%) Facility and Personnel Violence (30%) Ministerial/Policy Volatility (25%) Labor Unrest (15%) Country Economics (20%) Transfer Risk (35%) Primary Fiscal Balance (25%) Real Per Capita GDP Growth (25%) Level of Development (15%) BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

49 © 2014 IHS Oil & Gas Risk Service (OGRS) – Selected Risk Factors 49 M INISTERIAL /P OLICY V OLATILITY : The Ministerial/Policy Volatility score measures the risk to foreign operators of frequent or unpredictable changes in government policies affecting the hydrocarbon sector and/or in the sector’s leadership. Shifts in the content or direction of policy usually (but not always) stem from changes in the government itself or from changes in leadership at the Energy Ministry and/or the national oil company. Shifts in policy – especially when made abruptly – pose the most risk to foreign operators, compared to changes in leadership that do not alter policy (at times, because the new figure placed at the helm of the energy sector management does not have real authority). E XPORT R ISK : The Export Risk score is an assessment of constraints on the export of hydrocarbon resources. Scores are determined by considering several factors: physical infrastructure constraints (such as pipeline capacity); domestic or external political interference over export infrastructure or policy measures that favor domestic uses of energy over exports; security risks including piracy, vandalism or terrorism; the risk of international sanctions that directly or indirectly restrict hydrocarbon exports; and the potential for production cuts in coordination with OPEC’s informal market management strategy. S ANCTITY OF C ONTRACT : Sanctity of Contract refers to a broad range of issues relating to a government's treatment of its contractual obligations. At one extreme, this may involve the outright repudiation of property rights in the form of nationalization of an industry or expropriation of a company's assets. In a less severe form, often referred to as “creeping expropriation,” a government may seek to renegotiate terms and conditions, or to impose new terms and conditions retroactively. Contract frustration - whether deliberate or the result of excessive bureaucracy - can also undermine the sanctity of a written contract. These risk factors were selected for OGRS benchmarking as: ministerial/contract volatility factor reflects how stable the country's energy policy and consistency between administrations; expert risk factor best reflects risks relating to monetization of assets ( e.g. recent interventions on field development plans (Johann Sverdrup); sanctity of contracts factor best reflect the impact that retroactive changes in contracts (CO2 tax, reduced uplift) - and how Norway compared on contract changes to other countries. BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

50 © 2014 IHS IHS PEPS Methodology – fiscal benchmarking methodology 50 To gain better understanding of petroleum fiscal regimes around the world, IHS evaluates their economic impact on a wide range of hypothetical oil and gas projects, using fiscal ranking methodology. Analysis is done on a consistent basis with the only variable being the fiscal regimes themselves. The analysis is intended to allow the comparison of petroleum fiscal regimes around the world as they apply generally to upstream oil and gas projects (rather than model any particular known field developments themselves). Number crunching is done in IHS proprietary software called A$SET – IHS economic evaluation software. Results, as well as summary of fiscal regimes and terms, are stored in the database called IHS PEPS. Fiscal Benchmarking assumptions: Assumptions are made in the following categories: Oil and gas field reserves size (volume of recoverable reserves) E&A, development and operating costs Oil and gas prices Inflation rate of 3% per annum is applied to costs and prices. Cashflows are discounted at 12.5% nominal discount rate. This fiscal analysis methodology is intended to allow the comparison of upstream petroleum fiscal regimes around the world, rather than model any particular known field developments themselves. While the assumptions are, therefore, simplifications of real-life scenarios, they present a wide distribution of possible outcomes from new exploration projects, thus enabling a consistent comparison of the overall impact of each fiscal regime. BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

51 © 2014 IHS IHS PEPS Methodology – fiscal benchmarking methodology 51 1.The approach assumes 6 reserves sizes for each of oil and gas (a total of 12 sizes), ranging from Very Small to Giant: Oil Fields (MMbbl): 10, 25, 50, 100, 250, 750 Gas Fields (Bcf): 60, 150, 300, 600, 1,500, 4,500 2.Each hypothetical field is developed under 3 different cost scenarios (low, medium (or base), and high) Low and high costs are calculated as Base case unit of production development cost less 50% and plus 50% respectively 3.Each development is produced at 3 different price scenarios (low, medium, high) Oil Prices: Low case = $50/bbl; Base Case = $75/bbl; High case = $100/bbl Gas Prices: Low Case = $4/mcf; Base Case = $6/mcf; High Case = $8/mcf Prices are the same regardless of country/regime 4.Hence, a total of 108 development scenarios are modelled: 12 field sizes x 3 cost scenarios x 3 price scenarios (54 for oil and 54 for gas), allowing the user to select any combination of the field size/cost/price. 5.Fields are assumed to have only one primary product stream – either crude oil or non-associated natural gas. The location of a field (onshore/offshore) is not specified. 6.No economic limit is assumed, i.e. all fields produce their recoverable reserves, even if this means negative annual cashflow towards the end of project life – this ensures the full economic impact of each fiscal regime is properly reflected in the analysis. BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

52 © 2014 IHS IHS PEPS Methodology – fiscal benchmarking methodology Field GroupField Size MMbblCost CategoryDev. Cost $/unitPrice $/unit Gross Project 12.5% $/unit 1Upside10.00LOW Upside25.00LOW Upside10.00MEDIUM ………………… 14Upside10.00MEDIUM Upside250.00LOW Upside50.00LOW Economic100.00HIGH Economic25.00MEDIUM Economic250.00MEDIUM ………………… 14Economic250.00LOW Economic750.00HIGH Economic25.00LOW Marginal100.00HIGH Marginal250.00MEDIUM Marginal750.00LOW ………………… 14Marginal10.00HIGH Marginal750.00LOW Marginal25.00HIGH Uneconomic250.00MEDIUM Uneconomic50.00HIGH Uneconomic100.00HIGH Uneconomic750.00MEDIUM Uneconomic250.00HIGH Uneconomic750.00HIGH The Gross Project Cash Flow is defined as follows: Gross Project Cash Flow = Gross Revenue - Gross Operating Costs - Gross E&A Costs - Gross Development Costs Note: Gross Project means before any state participation and/or fiscal term is applied. 12 Uneconomic fields (6 gas and 6 oil) with negative or lowest Gross Project NPV per UOP are excluded from the analysis of average State Take figures Illustrative Summary Results (Oil) 32 Upside fields (16 oil and 16 gas) 32 Economic fields (16 oil and 16 gas) 32 Marginal fields (16 oil and 16 gas) Average econom ic indicato rs across 96 fields (48 oil and 48 gas) are included in the State Take analysis The 108 hypothetic developments are assessed on Gross Project level and classified into “marginal”, “economic” or “upside” based on Gross Project economics BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

53 © 2014 IHS IHS PEPS Ratings and Rankings Methodology 53 PEPS Ratings and Rankings methodology enables to rank a country by overall E&P risk. It is composed of approximately 50 variables. Each variable is assigned a rating in the range 0 to 5 (where zero is the best score) and this is then weighted. For detailed methodology please refer to the Appendix. The PEPS Ratings and Rankings Index (RRI) consists of three indices (E&P Activity, Fiscal Terms, Political Risk) that are designed to allow an overall assessment of E&P risk that affects a particular country’s comparative attractiveness for petroleum investment. Only E&P and Fiscal Rating was used for this project, since political risks were assessed through IHS country risk and OGRS Variables and weightings BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

54 © 2014 IHS IHS CPI methodology 54  The Carbon Policy Index (CPI) benchmarks the orientation and extent of energy-related national climate change mitigation policies.* This benchmarking framework, currently covering a total of approximately 80 countries worldwide, enables the consistent assessment of current and future exposure of oil and gas companies to regulatory constraints on GHG emissions in their upstream, refining, and marketing operations. National carbon policy benchmarking scores are assigned on a scale of , with higher scores representing more demanding carbon policy positions and more stringent regulatory constraints on carbon.  Current CPI: This is based on the current status of climate policy and carbon regulation, and is comprised of six components – Ambition, Clarity of Policy, Policy Scope, Carbon Emissions, Governance, and Climate Prioritization. Each component addresses a specific question that feeds into the overall assessment of the carbon policy context and the relative stringency of national carbon regulatory frameworks. Ratings are based on country policy research to examine national climate change policy frameworks and specific policy measures for emissions reduction. The six components of the Current CPI answer the following questions:  Future CPI: Building on the Current CPI and factoring in anticipated developments in a given country’s climate change policy framework and regulatory measures, each country is assigned a Future CPI score. Like the Current CPI, this is expressed on a scale of , with higher scores indicating more stringent carbon regulatory operating environments. The Future CPI serves as a directional indicator reflecting expectations over a relatively short-term time frame of three to seven years.  National Future CPI scores are associated with one of five possible Carbon Policy Outlook Classes: How ambitious is carbon policy? How clear is the medium- to long- term direction of carbon policy? How extensive is the scope of regulatory constraints on carbon emissions? What is the trend in carbon emissions relative to the scale of the population, the national economy, and national energy consumption? How credible is government commitment to carbon policy objectives? To what extent, if at all, are carbon policy objectives balanced against competing priorities of energy security and economic growth? NO CONSTRAINTS ANTICIPATED DECLINING CONSTRAINTS STABLE TRAJECTORY INTENSIFYING CONSTRAINTS STEP CHANGE AHEAD * The CPI methodology does not take into account GHG mitigation policies and measures that relate to land use, land use change, and/or climate change adaptation. BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014

55 © 2014 IHS CPI — Component weightings 55 Carbon Policy Index Score Ambition (25%) Definition of and commitment to challenging climate change mitigation policy (100%) Clarity (15%) Visibility on future climate change policy direction (85%) Emergence of policy focus on climate change mitigation (15%) Policy scope (20%) Sectoral coverage (60%) Range of policy tools (40%) CO2 emissions (10%) CO2 per capita (40%) 5-year trend in CO2 intensity of GDP (30%) CO2 intensity of TPES (30%) Governance (10%) Government effectiveness (40%) Regulatory quality (30%) Control of corruption (30%) Prioritization (20%) Demonstrated motivation to prioritize carbon emission reduction (100%) BENCHMARKING NORWAY’S INVESTMENT ATTRACTIVENESS/ JUNE 2014


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