Developing sound energy policies is difficult under the best circumstances. There is a delicate balance between government's need for revenue, modern society's need for energy and the producer's need for profitability to exploit resources. Many factors can affect the results for all interested parties. Good policies require an appreciation for the interactions among oilfield development and operations, costs and prices, government taxes and regulations and many other factors that are often difficult to define accurately. We live in a complex world that acts like a system with many interconnected components. Humans are ill equipped to understand its behavior. We instinctively focus on short term, local issues and simple cause and effect rather than the bigger picture. This reduces the likelihood that we can design effective policies that will work well over the long term for all stakeholders. There are no easy solutions in complex systems. We developed an approach using system models and regret analysis to find flexible and resilient tax policies, in spite of uncertainties, that would provide all parties with fair, profitable solutions – even though none might achieve their maximum goals. It can also measure the relative benefits of existing energy policies and, potentially, help to improve them. These challenges will only become harder in the future and more important for the energy industry. Now is the time to pursue new ways of thinking to solve these problems.

1. Society of Petroleum Engineers
Distinguished Lecturer Program
www.spe.org/dl
1
Frank Blaskovich
Blaskovich Services, Inc.
Energy Policy – Is It Effective? Is It
Fair?
To view a script of
my talk, access the
notes on each slide.

2. INITIAL THOUGHTS
• Do you care about
2
 Society?
 Energy Business?
 Energy Jobs?
 Your Job?
Energy Policy affects all of these

3. AGENDA
• Policy as a system problem
• Problem solving approach
• Observations
– Influence of problem definition
– Effectiveness & Fairness
3

4. ENERGY
4
Fire
Fossil
Fuels
Industrial
Revolution
Abundance?
Pollution?
Alternative Energy?

5. ENERGY
5
POLICY
Rules for Production, Acquisition and Use of
Energy

6. Population
Food
Energy
Health
6

7. SYSTEM
Simple
Complicated
Complex
Uncertainty
7
A set of interacting components that
function as a more complex whole.
7

8. • Complex systems are difficult
– Structural Dependency
– Predictability
– Minimize Regret
• Policy is a complex system problem
– Engineers Needed
PREMISES
8

9. SIMPLE SYSTEM
B+
Components
Connection
A
9
System dynamics – 1950’s - MIT

10. C D
+
-
Balancing
Loop
E F
+
+
Reinforcing
Loop
(B) (R)
FEEDBACK SYSTEM
10

11. G H I
+
-
+
+
J
-
-
(B)
(R)
(R)
COMPLEX SYSTEM
11

12. Technical
EconomicSociety
G H I
+
-
+
+
J
-
-
(B)
(R)
(R)
POLICY SYSTEM
12

13. COMPARISON
PHYSICAL POLICY
Well Defined Poorly defined
Past is Key Past is not Prologue
Predictable Not Predictable
Maximize Minimize
Few Surprises Many Surprises
13

14. • System Dynamics concepts
• Oil production and economics
• State and Producer
• Maximize NPV
MODEL DESIGN
14

15. POLICY MODEL
15
Oil
Production
Producer
Profits
State
Revenue
+
-
Taxes &
Royalties +
+
Rate
+
Oil Price
+
EUR
+
State NPV
+
Producer
NPV
+
Development
+
+
Tax & Royalty
Rates
+
(B) (R)

16. Driver
Driver
DRIVERS
16
Oil
Production
Producer
Profits
State
Revenue
+
-
Taxes &
Royalties +
+
Rate
+
Oil Price
+
EUR
+
State NPV
+
Producer
NPV
+
Development
+
+
Tax & Royalty
Rates
+
(B) (R)

17. LEVERS
Levers
17
Oil
Production
Producer
Profits
State
Revenue
+
-
Taxes &
Royalties +
+
Rate
+
Oil Price
+
EUR
+
State NPV
+
Producer
NPV
+
Development
+
+
Tax & Royalty
Rates
+
(B) (R)

18. Oil
Production
Producer
Profits
State
Revenue
+
-
Taxes &
Royalties +
+
Rate
+
Oil Price
+
EUR
+
State NPV
+
Producer
NPV
+
Development
+
+
Tax & Royalty
Rates
+
(B) (R)
Producer
Objective
State
Objective
OBJECTIVE FUNCTIONS
18

19. POLICY MODELING
19
Drivers &
Levers
Policy
Development
Validation
SD
Model
Runs
Regret
Analysis
Objective
Functions
Structure
OK For Now

20. • Uncertainties difficult to define
• Minimize impacts of “worst case”
scenarios
• Regret = difference between best and
actual outcomes
• Wide range of possible futures
REGRET ANALYSIS
20
Lempert et al (2003)

21. VALIDATION
• Effectiveness
– Meet policymaker goals
– Better than other policies
• Fairness
– Compare outcomes to “Fair” policy
21

22. Policy Envelope
FAIRNESS
22
StateObjective(s)
Driver(s)Min Producer Regret
Min State Regret
Min Net Regret
Existing Policy Fair Policy

23. CASE COMPARISON
• BAU Policy
– Business As Usual policy
• Constant with oil price
• PTX Policy
– Prod tax regret
• FAIR Policy
– Prod tax, Income tax & royalty regret
23
Could a Regret-based Policy Do Better?

24. Oil
Production
Producer
Profits
State
Revenue
+
-
Taxes &
Royalties +
+
Rate
+
Oil Price
+
EUR
+
State NPV
+
Producer
NPV
+
Development
+
+
Tax & Royalty
Rates
+
(B) (R)
BASE MODEL
24

25. Oil
Production
Producer
Profits
State
Revenue +
-
Taxes &
Royalties +
+
Rate
+
Oil Price
+
EUR
+
State NPV
+
Producer
NPV
+
Development
+
+
Exploration
+
+
Exploration
Costs
+
-
Tax & Royalty
Rates
+
(B)
(R)
(B)
(R)
EXPLORE MODEL
25
Chi et al (2009)

26. SOCIETY MODEL
Explore Model
Society Model
Link
Link
26
Oil
Production
Producer
Profits
State
Profits +
-
Taxes &
Royalties+
+
Rate
+
Oil Price
+
EUR
+
State NPV
+
Producer
NPV
+
Development
+
+
Exploration
+
+
Exploration
Costs
+
-
Tax & Royalty
Rates
+
(R)(B)
(B)
(R)
GDP per
Capita
+
(R)Support
+
+
+
(R)
Energy
Demand
+
+
(R)
Sanderson (2004)

27. 0
0.5
50 150
0
0.5
50 150
0
0.5
50 150
BASE POLICIES
27
Price ($/stb)
Price ($/stb)
Price ($/stb)
Fraction
Fraction
Fraction
Prod Tax Income Tax
Royalty
PTX FAIRBAU

28. 0
0.5
50 150
0
0.5
50 150
0
0.5
50 150
PTX FAIRBAU
EXPLORE POLICIES
28
Price ($/stb)
Price ($/stb)
Price ($/stb)
Fraction
Fraction
Fraction
Prod Tax Income Tax
Royalty

29. 0
0.5
50 150
0
0.5
50 150
0
0.5
50 150
PTX FAIRBAU
SOCIETY POLICIES
29
Price ($/stb)
Price ($/stb)
Price ($/stb)
Fraction
Fraction
Fraction
Prod Tax Income Tax
Royalty

30. 0
1
50 150
0
1
50 150
0
1
50 150
FAIRNESS
Price ($/stb)
Fraction
Society
Base
Price ($/stb)
Fraction
Price ($/stb)
Fraction
Explore
Envelope Fair PTX BAU 30

31. 0
15
BAU PTX FAIR
0
90
BAU PTX FAIR
0
60
BAU PTX FAIR
0
2
BAU PTX FAIR
EFFECTIVENESS
31
STATE NPV
CUM OIL
PROD NPV
GDP CAP
Base Explore Society
Median

32. 0
90
BAU PTX FAIR
0
15
BAU PTX FAIR
0
60
BAU PTX FAIR
EFFECTIVENESS
32
STATE NPV
CUM OIL
PROD NPV
GDP CAP
Base Explore Society
0
2
BAU PTX FAIR

33. 0
2
BAU PTX FAIR
0
15
BAU PTX FAIR
0
90
BAU PTX FAIR
0
60
BAU PTX FAIR
EFFECTIVENESS
33
STATE NPV
CUM OIL
PROD NPV
GDP CAP
Base Explore Society

34. 0
10
BAU PTX FAIR
0
2
BAU PTX FAIR
0
15
BAU PTX FAIR
0
90
BAU PTX FAIR
EFFECTIVENESS
34
STATE NPV
CUM OIL
PROD NPV
GDP CAP
Base Explore Society

35. COMPETITION
State
NPV
Prod
NPV
Cum
Oil
GDP
Cap
Base
Explore
Society
BAU PTX FAIR 35

36. EFFECTIVE? FAIR?
• Depends on policymaker’s goals
– NPV = near-term
– CUM OIL = long-term
– AVG GDP CAP = time independent
• Good policy decisions can be difficult
– Engineers can help design policies better for all
36

37. WICKED PROBLEMS
• World’s most serious problems
37
No definite structure
Every problem is unique – no template
 Open system – flow across boundaries
No absolute solutions – only better or worse
 Today’s solution affects tomorrow’s problem
• Energy Policy is a Wicked Problem
Rittel and Webber (1973)

38. SUMMARY
38
• Wicked, complex system problem
• Affects all of us every day
• Structure drives behavior
• Predictability not possible
• Can’t be solved, only managed with approach
• Hope for the best, plan for the worst
• Energy policy

39. • If results look right, are they? If results
look wrong, are they?
AND FINALLY…
39
• If it is measured, is it important? If not
measured, is it unimportant?
• All models are wrong, but some are useful

40. Society of Petroleum Engineers
Distinguished Lecturer Program
www.spe.org/dl 40
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