2018 Comparative Analysis of the Federal Oil and Gas Fiscal Systems: Gulf of Mexico International Comparison
Since the publication of the 2011 Comparative Assessment of the Federal Oil and Gas Fiscal System, significant changes to oil and gas market conditions have taken place globally. The Department of the Interior commissioned this independent study with the goal of ensuring the public’s oil and gas resources remain competitive for capital investment and provide a fair return to the taxpayer.
This study compares the U.S. Gulf of Mexico (GOM) shallow water and deepwater with international jurisdictions competing for upstream oil and gas investment using updated information. Similar oil and gas field sizes in peer group countries are analyzed using consistent financial metrics, including government take, internal rate of return (IRR) and net present value per barrel of oil equivalent. The report also analyzes a variety of alternative GOM fiscal terms with the same financial metrics. This GOM study finds:
GOM Shallow Water: The GOM shallow water is a mature province. As compared to the peer jurisdictions, the remaining yet to be discovered resources are smaller, gas-prone reservoirs, and as a result, GOM shallow water provides a lower return to investors and is an unattractive investment target when compared to other peer jurisdictions competing for investment. The reduction in federal corporate income taxes, combined with the 12.5 percent royalty rate in shallow water for new leases, has resulted in a reduction in GOM shallow water government take of 22 percentage points since 2011 for new leases.
As provided in the summary presentation below, if the shallow water policy goal is to maximize resource recovery, production, life of existing fields, and activity levels, additional fiscal incentives would likely be needed for gas fields. Similarly, the study indicates that small shallow water oil fields tend to be uneconomic and that categorical royalty relief could help improve expected returns. On a case-by-case basis, improvements to the design and application process for shallow water discretionary royalty relief could create an incentive to develop small discoveries that could utilize existing infrastructure. These changes could maximize the development potential of existing shallow water fields and infrastructure.
GOM Deepwater: The GOM deepwater has higher capital and operational costs than shallow water. Significant portions of GOM deepwater undiscovered resources are located in plays with high pressures and high temperatures (HPHT) and require substantial capital investment.1 Many of these HPHT prospects are not economic and are less attractive than those in peer jurisdictions. While the current US deepwater GOM fiscal system offers returns above the hurdle rates for most larger discoveries, the GOM rates of return are not as attractive as Guyana, Brazil, Angola, United Kingdom and Mexico, which offer rates of return above 20% under the base case scenario. Therefore, the study suggests international companies are likely to prioritize these jurisdictions over the GOM.
The Department of the Interior remains committed to ensuring that the public receives a fair return for the use of Outer Continental Shelf conventional energy resources. This determination involves a careful balancing of economic, employment, environmental, and national-security considerations. This study serves as one tool for informing decision-making on the appropriate fiscal terms for Federal oil and gas leases. Forthcoming reports will focus on the Department of the Interior’s onshore and offshore frontier areas.
1The study provides yet-to-find resource estimates that are the resources likely to be developed within the next 40 years. These estimates do not reflect BOEM's own assessment of undiscovered oil and gas resources, which can be found at: https://www.boem.gov/2016a-National-Assessment-Fact-Sheet/.