Chris Newton. National Energy Policy and the Role of Conventional and Unconventional Exploration

Transcription

1 Chris Newton National Energy Policy and the Role of Conventional and Unconventional Exploration

2 Presentation Outline National Energy Policy and the Role of Oil and Gas Recent Trends in Conventional Exploration Investment and Activity Stimulating Unconventional Exploration The UK Analogue and Industry Approach Recommendations 2

3 2014 National Energy Policy highlights Policy based on equity, sustainability and environment soundness to create Energy Independence and National Energy Security. Energy Independence and National Energy Security achieved through: Supply side management with prioritization of domestic energy sources Resource and demand management in an optimal, integrated, efficient & sustainable way Public access at an affordable price Industry, service sector, technology and human capacity development Employment creation and environmental protection. Energy development to maximize benefit for the people through national economic development, domestic value added and employment. Enhanced energy availability for national needs by: Improving resource exploration, and exploitation Gradual reduction of fossil fuel exports with a deadline set for stopping exports. Realize energy mix targets by, minimizing the use of oil, maximizing the use of economically viable renewables, optimizing the use of gas and using coal as the mainstay of national energy supply. Reduction of subsidies in line with peoples purchasing power. 3

4 New policy to address current deficiencies Inefficient energy use Poorly targeted energy subsidies Poor supply prioritization Energy prices < economic price Low investment interest Reliance on fossil fuels while reserve replacement is low Energy infrastructure limitations Low domestic funding and participation Limited R&D and technology application Low community access to energy Poor demand side management Export driven with limited value add 4

5 MTOE Policy primary energy mix targets REN= Renewable energy consists of mostly hydropower and geothermal 1,200 1, REN Coal Gas Oil 99 5% 13% 23% 60% CAGR 4.7% % 5% 23% 47% 6.4% % 30% 22% 25% 3.7% 1,000 31% 25% 24% 20% a at constant price 2000 C inflation assumption at 4.5% b implied d inflation assumption at 3% Source: Migas, National Energy Policy, Risco analysis 2014 Policy Targets 5

6 MTOE Actual and targeted oil and gas demand Gas CAGR Oil Oil Oil & Products CAGR Gas Role of Oil & Gas Declining role in primary energy supply mix % 26.8 Bscfd 3.6% p.a. increase in total demand to Demand looks understated given assumptions of: Bscfd 1.19 MMbopd 5.1% 2.3% 4.1 Bscfd 1.5 MMbopd 6.0% 2.0% 9.8 Bscfd 2.01 MMbopd 2.8% 4.02 MMbopd Rising efficiency. - Massive contribution from renewable energy, especially given PLN s own energy plans. - WoodMac agree and forecast 2.25 MMbopd liquids in Policy Targets Source: Migas, National Energy Policy 6

7 MTOE MTOE MTOE Approaching net BOE imports Oil Production and Consumption Oil and Gas Production and Consumption Oil Production Oil Consumption Gas Production and Consumption Gas Production Gas Consumption Oil and Gas Production Oil and Gas Consumption Source: Risco databases 7

8 Actual & projected domestic oil & gas supply & demand balance Mboe/d 5,000 4,500 4,000 3,500 3, Energy Policy Target Demand* 2.0 Mboe/d 2025 Gap to be filled by: Enhanced Recovery Conventional Exploration Unconventional 2,500 CBM 2,000 1,500 Undeveloped Shale Oil & Gas Tight Gas Imports 1, Natuna D Alpha Under Development Producing Source: Migas and Woodmac & Risco analysis 8

9 Widening supply / demand gap already has economic impact Source: Statistics Indonesia Source: Bloomberg

10 Policy fit for enhanced oil and gas exploration investment Increased exploration & exploitation investment Increased domestic reserves and supply Industry, technology and human capacity development Peoples benefit via economic multiplier & employment Energy Independence and National Energy Security Maximizing gas supply & environmental benefits Uncompetitive Investment Environment => Lower reserves & production => Higher imports => Reduced energy independence and security 10

11 Presentation Outline National Energy Policy and the Role of Oil and Gas Recent Trends in Conventional Exploration Investment and Activity Stimulating Unconventional Exploration The UK Analogue and Industry Approach Recommendations 11

12 PSC s signing have responded to oil prices and regulatory issues Trends Asian Financial Crisis Political & Regulatory Instability New Tax Law increases uncertainty GFC GR79 LBT New PSC signings exploded in 2007/08 with oil prices and the successful Direct Offer licensing approach. Block awards sensitive to global and local fiscal and regulatory issue that collide with on and off risk appetite. Recent decline in conventional PSC interest driven by poor exploration track record and unfriendly policies such as GR79 and LBT. Source: Migas / IPA 12

13 Seismic activity is lagging oil prices and PSC commitments Trends Seismic activity levels follow new PSC signings with a lag D peak related to early deep-water frontier exploration in blocks signed during high oil prices. Seismic activity levels have not responded to recent sustained high oil prices and PSC commitments reflecting: Funding and capability constraints for many new entrants Lack of significant discoveries 3D increasingly the exploration tool of choice. Source: skkmigas 13

14 Wells Spudded Conventional exploration drilling activity well below levels needed for energy security and independence objectives Annual New Field Wildcat Conventional Exploration Drilling 5 Year Moving Average Trends Long term decline in exploration drilling activity abated by ramp up in new PSC s signed in Drilling results disappointing and investment environment uncompetitive meaning further decline likely 3X current exploration activity level needed if conventional oil and gas is to fill 50% of the 2025 supply demand gap* Source: SKK Migas, IPA. * IPA analysis for 2012 ESDM IPA Exploration Forum.

15 The average exploration well is costing a lot more to drill Trends The average cost of drilling an exploration well, including associated seismic and G&A has grown 5X in the last decade. These costs and not drilling activity levels are the largest driver of expenditures. Largely reflects rising rig day rates and rising deep-water activity. Declining volumes / well and rising costs / well provide a double hit to average Finding Costs, a key exploration investment and performance metric. Source: skkmigas, bloomberg, Risco analysis 15

16 The decoupling between oil prices and equity markets has made capital raising for exploration more difficult Trends 2012 work by IHS showed a declining trend of exploration efficiency. Recent WoodMac suggest exploration efficiency has leveled out over the period WoodMac documents falling commercial success rates and declining find sizes as the key driver of falling exploration efficiency Source: IHS, IPA, WoodMac 16

17 The decoupling between oil prices and exploration activity mirrors equity markets Trends Global E&P equities followed oil prices well until early 2011 and partially decoupled until recently Key reasons include: Risk off world Costs outstripping prices and cutting margins In this environment companies are focusing more on margins, capital productivity and cashflow and less on growth. The equity underperformance also makes it hard for small cap E&P to raise money for exploration. Source: Bloomberg, Risco 17

18 The bottom line: - Decision Time Indonesia needs to drill at least 3X as many wildcat exploration wells Contractors are spending more money to drill fewer wells They are finding less reserves / well drilled This is making finding costs internationally uncompetitive The risk reward balance needs to be adjusted. Wood Mackenzie is correct Its decision time for Indonesia Source: Bloomberg, Risco 18

19 Presentation Outline National Energy Policy and the Role of Oil and Gas Recent Trends in Conventional Exploration Investment and Activity Stimulating Unconventional Exploration The UK Analogue and Industry Approach Recommendations 19

20 Number of wells In unconventional projects there is additional commercialization risk Distribution of Well Productivity in Conventional and Shale Gas Wells Shale wells (Log Normal distribution) Conventional wells (Generally Normal Distribution) Uneconomic Economic Single well Gas production mmcf/d 20

21 Indonesian economics with Indonesia specific considerations: Take a dry gas play (Haynesville) and a liquids play (Bakken) as representative end memberstook at a hypothetical full field development under Indonesian conditions and fiscal terms. Development Concept: 100 well development assuming 640 acres / well = 259km2 appx. 25% development of a 1,000 km2 block 6 well exploration & appraisal period followed by development / wells / year Reserves & Production: P10 P50 P90 US benchmark data for each play Developed production profiles for liquids, gas and water Costs Adjusted for Indonesian Conditions: Drilling 1.5X current US costs reflecting equipment and service availability Midstream and pipeline costs added to reflect lack of infrastructure Opex 1.2X US costs Product Prices: Base Oil Price = US$100 / bbl ICP Base Gas Price = US$8.0 MMbtu at customer gate escalated at 3%p.a. Associated gas <20 MMsfd consumed for own use purposes Fiscal Terms: Gas Base Case: Indonesian CBM PSC with 55:45 post tax split Oil Base Case : Indonesian CBM PSC with assumed 60:40 post tax split 21

22 Shale oil and gas economics under the Indonesian unconventional PSC Shale Oil Shale Gas PSC PSC Low Case Unit NPV IRR UTC $(52)/boe N/A $264/bbl $(0.6)/MCF or $(0.1)/boe 2% $10.0/MCF Base Case Unit NPV IRR UTC $(3)/boe 4% $92/bbl $0.3/MCF or $0.05/boe 18% $5.3/MCF High Case Unit NPV IRR UTC $4/boe 35% $33/bbl $0.6/MCF or $0.1/boe 43% $2.7/MCF CPI (Capital Productivity Index) is sum of NPV and discounted capex divided by discounted capex. CPI is a measure of efficiency of capital investment. UTC (Unit Technical Cost) is the discounted capex and opex divided by discounted production. UTC is often used by decision makers as a first pass ranking of projects in a portfolio. 22

23 Conclusions and recommendations for regulators Unconventional projects have high commercialization uncertainty driven by uncertainty in IP s and related EUR/well and cost uncertainty for early movers in particular. Unlike CBM, the E&A stage to prove commerciality is very capital and technology intensive, exacerbated by the lack of fit for purpose equipment and services in country. Low case volume / well outcomes do not generate an economic surplus (even in the US). Upside outcomes can be quite attractive if schedule & cost can be optimized but are by definition a low probability The need for and potential of shale oil & gas is clear, the challenge is to compete for internationally mobile skills & capital - Structure a fiscal regime that captures a fair share of the economic surplus across the wide range of potential outcomes while recognizing the average outcome is a marginal business. - Structure a regulatory regime that facilitates and enables investment and provides the necessary operating flexibility for operators to iterate and optimize with technology and operations. 23

24 Conclusions and recommendations for regulators With significant volume and cost uncertainty the R/C structure where R/C ratio drives profit oil and gas split has merit. With higher costs and great risks in the early stages in Indonesia, fiscal terms better than CBM are needed. Land access will need to be enabled through regulation, alignment and CSR initiatives. An attractive fiscal regime alone will not drive capital, skills and technology intensive investment if the operating environment does not provide the necessary flexibility and efficiency necessary to iterate, optimize and relentless drive down costs - Elimination of PTK 007 compliance obligations in the exploration stage would be a good start - Elimination of LBT, it will kill the unconventional business before it gets started - No clear boundary between appraisal and development with development flexibility and iteration essential so ring fencing is inappropriate With long life projects and long payout times, contractual, clarity, consistency and certainty is essential. 24

25 Lessons from Poland s Shale Fail The Statistics EIA record 5.4 TCM shale gas potential 64 vertical exploration wells drilled and 11 wells horizontally drilled and fracked No commercial success with flow rates 10-30% of commercial threshold 2010: Euphoria as technocrats, investors and state expectation of a shale gas boom peak. All that was needed was to open the country to foreign drilling firms, set up a regulatory and profitsharing structure, open the taps, and watch the methane (and the dollars) flow. 2014: Dream are fading, activity and results very disappointing and investors leaving Source: UK Oil & Gas, Risco What went wrong? The geology Regulations not fit for purpose Slow and cumbersome bureaucracy Investors heading back to US slow and incompetent bureaucracy, which has made life difficult for gas prospecting firms. Despite years of government promises, Poland s administration is one of the most sluggish in Europe. It takes about seven months to get the permits needed to start drilling, six months to amend the drilling concession and nine months to obtain an environmental decision 25

26 Presentation Outline National Energy Policy and the Role of Oil and Gas Recent Trends in Conventional Exploration Investment and Activity Stimulating Unconventional Exploration The UK Analogue and Industry Approach Recommendations 26

27 UK oil and gas industry has may similarities with Indonesia Industry Characteristics Industry is the largest investor and tax payer in the UK Oil production peaked in 2000 and is now at < 30% of peak levels Net oil importer since 2004 Gas production peaked in 2001 and is now <40% of peak levels Net gas importer since 2004 Rapidly rising capital and unit operating costs Falling exploration activity but rising expenditure. Falling exploration efficiency and negative reserves replacement Increasing regulatory complexity and investment stifling taxation Increasing industry fragmentation Loss of international investment competitiveness Exploration crisis Source: UK Oil & Gas, Risco UK Oil & Gas Production Exploration Drilling Vs Oil Price 27

28 Rig availability and funding key UK exploration constraints Constraints on Exploration and Appraisal Drilling in 2012 UK Offshore Rig Rates Source: UK Oil & Gas, 28

29 History of UK drilling Source: UK Oil & Gas, Risco 29

30 Independent UKCS Maximizing Recovery Review Completed Feb 2014 UK Oil & Gas Annual Report Executive Summary Government Commissioned Sir Ian Wood (Ex Chairman of Wood Group) to make proposals on maximizing recovery of remaining resources from the ULCS Review recognized unique partnership required between operators and government and looked specifically at: Incentives on operators to maximize investment and optimize recovery How to build a collaborative partnership between within Industry and between Industry and government Government / regulatory structure and resource requirements 30

31 UKCS Maximizing Economic Recovery (MER) Review - 4 Key Recommendations 1 Government (Treasury and Regulator) plus operators must adopt a cohesive, corporative and collaborative tripartite approach and strategy to maximize the huge economic and energy security opportunities that still remain. 2 Create a new stronger more focused, higher skilled and capable regulator that that can drive the strategy execution and inter ministerial collaboration required. 3 Regulator should be enabled with additional powers and capabilities to develop and execute national strategy for MER 4 Regulator to work with industry to develop & implement critical sector strategies such as Exploration, Production Optimization, & Infrastructure Access. A collaborative tripartite approach to ensure fiscal and regulatory policies recognize late life challenges & opportunities 31

32 UKCS Maximizing Economic Recovery (MER) Review - Exploration Sector Strategy Action Items 1 2 Government to urgently assess the potential to stimulate exploration by enhancing international investment competitiveness Regulator should facilitate the development of regional exploration plans by data sharing to enhance exploration efficiency 3 Regulator to work closely with industry & treasury to incentivize new play exploration Regulator to establish why high demand for acreage in recent years has not translated in high levels of seismic and drilling activity Risk / Reward, well costs, fiscal policy, etc.? Regulator should facilitate Industry and seismic companies to carry out spec seismic surveys Regulator in consultation with industry to investigate what measures would increase the supply of drilling rigs and costs of rigs 7 A continuously updated seismic & geological digital perspective of UK hydrocarbon prospectivity 8 / / 12 Incentivize targeted exploration and data sharing around critical infrastructure to extend its life. Adjust exploration terms of licenses to reflect exploration cycle time realities and provide greater flexibility around exploration commitments Earlier and more timely release of exploration data to enhance exploration efficiency and more sustainable and unified approach to the management of geoscience information 32

33 Presentation Outline National Energy Policy and the Role of Oil and Gas Recent Trends in Conventional Exploration Investment and Activity Stimulating Unconventional Exploration The UK Analogue and Industry Approach Recommendations 33

34 Conclusions and recommendations for regulators National Energy policy focuses on enhanced domestic supply, improved demand side management and a reduced contribution of hydrocarbons in the supply mix to deliver energy security and independence. Indonesia faces a widening gap between domestic oil & gas supply & demand and the choices are simple, either accelerate upstream investment or increase imports. To deliver energy security, and energy independence Indonesia needs a quantum jump in investment to quickly unlock the potential of its conventional and unconventional hydrocarbon resources. Increasing investment means delivering the right fiscal, regulatory and operating environment necessary to compete for highly mobile capital, technology and skills. The upstream business is increasingly competitive, capital, skills and technology intensive. The investment and the operating environment must provide the flexibility and efficiency necessary to iterate, optimize and relentlessly drive down costs: - Fiscal terms better than CBM - Streamlined bureaucracy - Fit for purpose unconventional regulations - Longer exploration periods in tune with frontier and unconventional exploration cycle times - Elimination of PTK 007 compliance obligations in the exploration stage - Fiscal certainty through elimination of all non PSC based taxes. Land and building tax was a disaster for exploration and a lot of uncertainty remains. - Market driven gas pricing and commercialization - GR79 needs revision it s not helping investment & caused the disastrous LBT problem Fiscal and regulatory clarity, consistency and certainty is essential to meet National Energy Policy Objectives. 34

35 Thank You 35