UNIVERSITY OF OKLAHOMA - PowerPoint PPT Presentation

1 / 48
About This Presentation
Title:

UNIVERSITY OF OKLAHOMA

Description:

Production Tranche Assumptions. Beta Field produces ... Profit Petroleum is allocated on a production tranche method ... Production Tranche Calculation ($15/bo) ... – PowerPoint PPT presentation

Number of Views:97
Avg rating:3.0/5.0
Slides: 49
Provided by: lynnysc
Category:

less

Transcript and Presenter's Notes

Title: UNIVERSITY OF OKLAHOMA


1
UNIVERSITY OF OKLAHOMA
  • INTERNATIONAL PETROLEUM CONTRACTS
  • FEBRUARY 6, 2003

2
DISCLAIMER
  • The views expressed in this presentation are
    solely those of the presenter. They should not
    be taken as reflecting the views of Kerr-McGee
    Corporation or any of its subsidiaries or
    affiliates (the Company) or the University of
    Oklahoma (the University). This presentation
    is presented with the understanding that neither
    the presenter, the Company nor the University is
    engaged in rendering legal, accounting or other
    professional services. In no event, including
    negligence on the part of the presenter, the
    Company or the University, will any of the
    aforementioned be liable for any direct,
    indirect, or consequential damages resulting from
    the use of this material.

3
Why Have An Investor?
  • In virtually every country around the world, the
    state owns the oil and gas rights.
  • In many countries, exploration and development
    are carried out by private capital.
  • Why does the state not develop what it owns?
  • Because
  • It does not have sufficient capital
  • It is not the most efficient user of capital
  • It does not have the technical capabilities.

4
Sharing Benefits in Petroleum Investment
  • Private capital is encouraged by giving investors
    the opportunity to expect returns better than
    other alternatives on offer.
  • Risk/reward balance
  • Returns are provided by sharing benefits.
  • Sharing of benefits is a balance between
    nations rights to benefits as resource owner,
    and providing sufficient incentive to encourage
    investment.

5
Sources of Government Revenue
  • Bonuses
  • Signature
  • Commerciality
  • Production Rate Based
  • Participation
  • Paid Government shares risks and rewards
  • Carried No risk to government
  • Royalty
  • Rentals
  • Amount
  • Less significant in relation to royalties and
    bonuses
  • Used to deter land banking

6
Sources of Government Revenue (cont.)
  • Taxes
  • Corporation Income Tax
  • Take based on measure of profitability and
    typically applies to all industries
  • Other Tax(es) (VAT, Customs, Duties)
  • Special Petroleum Tax
  • May be deductible from corporation tax
  • Aimed to recover profits in excess of normal
    levels.
  • Taxes preferably should address full-cycle costs
    and not project-specific returns

7
Petroleum Contract Legal Issues
  • Establish sovereignty (Boundary Issues)
  • Establish petroleum/minerals ownership
  • Establish legislation framework
  • Petroleum Laws
  • Taxation
  • Establish regulating organization(s)
  • Establish license/permit type(s)
  • Concession
  • Production Sharing
  • Recognize other prevailing national laws
  • (U.S. laws also)

8
Petroleum Legislation Framework-Ownership of
Hydrocarbons and Minerals National Petroleum Codes
  • Facilitate Achievement of Energy Policy
    Objectives
  • Prompt and thorough exploration of licensed area
  • Efficient development of any discovery
  • Maximization of ultimate recovery
  • Disposition of petroleum in domestic and export
    markets
  • Access to modern technology and training
  • Obtain revenues

9
Petroleum Legislation Framework
  • Broad Objectives
  • Provide mechanism whereby companies
  • Recover their costs
  • Earn an income that adequately compensates for
    risks taken
  • Procure maximum income for state with mechanism
    for recovery of excess profits

10
Typical Hydrocarbons Law
  • Usually items are authorized in the law and then
    details are spelled out in regulations and
    contracts
  • Ownership of hydrocarbons in place or after
    production
  • Who has authority to set national policy,
    specific areas for bidding, award permits
  • Constraints, if any, on who is eligible for
    permits and concessions
  • Provision for exports and domestic requirements

11
Typical Hydrocarbons Law (cont.) -Awards
Procedures
  • How Will Permits and Concessions Be Awarded?
  • Bidding or negotiations
  • Parameters to be considered royalty rates, work
    programs, etc.
  • Who determines areas to be offered, terms of
    offer, eligible bidders, timing

12
Typical Hydrocarbons LawExploration Permits,
Rights and Obligations Under Such Permits
  • Minimum work program
  • Period of validity of exploration permit
  • One or more terms, relinquishment of some area at
    end of each term
  • Size and contiguity of area, possible limitation
    on how many one company can have
  • Exploitation concession if successful

13
Typical Hydrocarbons Law (cont.)
  • Exploitation Concessions
  • Rights and Obligations Under Such Concessions
  • Develop and produce hydrocarbons within defined
    area
  • Right of transport (e.g. Pipelines, terminals,
    roads)
  • Must meet standards for work procedures and
    safety programs
  • Must provide development plan and progress
    reports
  • Information and technology transfer
  • Production reporting and accounting required
  • Period of validity of concession
  • size and contiguity of area, possible
    limitations
  • on how many one company can have

14
Typical Hydrocarbons Law Other Rights and
Obligations
  • Surface access rights, indemnification of owners
    for damages
  • Must use good oil field practices, avoid damage
    to reservoirs, avoid wastage, comply with all
    rules and regulations
  • Provide information on operations and production
  • Make books available for audit
  • Assist in inspection and control efforts
  • Employ and train local personnel
  • Insurance required
  • Pollution and clean-up procedures

15
CLASSIFICATION OF PETROLEUM FISCAL SYSTEMS
  • PETROLEUM FISCAL ARRANGEMENTS

The first branch deals with the title to the
mineral resources. Concessionary systems allow
private ownership. In contractual systems, the
state retains ownership
CONCESSIONARY SYSTEMS
CONTRACTUAL SYSTEMS
The primary difference here rests upon whether
the fee is taken in cash (service) or in kind
(PSC).
Production Sharing Contracts
Service Contracts
Divided primarily upon whether fee is based upon
a flat fee (pure), or profit (risk)
Also referred to as Production Sharing Agreements
Pure Service Contracts
Risk Service Contracts
16
Concession Agreement
  • Key Features
  • Concession company has exclusive right to explore
    for and exploit petroleum at its own risk
  • Concession company owns production and can freely
    dispose of it (though it may have an obligation
    to supply the local market)
  • During the exploration and exploitation phase,
    concession company pays surface rentals to host
    country
  • The concession company pays taxes on profits
    derived from its exploitation operations
  • The equipment and installations used for
    petroleum operations belong to the concession
    company
  • Concession company pays royalty in cash or kind
    to host country

17
CONCESSION/LICENSEPRODUCTION ALLOCATION DIAGRAM
18
Concession/License
  • Royalty Assumptions
  • Alpha Field produces
  • 50,000 bopd per Quarter (90 days)
  • at a market price of 15/bbl
  • If the royalty is a flat rate of 20, what is the
    value of the Quarterly royalty?
  • If the royalty is the following sliding scale,
    what is the value of the Quarterly royalty?
  • Annual average production rate
  • 0 to 20,000 bopd 17.5
  • 20,000 to 40,000 bopd 20
  • more than 40,000 bopd 25

19
Concession/License
  • Royalty Calculation
  • Alpha Field Quarterly Production
  • 50,000 bopd x 90 4.5 mm bbls
  • Flat Royalty
  • In kind 4.5 mm bbls x 20 900 m bbls
  • In cash 900 m bbls x 15 13.5 mm
  • Sliding Scale Royalty at 50,000 bopd
  • 1st 20,000 bbls x 90 x 17.5 315,000 bbls
  • 2nd 20,000 bbls x 90 x 20 360,000 bbls
  • 3rd 10,000 bbls x 90 x 25 225,000 bbls
  • In kind Total 900,000 bbls
  • In cash 900 m bbls x 15 13.5 mm

20
(No Transcript)
21
CONCESSIONARY SYSTEM FLOW DIAGRAM
One Barrel of Oil 20.00
Contractor Share
Royalties Taxes
20 Royalty
4.00
16.00
(Net Revenue)
Deductions (Operating Costs, DA, IDCs, etc.)
9.00 3.78 12.78 64
7.00 (Taxable Income) Provincial Taxes (Ad
Valorem, Severence, Income) 10
.70 2.52 7.22 36
6.30 Federal Income Tax 40
Net Income After Tax

22
The Problems With a Royalty-Based Fiscal System
  • Sets an arbitrary economic threshold (cuts out
    higher cost developments)
  • Will have strong negative effect on new and
    mid-life investments capital since it raises the
    economic threshold
  • Increases time for investment capital recovery
  • Increases cost of capital
  • It discourages development of smaller fields
  • It encourages earlier abandonment of producing
    fields
  • Lacks flexibility to accommodate changes in the
    underlying conditions (price, cost etc.)

23
Reasons for Evolution
  • The Concession Form earned, and retains, a
    pejorative connotation.
  • Host Countries shift away from the Concession
    Form was to redress those inequities by
  • Reasserting sovereign ownership
  • Introducing controls, such as equivalent of
    implied covenants
  • Reallocating economic rents.
  • The PSC and RSC Forms are much better than the
    Concession Form for asserting ownership,
    effecting control, and capping economic rent.

24
PSCPRODUCTION ALLOCATION DIAGRAM
25
Hybrid PSCProduction Allocation Diagram
26
(No Transcript)
27
(No Transcript)
28
PSC Cost Recovery
  • Assumptions
  • Beta Field produces
  • 50,000 bopd per quarter (90 days)
  • at a market price of 15/bbl
  • Investors unrecovered costs for Beta Field are
  • Operating Costs 5/bbl
  • Development Costs 200 mm
  • Exploration Costs 80 mm
  • Commercial terms of the PSC provide
  • Cost recovery percentage 50
  • Amortization rate 25
  • What is the cost recovery for the Quarter?

29
PSC Cost Recovery
  • Calculation
  • Quarterly Recoverable Costs
  • 4.5 mmbo x 5 22.5 mm
  • 200 mm x 25/4 12.5 mm
  • 80 mm x 25/4 5.0 mm
  • 40 mm
  • Value of Quarterly Production Available for Cost
    Recovery
  • 50 mbopd x 90 days 4.5 mmbo
  • 4.5 mmbo x 50 2.25 mmbo
  • 2.25 mmbo x 15/bbl 33.75 mm
  • Quarterly Amount Recovered 33.75 mm (2.25
    mmbo)
  • Quarterly Amount Carried Forward - 6.25 mm
  • Quarterly Production Available for Profit Split -
  • (50,000 bopd x 90 days) - (2.25 mmbo) 2.25 mmbo

30
PSC Cost Recovery
  • Calculation
  • Quarterly Recoverable Costs
  • 4.5 mmbo x 5 22.5 mm
  • 200 mm x 25/4 12.5 mm
  • 80 mm x 25/4 5.0 mm
  • 40 mm
  • Value of Quarterly Production Available for Cost
    Recovery
  • 50 mbopd x 90 days 4.5 mmbo
  • 4.5 mmbo x 50 2.25 mmbo
  • 2.25 mmbo x 40/bbl 90 mm
  • Quarterly Amount Recovered 40 mm (1 mmbo)
  • Excess Cost Recovery Petroleum (50 mm/40)
    1,250,000 bbl
  • Quarterly Production Available for Profit Split -
  • (50,000 bopd x 90 days) - (1 mmbo) 3.5 mmbo

31
PSC Profit
  • Production Tranche Assumptions
  • Beta Field produces 50,000 bopd at a market price
    of 15/bbl
  • Quarterly Recoverable Costs 33.75 mm (2.25
    mmbo)
  • Quarterly Production Available for Profit Split
    2.25 mmbo
  • Profit Petroleum is allocated on a production
    tranche method
  • Ave. Gross Production Contractor
    Government
  • lt 20,000 bopd 80 20
  • 20 - 40,000 bopd 50 50
  • gt 40,000 bopd 20 80
  • Excess Cost Petroleum is treated as Profit
    Petroleum
  • What is the Quarterly allocation of Profit
    Petroleum?

32
PSC Profit
  • Production Tranche Calculation (15/bo)
  • Quarterly Production Available for Profit Split
    2.25 mmbo
  • Profit Petroleum Allocation Ration at 50,000 bopd
  • Contractor Government
  • 1st tranche (20 mbopd) 16 4
  • 2nd tranche (20 mbopd) 10 10
  • 3rd tranche (10 mbopd) 2 8
  • 28 22
  • Quarterly Profit Petroleum Allocation
  • Contractor 2.25 x (28/50) 1.26 mmbo
  • Government 2.25 x (22/50) 0.99 mmbo

33
PSC Profit
  • Production Tranche Calculation (40/bo)
  • Quarterly Production Available for Profit Split
    3.5 mmbo
  • Profit Petroleum Allocation Ratio at 50,000 bopd
  • Contractor Government
  • 1st tranche (20 mbopd) 16 4
  • 2nd tranche (20 mbopd) 10 10
  • 3rd tranche (10 mbopd) 2 8
  • 28 22
  • Quarterly Profit Petroleum Allocation
  • Contractor 3.5 x (28/50) 1.926 mmbo
  • Government 3.5 x (22/50) 1.54 mmbo

34
RSCPROCEEDS ALLOCATION DIAGRAM
35
Risk/Service Agreement
  • Key Issue
  • Similar to the PSC but cost recovery mechanism is
    different and is based on service formula (/BO)

36
Risk Service
  • Fee Assumptions
  • Gamma Field produces
  • 50,000 bopd per Quarter (90 days)
  • Assume level production
  • Commercial terms of the RSC provide
  • Cost Recovery Rate 7.50/bbl
  • Contractors Service Fee 4.00bbl
  • What is the Contractor take for each Quarter?

37
Risk Service
  • Fee Calculation
  • Gross Production
  • 50,000 bopd x 90 days 4.5 mmbo
  • Cost Recovery
  • 4.5 mmbo x 7.50 / bbl 33.75 mm
  • Service Fee
  • 4.5 mmbo x 4.00 / bbl 18 mm
  • 51.75 mm

38
Reconnaissance/TechnicalStudy Agreement
  • Key Features
  • Typically for large frontier type area
  • Usually will be for geology and seismic studies
    and will not include drilling obligations.
    Stratigraphic holes may be contemplated.
  • May provide first refusal to participant if host
    country decides to license area after initial
    study or conversion options for
    exploration/exploitation contract
  • May include provisions for later
    exploration/exploitation contract terms
  • Typically for short periods
  • May include provisions for training of host
    country personnel
  • All expenditures borne by participating country

39
Perspective
  • Granting Instruments
  • Exist in the Context of
  • International Conventions and Treaties
  • Host Country Laws and Regulations
  • Contracts
  • Industry Practices
  • Are the Source of Rights to Explore and Exploit
  • Allocate Risks and Rewards of Investment
  • Establish Relationship for Investment

40
Contents of a Petroleum Contract
  • Scope and definitions
  • Term
  • Relinquishment
  • Minimum work program
  • Rights and obligations
  • Disposition of production
  • Valuation of production
  • Measurement of production
  • Government share, fees, taxes
  • Payments

41
Contents of a Petroleum Contract (cont.)
  • Title to assets
  • Records and reports
  • Arbitration
  • Training technology transfer
  • Force majeure
  • Termination
  • Books of account, financial reporting, audit
  • Other provisions
  • Operating agreement

42
IOC Host Country Issues
  • IOC
  • Stability
  • Transparency
  • Timeliness
  • New opportunities
  • Return on investment
  • HOST
  • Commitment
  • Measure of control
  • Technology transfer
  • Catalyst for local industrial development
  • Investment options
  • Rent capture

43
IssuesManagement and Control
  • The foreign investor(s) will want absolute
    control.
  • The host country will want its voice heard.
  • Host government participation in management and
    control may occur in several ways
  • Laws and Regulations
  • Direct Ministry or Bureau supervision
  • Representation on the Management Committee or
    Board of Control
  • Equity participation in the enterprise, whether a
    joint venture, a partnership or a corporation
  • If the last, participation often will be a
    carried interest through discovery or development

44
IssuesEnvironmental Protection
  • Fear of existing or future environmental
    legislation is a major deterrent to foreign
    investment in resource development
  • In the United States, environmental laws have
    entangled remediation contractors, banks,
    lessees, etc.
  • Baseline study by a neutral expert
  • Photographic record signed by both parties on
    contract date
  • A cross-indemnity is common Grantor as to past
    fouling, Grantee as to future. Very difficult to
    distinguish.

45
IssuesSettlement of International Contract
Disputes
  • Reference to the courts is viewed by private
    investors as unfavorable
  • Reference to arbitration is often viewed more
    favorably

46
Fiscal System Design Considerations
  • A flexible structure is a stable structure
  • Fiscal conditions, and the rent available for
    collection, will change from time to time.
    Fiscal structure must be flexible to accommodate
    this
  • Good fiscal design without complementary
    institutional structures may still not achieve
    the desired goals
  • Design needs to be within the administrative and
    audit capacity of the relevant institutions
  • A simpler system may be more viable than a
    theoretically ideal but complex or contentious
    system

47
Contract Types
  • Style of contract usually not a material issue -
    identical economic behaviors can be induced in
    range of contracts

48
(No Transcript)
Write a Comment
User Comments (0)
About PowerShow.com