Thursday, June 12, 2014

Working to understand global "Best Practice" ...

In a previous column on the main page I discussed a fact-finding mission to Norway arranged by the Institute of the North to meet with various components of the Norwegian government responsible for the development of Norway's oil and gas resources.  As is largely the case with Alaska, there the oil and gas resource is owned by the government and the resource is managed to produce the maximum benefit for its citizens.  The meetings are at the end of next week, June 19 -20 in Stavanger and Oslo.

As I said in the original column, Alaska may have something to learn from Norway's approach.  "By partnering with industry, Norway has both successfully slowed the decline curve in oil and gas production and successfully developed a global gas and LNG industry. In addition, Norway is maintaining a strong exploration program at a time that, even under SB 21, Alaska’s continues to struggle."

Central to Norway's approach is co-investment by the government along side industry in development of the state's oil and gas resources.  Under the approach the state takes a direct financial interest (what the government terms a State Direct Financial Interest or "SDFI") throughout the value change, from the field through the midstream and marketing.  As I have explained previously, this delivers a number of benefits that Alaska's more passive, royalty based approach does not.  The state's financial interest is held and managed through a non-political corporation named Petoro that is similar in many respects to Alaska's Permanent Fund Corporation.

In preparation for the meetings I have developed a set of questions to help focus the discussion and my thought process.  I share them here to provide an opportunity for readers of these pages to provide additional thoughts.  As some readers may anticipate, a number of the questions follow up on meetings that occurred on an earlier fact finding mission to Norway sponsored by the Institute.  For background, a number of the results from those meetings are captured in a previous column available on these pages ("Legislative Presentations on Norway Oil & Gas Policy").

I would note that, if anyone is so inclined, the opportunity remains to add one or two to the meetings.  Anyone interested should contact Nils Andreassen, the Executive Director of the Institute at phone: (907) 786-6324, or email: nandreassen@institutenorth.org.

If you have thoughts about the questions, or additional questions that you believe are worth exploring, please do not hesitate to leave them as comments to this column, or email them to me at bgkeithley@keithleyconsulting.com.

The questions:  

Background: Alaska historically has used a royalty approach to upstream activities on state lands. The government is in the process of evaluating whether to become a co-investor in the midstream sector, but preliminarily maintaining a royalty approach in the upstream sector. The purpose of a number of the following questions is to evaluate the benefits also of becoming a co-investor (undertaking a "State Direct Financial Interest" or "SDFI") also in the upstream sector and, if so, how to transition from the royalty approach. Other questions are intended to identify other steps that the government takes which appear to have the effect of directing exploration and development dollars to Norway that otherwise might go elsewhere (i.e., improve its competitive positioning).

1. Effect of SDFI on oil & gas exploration and development.
a. Has SDFI resulted in more oil & gas exploration and development in the Norwegian sector than would have occurred under a royalty approach? If so, why and are there any studies on the issue.

b. Has Petoro resulted in more oil & gas exploration and development in the Norwegian sector than would have occurred under continued Statoil management of SDFI? If so, why and are there any studies on the issue.

c. Would the effect on oil & gas exploration and development have been different if SDFI had been limited to midstream investment (pipelines and liquefaction plants) and a royalty approach had continued in the upstream sector?
2. SDFI.
a. What were the reasons for the change in the government’s approach from taking a royalty interest to SDFI? Was there at the time (or has there been since) any analysis of whether government revenues under SDFI have been greater or lesser than they would have been under a continued royalty approach?

b. How did the government handle the transition from royalty to SDFI for fields that originally started with a royalty interest? How was the SDFI interest in those fields determined at the time of the transition?

c. How did the government fund the transition from royalty to SDFI (i.e., how did it fund the working capital required to pay for the first few years of SDFI until the investments went cash flow positive).

d. How does the government determine what the SDFI percentage will be in each field? What role does Petoro play in that decision process?
e. What consideration, if any, is given to production tax rates in the determination of the SDFI percentage?
3. Operations of Petoro.
a. How is Petoro organized? Does it supplement staff with the use of outside consultants and, if so, for what?

b. How is Petoro’ s overall budget set? How does it decide on which projects to fund?

c. How does Petoro interact with the other license holders? Is it included on the operating and other committees, and in all meetings as the private investors?

d. Are there any limitations on the manner in which Petoro may use the data derived from its involvement on those committees. What confidentiality provisions apply to the data?
e. Is Petoro able to propose projects to the other licensees? If so, are its proposals given any special status, or are they treated the same as if made by any other non-operator? Is there a usual percentage required under the relevant operating agreements for projects to proceed? Does the NPD or other agency have the right to require licensees to pursue a project that otherwise has not received the required vote? 
f. How does Petoro market its share of production?
g. What steps does Petoro take that it believes helps drive investment dollars to Norwegian projects that otherwise might go elsewhere?
4. Other issues
a. How are license areas identified and licensees determined? What are the selection criteria? 
b. What policies or steps does each agency take (Ministerial, NPD, Petoro) that it believes are key to helping drive investment to Norway over other areas. What role does tax policy play in that? 
c. How have tax rates been set and what analysis was done to determine the effect on investment levels?