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Contracts
        • A   contract is an agreement entered into
          voluntarily by two parties or more with the
          intention of creating a legal obligation, which may
          have elements in writing, though contracts can be
          made orally.
        • The remedy for breach of contract can be "damages"
          or compensation of money. In equity, the remedy can
          be specific performance of the contract or an
          injunction. Both of these remedies award the party at
          loss the "benefit of the bargain" or expectation
          damages, which are greater than mere reliance
          damages, as in promissory estoppel. The parties may
          be natural persons or juristic persons, A contract is a
          legally enforceable promise or undertaking that
          something will or will not occur. The word promise
          can be used as a legal synonym for contract, although
          care is required as a promise may not have the full
          standing of a contract, as when it is an agreement
          without consideration
3




Types of contracts
        • Concession


        • Joint Venture


        • Service


        • Production (Risk) sharing contract
4




Concession contracts
        • Contractor have exclusive rights to explore
         , develop, sell and export oil/gas in
         particular area over period of time

        • Equity or Royalty/tax structure


        • Maximum control to contractor


        • Oldest and most widely used method
5




Concession Contracts
• Advantages                      • Disadvantages
  • If production occurs, govt.     • Govt. may not know the full
    earns royalty and/or profit       potential through the
    tax based on the commodity        extensive exploration
    price                           • Companies will be cautious in
  • Successful bidders pay            bidding for uncertain returns
    bidding price (License fee        (Virgin / non productive
    /signature bonus)                 areas)
                                    • Not suitable for countries
                                      which seeks extensive
                                      exploration work through
                                      biddings
6




Joint Venture
        • Foreign/private companies and NOC‟s
         involves in joint ventures

        • Both pays/receives its share in the ratio of
         their participating interest

        • JV‟s pays royalties, income tax and some
         part of Petroleum Revenue Tax (PRT)

        • Low success rate, less commonly used
7




Joint Venture contracts
• Advantages                         • Disadvantages
  • Govt. is not alone in decision     • Costs and risks both are
    making /responsibility of the        shared; Not suitable for
    project                              exploration that involves huge
  • Govt. can count on companies         investment
    expertise on the project           • Responsibility also brings
  • Govt. shares profit on the top       liabilities such as
    of the royalties and taxes           environmental issues etc.
8




Service Contracts
        • Contractor pays for all the exploration and
         development works

        • Contractor works under government
         mandate‟s and is paid for its works

        • Government maintains ownership and title
         of the reserves

        • Most suitable for contractor for risk-free
         operation and for states having producing
         assets
9




Service Contracts
• Advantages                     • Disadvantages
  • Payment is made to service     • Most of the companies
    companies at predetermined       reluctant to sell their services
    rate                             for turnkey projects as their
                                     profits are limited
                                   • Not relevant to the
                                     exploration ; but suitable for
                                     production
10




Production Sharing Contract (PSC)
        • State companies enters in to PSC with
            contractor company for a specified period of
            time
        •   Contractor finances exploration and
            development
        •   If successful contractor will recover it‟s cost
            and earn profit by receiving a share of
            production
        •   Royalties & income taxes are paid as
            applicable
        •   Significant control to contractor but
            contractual controls are with state
            companies
11




Production Sharing Contract (PSC)
• Advantages                          • Disadvantages
  • Most attractive investment          • Govt. has no/ltd. knowledge
    model in inviting risk capital;       about the field
    govt. is on the safe side           • Government may face conflict
  • Successful in attracting              of interest; It has to balance
    foreign companies                     the desire for higher profit
  • Unexplored areas can be               through optimal
    explored with no direct               exploration/prodn. and
    investment by the govt.               regulatory concerns
  • Contractor enjoys autonomy
    and optimizes E&P to ensure
    “cost recovery”
12




Hybrid contracts
        • Combination of
          Concession, JV, PSC, Service types
        • Efforts to build a world model faces
          challenges such as diversities, different
          specifications by different countries
13




Hybrid contracts
• Advantages                   • Disadvantages
  • Incorporates the best of     • Complex, diversified model
    available contract types     • Difficult to estimate the
                                   shares between government
                                   and contractor in win-win
                                   situations
                                 • Extensive expertise and
                                   negotiation skills required for
                                   this type of contracts
14




Comparative Analysis
       Contract type       Contractor           Government

       Concession          All Risk/All Reward Reward is function
                                               of Production and
                                               Price

       Service             No Risk              All Risk/All Reward

       Joint Venture       Share in             Share in Risk &
                           Risk/Reward          Reward
       Production Sharing Risk in exploration   Share in Reward
                          ;Share in Reward


       Hybrid              Mixed                Mixed
15




                                                                                Petroleum Fiscal Systems




Concessionary System (Also known as Permits, Lease or license) followed in
                US, UK, Norway, Australia , New Zealand                                                                       Contractual System (Title lies with the government)




                                                                                                                                                        Production Sharing Contracts (Kind)
                                                                                       Service Contracts (Cash)                                                      Followed in
                                                                                                                                     India, Indonesia, Malaysia, Libya, Egypt, China, Vietnam, Thailand, Brunei




                                 Pure Service Contracts                                                                        Risk Service Contracts
              Followed in Mexico, Iran, UAE, Kuwait, Saudi Arabia (fixed fee)                                     Followed in Philippines, Ecuador (profit is shared)
16




  Scorecard
 Type of Contract    Number of           Name of countries utilizing the
                      countries                  contract type
                     utilizing the
                       contract
                          type
Concession                59          UK, US, Norway, Australia, Canada, Peru,
                                        Namibia, Thailand, Sudan, Ecuador,
                                                    Bahamas
Service                   2                          Iran, Qatar


Joint Venture             31          Colombia, Cameron, Netherland, Pakistan


Production Sharing        40         Egypt, Yemen, Angola, Indonesia, Sri Lanka,
                                                Guatemala, India

Hybrid                    16          Libya, China, Kenya, Myanmar, Tanzania,
                                                      Malaysia
17




Elements of Ideal Contract
        • Vital for the government to reap the full

         benefits of its natural resources

        • Balance the interests of both investors and

         country‟s needs

        • Takes care of the considerations of

         communities which are not part of the deal
         but interested /will be affected by the
         contract
18




Parties
•   For offshore areas – Grant of license and lease by
    the Central Government
•   For onshore areas – Grant of license and lease by
    the State Government, with prior approval of the
    Central Government
•   Every license or lease granted to contain additional
    terms and conditions as provided for in an
    agreement between the Central Government and
    the licensee or the lessee (the PSC)
•   Where license or lease to be granted by a State
    Government – merely an obligation to „consult‟ the
    Central Government
19




PSC Attributes
        • Contact term
        • Relinquishment
        • Management committee
        • Discovery, Development & Production
        • Unit development
        • Cost recovery & Production Sharing
        • Taxes, Royalties & Rentals
        • Domestic sources & Supply obligations
        • Employment and training
        • Title to assets
20




Contractual Framework
    BIDDER 1   Joint Bidding   CONSORTIUM /        Bid
                Agreement                                    GOVERNMENT
                               CONTRACTOR
    BIDDER 2
                                                 License
    BIDDER 3
                                            Production Sharing
                                                  Contract
                                    Work program & budget approvals
                                    Exploration Activities

                                                DISCOVERY

                                    Notification to Government
                                    Appraisal and testing

                                              COMMERICAL

                                              mining lease
                                    Development and production
21




Contractual Obligations
        • At the expiry of any Exploration phase of the
          exploration period provided that the Contractor
          has completed the minimum work programme
          for that exploration phase, the Contractor shall
          have the option , exercisable by giving a written
          notice to the Government at least 30 days prior
          to the expiry of the relevant phase, either:
        1. To proceed to next exploration phase.
        2. To relinquish the entire contract area except
            for any discovery area and any development
            area and to conduct development operation
            and production operation in relation to any
            commercial discovery in accordance with the
            terms of this contract.
22




Relinquishment
       • At the end of Exploration phase , the

        Contractor shall retain only development
        area‟s and discovery area‟s.

       • At the end of each phase Contractor is liable

        to relinquish part of unproductive block in
        simple three geometrical shapes.
23




Work Programme
      • Contractor shall commence petroleum
        operation not later than six months from
        effective date.
      • Work programme has mandatory work
        programme and biddable work programme.
      • The work programme consist of
        geological, exploration ,geochemical
        survey‟s, gravity magnetic survey‟s ,seismic
        programme (2-D and 3-D) and drilling of
        exploration wells.
24




Work Programme
      • Contractor require to mention the meterage it
        will be drilling and will specify the basement
        depth.
      • A s soon as possible after the effective date and
        thereafter within 90 days before
        commencement of each following year , the
        contractor shall submit to management
        Committee the Work Programme and budget
        relating to Petroleum operation to be carried
        out during the relevant year . Work Programme
        and budget for exploration period shall include
        work sufficient to meet the relevant mandatory
        Work Programme and minimum Work
        Programme with respect to each Exploration
        phase.
25




PSC-Cash Flow structure
         Production
                                         Royalties
           Value


       Cost Petroleum                   Exploration


                                        Production
      Profit Petroleum

                                        Development

 Contractor              Government’s
                                        Government’s
   Share                    Share
                                            Take
        Income Tax

        Contractor’s
           Take
26




Joint Operating Agreement
        • Within 45 days of effective date or such
          longer period as maybe agreed to by
          Government the company constituting the
          contractor , shall execute a Joint Operating
          Agreement.
        • The said agreement shall be consistent with
          the provision of this contract and shall
          provide for ,among other things
          1.   Appointment ,resignation ,removal and
               responsibility of the Operator.
          2.   Establishment of the Operating Committee
               comprising of an agreed no of representative of
               the companies chaired by a representative of the
               Operator
27




Joint Operating Agreement
        3.Function of the said Operating Committee taking
         into account the provisions of the Contract
         , procedure for decision making , frequency and
         place of meeting.

        4. Contribution to cost , default , sole risk, disposal of
         Petroleum and assignment as between the parties to
         Joint Operating Agreement.
28




Discovery , Development and Production
            If and when a Discovery is made within the
           Contract Area, the Contractor shall:
         1. Forthwith inform the Management
            Committee and Government of the
            Discovery;
         2. Promptly thereafter, but in no event later
            than a period of thirty (30) days from the
            date of the Discovery, furnish to the
            Management Committee and Government
            particulars, in writing, of the Discovery.
29




Discovery , Development and Production
         3 .Run tests promptly and in any case within
          90 days from the date under Article 10.1 (a)
          to determine whether the Discovery is of
          potential commercial interest and, within a
          period of sixty (60) days after completion of
          such tests, submit a report to the
          Management Committee containing data
          obtained from such tests and its analysis
          and interpretation thereof, together with a
          written notification of whether, in the
          Contractor‟s opinion, such Discovery is of
          potential commercial interest and merits
          appraisal.
30




Cost petroleum and Profit petroleum
•   Profit petroleum – total value of product saved from
    a particular contract area – calculated in specified
    manner
    Use of investment multiple
    Contractors bid on IM
    Complex proportions are intended to make sharing
    of oil more favorable to the Government at higher
    production levels

•   Cost petroleum linked to volume of petroleum
    produced and saved and „contract costs‟
    Control over costs – a legitimate state concern
31




Fiscal System
        • What is a petroleum fiscal system?
        • Fiscal system is primarily concerned with
         the division of profits between the
         government and the contractor. Though
         both the parties target to maximize their
         share, it is in their collective best interests to
         divide profits such that both parties earn
         reasonable rates of return.
32




Fiscal System
33



Revenue Sharing
    Contractor         $80 /bbl                 Government

                       Royalty 10%
                                                 $8

                         $ 72

          $ 24
                 Cost recovery 33.3%(max 50%)

                          $ 48

     $ 19.2      Profit Oil Split 40% / 60%           $ 28.8

     - $ 5.76
                        Tax 30%                       $ 5.76

     $ 13.44         Gross revenue                    $ 42.56

     $ 13.44          Net cash Flow                   $ 42.56


        24 %             Take                         76 %
34




Revenue Sharing
35




Cash flow
36




Cash Bonus
       • A form of key money given by the company
         that wants to conduct exploration
       • Amount will be specified by law but
         normally fixed by negotiations
       • Paid before any discovery but amount
         stipulates in future time
       • Bonus amount varies according to the hopes
         offered by the exploration acreage
37




Royalties
        • Royalties on petroleum and gas, coal and
            most minerals are payable on an ad
            valorem (value) basis. These are essentially
            calculated as a percentage of the value of the
            mineral or petroleum as determined by the
            Minister.

        • Royalties are generally assessed as a
            percentage of the wellhead value of
            production.
38




Royalty Calculation
        • Royalties are levied at a rate between 10% to
         12.5%of the wellhead value (depending on
         the jurisdiction involved)

        • Wellhead value =

           Sales value of all          Transport & processing
           petroleum products      –   cost of raw products from
           sourced from the well       wellhead to market
39




Petroleum income tax
       • Petroleum Income Tax (PT) is a direct
         tax, levied annually on net profit of a
         “petroleum taxpayer”, who is carrying out
         the business of petroleum exploration and
         production.
       • The rates, penalties, surcharge, etc. are
         different from that of Corporate Income tax
       • The term „petroleum taxpayer‟ covers
         anybody who:
         • Holds a concession under petroleum law or has a
           joint interest in it
         • Purchases crude oil produced by any
           concessionaire, all of which is intended for export
40



Cash surplus / Cash deficit
             cash surplus     = gross revenue- expenditure
                              = gross revenue - capex - opex - royalty- tax
               production = 12 MMbbl
               oil price = $20/bbl
               Capex= $80 m
               opex = $15m
               royalty rate = 16.66%
               tax rate = 70%


                Assume that the only previous capex had been $120 m, spent
                in the previous year, with 25% straight line capital
                allowance, thus;
                capital allowance in this year = 0.25 x $120 m+ 0.25 x $80 m
                = $50 m.

                Revenue = production x oil price
                       = 12 MMbbl x $20/bbl = $240 m
41




Cash surplus / Cash deficit
             capex = $80 m
             opex = $15 m

             Technical cost = $95 m (capex+opex)

             Royalty = revenues x royalty rate
                     = $240 m x 0.1666 = $40 m

             Fiscal costs = royalty + opex + capital allowance
                        = $40m+$15m+$50m
                        = $105 m

             Taxable income = revenue- fiscal costs
                          = $240m-$105m
                          =$135m

             Tax = taxrate x taxable income
                 = 0.70x$135m
                 = $94.5 m
42




Cash surplus / Cash deficit
        • cash surplus = revenues - capex - opex -
         royalty - tax
           = $240-80-15-40-94.5m
           = $10.5 m

        • host government take = tax+ royalty
                 = $94.5+40m
                 = $134.5 m
43




Authorization For Expenditure (AFE)
        • Prior to incurring any expenditure or
          incurring any commitment for work the
          Operator prepares an authorization for
          expenditure (AFE).
        • The Joint Operating agreements contains
          provisions for seeking approval of ventured
          partner before undertaking certain specified
          activities through authorization for
          expenditures.
        • If the operating committee approves an AFE
          for the work , the operator is authorized to
          conduct the works under the terms of
          operating agreements.
44




Authorization For Expenditure (AFE)
        • The AFE proposed by the operator usually
         contains the particular of the work with
         reference to the approved work programme
         and budget, best estimate of the total
         funds, proposed work schedule, time table
         of expenditure and any other supporting
         information for any type of decision.
45




Cash Call
        • In order to fund the operation of Joint
          Venture , the operator raises cash call on
          other ventured partners in accordance with
          their participating interest.
        • Cash calls are raised for their expenditure
          (as per the approved work programmes
          , budgets and AFE‟s) and for currencies in
          which the money is spend
        • A cash call is operators estimate on the
          amount required from the parties to enable
          the operator to make cash payment less
          cash receipt in the relevant period.
46

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Contracts and psc

  • 1. 1
  • 2. 2 Contracts • A contract is an agreement entered into voluntarily by two parties or more with the intention of creating a legal obligation, which may have elements in writing, though contracts can be made orally. • The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific performance of the contract or an injunction. Both of these remedies award the party at loss the "benefit of the bargain" or expectation damages, which are greater than mere reliance damages, as in promissory estoppel. The parties may be natural persons or juristic persons, A contract is a legally enforceable promise or undertaking that something will or will not occur. The word promise can be used as a legal synonym for contract, although care is required as a promise may not have the full standing of a contract, as when it is an agreement without consideration
  • 3. 3 Types of contracts • Concession • Joint Venture • Service • Production (Risk) sharing contract
  • 4. 4 Concession contracts • Contractor have exclusive rights to explore , develop, sell and export oil/gas in particular area over period of time • Equity or Royalty/tax structure • Maximum control to contractor • Oldest and most widely used method
  • 5. 5 Concession Contracts • Advantages • Disadvantages • If production occurs, govt. • Govt. may not know the full earns royalty and/or profit potential through the tax based on the commodity extensive exploration price • Companies will be cautious in • Successful bidders pay bidding for uncertain returns bidding price (License fee (Virgin / non productive /signature bonus) areas) • Not suitable for countries which seeks extensive exploration work through biddings
  • 6. 6 Joint Venture • Foreign/private companies and NOC‟s involves in joint ventures • Both pays/receives its share in the ratio of their participating interest • JV‟s pays royalties, income tax and some part of Petroleum Revenue Tax (PRT) • Low success rate, less commonly used
  • 7. 7 Joint Venture contracts • Advantages • Disadvantages • Govt. is not alone in decision • Costs and risks both are making /responsibility of the shared; Not suitable for project exploration that involves huge • Govt. can count on companies investment expertise on the project • Responsibility also brings • Govt. shares profit on the top liabilities such as of the royalties and taxes environmental issues etc.
  • 8. 8 Service Contracts • Contractor pays for all the exploration and development works • Contractor works under government mandate‟s and is paid for its works • Government maintains ownership and title of the reserves • Most suitable for contractor for risk-free operation and for states having producing assets
  • 9. 9 Service Contracts • Advantages • Disadvantages • Payment is made to service • Most of the companies companies at predetermined reluctant to sell their services rate for turnkey projects as their profits are limited • Not relevant to the exploration ; but suitable for production
  • 10. 10 Production Sharing Contract (PSC) • State companies enters in to PSC with contractor company for a specified period of time • Contractor finances exploration and development • If successful contractor will recover it‟s cost and earn profit by receiving a share of production • Royalties & income taxes are paid as applicable • Significant control to contractor but contractual controls are with state companies
  • 11. 11 Production Sharing Contract (PSC) • Advantages • Disadvantages • Most attractive investment • Govt. has no/ltd. knowledge model in inviting risk capital; about the field govt. is on the safe side • Government may face conflict • Successful in attracting of interest; It has to balance foreign companies the desire for higher profit • Unexplored areas can be through optimal explored with no direct exploration/prodn. and investment by the govt. regulatory concerns • Contractor enjoys autonomy and optimizes E&P to ensure “cost recovery”
  • 12. 12 Hybrid contracts • Combination of Concession, JV, PSC, Service types • Efforts to build a world model faces challenges such as diversities, different specifications by different countries
  • 13. 13 Hybrid contracts • Advantages • Disadvantages • Incorporates the best of • Complex, diversified model available contract types • Difficult to estimate the shares between government and contractor in win-win situations • Extensive expertise and negotiation skills required for this type of contracts
  • 14. 14 Comparative Analysis Contract type Contractor Government Concession All Risk/All Reward Reward is function of Production and Price Service No Risk All Risk/All Reward Joint Venture Share in Share in Risk & Risk/Reward Reward Production Sharing Risk in exploration Share in Reward ;Share in Reward Hybrid Mixed Mixed
  • 15. 15 Petroleum Fiscal Systems Concessionary System (Also known as Permits, Lease or license) followed in US, UK, Norway, Australia , New Zealand Contractual System (Title lies with the government) Production Sharing Contracts (Kind) Service Contracts (Cash) Followed in India, Indonesia, Malaysia, Libya, Egypt, China, Vietnam, Thailand, Brunei Pure Service Contracts Risk Service Contracts Followed in Mexico, Iran, UAE, Kuwait, Saudi Arabia (fixed fee) Followed in Philippines, Ecuador (profit is shared)
  • 16. 16 Scorecard Type of Contract Number of Name of countries utilizing the countries contract type utilizing the contract type Concession 59 UK, US, Norway, Australia, Canada, Peru, Namibia, Thailand, Sudan, Ecuador, Bahamas Service 2 Iran, Qatar Joint Venture 31 Colombia, Cameron, Netherland, Pakistan Production Sharing 40 Egypt, Yemen, Angola, Indonesia, Sri Lanka, Guatemala, India Hybrid 16 Libya, China, Kenya, Myanmar, Tanzania, Malaysia
  • 17. 17 Elements of Ideal Contract • Vital for the government to reap the full benefits of its natural resources • Balance the interests of both investors and country‟s needs • Takes care of the considerations of communities which are not part of the deal but interested /will be affected by the contract
  • 18. 18 Parties • For offshore areas – Grant of license and lease by the Central Government • For onshore areas – Grant of license and lease by the State Government, with prior approval of the Central Government • Every license or lease granted to contain additional terms and conditions as provided for in an agreement between the Central Government and the licensee or the lessee (the PSC) • Where license or lease to be granted by a State Government – merely an obligation to „consult‟ the Central Government
  • 19. 19 PSC Attributes • Contact term • Relinquishment • Management committee • Discovery, Development & Production • Unit development • Cost recovery & Production Sharing • Taxes, Royalties & Rentals • Domestic sources & Supply obligations • Employment and training • Title to assets
  • 20. 20 Contractual Framework BIDDER 1 Joint Bidding CONSORTIUM / Bid Agreement GOVERNMENT CONTRACTOR BIDDER 2 License BIDDER 3 Production Sharing Contract  Work program & budget approvals  Exploration Activities DISCOVERY  Notification to Government  Appraisal and testing COMMERICAL mining lease  Development and production
  • 21. 21 Contractual Obligations • At the expiry of any Exploration phase of the exploration period provided that the Contractor has completed the minimum work programme for that exploration phase, the Contractor shall have the option , exercisable by giving a written notice to the Government at least 30 days prior to the expiry of the relevant phase, either: 1. To proceed to next exploration phase. 2. To relinquish the entire contract area except for any discovery area and any development area and to conduct development operation and production operation in relation to any commercial discovery in accordance with the terms of this contract.
  • 22. 22 Relinquishment • At the end of Exploration phase , the Contractor shall retain only development area‟s and discovery area‟s. • At the end of each phase Contractor is liable to relinquish part of unproductive block in simple three geometrical shapes.
  • 23. 23 Work Programme • Contractor shall commence petroleum operation not later than six months from effective date. • Work programme has mandatory work programme and biddable work programme. • The work programme consist of geological, exploration ,geochemical survey‟s, gravity magnetic survey‟s ,seismic programme (2-D and 3-D) and drilling of exploration wells.
  • 24. 24 Work Programme • Contractor require to mention the meterage it will be drilling and will specify the basement depth. • A s soon as possible after the effective date and thereafter within 90 days before commencement of each following year , the contractor shall submit to management Committee the Work Programme and budget relating to Petroleum operation to be carried out during the relevant year . Work Programme and budget for exploration period shall include work sufficient to meet the relevant mandatory Work Programme and minimum Work Programme with respect to each Exploration phase.
  • 25. 25 PSC-Cash Flow structure Production Royalties Value Cost Petroleum Exploration Production Profit Petroleum Development Contractor Government’s Government’s Share Share Take Income Tax Contractor’s Take
  • 26. 26 Joint Operating Agreement • Within 45 days of effective date or such longer period as maybe agreed to by Government the company constituting the contractor , shall execute a Joint Operating Agreement. • The said agreement shall be consistent with the provision of this contract and shall provide for ,among other things 1. Appointment ,resignation ,removal and responsibility of the Operator. 2. Establishment of the Operating Committee comprising of an agreed no of representative of the companies chaired by a representative of the Operator
  • 27. 27 Joint Operating Agreement 3.Function of the said Operating Committee taking into account the provisions of the Contract , procedure for decision making , frequency and place of meeting. 4. Contribution to cost , default , sole risk, disposal of Petroleum and assignment as between the parties to Joint Operating Agreement.
  • 28. 28 Discovery , Development and Production If and when a Discovery is made within the Contract Area, the Contractor shall: 1. Forthwith inform the Management Committee and Government of the Discovery; 2. Promptly thereafter, but in no event later than a period of thirty (30) days from the date of the Discovery, furnish to the Management Committee and Government particulars, in writing, of the Discovery.
  • 29. 29 Discovery , Development and Production 3 .Run tests promptly and in any case within 90 days from the date under Article 10.1 (a) to determine whether the Discovery is of potential commercial interest and, within a period of sixty (60) days after completion of such tests, submit a report to the Management Committee containing data obtained from such tests and its analysis and interpretation thereof, together with a written notification of whether, in the Contractor‟s opinion, such Discovery is of potential commercial interest and merits appraisal.
  • 30. 30 Cost petroleum and Profit petroleum • Profit petroleum – total value of product saved from a particular contract area – calculated in specified manner Use of investment multiple Contractors bid on IM Complex proportions are intended to make sharing of oil more favorable to the Government at higher production levels • Cost petroleum linked to volume of petroleum produced and saved and „contract costs‟ Control over costs – a legitimate state concern
  • 31. 31 Fiscal System • What is a petroleum fiscal system? • Fiscal system is primarily concerned with the division of profits between the government and the contractor. Though both the parties target to maximize their share, it is in their collective best interests to divide profits such that both parties earn reasonable rates of return.
  • 33. 33 Revenue Sharing Contractor $80 /bbl Government Royalty 10% $8 $ 72 $ 24 Cost recovery 33.3%(max 50%) $ 48 $ 19.2 Profit Oil Split 40% / 60% $ 28.8 - $ 5.76 Tax 30% $ 5.76 $ 13.44 Gross revenue $ 42.56 $ 13.44 Net cash Flow $ 42.56 24 % Take 76 %
  • 36. 36 Cash Bonus • A form of key money given by the company that wants to conduct exploration • Amount will be specified by law but normally fixed by negotiations • Paid before any discovery but amount stipulates in future time • Bonus amount varies according to the hopes offered by the exploration acreage
  • 37. 37 Royalties • Royalties on petroleum and gas, coal and most minerals are payable on an ad valorem (value) basis. These are essentially calculated as a percentage of the value of the mineral or petroleum as determined by the Minister. • Royalties are generally assessed as a percentage of the wellhead value of production.
  • 38. 38 Royalty Calculation • Royalties are levied at a rate between 10% to 12.5%of the wellhead value (depending on the jurisdiction involved) • Wellhead value = Sales value of all Transport & processing petroleum products – cost of raw products from sourced from the well wellhead to market
  • 39. 39 Petroleum income tax • Petroleum Income Tax (PT) is a direct tax, levied annually on net profit of a “petroleum taxpayer”, who is carrying out the business of petroleum exploration and production. • The rates, penalties, surcharge, etc. are different from that of Corporate Income tax • The term „petroleum taxpayer‟ covers anybody who: • Holds a concession under petroleum law or has a joint interest in it • Purchases crude oil produced by any concessionaire, all of which is intended for export
  • 40. 40 Cash surplus / Cash deficit cash surplus = gross revenue- expenditure = gross revenue - capex - opex - royalty- tax production = 12 MMbbl oil price = $20/bbl Capex= $80 m opex = $15m royalty rate = 16.66% tax rate = 70% Assume that the only previous capex had been $120 m, spent in the previous year, with 25% straight line capital allowance, thus; capital allowance in this year = 0.25 x $120 m+ 0.25 x $80 m = $50 m. Revenue = production x oil price = 12 MMbbl x $20/bbl = $240 m
  • 41. 41 Cash surplus / Cash deficit capex = $80 m opex = $15 m Technical cost = $95 m (capex+opex) Royalty = revenues x royalty rate = $240 m x 0.1666 = $40 m Fiscal costs = royalty + opex + capital allowance = $40m+$15m+$50m = $105 m Taxable income = revenue- fiscal costs = $240m-$105m =$135m Tax = taxrate x taxable income = 0.70x$135m = $94.5 m
  • 42. 42 Cash surplus / Cash deficit • cash surplus = revenues - capex - opex - royalty - tax = $240-80-15-40-94.5m = $10.5 m • host government take = tax+ royalty = $94.5+40m = $134.5 m
  • 43. 43 Authorization For Expenditure (AFE) • Prior to incurring any expenditure or incurring any commitment for work the Operator prepares an authorization for expenditure (AFE). • The Joint Operating agreements contains provisions for seeking approval of ventured partner before undertaking certain specified activities through authorization for expenditures. • If the operating committee approves an AFE for the work , the operator is authorized to conduct the works under the terms of operating agreements.
  • 44. 44 Authorization For Expenditure (AFE) • The AFE proposed by the operator usually contains the particular of the work with reference to the approved work programme and budget, best estimate of the total funds, proposed work schedule, time table of expenditure and any other supporting information for any type of decision.
  • 45. 45 Cash Call • In order to fund the operation of Joint Venture , the operator raises cash call on other ventured partners in accordance with their participating interest. • Cash calls are raised for their expenditure (as per the approved work programmes , budgets and AFE‟s) and for currencies in which the money is spend • A cash call is operators estimate on the amount required from the parties to enable the operator to make cash payment less cash receipt in the relevant period.
  • 46. 46

Editor's Notes

  1. Royalty is a share of the revenue free and clear of all costs of developmentand production. The royalty is paid to the owner of the mineral interest under the land associatedwith the well. In the United States, the mineral interest can be “severed” from the surfaceownership so that the person who owns the surface may not have any interest in the mineralsand may not receive any income from a well. In rare cases the owners of the working interestwill own the minerals and, in that case, there is no royalty. Typical royalty rates in the U.S.range from 1/8 (12.5%) to 25% of the production. Royalties in other countries can range fromzero to more than 30%