PRODUCTION SHARING CONTRACT (PSC) KEY CONTRACTUAL ISSUES

PSC a definition
An agreement between the contractor and the

government whereby the Contractor bears all the exploration risk, production and development costs in return for its stipulated share of the production resulting from its efforts.

These costs are recoverable in case of

commercial Discovery.

Historical Background
First concept for PSC was introduced in Bolivia in 1950 PSCs were successfully implemented in Indonesia in 1966 PSCs are being widely used in more than 40 countries In India, first PSC was signed in 1993 for a Pre-NELP Block PSC terms continuously improved in consecutive NELP

rounds

Petroleum Fiscal Arrangements

There are two main types of petroleum fiscal

arrangements: Concessionary systems & Contractual systems

Concessionary System Vs Production Sharing Contract

In PSC, the title of the hydrocarbons remains

with the state while in concessionary it remains with the company petroleum company, while in a Concession they deal with the host government production split after being allowed to recover costs from initial production. In a Concession the companies can take all the petroleum produced, but they must pay a royalty based on a percentage of production.

In PSC, oil companies deal with the national

In PSC, oil companies are subject to a

Comparative Analysis of Agreements

Type of Agreements Concession Contractor All risk All reward Share in risk & reward No risk Mixed Exploration risk Share in reward Government Reward is a function of production & price Share in risk & reward All risk All reward Mixed Share in reward

Joint venture Service contract Hybrid PSC

Countries and Agreement Types

TYPE OF AGREEMENTS CONCESSIONS (59) COUNTRIES UTILIZING UK, US , Norway, Australia, Canada, Peru, Namibia, Thailand, Sudan, Ecuador, Kuwait, Bahamas Colombia, Cameroon, Netherlands, Pakistan Egypt, Yemen, Angola, Indonesia, India, Guatemala, Sri Lanka

JOINT VENTURES (31) PSC (40)

SERVICE CONTRACTS (2) Iran , Qatar HYBRID (16) Libya, China, Malaysia, Kenya, Tanzania, Gabon, Myanmar

PSC - Contractual Framework

Bidder 1 Bidder 2 Bidder 3
Joint Bidding Agreement

Consortium / Contractor

Bid License

Government

Production Sharing Contract Work Programme and Budget Approvals Exploration Activities Discovery Notification to Govt. Appraisal and Testing Commercial Mining Lease Development and Production

Various Contract Elements

Contract Term Relinquishment Work Programme & Participation Management Committee and

Operating Committee Discovery, Development and Production Cost Recovery and Production Sharing Domestic Market Obligation (DMO) Contract Duration and Commerciality

PRODUCTION SHARING CONTRACT (PSC) NELP IX

Non-Economic terms of the contract:
License and Exploration Period Work Programme Relinquishment MC & OC

Economic terms of the contract:

Recovery of Cost Petroleum Participating Interest Profit oil sharing Royalties & duties

INTRODUCTION
A total of 34 Exploration blocks are on offer under

NELP IX Round. Sl.No. 1 Type Onland Blocks Number 19 ( 8 are Type S Blocks)

2 3

Shallow Water Blocks 7 Deep Water Blocks (beyond 400 8 meter bathymetry) Total Exploration Blocks 34

Exploration Period
Exploration Period will be of 7 years for Onland &

Shallow water Blocks and 8 years for the Deepwater Blocks.

There will be only one Exploration Phase The initial Exploration period shall consist of the

first four consecutive contract years in case of onland and shallow water blocks and five years in case of deep water blocks

Relinquishment
There will be no compulsory relinquishment after initial

exploration period (when mandatory and committed programme are to be completed i.e. first four years)

Operator has the option to relinquish entire area after after

completion of MWP

OR retain the Block by committing one well per year in case

of Onland and Shallow water Blocks

OR one well in 3 years in case of Deepwater Blocks In any case, the entire area (leaving aside the development

and discovery area) has to be relinquished at the end of the 7th or 8th years of exploration, as the case may be.

Work Programme
Mandatory Work Programme Minimum Work Programme (MWP) Both to be completed during the first four or five

years, as the case may be.

Development and Production Period

This period will not exceed a period of twenty (20) years in

respect of crude oil and natural gas extracted in association with crude oil.

In case of non-associated natural gas, the development and

production period will not exceed thirty (30) years.

MC & OC
MC consists of two members from the government and one

member each from the company constituting the Contractor One representative of the Government will be designated as the Chairman of the committee and the other designated as the Deputy Chairman The member of the Operator will be designated as the Secretary of the committee MC committee shall be formed within 30 days of the effective date
The companies constituting the Contractor shall for a Joint

Operating Agreement (JOA) and Operating Committee constituting representation from each company. OC committee must be formed within 45 days of the effective date.

Recovery of Cost Petroleum

Recovery of Exploration Costs at the rate of 100%

up to the date of first Commercial Production.

Recovery of Development Costs at the rate of

100% up to the date of first Commercial Production.

Recovery of full Production costs in any year

incurred in that year.

In any year if the contractor is not able to recover

its costs than that left cost is taken up in the next year.

Profit Petroleum
Production Sharing of Petroleum
A partys share of profit petroleum in any year is calculated on the basis of Pre-Tax Investment Multiple (PTIP) achieved by the contractor.

Contractors take = Cost petroleum + Contractors share of Profit petroleum Contractors net cash flow = Contractors take ( Production cost (OPEX) +Royalty )

PTIM

Contractors Cumulative net cash flow Cumulative exploration & development cost

Sharing of Profit Petroleum

Profit Sharing Concept (Example) PTIM Tranches Profit Share to Government Upto 1.5 3.5 and above 30% 80%

Profit Share

Up to 1.5

3.5 & above

PTIM

Sharing Framework
FOC GROSS PRODUCTION NOC

COST RECOVERY

ROYALTY

PROFIT OIL

FOC SHARE

NOC SHARE

PROFIT

INCOME TAX

Sharing Concept
CONTRACTOR $20bbl GOVERNMENT $2 ROYALTY 10% $18 $6 $4.80 COST RECOVERY 33.3% PROFIT OIL SPLIT 40% / 60% -$1.44 $9.36 $3.36 24% TAX 30% GROSS REVENUE NET CASH FLOW TAKE $1.44 $10.64 $10.64 76% $7.20

Royalty
Onshore areas - @ 12.5% (crude oil) @ 10% (natural gas) Shallow Offshore areas - @ 10% (for both crude oil & gas) Deepwater area - @ 5% (for both crude oil and natural gas for the first seven years of Commercial Production and thereafter at the rate of 10%)

Other Terms Offered under NELP IX

Up to 100% participation by foreign companies. No signature, discovery or production bonus. No mandatory state participation No carried interest by National Oil Companies (NOCs) Income tax holiday for seven years from the start of

commercial production of Mineral Oil Predetermined Liquidated Damages (LD) specified for unfinished Minimum Work Programme One Time Bank Guarantee (BG) at a lower rate for the total committed Work Programme A nominal Bid Bond at a specified rate to encourage serious bidders.

Bidding Terms and Criteria

Biddable Terms
Companies would be required to bid for:

Work Programme commitment Percentage of value of the annual production sought to be allocated towards cost recovery Profit Petroleum share offered to Government of India at the Lowest tranche (<=1.5) and the highest tranche (3.5 and above)

Bid Evaluation Criteria

The bids are evaluated on the following three main parameters,

Technical Capability Acreage Holding (PEL) Operatorship Experience Annual Accretion of Proved Reserves Average Annual Production (O+OEG) for the previous five years Work Programme 2D Seismic surveys 3D Seismic surveys Exploratory Drilling of wells Fiscal Package Profit Share to Govt. Cost Recovery

BEC TYPE S BLOCKS

Technical Capability Neither a pre-qualification nor a bid evaluation criteria Financial Capability The net worth of every company should be equal to more than every companys participating interest in the MWP commitment, including the both mandatory and biddable work programme Work Programme Only the biddable work programme by the company / consortium will be evaluated Successful bidder will not be allowed to transfer its Participating Interest (PI) till completion of MWP during the first four years.

BEC Onshore and Shallow Water Blocks

Technical Capability Will be a pre-qualification criteria. The designated operator has to score non-zero on one out of the three sub-criteria of technical capability apart from non-zero score on operatorship experience. Financial Capability The net worth of every company should be equal to more than every companys participating interest in the MWP commitment, including the both mandatory and biddable work programme Work Programme Only the biddable work programme by the company / consortium will be evaluated Successful bidder to confirm to complete the Mandatory Work Programme during the Initial Exploration Period.

BEC Deepwater Blocks

Technical Capability Will be an evaluation criterion. The designated operator has to score non-zero on aggregate basis on account of Acreage Holding, Operatorship experience, Average Annual Accretion of Proved Reserves and Average Annual Production taken together should be more than zero. Financial Capability The net worth of every company should be equal to more than every companys participating interest in the MWP commitment, including the both mandatory and biddable work programme Work Programme Only the biddable work programme by the company / consortium will be evaluated Successful bidder to confirm to complete the Mandatory Work Programme during the Initial Exploration Period.

Bid Evaluation Criteria

Criteria Onland Blocks S Type Onland & shallow water Blocks Deepwater Blocks

Technical Capability Work Programme Fiscal package Total

Not a criterion 50 50 100

Pre-Qualifying 50 50 100

25 25 50 100

Other Terms and Conditions

Bid Bond

Bid bond to be valid for a period of one year Will be released on signing of the PSC of the block Amount for the bid bond is as follows, ( IN Rs. MM)

Deepwater Block Shallow Water Block Onland Block Onland Type S Block

2.0 1.5 1.0 0.5

Other Terms and Conditions

Liquidated Damages

Upfront liquidated damages shall be levied in case of unfinished work programme

( in US $) Onland Per Well Per Sq.Km. of 3D Per Line Km of 2D 1,000,000 5,000 2,500 Shallow Water Deepwater 3,000,000 1,500 1,000 6,000,000 1,500 1,000

Other Terms and Conditions

Bank Gaurantee

One time Bank Gaurantee valid for the period of the exploration at the rate of 7.5 % of the total committed work programme Assignment For Type S blocks, no assignment of PI permitted without completing Minimum Work Programme during the first four years

To Conclude
In a competitive world, areas with the least

favorable geology, with highest costs, and with lowest wellhead prices would be expected to offer the best fiscal terms costs, and with the highest well head prices offer the toughest terms. offer very favorable or favorable terms, and countries with favorable conditions, such as the oil-exporting countries, demand tough or very tough terms.

Areas with the best geology, with the lowest

Countries with unfavorable conditions typically

FINAL WORD
The key differences among the PSCs are on the

basis of:

Geo potential and costs. Negotiations and fiscal terms.

An ideal Fiscal system must take into

considerations following factors:

Ensure stable business environment Discourage speculation Provide potential return to both state and the companies, balancing risk Promote healthy competition.

Thank You