Alaska Senate Bill 21 Analysis Paper II. Capital Intensive Legacy Producer

Transcription

1 Alaska Senate Bill 21 Analysis Paper II Capital Intensive Legacy Producer January 29, 2013

2 Copyright The information in this document is subject to change without notice. The software described in this document is furnished under a license agreement. This software may be used or copied only in accordance with the terms of such agreement. It is against the law to copy the software on any medium except as specifically allowed in the license agreement. No part of this document may be reproduced or transmitted in any form, or by any means, electronic or mechanical, including photocopying and recording, for any purpose without the express written permission of Palantir USA Inc. Copyright 2013 Palantir USA Inc. Registered Trademarks

3 1 Introduction This is Palantir s second report on SB21. Our first analysis focused on a new standalone project that would be relevant to a small to midsize producer with a field that would qualify for gross value at the point of production (GVPP) exemption (see Table 1). This report analyzes economics of SB21 from the perspective of a large capital intensive legacy producer whose production and prospects do not qualify for the GVPP exemption. Proposed Statute Changes Table 1 Statute Current SB21 Production Tax Value (PTV) Gross Value at the Point of Production Minus Lease Expenditures (adjusted) Old Fields: (no change) New Fields*: Gross Value at the point of Production reduced by 20% Base Tax Rate % 25% Progressivity $30 to $92.5 PTV/BOE: ELIMINATED 0.4% added for every dollar Over $92.5 PTV/BOE: 0.1% added for every dollar Capped at 50% Qualified Capital (a) 20% of qualified capital expenditures, applied ELIMINATED effective December 31, Credits over 2 years 2013 Loss Carry (b) 25% of carried-forward annual loss Limited to 2 years, 10 years if approved by Forward Credits Can apply against taxes or obtain transferrable credit certificates (transferrable) the Department of Revenue. Not transferrable after Dec 31, % interest on loss carry forward from the 2 nd calendar year after incurred loss Small Producer Credit Expires in 2016 Extended to 2022 *For the purposes of this paper New Field is defined as a production target that meets the below criteria, whereas Old Field is a production target that does not. Must meet either or both of the following: (1) the oil or gas is produced from a lease or property that does not contain land that was within a unit on January 1, 2003; (2) the oil or gas is produced from a participating area established after December 31, 2011, that is within a unit formed under AS (p) before January 1, 2003, if the participating area does not contain a reservoir that had previously been in a participating area established before January 1, Palantir USA Inc. Page 2 of 13

4 2 Methodology The following analysis was performed in PalantirCASH utilizing our current Alaska ACES fiscal model and a modified version of that model with the changes in SB21. The objective was to show the impact of SB21 on the overall economics as well as on the marginal project at different price points. North Slope production tax is ring-fenced at North Slope level, meaning that expenses at one field can be deducted against the tax base for all of North Slope, simply calculating a project on a stand-alone basis without considering the impact on the overall production tax could misstate the overall impact of that project. For that reason, in our analysis we have: 1. Firstly we calculated the sum of the baseline and the marginal project under ACES and SB Then we have calculated the baseline project on a standalone basis under both ACES and SB Finally we calculated the difference between the sum of two projects and the standalone baseline was calculated under both ACES and SB21. The difference between the sum of two projects and the standalone baseline project showed incremental economics of the marginal project under the two regimes. The table below details the two projects. Palantir USA Inc. Page 3 of 13

5 Table 2 Baseline Marginal Project Project Life 26 years 26 years Production Start Before Initial Production 100 MBBLS/day 9 MBBLS/day Decline Rate 7% harmonic 8% harmonic ANS Netback Price $100 flat is the base case Tested at $80, $90, $110 & $120 flat Same as in Baseline Years of CAPEX 26 years 5 years until 2018 CAPEX/year $500MM flat, is the base case Tested at +/- 20% $100MM flat, is the base case Tested at +/- 20% OPEX/year $15 * production in 2013 = $548MM/year flat $20 * initial production in 2015 = $66MM/year flat Taxes Royalty, 12.5% Effective Government Take includes Royalty, Severance (SB21 or ACES), State & Federal Income Taxes NO GVPP exemption NO Small Producer Credit The following sources were used as guidance for project inputs above: 1) SEC. Form 10K. By ConocoPhillips. N.p., Web. 2) "Conoco: $1B in 2013." Petroleum News, 20 Jan Web. < Same 3 Analysis This analysis below first considers lifecycle impact of prices and CAPEX on fiscal take under the two regimes (Figure 1). This is followed by total and incremental economic analysis under two fiscal regimes at $80 and $120 ANS netback (Figures 2 through 9 and Incremental Economics Palantir USA Inc. Page 4 of 13

6 Section). Figures 10 through 13 focus on changes of various tax components under ACES and SB21 at $80 and $120 ANS netback. For a large capital intensive producer that would NOT qualify for the GVPP exemption, SB21 increases tax take at ANS netback prices below $110/bbl and assumed base level of CAPEX and OPEX (Figure 1). Calculations in support of (Figure 1) below have been done over the entire undiscounted life of the projects. The point of indifference between the two fiscal regimes is between $90 and $110 in the first 4 to 5 years; however as production declines the point of indifference reaches $110 around year 5. Below the point of indifference, eliminated progressivity is insufficient to overcome the loss of capital credits. SB21 is less sensitive to CAPEX because of the eliminated progressivity. However because SB21 does not contain 20% capital credits, at $100 ANS netback change in CAPEX within a +/- 20% band from the assumed base case will result in a higher government take than an equivalent shift under existing fiscal system. Figure 1: Sensitivity of Government Take* Price and CAPEX Including Royalty 20% 23% 25% 28% 30% 33% 35% 38% 40% 43% 45% ACES, ANS Price $80 $90 $110 $120 SB21, ANS Price $80 $90 $110 $120 ACES, CAPEX** +20% -20% SB21, CAPEX** +20% -20% Figure 1. Calculated from the sum of Baseline and Marginal projects above. Government take calculated as a % of revenue and includes royalties, state and federal taxes. Both revenue and government take are calculated OVER THE LIFE OF THE PROJECT and are UNDISCOUNTED. Price is ANS netback. CAPEX sensitivity is based on % increase and decrease from the undiscounted sum of Baseline and Marginal CAPEX $100 ANS Price over project life. Palantir USA Inc. Page 5 of 13

7 Figures 2 and 3 below show the decreased after tax cash flow on entire production (baseline & progressivity) resulting from SB21 at $80/bbl ANS netback. In this case lack of progressivity under SB21 is insufficient to offset loss of capital credits. Figure 2: Sum of Baseline and Marginal project calculated against the current ACES fiscal terms at $80/bbl ANS netback Figure 3 Sum of Baseline and Marginal project calculated against SB21 fiscal terms at $80/bbl ANS netback Palantir USA Inc. Page 6 of 13

8 Figures 4 and 5 below show the increased after tax cash flow on entire production (baseline & progressivity) resulting from SB21 at $120/bbl ANS netback. Substantial progressivity component under current ACES at higher prices has a greater negative impact on producers after tax cashflow than tax credits. Figure 4: Sum of Baseline and Marginal project calculated against the current ACES fiscal terms at $120/bbl ANS netback Figure 5: Sum of Baseline and Marginal project calculated against SB21 fiscal terms at $120/bbl ANS netback Palantir USA Inc. Page 7 of 13

9 Figures 6, 7, 8, 9 below show that under existing ACES a greater amount of upfront capital is paid by the State as compared to SB21. This is a result of capital credits and greater impact of capital deduction on baseline cash flows because of the higher effective tax rate under existing ACES. Once project is in production; however, SB21 will provide for the same or lower tax payment depending on the production tax value which is ring-fenced at North Slope level (Baseline & Marginal). Figure 6: Incremental impact of the Marginal project obtained by differencing the sum of Baseline & Marginal project, and the Baseline. Calculated against the Current ACES fiscal terms at $80/bbl ANS netback Figure 7: Incremental impact of the Marginal project obtained by differencing the sum of Baseline & Marginal project, and the Baseline. Calculated against the SB21 fiscal terms at $80/bbl ANS netback Palantir USA Inc. Page 8 of 13

10 Figure 8: Incremental impact of the Marginal project obtained by differencing the sum of Baseline & Marginal project, and the Baseline. Calculated against the Current ACES fiscal terms at $120/bbl ANS netback Figure 9: Incremental impact of the Marginal project obtained by differencing the sum of Baseline & Marginal project, and the Baseline. Calculated against SB21 fiscal terms at $120/bbl ANS netback Palantir USA Inc. Page 9 of 13

11 Incremental Economics: Impact of different fiscal regimes on incremental project economics is timing sensitive. Current ACES reduces upfront capital outlays but has the same or higher fiscal take once the project is in production. Here are investment metrics calculated for incremental scenarios (Figures 6-9). $80 ANS netback $120 ANS netback ACES SB21 ACES SB21 NPV10 * [$MM] DPI10** [%] 24% -3% 74% 54% Payback*** [years] *net present value of net after tax cash flows discounted at 10%, 2014 first discounted year ** NPV10 divided by CAPEX discounted at 10% *** Time required to recover undiscounted capital costs Based on the above metrics the selected incremental project is more attractive under existing ACES because of the smaller upfront investment. Generally projects with longer construction time and under lower prices will perform better with existing ACES whereas projects with shorter construction time and under higher prices might perform better with SB21. The latter scenario is not part of this analysis. Palantir USA Inc. Page 10 of 13

12 Figures 10 & 11 show that at $80/bbl progressivity component under current ACES is relatively small compared to qualified capital credits, making current ACES a more favorable fiscal regime. Figure 10: Severance tax with components under current ACES at $80/bbl ANS netback Figure 11: Severance tax with components under SB21 at $80/bbl ANS netback Palantir USA Inc. Page 11 of 13

13 Figures 12 & 13 show that at $120/bbl progressivity component under current ACES is relatively large compared to qualified capital credits, making current SB21 a more favorable fiscal regime. Figure 12: Severance tax with components under current ACES at $120/bbl ANS netback Figure 13: Severance tax with components under SB21 at $120/bbl ANS netback Palantir USA Inc. Page 12 of 13

14 4 Summary SB21 is unlikely to incentivize additional investment, for large, capital intensive legacy producers whose existing fields and prospects under consideration do not qualify for gross value at the point of production (GVPP) exemption*. SB21 might improve overall economics at price levels above $110 ANS netback. However, because a producer has to bear a greater share of capital upfront SB21 penalizes capital intensive projects with long lead times. As our previous paper indicated, existing producers whose production qualifies for GVPP exemption might benefit from SB21. For those producers that have both new and old fields in their prospect portfolio preferential treatment based on a somewhat arbitrary cut off under SB21 distorts the incentives whereas an otherwise more economic target in an old field might be foregone in favor of a less economic target in a new field. * For the purposes of this paper New Field is defined as a production target that meets the below criteria, whereas Old Field is a production target that does not. To qualify for GVPP exemption, must meet either or both of the following: (1) the oil or gas is produced from a lease or property that does not contain land that was within a unit on January 1, 2003; (2) the oil or gas is produced from a participating area established after December 31, 2011, that is within a unit formed under AS (p) before January 1, 2003, if the participating area does not contain a reservoir that had previously been in a participating area established before January 1, Palantir USA Inc. Page 13 of 13