Presentation on theme: "Benchmarking Norway’s investment attractiveness"— Presentation transcript:
1Benchmarking Norway’s investment attractiveness June 2014Benchmarking Norway’s investment attractiveness
2Contents: Scope Peer Group Selection and IHS indices Benchmarking Norway’s investment attractiveness/ JUNE 2014Contents:ScopePeer Group Selection and IHS indicesFiscal BenchmarkingPolitical Risks BenchmarkingCO2 Tax and Policy BenchmarkingIHS Expert ViewIHS Assumptions and Methodology
3Benchmarking Norway’s investment attractiveness/ JUNE 2014 Scope: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.
4Peer Group Selection and IHS Indices Benchmarking Norway’s investment attractiveness/ JUNE 2014Peer Group Selection and IHS Indices
5Peer Group Countries Selection (Fiscal and Political Benchmarking): Benchmarking Norway’s investment attractiveness/ JUNE 2014Peer Group Countries Selection (Fiscal and Political Benchmarking):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.
6Benchmarking Norway’s investment attractiveness/ JUNE 2014 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 characteristicsUpstream investment activity levelsCarbon intensity and absolute GHG emissions trendsClimate policy and regulationSignificance to international energy system
7Peer Group Countries Fiscal and Political Benchmarking UK USA Benchmarking Norway’s investment attractiveness/ JUNE 2014Peer Group CountriesFiscal and Political BenchmarkingUKUSAAustraliaCanadaBrazilNigeriaIndonesiaAngolaMozambiqueIsraelCO2 Tax and Carbon Policy BenchmarkingUKUSAAustraliaCanadaBrazilNigeriaIndonesiaMexicoChinaNetherlandsDenmarkRussiaUAESaudi ArabiaMalaysiaCountries common for fiscal, political andcarbon policy benchmarkingCountries specific for fiscal, political andcarbon policy benchmarking
8INDICES In the execution of work, IHS used the following Indices: Benchmarking Norway’s investment attractiveness/ JUNE 2014INDICESIn 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).
9Benchmarking Norway’s investment attractiveness/ JUNE 2014 Fiscal Benchmarking
10Summary of Assumed Fiscal Terms: Benchmarking Norway’s investment attractiveness/ JUNE 2014Summary of Assumed Fiscal Terms:CountryFiscal RegimeContract TypeBonuses / Other PaymentsState ParticipationRoyaltyCost Recovery/Tax DepreciationCost Recovery CeilingContractor Profit ShareIncome Tax RateAdditional TaxesNorwayNorway - Royalty Tax TermsR/TNone20%*TAX (Exploration: XPS; Development: 6 yrs) SPT (Exploration: XPS; Development: 6 yrs; 22% Uplift on Development 4 yrs)N/A27%SPT (51%)AngolaAngola Model PSA Terms Offshore (Shelf & Deep Water less than 1000m)PSAS*, T*, F*65% *CRC (Exploration: XPS; Development: 4 yrs, 10% uplift); TAX (n/a)50% of PDN (rising to 65% after 5 years)70% - 10%50%AustraliaAustralia - PRRT Terms Offshore (except NW Shelf)TAX (Exploration: XPS; Development: 8 yrs)29%PRRT (40%); WTH (15%)BrazilBrazil - Royalty Tax Terms Offshore less than 400m (non-pre salt areas)S*, F10%SPF (Intangible: XPS; Tangible: 10 yrs); TAX (10 yrs)34%SPF (0% - 40%); ISS (5%)*; IPI (10%)*; ICMS (22%)*; PIS (1.65%); COFINS (7.6%); II (15%)*; RDE (1%)CanadaCanada - Nova Scotia Generic Offshore Royalty Tax TermsS*2% - 35%TAX (Exploration: XPS; Development: Intangible - 30% db, Tangible - 25% db)Provincial (16%); Federal (15%)WTH (25%)IndonesiaIndonesia Bidding Rounds PSC TermsS*, P*, A20%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%)IsraelIsrael Royalty Tax Terms12.5%TAX (10 yrs)*22% (reducing to 18% by 2016)Petroleum Profits Levy (0% - 50%); WTH (25%)MozambiqueMozambique Model PSA TermsP*, T*, F*10%*Oil: 10%; Gas: 6%CRC & TAX (Exploration: XPS; Development: 4 yrs)70%* of (PDN - ROY)95% - 50%*32%WTH (20%)
11Summary of Assumed Fiscal Terms (cont.): Benchmarking Norway’s investment attractiveness/ JUNE 2014Summary of Assumed Fiscal Terms (cont.):CountryFiscal RegimeContract TypeBonuses / Other PaymentsState ParticipationRoyaltyCost Recovery/Tax DepreciationCost Recovery CeilingContractor Profit ShareIncome Tax RateAdditional TaxesNigeriaNigeria Royalty Tax Terms On & Off-shore less than 200mR/TS*, P*None*16.5% - 20%CRC & TAX (Exploration: XPS; Development: Intangible - XPS, Tangible - 5 yrs)N/A67.75% - 85%Local Content Development Levy (1%); Indirect Taxes (1% - 20%) (Oil); Education Tax (2%)United KingdomUnited Kingdom - Royalty Tax TermsNoneTAX (XPS)30%Supplementary Charge (32%)United StatesUnited States - Gulf of Mexico Royalty Tax Terms Offshore less than 200mS*18.75%TAX (Intangible: XPS; Tangible: 150% db over 10 yrs)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 BonusD: Discovery BonusP: Production BonusT: Training feesA: Administration FeesF: Fund paymentsCRC: Cost Recovery CeilingXPS: costs are expensed & recovered /deducted immediatelyPDN: Gross ProductionROY :RoyaltySource: IHS PEPS
12Benchmarking Norway’s investment attractiveness/ JUNE 2014 Average Undiscounted State Take* % for Oil and Gas Fields in the Peer GroupNorway 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.Source: IHS PEPS
13Benchmarking Norway’s investment attractiveness/ JUNE 2014 Average Undiscounted State Take for Marginal, Economic and Upside Oilfields in the Peer GroupNorway 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
14Benchmarking Norway’s investment attractiveness/ JUNE 2014 Undiscounted State Take for Offshore Oil Fields vs Remaining Offshore Oil ResourcesCIHS 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 termsSource: IHS PEPS, IHS Edin
15Benchmarking Norway’s investment attractiveness/ JUNE 2014 Undiscounted State Take for Offshore Gas Fields vs Remaining Offshore Gas ResourcesIHS 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
16E&P Activity Rating of Peer Group Countries (Q2 2014) Benchmarking Norway’s investment attractiveness/ JUNE 2014E&P Activity Rating of Peer Group Countries (Q2 2014)0-5 scale, lower score represents higher investor attractivenessNorway 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
17Fiscal Rating of Peer Group Countries (Q2 2014) Benchmarking Norway’s investment attractiveness/ JUNE 2014Fiscal Rating of Peer Group Countries (Q2 2014)0-5 scale, lower score represents higher investor attractivenessNorway 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
18E&P Activity Rating vs Fiscal Rating Benchmarking Norway’s investment attractiveness/ JUNE 2014E&P Activity Rating vs Fiscal RatingHigher score => lower attractiveness as perceived by investorsHigher E&P Attractiveness (<2.5), but tougher fiscal terms (>2.5)Low E&P Attractiveness (~5) and Fiscal Attractiveness (>3), i.e. Frontier exploration with untested prospectivity and more severe fiscal termsCLow E&P Attractiveness (~5) and Fiscal Attractiveness (>3), i.e. Frontier exploration with untested prospectivity and more severe fiscal termsAverage 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
19Fiscal Developments and Watch-Points across the Peer Countries NorwayPassed: CO2 taxReduction ofuplift on capital allowances.UK: Introduction of HPHT field allowances, regular tweaks through budget.Canada Newfoundland:No recent proposalsIndonesiaCap on cost recovery imposed then withdrawn; concern about domestic supply obligationsNigeria: 6th year of discussion on Petroleum Industry Bill which proposes retroactive fiscal changes.IsraelChanges to gas export policy, Current focus: gas export tariff.US offshore: Multi-year debate on reduced drilling allowances but action blocked by political impasseMozambiqueGas legislation planned. Fiscal terms under review for new projects,Angola: occasional dispute over contract interpretation of contracts. No new proposals.Brazil First ever PSA contract awarded, Supreme Court decision on validity of new royalty distribution law still pendingAustraliaPlans for reduction in corporate tax from mid-2015 under a royalty/tax frameworkSource: IHS Oil & Gas Risk Service
21Rank from lowest risk to highest Benchmarking Norway’s investment attractiveness/ JUNE 2014Macro Benchmarking – Overall Political, Economical, Legal, Tax, Operation, Security Risk (PELTOS)1-5 scale, 1.0 indicates minimum risk and 5.0 maximum riskRating from 1.25 to 1.74 is classified as NegligibleRank from lowest risk to highestRisk scoreNorway ranks second best in the Peer Group countries and seventh in the overall PELTOS rating of 207 countriesSource: IHS Country Risk Rating
22Macro Benchmarking – Political Risk Benchmarking Norway’s investment attractiveness/ JUNE 2014Macro Benchmarking – Political Risk1-5 scale, 1.0 indicates minimum risk and 5.0 maximum riskRating from 1.25 to 1.74 is classified as NegligibleRank from lowest risk to highestRisk scoreNorway’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 consensusSource: IHS Country Risk Rating
23Macro Benchmarking – Economic Risk Benchmarking Norway’s investment attractiveness/ JUNE 2014Macro Benchmarking – Economic Risk1-5 scale, 1.0 indicates minimum risk and 5.0 maximum riskRating from to 1.99Is classified as LowRank from lowest risk to highestRisk scoreNorway’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.Source: IHS Country Risk Rating
24Macro Benchmarking – Operational Risk Benchmarking Norway’s investment attractiveness/ JUNE 2014Macro Benchmarking – Operational Risk1-5 scale, 1.0 indicates minimum risk and 5.0 maximum riskRating from to 1.99is classified as LowRank from lowest risk to highestRisk scoreNorway’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 corruptionSource: IHS Country Risk Rating
25Rank from lowest to highest Benchmarking Norway’s investment attractiveness/ JUNE 2014Oil & Gas Sector Benchmarking – Overall Oil and Gas Risk Service Rating1-10 scale, 10 indicates low risk and 1 high riskRank from lowest to highestThis rating corresponds to low riskRisk scoreNorway ranks second best in the Peer Group countries and third in the overall OGRS rating of 131 countries. Source: IHS Oil & Gas Risk Service
26Oil & Gas Sector Benchmarking – Export Risk Benchmarking Norway’s investment attractiveness/ JUNE 2014Oil & Gas Sector Benchmarking – Export Risk1-10 scale, 10 indicates low risk and 1 high risk1-10 scale, 10 indicates low risk and 1 high riskThis rating corresponds to low riskRank from lowest to highestRisk scoreNorway’s Export Risk is ranked first along with United Kingdom in the Peer GroupThe 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
27Oil & Gas Sector Benchmarking – Sanctity of Contract Benchmarking Norway’s investment attractiveness/ JUNE 2014Oil & Gas Sector Benchmarking – Sanctity of Contract1-10 scale, 10 indicates low risk and 1 high riskRank from lowest to highestThis rating corresponds to the low riskRisk scoreNorway’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.Source: IHS Oil & Gas Risk Service
28Oil & Gas Sector Benchmarking – Ministerial/Policy Volatility Benchmarking Norway’s investment attractiveness/ JUNE 2014Oil & Gas Sector Benchmarking – Ministerial/Policy Volatility1-10 scale, 10 indicates low risk and 1 high riskThis rating corresponds to a low riskRank from lowest to highestRisk scoreNorway’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
29CO2 Tax and Policy Benchmarking Benchmarking Norway’s investment attractiveness/ JUNE 2014CO2 Tax and Policy Benchmarking
30Benchmarking Norway’s investment attractiveness/ JUNE 2014 IHS Carbon Policy Index (CPI) benchmarks climate policy, with higher scores indicative of more stringent regulationsIHS Carbon Policy Index heat map by country score — Summer 2014CPI ScoresThe CPI is intended to give our energy sector clients a high-level bird’s eye view of the global climate policy landscape. By benchmarking the stringency of national policy environments worldwide, the CPI enables the consistent assessment of current and future exposure to carbon constraints. The current country list is one area that is under review; it may be shortened or more focused depending on client feedback and demand.4.0 <= CPI <= 5.03.0 <= CPI <= 4.02.0 <= CPI <= 3.01.0 <= CPI <= 2.0CPI <= 1.0Sources: IHS Energy
31IHS Carbon Policy Index (CPI) Benchmarking Norway’s investment attractiveness/ JUNE 2014IHS Carbon Policy Index (CPI)0-5 scale, Maximum CPI score is 5.001-10 scale, 10 indicates low risk and 1 high riskNorway stands out and ranks first when IHS benchmarks the relative stringency of national climate policy environments
32Benchmarking Norway’s investment attractiveness/ JUNE 2014 4/12/2017 7:25 AMNorway’s overall climate policy index score tops this peer group, with policy clarity, ambition and scope key driversCarbon Policy Index ratings for country peer group by component and total scoresPeer RatingCountry NameClarityAmbitionCarbon EmissionsGovernancePolicyScopePrioritizationTotal1.Norway4.584.503.603.964.372.United Kingdom18.104.22.1683.764.023.Denmark4.002.904.193.853.904.Netherlands1.304.013.753.655.USA3.092.751.203.622.214.171.1246.Mexico2.202.272.502.627.China3.153.002.401.922.002.598.Brazil2.662.112.339.Canada0.902.851.752.3010.Australia2.450.3011.Indonesia1.731.852.0712.United Arab Emirates2.031.500.603.111.601.6713.Russia2.161.481.350.751.4314.Nigeria1.391.005.001.3815.Malaysia126.96.36.19916.Saudi Arabia2.170.500.250.80However, for the most part the CPI deliverable has consisted of an interactive Excel file with tables and charts summarizing CPI scores and ranks, including from the prior year’s assessment. The table here is a snapshot of the top 20 countries by CPI score based on our latest assessment done a couple months ago.Source: IHS Energy
34Benchmarking Norway’s investment attractiveness/ JUNE 2014 IHS Expert View
35Macro Political Risk Expert View Benchmarking Norway’s investment attractiveness/ JUNE 2014Macro Political Risk Expert ViewNorway is overall politically and operationally stableNorway 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 7th lowest in the world on the overall PELTOS risk rating, at 1.53.
36Macro Political Risk Expert view (cont.) Benchmarking Norway’s investment attractiveness/ JUNE 2014Macro Political Risk Expert view (cont.)The government is positive towards new oil and gas developmentThe 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.
37Macro Political Risk Expert view (cont.) Benchmarking Norway’s investment attractiveness/ JUNE 2014Macro Political Risk Expert view (cont.)The parliamentary composition increases policy unpredictability regarding environmental policyThe 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 2022.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.
38Macro Political Risk Expert view (cont.) Benchmarking Norway’s investment attractiveness/ JUNE 2014Macro 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.
39Oil & Gas Sector Risk Expert View Benchmarking Norway’s investment attractiveness/ JUNE 2014Oil & Gas Sector Risk Expert ViewThere are few watch points for possible changes in OGRS risk ratingDespite 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.
40Oil & Gas Sector Risk Expert View (cont.) Benchmarking Norway’s investment attractiveness/ JUNE 2014Oil & Gas Sector Risk Expert View (cont.)There are few watch points for possible changes in OGRS risk ratingOne 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.
41Fiscal terms expert view Benchmarking Norway’s investment attractiveness/ JUNE 2014Fiscal terms expert viewFiscal Terms, Attractiveness and Fiscal RisksNorway 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.
42CO2 Tax and Policy Expert View Benchmarking Norway’s investment attractiveness/ JUNE 2014Norway has the world’s most stringent climate policy framework in place todayOf 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.CO2 Tax and Policy Expert View
43CO2 Tax and Policy Expert View (cont.) Benchmarking Norway’s investment attractiveness/ JUNE 2014CO2 Tax and Policy Expert View (cont.)Norway’s aggressive long-term climate policy goals make next steps in domestic emissions reduction program higher costNorway’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.
44IHS Assumptions and Methodology Benchmarking Norway’s investment attractiveness/ JUNE 2014IHS Assumptions and Methodology
45IHS Country Risk Methodology Benchmarking Norway’s investment attractiveness/ JUNE 2014IHS Country Risk MethodologyIHS’s country risk-rating system enables clients to compare and contrast the investment climate in 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.
46IHS Country Risk Methodology (cont.) Benchmarking Norway’s investment attractiveness/ JUNE 2014IHS 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.Overall Risk RatingRisk DescriptionInsignificantNegligibleLowModerateMediumSignificantHighVery highExtreme
47IHS Oil & Gas Risk Service (OGRS) Methodology Benchmarking Norway’s investment attractiveness/ JUNE 2014IHS Oil & Gas Risk Service (OGRS) MethodologyThe 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. RankingsA: 10, 9B: 8, 7C: 6, 5D: 4, 3F: 2, 1
48Oil & Gas Risk Service (OGRS) – Ratings Model Benchmarking Norway’s investment attractiveness/ JUNE 2014Oil & Gas Risk Service (OGRS) – Ratings ModelTotal OGRS ScoreCountry 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%)Country Economics (20%)Transfer Risk (35%)Primary Fiscal Balance (25%)Real Per Capita GDP Growth (25%)Level of Development (15%)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%)
49Oil & Gas Risk Service (OGRS) – Selected Risk Factors Benchmarking Norway’s investment attractiveness/ JUNE 2014Oil & Gas Risk Service (OGRS) – Selected Risk FactorsMinisterial/Policy Volatility: 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).Export Risk: 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.Sanctity of Contract: 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.
50IHS PEPS Methodology – fiscal benchmarking methodology Benchmarking Norway’s investment attractiveness/ JUNE 2014IHS PEPS Methodology – fiscal benchmarking methodologyTo 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 costsOil and gas pricesInflation 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.
51IHS PEPS Methodology – fiscal benchmarking methodology Benchmarking Norway’s investment attractiveness/ JUNE 2014IHS PEPS Methodology – fiscal benchmarking methodologyThe 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, 750Gas Fields (Bcf): 60, 150, 300, 600, 1,500, 4,500Each 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% respectivelyEach development is produced at 3 different price scenarios (low, medium, high)Oil Prices: Low case = $50/bbl; Base Case = $75/bbl; High case = $100/bblGas Prices: Low Case = $4/mcf; Base Case = $6/mcf; High Case = $8/mcfPrices are the same regardless of country/regimeHence, 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.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.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.
52IHS PEPS Methodology – fiscal benchmarking methodology Benchmarking Norway’s investment attractiveness/ JUNE 2014IHS PEPS Methodology – fiscal benchmarking methodologyThe 108 hypothetic developments are assessed on Gross Project level and classified into “marginal”, “economic” or “upside” based on Gross Project economicsThe Gross Project Cash Flow is defined as follows:Gross Project Cash Flow = Gross Revenue - Gross Operating Costs - Gross E&A Costs - Gross Development CostsNote: Gross Project means before any state participation and/or fiscal term is applied.Illustrative Summary Results (Oil)Field GroupField Size MMbblCost CategoryDev. Cost $/unitPrice $/unitGross Project 12.5% $/unit1Upside10.00LOW5.00100.0052.91225.004.5047.703MEDIUM47.58…1475.0032.7315250.003.0031.381650.004.0031.33EconomicHIGH10.5031.089.0029.686.0028.6922.69750.007.5022.4520.99Marginal20.5420.002.5019.4015.0012.5512.0113.5011.66Uneconomic11.3112.0010.8049.8458.6267.6732Upsidefields (16 oil and 16 gas)Average economic indicators across 96 fields (48 oil and 48 gas) are included in the State Take analysis32Economicfields (16 oil and 16 gas)32Marginalfields (16 oil and 16 gas)12 Uneconomic fields (6 gas and 6 oil) with negative or lowest Gross Project NPV per UOP are excluded from the analysis of average State Take figures
53IHS PEPS Ratings and Rankings Methodology Benchmarking Norway’s investment attractiveness/ JUNE 2014IHS PEPS Ratings and Rankings MethodologyPEPS Ratings and Rankings methodology enables to rank a country by overall E&P risk. It is composed of approximately 50 variables. Each variable is assigned a rating in the range 0 to 5 (where zero is the best score) and this is then weighted. For detailed methodology please refer to the Appendix.The PEPS Ratings and Rankings Index (RRI) consists of three indices (E&P Activity, Fiscal Terms, Political Risk) that are designed to allow an overall assessment of E&P risk that affects a particular country’s comparative attractiveness for petroleum investment. Only E&P and Fiscal Rating was used for this project, since political risks were assessed through IHS country risk and OGRSComposite Ratings & Rankings (RRI) IndexE&P activity,50%Fiscal Terms,35%Political Risk15%Production, 10%Activity, 10%Reserves, 10%Undiscounted State 5%Investor NPV ($/bbl ), 20%Undiscounted 0%, 5%NFW, 50%Active Companies, 25%New Licences, 25%Investor Net Cash Flow ($/bbl) ), 5%Investor NPV ($mm), 10%Investor IRR, 20%Oil added, 20%Success RateGas added, 15%Added/NFWSuccess, 70%Investor NPV ($mm), 5%Investor P/I Ratio, 30%Political Risks, 60%Socio-Economic Risks, 20%Commercial Petroleum Risks, 20%Marginal, 35%Economic, 45%Upside, 20%War & External Threats, 10%Internal Violence, 35%Civil &LaborUnrest, 25%Regime Instability, 30%Economic Instability, 25%Environmental Activism, 30%Energy Vulnerability, 20%EthnoLinguistic Factionalism, 25%Repatriation/Convertibility Restrictions, 25%Opposition to Foreign Investment, 35%Threat of Adverse Contract/Fiscal Changes, 40%Oil, 60%Gas, 40%Variables and weightingsVariables and weightings
54Benchmarking Norway’s investment attractiveness/ JUNE 2014 IHS CPI methodologyThe 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 ANTICIPATEDDECLINING CONSTRAINTSSTABLE TRAJECTORYINTENSIFYING CONSTRAINTSSTEP 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.
55CPI — Component weightings Benchmarking Norway’s investment attractiveness/ JUNE 2014CPI — Component weightingsCarbonPolicy Index ScoreAmbition(25%)Definition of and commitment to challenging climate change mitigation policy (100%)Clarity(15%)Visibility on future climate changepolicy direction (85%)Emergence of policy focus onclimate 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 intensityof GDP (30%)CO2 intensity of TPES (30%)GovernanceGovernment effectiveness (40%)Regulatory quality (30%)Control of corruption (30%)PrioritizationDemonstrated motivation to prioritizecarbon emission reduction (100%)Here is a thematic overview summarizing the CPI components we just discussed and their respective weightings. Again, component weightings and sub-categories may change in due course. While it’s relatively easy to define a low, medium or high score, it’s the scores in between that ultimately make the scoring process subjective and dependent on the analyst’s knowledge and perceptions of existing climate policies.