Developing a Fair and Robust Energy Policy

1. Developing a Fair and Robust Energy Policy Frank Blaskovich Blaskovich Services, Inc.

2. Goals & Approach Model Design & Features Policy Development Example Summary Slide 2 AGENDA

3. Slide 3 GOALS & APPROACH • Fair, robust policy • Uncertainty difficult to quantify • Technical and non-technical factors • Start simple, add complexity • Process most important

4. Slide 4 MODEL DESIGN & FEATURES • System Dynamics & Feedback • Oil Production & Economics • State & Producer • Maximize NPV

5. Slide 5 SYSTEM NARRATIVE Energy Production Producer State

6. Slide 6 Higher Production => Higher Revenue => Higher NPV LOWER Taxes & Royalties => Higher Producer Profits => Higher Producer NPV HIGHER Taxes & Royalties => Higher State Revenue => Higher State NPV SYSTEM NARRATIVE

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

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

9. Slide 9 SENSITIVITY RESULTS State NPV Producer NPV Levers Drivers

10. Slide 10 REGRET ANALYSIS • Uncertainties difficult to define • Minimize impacts of “worst case” scenarios • Regret = difference between best and actual outcomes • Multiple futures, wide probability distributions

11. Slide 11 REGRET DEFINITIONS • 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))

12. Slide 12 REGRET EXAMPLE State NPV Failure Maximum NPV Minimum Regret Decreasing NPV Increasing Regret Tax Rate Maximum Regret Future

13. Slide 13 REGRET EXAMPLE State NPV State Regret 0.80 (0.2) 0.72 3.8 Regret = 3.8 – 3.8 = 0 0.36 3.1 Regret = 3.8 – 3.1 = 0.7 Tax Rate 0 2.3 Regret = 3.8 – 2.3 = 1.5 Future Oil Price = $100/stb Initial Oil Reserves = 200 mmstb

14. Slide 14 REGRET EXAMPLE State Regret State Relative Regret 0.80 0.72 0 Relative Regret = 0 / 1.5 = 0 0.36 0.7 Relative Regret = 0.7 / 1.5 = 0.4 Tax Rate 0 1.5 Relative Regret = 1.5 / 1.5 = 1.0 Future Oil Price = $100/stb Initial Oil Reserves = 200 mmstb

15. Slide 15 REGRET EXAMPLE State Rel Regret Prod Rel Regret Equiv Regret 0.80 0.72 0 0.8 0.8 Possible Solution 0.36 0.4 0.4 0.0 Tax Rate 0 1.0 0 1.0 Future Oil Price = $100/stb Initial Oil Reserves = 200 mmstb

16. Slide 16 STATE RELATIVE REGRET Non-optimal solutions

17. Slide 17 PRODUCER RELATIVE REGRET Non-optimal solutions

18. Slide 18 EQUIVALENT REGRET Equivalent regret solutions

19. Slide 19 NPV vs PRICE & RESERVES State NPV Results Producer NPV Results

20. Slide 20 SUMMARY • 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

21. Questions or Comments? Slide 21