Bureau of Economic Geology, The University of Texas at … Foss.pdf · Bureau of Economic Geology,...

Bureau of Economic Geology, The University of Texas at Austin

The elusive optimal fiscal regime for an extra- heavy oil resource: a case study

©CEE, Bureau of Economic Geology, UT Austin, 2

Outline

• Background• Evolution of fiscal regime• Uncertainty• Final comment


The Faja• The Faja is one of the largest oil deposits in the

Western Hemisphere and is now economically viable, over 70 years after its discovery.

• Hydrocarbon ranges from 5 to 12 API and 125m to 1600m of depth.

• Why did production finally take off?


Development of Unconventional Resources

• Geostatistical and production uncertainty– Where should wells be located?– How much will wells cost to build?– How will they perform?– For how long?– How much oil? Gas? Water? Sand?

• And let us not forget– For how much will the oil be sold?

• Historically blended with lighter crude oil.


Impact of Fiscal Regime

• 1976– Royalty Relief: No– Long run royalty: 16.67%– Taxes: 66.7%– Private participation: No

• 1990’s– Royalty Relief: 1% – Long run royalty: 16.67%– Taxes: 34%– Private participation: 50%

• Price Level– $8-$20 per barrel


HEAVY OIL PRODUCTION

200600

1200

2000

3000

0

500

1000

1500

2000

2500

3000

3500

1980 1985 1990 1995 2000

Initi

al P

rodu

ctio

n <B

PD

>

VERTICAL WELLS. IGP, OHGP BASAL

SANDS

BETTER SUCKER-ROD

PUMPS

HORIZONTAL WELLS 1500’,

ESP AND DILUENT

INJECTION

HORIZONTAL WELLS 4000 - 5000’, HIGH

CAPACITY ESP AND PCP

MULTIPHASE PUMPS

MULTILATERAL WELLS

$5000/BPDi

$1666/BPDi

$400/BPDi


Original Production Plan of the Faja

092 108 129 129 129 129 129 129

0

79105

105 105 116 116 116 116 116

0

0

130150 154 159 186 186 186 186

0

0

08

170 170170 180 208 208

129

169

317

461507

622 639671 681

711 711

0

100

200

300

400

500

600

700

800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Synt

hetic

Cru

de <

KB

PD>

AmerivenSincorOCNPetrozuataCrude Oil

639


Investment in the Faja

Up to2000 2001

20022003

2004

1163

6666

660

1564

657455

100455

77

0

1000

2000

3000

4000

5000

6000

7000

8000In

vesm

ent <

Mill

ion

$>

Partners PDVSA


HORIZONTAL WELLS

Courtesy of Petrozuata


LATERAL FISHBONES



COMPLEX MULTILATERALS



WELLS OF PETROZUATA



Tax – Royalty with depreciation schedule

• In the simple case– Company pays royalty– Company pays taxes on

profits after considering depreciation

Revenue

Royalty

Costs

Cash Flow=(Revenue – Royalty – OPEX – Dep.) * ( 1 - tax) + Dep.

TaxableDepre.

TaxTax

Net Profit


Expected Project Value 1998

P50 $815.12


Expected Project Value 1998


Expected Project Value 2006 (1998 $)

P50 $7,786.79

Considers price evolution between 1998 and 2006.


Expected Project Value 2006 (1998 $)


Expected Value in 1998 vs 2006


How was the value distributed?



In 2006 Temptation wins!


• Price Level– $8 - $12 per barrel

• 2006– Royalty Relief: None– Royalty: 33%– Taxes: 50%– Private participation: 50%

• Price Level– $50-60 per barrel


How much value would a company lose?


And what happens if prices go down?


What is the status today?

• Incumbents did not add investments during transition of fiscal regime and some have been removed

• Add on investments still seem attractive– Lessons learned are in jeopardy of being lost– New operators versus Associations

• New projects will need market for Syncrude– Brasil will likely be the likely market for next project


Final Comments and Open Questions

• The value of the Faja is mostly untapped and will likely not be tapped in the short term. And Alberta?

• Should royalty change once uncertainty is resolved? Low initial royalty and then one that captures extra rents? Wouldn’t a corporate tax do the same?

Bureau of Economic Geology, The University of Texas at … Foss.pdf · Bureau of Economic Geology,...

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