Diapositiva 1

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Unconventional EP Agreements
A review to Governments different approaches to
maximize a Nations natural resources wealth
September 2007
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Governments basic needs

• Governments objective is to promote wealth and
  progress to their citizens
• They need to secure its budget to provide its
  citizens with the required social services
• They are responsible to maximize their countrys
  natural resource value, generating employment and
  benefits for their citizens.
• Governments should look for formulas aligned with
  its strategic plan, to promote investments and
  competition, with or without the participation of
  foreign companies, retaining control over the
  exploitation of their resources, and modulating
  Cos. profits.

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NOCs vs Private or IOCs Basic Needs

• NOCs needs
• NOCs need to maximize the income to their
  Government as its shareholder, implementing
  Government policy to discover, develop and
  exploit the countrys hydrocarbon resources
• NOCs must look for technical efficiency and
  operational excellence, thus to extract maximum
  value from their fields, applying Government
  allocated funds to the most profitable projects
• Private Co. or IOCs needs
• IOCs need a stable framework to perform the
  necessary investments, competitive with other
  projects and with a reasonable profitability for
  its shareholders, balanced with the specific risk
  of the project.
• IOCs require flexibility within upstream
  operations, with quick decision making to
  optimize project's efficiency.

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Governments / NOCs - IOCs Agreements

• The Conventional Agreements
• Tax Royalties (USA, Canada, Australia, UK,
  Russia, Argentina.)
• PSA PSC (Nigeria, Algeria, Libya,
  Angola, Indonesia....)
• The Unconventional Agreements
• Islamic Republic of Iran Buy Back
• Venezuela Empresas Mixtas
• Mexico Multiple Services Contract
• Saudi Arabia NOC-IOC Joint Ventures

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Governments-IOCs Unconventional agreements
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IRAN. EP Buy Back CONTRACT

• IOC has the obligation to fully finance and
  perform all activities relating to Exploration
  and, in case of discovery, Development, but not
  Exploitation
• IOC bears 100 the exploration risk, and the
  large investments related to development
• IOC recover, in cash equivalence, past
  investments with a remuneration fee as single
  annual payments from field production, for 5-8
  years. The amount is calculated to provide an
  agreed IRR
• IOC performs the development and transfers the
  operation to NIOC for the production phase
• Once transferred the operation to NIOC, in
  principle, IOC has not any further involvement
  with fields operations but still all
  reimbursement of its past costs and remuneration
  is pending

ADVANTAGES DRAWBACKS
If sufficient production available, IOC insensitive to low oil price Results taken off IOCs hands, relying on good performance of NIOC in the field as operator and field manager
Do not drain companies resources for the entire life of the field IOC cannot book reserves
IOC short term view on the project
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VENEZUELA. TAX ROYALTY - EMPRESAS MIXTAS

• At Government request, negotiations during 2005,
  culminated in an agreement with the state-owned
  company, PDVSA, to convert former 100 IOCs
  operating concessions into mixed companies, with
  a majority state participation. (Empresas
  Mixtas). Production phase PDVSA 60 - IOC 40
• Type of contract Tax-Royalty
• For Exploration and Development, IOC supports
  100 of the investment. NOCs enters exploitation
  phase
• For fields on production, IOC is remunerated
  through dividends of the company given annually
  to the shareholders of the Empresa Mixta

ADVANTAGES DRAWBACKS
Full joint NOC-IOC operations through the life of the field IOC has minority participation for operational decisions
Aligns economical interests of NOC and IOC IOC maybe exposed to decisions made not always on the basis of the best economical interest of that project
IOC is able to book its equity share in term of reserves
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MEXICO. MULTIPLE SERVICE CONTRACTS

• MSC contract is a unique contractual model
  designed by Mexicos NOC to overcome the strong
  restrictions within Mexico's constitution for IOC
  investments in the upstream sector.
• IOCs remuneration on investments relies on the
  Civil Work Law, that rewards IOC with a
  pre-specified tariff per work performed.
• Only if gross income from the field is available
  IOC gets remunerated
• The essential issue on this contract is the
  tariff applied which needs to cover the real cost
  of the job plus some remuneration for the IOC

ADVANTAGES DRAWBACKS
Full control on the development IOC cannot book reserves
If sufficient production, IOC insensitive to low gas prices Highly sensitive to fluctuations on cost if tariff is not adjusted
IOC cannot fully recover failed exploratory /appraisal wells
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SAUDI ARABIA. JOINT VENTURE

• IOC has a majority share within a joint venture
  company with Saudi Aramco to operate concessions
• NOC fully finance its share on the expenditures
  both, within Exploration Development phases
• IOC remuneration comes from the fields revenues
  related to gas, with a variable tax on profits to
  regulate and limit the project IRR
• NOC guarantees gas purchase volumes and price

ADVANTAGES DRAWBACKS
IOCs and NOCs interests aligned and share the risk of exploration phase Only gas and condensate. No right on associated oil
Long Term Project. 15-25 years Restrictions on the amount of production to be delivered to the domestic market
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Conclusions Advisors Experience
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Then, lets summarize Government/NOCs options

• NOCs carry out EP projects on its own
• The benefit of a second opinion
• The access to latest technology
• The improvements from other experiences world
  wide
• The efficiency of competition?
• NOCs contract Services Provider Cos. and
  Advisors
• Where is the profit for the Contractor?. The
  monthly bill
• Where is the profit for NOC?. Increase
  reserves, decrease costs
• The problem of different / colliding? objectives
• NOCs contract / joins IOCs
• The need to align NOCs-IOCs objectives. The
  Contractual framework
• Get a third opinion. Competition. Include 2-3 IOC
  into each EP project

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EXPERIENCE

• Working for Repsol, the only IOC with signed
  contracts within the largest world oil producing
  countries, Sueñergy experts have long experience
  in working successfully with the NOCs in the
  development and production of oil and gas fields
• Egypt. EGPC (Egypt NOC) and Repsol operated in
  the 90s through Khalda Oil Company the oil and
  gas fields in the Western Desert.
• Libya. NOC and Repsol-YPF established and operate
  today the blocks NC-115 and NC-186 in the Murzuq
  Basin, jointly through Repsol Oil Operations,.
• Algeria. Sonatrach, Repsol-YPF and Total have
  created a Groupement to operate the
  Tin-Fouye-Tabancourt gas field.
• Iran. Repsol-YPF has two buy back contracts, one
  related to onshore Mehr Block and the second for
  two offshore Blocks within the Persian Gulf
• Venezuela. PDVSA and Repsol have Petroquiriquire
  and Quiriquire gas, Empresas Mixtas
• Mexico. Repsol-YPF operates on behalf of Pemex
  (Mexico) under a Service Contract for the
  development and incremental gas production phase
  for the Reynosa block, Burgos basin
• Saudi Arabia. Saudi Aramco, Repsol-YPF and Eni
  have EniRepSa,a Joint Operating Company exploring
  the large Block C

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For a successful Governments/NOC-IOC marriage

• Confidence between NOC and IOC is imperative.
  Clear and stable contractual agreements are
  essential for a long term relationship.
• Governments must understand and preserve IOCs
  economical interests, always compatible with the
  countrys development and production
• Contracts proposed must have an attractive
  economical alternative to promote investments in
  EP projects in their countries.
• IOCs have to assume the legal scenario in which
  the contract is based, and within this framework,
  perform the projects efficiently in order to
  optimize results.
• Flexibility, communication and dedication to the
  partnership.