31st International Conference of the System Dynamics Society Developing a Fair and Robust Energy Policy Frank Blaskovich Blaskovich Services, Inc.

31st International Conference of the System Dynamics Society AGENDA Slide 2 Goals & Approach Model Design & Features Policy Development Example Summary

31st International Conference of the System Dynamics Society GOALS & APPROACH Slide 3 Fair, robust policy Uncertainty difficult to quantify Technical and non-technical factors Start simple, add complexity Process most important

31st International Conference of the System Dynamics Society MODEL DESIGN & FEATURES Slide 4 System Dynamics & Feedback Oil Production & Economics State & Producer Maximize NPV

31st International Conference of the System Dynamics Society SYSTEM NARRATIVE StateProducer Energy Production Slide 5

31st International Conference of the System Dynamics Society SYSTEM NARRATIVE HIGHER Taxes & Royalties => Higher State Revenue => Higher State NPV LOWER Taxes & Royalties => Higher Producer Profits => Higher Producer NPV Higher Production => Higher Revenue => Higher NPV Slide 6

31st International Conference of the System Dynamics Society SYSTEM NARRATIVE Producer Development Plan Wells to drill Facilities Field Development (3 yr min) Economic forecast Production Exponential decline based on oil reserves Producer Net Revenue (Gross Revenue - State Royalty) Producer Cash Flow (Net Revenue - Opex - State Taxes) Producer Cash Flow Positive? Yes No End of Field Life (Abandonment) Essential Logic of Current Model Slide 7

31st International Conference of the System Dynamics Society SYSTEM MODEL Slide 8 Oil Reserves Cum Oil Production Oil Rate Decline Rate Initial Oil Reserves Max Well Oil Rate Active Wells Oil Price Gross Oil Revenue Discount Rate Decline Point Success Rate Failure Factor Drilling Cost Per Well OPEX Cost Rate Producer Total Costs Producer Net Oil Revenue State Royalty Rate State Oil Revenue Producer NPV State NPV Time Conv Factor CAPEX Costs Facility Cost Rate Development Time Pipeline Tariff Pipeline OPEX Costs State Prod Tax <Producer Total Costs> OPEX Costs Producer Net Income Before Tax State Income Tax Rate Producer NCF Before Tax Producer NCF After Tax <Producer NCF After Tax> <State Income Tax> State Royalty Income <State Royalty Income> <Development Time> Producer NCF After Tax Last Year End Of Field Life EOFL Flag Pipeline OPEX Correlation State Cum Oil Revenue Producer Cum NCF After Tax Wells Drilled Each Year Total Wells Drilled Drilling Rate Per Year <Total Wells Drilled> <Total Wells Drilled> <Max Well Oil Rate> Max Field Oil Rate <Max Field Oil Rate> <CAPEX Depreciation> <Undepreciated CAPEX Expensed> <Field Abandonment Cost> <CAPEX Expensed> <State Prod Tax Rate> Oil Production State EconomicsProducer Economics Field Operations

31st International Conference of the System Dynamics Society State NPVProducer NPV SENSITIVITY RESULTS Slide 9 Levers Drivers

31st International Conference of the System Dynamics Society REGRET ANALYSIS Slide 10 Uncertainties difficult to define Minimize impacts of “worst case” scenarios Regret = difference between best and actual outcomes Multiple futures, wide probability distributions

31st International Conference of the System Dynamics Society REGRET DEFINITIONS Slide 11 Regret(s,f) = Maximum NPV(f) – NPV(s,f) Relative Regret(s,f) = Regret(s,f) / Maximum Regret(f) Equivalent Regret(s,f) = |State Relative Regret(s,f) – Producer Relative Regret(s,f)| s = scenario (lever(s)) f = future (driver(s))

31st International Conference of the System Dynamics Society REGRET EXAMPLE Slide 12 Tax Rate State NPV Maximum NPV Failure Decreasing NPVIncreasing Regret Minimum Regret Maximum Regret Future

31st International Conference of the System Dynamics Society REGRET EXAMPLE Slide 13 Future Oil Price = $100/stb Initial Oil Reserves = 200 mmstb 0.36 State NPV 3.8 (0.2) 3.1Regret = 3.8 – 3.1 = 0.7 Regret = 3.8 – 3.8 = Tax Rate 0Regret = 3.8 – 2.3 = 1.5 State Regret 2.3

31st International Conference of the System Dynamics Society REGRET EXAMPLE Slide State Regret 0 0.7Relative Regret = 0.7 / 1.5 = 0.4 Relative Regret = 0 / 1.5 = Tax Rate Relative Regret = 1.5 / 1.5 = 1.00 State Relative Regret 1.5 Future Oil Price = $100/stb Initial Oil Reserves = 200 mmstb

31st International Conference of the System Dynamics Society REGRET EXAMPLE Future Oil Price = $100/stb Initial Oil Reserves = 200 mmstb Possible Solution 0.36 State Rel Regret Tax Rate 0 Prod Rel Regret Equiv Regret Slide 15

31st International Conference of the System Dynamics Society STATE RELATIVE REGRET Slide 16 Non-optimal solutions

31st International Conference of the System Dynamics Society PRODUCER RELATIVE REGRET Slide 17 Non-optimal solutions

31st International Conference of the System Dynamics Society EQUIVALENT REGRET Slide 18 Equivalent regret solutions

31st International Conference of the System Dynamics Society NPV vs PRICE & RESERVES Slide 19 State NPV ResultsProducer NPV Results

31st International Conference of the System Dynamics Society SUMMARY Slide 20 Fair & robust policies require compromise and consideration of unexpected events System Dynamics & Regret Analysis are useful policy development & analysis tools Other factors also need to be considered

31st International Conference of the System Dynamics Society Slide 21 Questions or Comments?