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• 2.1 Issues
• 2.2 Context for Reduction
• 2.3 Reduction of AVR
• 2.4 Reducing APR

2.1 Issues

The project team has discussed:

• Whether to reduce AVR only or APR and AVR
• Whether the Minister can reduce AVR to 0%
• Whether the incentive should discriminate between gas and oil

2.2 Context for Reduction

[Withheld under section 9(2)h of the Official Information Act where withholding of the information is necessary to maintain legal professional privilege]

2.3 Reduction of AVR

As noted above, our modelling has shown that the impact on the economics of our base case projects of removing the AVR royalty is relatively minor.

Our sensitivity analysis indicates that this conclusion holds across a reasonably wide range of projects.

2.4 Reducing APR

The project team has considered whether it would be possible to positively discriminate in favour of gas production by reducing royalties in respect of gas produced. Graham Hull has pointed out that there would be considerable interpretational issues around the allocation of costs.

This distinction would require far more prescriptive rules in terms of cost allocation. It would therefore require greater audit and negotiation resources within Crown Minerals. The project team consequently concluded that any reduction should apply to both oil and gas, but that the lower rate would cease once production reached a specified threshold. For modelling purposes, we have assumed a threshold of 150bcf (or equivalent), but note that this value has been selected for illustrative purposes only.

A comparison of Table 1 and Table 2 shows that the relative significance of reductions in the AVR and APR rates depends to some extent on field-specific features. The APR reduction has a broadly equivalent impact to the AVR reduction on our sample offshore project. For our onshore project, the value impact of a lower APR rate is around three times the value impact of a reduced AVR rate.

Similarly, a comparison of Tables 2 and 3 shows that the more profitable the project the greater the relative benefit from a lower APR. This is because the APR takes effect earlier the more profitable the field. By itself, this feature suggests a capped reduction in the APR rate is a "blunter" way of inducing higher exploration.

Other matters that should be considered in determining whether to reduce the APR rate include:

• Unless limited to a fixed volume of gas and / or condensate, the concession is effectively open-ended.
• It would be necessary to carefully design the cap to avoid, for example, creating incentives to defer or avoid gas production. For example, this might arise if the cap was specified solely in terms of cumulative gas production. In that instance, the producer may be disincentivised from exceeding that threshold and may prefer to produce condensates and oil. One approach would be to specify a net revenue threshold rather than a volume threshold.