Global Competitiveness

Oil and Gas Investment Drivers

Industry is concerned that changes to the fiscal and regulatory regime will have an adverse impact on investment. The following list highlights many of the key criteria which are routinely considered as part of an investment decision:

1. Economic measures, (addressed below)
2. Portfolio fit (e.g. global or regional)
3. Strategic fit (e.g. niche / independent / major)
4. Materiality (size, value and impact of opportunity – addressed below)
5. Timing and Longevity (addressed below)
6. Risk exposure (addressed below)

The relative importance of the different metrics, risks and opportunities will vary depending on the company, global competition and the local fiscal, regulatory and business environment. However, all the following measures have been impaired by the recent tax increases.

Economic Measures include Net Present Value (NPV) and Expected Monetary Value (EMV) which are both post tax measures and sensitive to changes in tax rate.

Materiality considers the size, value (post-tax) and impact of the opportunity. The size of new discoveries in the UKCS is typically small and may demand disproportionate company resource to develop.

Timing and Longevity of investments are both considerations. The oil and gas industry is a long term industry, seeking to make long term investments which will deliver long term value for all stakeholders. Investments typically take 2-5 years to come on steam and may be producing for 15 years. In such cases, investments are tested against long term perceptions of price combined with an assessment of regulatory and fiscal risk.

Risk Exposure In all cases an assessment of risks is a fundamental part of making an investment decision. Oil and gas investments typically face a number of risks in which different parties are involved:

Risk	Party
Technical	Industry
Costs	Industry, Market
Funding	Industry
Price	Market
Exchange and Interest Rates	Market
Fiscal	Government
Political / Regulatory	Government

All these risks are borne by the investing companies; the only risks that the Government can influence are within the fiscal, regulatory and political environment. Companies will assess these risks when deciding on the proportion of their capital funding that is likely to be invested in different oil and gas basins. Perceptions of future risks are based on historic experience and assessments of likely future decisions and policies. These may be reflected in different discount rates being applied to different basins according to the perceived risk.