Jargon free volume on upstream fiscal design

Takings from upstream oil and gas projects, whether they are small scale or big ticket ones, ultimately determine their profitability – the stuff that shareholders, venture sponsors and governments alike have a keen interest in.

It is why oil and gas companies, both state or privately held, deploy an army of petroleum economists to offer conjecture or calculated projections on what the final fiscal share of such ventures might be.

In this complex arena, both budding petroleum economists and established ones could do with all the help they can get. Industry veterans Ken Kasriel and David Wood’s book Upstream Petroleum: Fiscal and Valuation Modeling in Excel (published by Wiley Finance) goes a long way towards doing just that, and quite comprehensively too.

In a volume of 370 pages, with eight detailed chapters split into sequential sub-sections, the authors offer one of the most detailed subjective discussions and guidance on fiscal modeling that is available on the wider market at the moment in the Oilholic's opinion.

The treatment of fiscal systems, understanding and ultimately tackling the complexities involved is solid, predicated on their own views and experience of understanding the tangible value of upstream projects before, during and when they ultimately come onstream, and what the takings would be.

Kasriel and Wood have also included five appendices and a CD-ROM (in the hardcover version) to take the educational experience further, and accompanying the main text of the title are over 400 pages of supplementary PDF files and some 120-plus Excel files, with an introduction to risk modeling.

What is particularly impressive is the authors’ painstaking effort in cutting through industry jargon, putting across their pointers in plain English for both entry-level professionals and experienced practitioners. Furthermore, the sequential format of the book makes it real easy for the latter lot to jump in to a section for quick reference or for a subject specific refresher. 

Generic treatment of taxation, royalties, bonuses, depreciation, profit sharing mechanics, incentives, ringfencing, and much more, including decommissioning finance, are all there and should withstand the passage of time as both authors have called their combined 48 years of experience in the industry into play, to conjure up a reasonably timeless discussion on various issues. 

Above everything else, Kasriel and Wood’s conversational style makes this book a very purposeful, handy guide on a subject that is vast. The Oilholic is happy to recommend it to fellow analysts, (aspiring, new and established) petroleum economists, policymakers, industry professionals, corporate sponsors and oil and gas project finance executives.

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© Gaurav Sharma 2015. © Photo: Front Cover – Upstream Petroleum: Fiscal and Valuation Modeling in  Excel © Wiley Publishers, March, 2015.

The ostentatious & those 'crude' percentages

The Oilholic finds himself gazing at the bright lights of Las Vegas, Nevada once again after a gap of five years. This gambling hub's uniqueness is often the ostentatious and loud way it goes about itself. The oil market had its own fair share of loud and exaggerated assumptions last week.

Sample these headlines – “Brent spikes to 2015 high”, “Oil markets rally as shale production drops”, “Brent up 10%.” There is some truth in all of this, and the last one is technically correct. Brent did close last Friday up 10.03% relative to the Friday before, while WTI rose 8.41% and OPEC's basket of crude oil(s) rose 10.02% over a comparable period (see graph blow right hand corner).

Bullish yes, bull run nope! This blogger believes market fundamentals haven't materially altered. There is still too much crude oil out there. So what's afoot? Well, given that one is in a leading gambling hub of world, once 'the leading one' by revenue until Macau recently pinched the accolade, it is best to take a cue from punters of a different variety – some of the lot who've been betting on oil markets for decades out of the comfort of Nevada, but never ever turn up at the end of a pipeline to collect black gold.

Their verdict – those betting long are clutching at the straws after enduring a torrid first quarter of the year. Now who can blame the wider trading community for booking a bit of profit? But what's mildly amusing here is how percentages are interpreted by the media 'Las Vegas size', and fanned by traders "clutching at the straws", to quote one of their lot, 'Las Vegas style'.

For the moment, the Oilholic is sticking one's 2015 forecast – i.e. a mid-year equilibrium Brent price of $60 per barrel, followed by a gradual climb upwards to $75 towards the end of the year, if we are lucky and media speculation about the Chinese government buying more crude are borne out in reality. The Oilholic remains sceptical about the latter.

Since one put the forecast out there, many, especially over the last few weeks wrote back wondering if this blogger was being too pessimistic. Far from it, some of the oldest hands in the business known to the Oilholic, including our trader friends here in Las Vegas, actually opine that yours truly is being too optimistic!

The reasons are simple enough – making assumptions about the decline of US shale, as some are doing at the moment is daft! Make no mistake, Bakken is suffering, but Eagle Ford, according to very reliable anecdotal evidence and data from Drillinginfo, is doing pretty well for itself. Furthermore, in the Oilholic’s 10+ years of monitoring the industry, US shale explorers have always proved doubters wrong.

Beyond US shores – both Saudi and Russian production is still marginally above 10 million bpd. Finally, who, alas who, will tell the exaggerators to tackle the real elephant in the room – the actual demand for black gold. While the latter has shifted somewhat based on evidence of improved take-up by refiners as the so called “US driving season” approaches, emerging markets are not importing as much as they did if a quarter-on-quarter annualised conversion is carried out.

Quite frankly, all eyes are now on OPEC. Its own production is at a record high; it believes that US oil production won’t be at the level it is at now by December and its own clout as a swing producer is diminished (though not as severely as some would claim).

Meanwhile, Russian president Vladimir Putin declared the country's financial crisis to be over last week, but it seems Russia’s GDP fell between 2% to 4% over the first quarter of this year. The news caused further rumbles for the rouble which fell by around 4.5% last time one checked. The Oilholic still reckons; Russian production cannot be sustained at its current levels.

That said, giving credit where it is due – Russians have defied broader expectations of a decline so far. To a certain extent, and in a very different setting, Canada too has defied expectations, going by separate research put out by BMO Capital and the Canadian Association of Petroleum Producers. Fewer rigs in Canada have – again inserting the words 'so far' – not resulted in a dramatic reduction in Canadian production.

Finally, here's an interesting report from the Weekend FT (subscription required). It seems BP's activist shareholders have won a victory by persuading most shareholders to back a resolution obliging the oil major to set out the potential cost of climate change to its business. As if that's going to make a difference - somebody tell these activists the oil majors no longer control bulk of the world's oil – most of which is in the hands of National Oil Companies unwilling to give an inch!

That's all for the moment folks from Las Vegas folks, as the Oilholic turns his attention to the technology side of the energy business, with some fascinating insight coming up over the next few days from here. In the interim, keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2015. Photo: Paris Casino on the Las Vegas Strip, Nevada, USA © Gaurav Sharma, April 2015. Graph: Oil benchmark prices - latest Friday close © Gaurav Sharma, April 17, 2015.