Friday, July 14, 2017

Investing in the Global Oil and Gas Industry

The Fraser Institute's recent Global Petroleum Survey 2016, it's tenth annually survey of petroleum industry executives and other management, looks at a jurisdiction-by-jurisdiction analysis of barriers to investment in oil and gas exploration and production.  A total of 96 jurisdictions were included in this year's analysis, accounting for 75 percent of global oil and gas production and 66 percent of global oil and gas reserves.

Let's start by looking at the topics covered in the survey; respondents were asked to indicate how each factor influenced their company's decision to invest in various jurisdictions and were to rank each factor on whether the jurisdictions that they were familiar with encouraged investment, did no deter investment, mildly deterred investment, strongly deterred investment or whether their company would not invest due to this factor:

1.) Fiscal terms—including licenses, lease payments, royalties, other production taxes, and gross revenue charges, but not corporate and personal income taxes, capital gains taxes, or sales taxes.

2.) Taxation in general—the tax burden including personal, corporate, payroll, and capital taxes, and the complexity of tax compliance, but excluding petroleum exploration and production licenses and fees, land lease fees, and royalties.

3.) Environmental regulations—stability of regulations, consistency and timeliness of regulatory process.

4.) Regulatory enforcement—uncertainty regarding the administration, interpretation, stability, or enforcement of existing regulations.

5.) Cost of regulatory compliance—related to filing permit applications, participating in hearings, etc.

6.) Protected areas—uncertainty concerning what areas can be protected as wilderness or parks, marine life preserves, or archaeological sites.

7.) Trade barriers—tariff  and non-tariff  barriers to trade and restrictions on profit repatriation.

8.) Labor regulations and employment agreements—the impact of labor regulations, employment agreements, labor militancy or work disruptions, and local hiring requirements.

9.) Quality of infrastructure—includes access to roads, power availability, etc.

10.) Quality of geological database—includes quality, detail, and ease of access to geological information.

11.) Labor availability and skills—the supply and quality of labor, and the mobility that workers have to relocate.

12.) Disputed land claims—the uncertainty of unresolved claims made by aboriginals, other groups, or individuals.

13.) Political stability.

14.) Security—the physical safety of personnel and assets.

15.) Regulatory duplication.

16.) Legal system—legal processes that are fair, transparent, non-corrupt, efficiently administered, etc.

The responses were then used to calculate a Policy Perception Index (PPI) which is calculated using each jurisdictions average response to each survey question; jurisdictions that had less than five respondents for all sixteen factors were excluded from the rankings since their final score would not be as accurate.  The jurisdiction with the most attractive policies receives a score of 100 and the jurisdiction with the greatest investment barriers receives a score of 0. 

The Fraser Institute also divides the jurisdictions several ways.  First, let's look at the rankings of jurisdictions with large reserves which is defined as those jurisdictions that hold at least 1 percent of the sum of the proved hydrocarbon reserves of the 93 jurisdictions in the survey that have at least some proved hydrocarbon reserves:

Five of the jurisdictions in this ranking have PPI scores that put them in the top two quintiles (top 40 percent) and that two jurisdictions, Libya and Venezuela, have PPI scores that put them well into the bottom quintile.  Despite the fact that Russia has the largest proved ink reserves in the grouping, its PPI score of 39.21 shows that the oil industry deems it to have significant barriers to investment   It is interesting to note that Alberta, Canada's largest petroleum producing province, has slipped from 2nd place in 2014 and 3rd place in 2015. 

Second, here is a ranking of jurisdictions with medium/modest hydrocarbon reserves which is defined as those jurisdictions that hold at least 0.1 percent but less than 1 percent of the proved reserves of the 93 jurisdictions in the survey:

Ten jurisdictions in this grouping fall into the top quintile including three European nations, Norway, the Netherlands and the United Kingdom, and six states.  No jurisdictions fall into the bottom quintile, however, four jurisdictions fall into the fourth quintile including Ukraine, Ecuador, California and Bolivia.

Lastly, let's look at the Policy Perception Index scores in order from greatest to lowest without regard to the size of each jurisdictions' hydrocarbon reserves:

Of the top ten highest scoring jurisdictions, all but one was located in Canada or the United States.  Of the bottom ten lowest scoring jurisdictions, two were in Canada, three were in South America, one was in the United States, one in Africa, one in Australia and the remaining two were Russia and Ukraine.  As far as quintiles go, it is interesting to note that the the majority of the proved hydrocarbon reserves in the 96 nation study are located in nations with PPI scores that fall in the bottom two quintiles (bottom 40 percent).

As far as American jurisdictions go, Oklahoma, Texas, Kansas, Wyoming and North Dakota fall into the top five positions while California, Colorado, Michigan, Alaska and Illinois fall into the bottom five positions.

As far as Canadian jurisdictions go, Saskatchewan, Manitoba and Newfoundland and Labrador fall into the top three positions while Quebec, New Brunswick and the Yukon fall into the bottom three positions.  Interestingly, Canada's most prolific hydrocarbon producing province, Alberta, is right in the middle of the entire pack, coming in 43rd place out of 96 jurisdictions and British Columbia, the site of much of Canada's fracked reserves comes in 39th place overall.

As far as Middle East jurisdictions go, the United Arab Emirates and Qatar fall into the top two positions while Yemen and Iraq fall into the bottom two positions.

As far as African jurisdictions go, Morocco, Namibia and South Africa fall in the top three positions while Libya, Nigeria and Tunisia fall into the bottom three positions. 

Overall, the 2016 analysis of barriers to investment by the petroleum industry shows that industry executives are increasingly expressing negative sentiment about key factors that drive investment.    The United States remains as the most investor-friendly environment while Russia and Venezuela with their massive hydrocarbon reserves remain among the least investor-friendly jurisdictions.  Canada's fall to third place overall reflects the deterioration of Alberta as an investment target, a situation that is certain to put pressure on Alberta's current New Democrat government prior to the next provincial election.

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