OIL & GAS MANAGEMENT REPORT

7/30/2019 OIL & GAS MANAGEMENT REPORT

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THE ROBERT GORDONUNIVERSITY

ABERDEEN

ABERDEEN BUSINESS SCHOOL

MSC PROJECT MANAGEMENT

OIL AND GAS MANAGEMENT BSM2519

INDIVIDUAL REPORT: CHEVRON-LNOC COLLABORATION


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SAHARA DESERT ONSHORE GAS FIELDCHEVRON-LNOC COLLABORATION

Rev: 14 Ref:O&G-CW

EXECUTIVE SUMMARYWithin the context of the Chevron-LNOC Production Sharing Contract for the developmentof an onshore gas field in Libya, this report provides an overview of the differentcontractual elements which should be included in the agreement and defines how toaddress some of the key issues related to them.

For this purpose, a Base Case was defined taking in account the initial estimationsobtained from the FEED programme, which have been adequately updated due to thecurrent situation of the country and the perceived risks associated to the development of the project.

After this, an assessment of the terms of the PSC has been realized to evaluate how their variation could affect to the feasibility of the project and therefore to be able to establishwhich are the drivers for the success of the project and to define priorities.

Furthermore, trigger values defining acceptable variation limits have been calculated for the most sensible contractual terms, and several options have been included as possiblesolutions to be taken in account for planning a negotiation strategy.

In addition, several proposals for the development of Local Content initiatives have beenincluded in this report to enhance the attractiveness of the offer and to demonstratecommitment to the Libyan Government. In this regard, local workforce and supplier

development, as well as community focused initiatives have been outlined and costsassociated to them have been estimated.

Finally, it has also been undertaken an options appraisal for the selection of the mostsuitable type of contract which could rule the construction of the pipeline from the gas fieldto the coast. In this regard, a weighted system has been created to evaluate the suitabilityof the different types of contracts with the final objective of balancing risks allocationbetween client and contractor.


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SAHARA DESERT ONSHORE GAS FIELDCHEVRON-LNOC COLLABORATION Rev: 14 Ref:O&G-CW

TABLE OF CONTENTS:

1. INTRODUCTION .......................................................................................................... 8

1.1. PROJECT BACKGROUND .................................................................................... 8

2. PSC PROPOSAL DEVELOPMENT METHODOLOGY .............................................. 10

2.1.

KEY FEATURES OF A PSC ................................................................................ 10

2.2. METHODOLOGY ................................................................................................. 11

3. BASE CASE ............................................................................................................... 12

3.1. REVENUES .......................................................................................................... 13

3.1.1. Gas Price ....................................................................................................... 13

3.1.2. Gas Production .............................................................................................. 13

3.2. CAPITAL EXPENDITURE (CAPEX) ..................................................................... 14 3.3. OPERATING COSTS (OPEX) .............................................................................. 14

3.4. PSC TERMS ........................................................................................................ 15

3.4.1. Bonus ............................................................................................................. 16

3.4.2. Royalties ........................................................................................................ 16

3.4.3. Cost Recovery ............................................................................................... 17

3.4.4. Profit Share/Profit Oil Split ............................................................................. 17

3.4.5. Profit Tax ....................................................................................................... 17

3.4.6. Accounting Standards .................................................................................... 17

3.4.7. Foreign Exchange .......................................................................................... 18

3.4.8. Export Rights ................................................................................................. 18

3.4.9. Duration of Contract ....................................................................................... 18 3.4.10. Relinquishment ........................................................................................... 18

3.4.11. PSC Terms Resume Table ......................................................................... 19

3.4.12. Base Case Financial Results Resume ........................................................ 19

4 SENSITIVITY ANALYSIS 23


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4.5.4. OPEX ( Platform) ........................................................................................... 35

4.5.5. Cost Recovery ............................................................................................... 35 5. ADDITIONAL OFFERINGS ........................................................................................ 36

5.1. LOCAL WORKFORCE DEVELOPMENT (LWD) .................................................. 37

5.1.1. LWD Estimated Investment ........................................................................... 37

5.2. SUPPLIER DEVELOPMENT ................................................................................ 37

5.2.1.

Supplier Development Estimated Investment ................................................ 37

5.3. COMMUNITY DEVELOPMENT ........................................................................... 38

5.3.1. Community Development Estimated Investment ........................................... 38

6. PIPELINE CONTRACT SELECTION ......................................................................... 39

6.1. SCOPE OF THE CONTRACT .............................................................................. 39

6.1.1. Design, Procurement and Construction Contract ........................................... 39

6.1.2. Design, Procurement, Construction and Operation Contract ......................... 41 6.1.3. Scope Preferences: ....................................................................................... 42

6.2. TYPES OF CONTRACTS .................................................................................... 42

6.3. CONTRACTS COMPARATIVE ............................................................................ 43

6.3.1. Engineering & Design Phase ......................................................................... 44

6.3.2. Procurement .................................................................................................. 45

6.3.3. Construction ................................................................................................... 46

6.3.4. Operation ....................................................................................................... 47

6.4. CONTRACT TYPE RECOMMENDATION ........................................................... 48

6.4.1. Engineering & Design .................................................................................... 48

6.4.2. Procurement .................................................................................................. 48

6.4.3. Construction ................................................................................................... 49 6.4.4. Operation ....................................................................................................... 49

7. CONCLUSIONS ......................................................................................................... 50

8. RECOMENDATIONS ................................................................................................. 50


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11.5.2. Cost-Reimbursement Contracts ................................................................. 61

11.5.3. Incentive Contracts (Payment linked to results) .......................................... 62 11.5.4. Time and Materials and Labour-Hour Contracts ......................................... 63

11.5.5. Gainshare ................................................................................................... 63

11.5.6. Equity Investment ....................................................................................... 63

11.6. APPENDIX 3: BASE CASE FINANCIAL RESULTS RESUME ......................... 66

11.6.1.

Economic Results Summary for Foreign Oil Company ............................... 66

11.6.2. Economic Results Summary for National Oil Company .............................. 67


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FIGURES:

Figure 1: Libya Map ............................................................................................................. 8 Figure 2: PSC Scope ........................................................................................................... 9 Figure 3: PSC Taxation Structure ...................................................................................... 10 Figure 4: PSC Development Methodology ........................................................................ 11 Figure 5: PSC Financial Elements ..................................................................................... 12 Figure 6: Gas Prices trends ............................................................................................... 13 Figure 7: Gas Price Estimations ........................................................................................ 13 Figure 8: Revenues Distribution ........................................................................................ 15 Figure 9: Royalty/Gas Production Relationship ................................................................. 16 Figure 10: Discounted Net Cash Flow Comparative .......................................................... 20 Figure 11: Cumulative Discounted Cash Flow Comparative.............................................. 20 Figure 12: Revenues Distribution ...................................................................................... 21 Figure 13: Revenues Distribution ...................................................................................... 22 Figure 14: NPV Spider Diagram ........................................................................................ 24

Figure 15: IRR Spider Diagram ......................................................................................... 27 Figure 16: PIR Spider Diagram .......................................................................................... 30 Figure 17: Elements Importance ........................................................................................ 33 Figure 18: Local Content ................................................................................................... 36 Figure 19: Local Workforce Development.......................................................................... 37 Figure 20: Supplier Development ...................................................................................... 37 Figure 21:Community Development .................................................................................. 38 Figure 22: Contract Scope Comparative ........................................................................... 39 Figure 23: DPC Option Contract Value Comparative ........................................................ 40 Figure 24: DPC Option Profit Comparative ........................................................................ 40 Figure 25: DPCO Option Contract Value Comparative ...................................................... 41 Figure 26: DPCO Option Profit Comparative ..................................................................... 41 Figure 27: Contract Risk Allocation ................................................................................... 42 Figure 28: Contract Types Tree ......................................................................................... 68


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TABLES:

Table 1: Contract Requirements .......................................................................................... 8 Table 2: Operating Costs Estimations ................................................................................. 9 Table 3: Investor/Government Take .................................................................................. 10 Table 4: PSC Development Processes ............................................................................. 11 Table 5: Base Case ........................................................................................................... 12 Table 6: CAPEX ................................................................................................................ 14 Table 7: OPEX ................................................................................................................... 14 Table 8: PSC Terms .......................................................................................................... 15 Table 9: Royalty Rate ........................................................................................................ 16 Table 10: Profit Oil Split ..................................................................................................... 17 Table 11: R- factor ............................................................................................................. 17 Table 12: Base Case PSC Terms ...................................................................................... 19 Table 13: Financial Results Resume ................................................................................. 19 Table 14: NPV Sensible Variables ..................................................................................... 25

Table 15: NPV Variation Limits .......................................................................................... 26 Table 16: IRR Sensible Variables ...................................................................................... 28 Table 17: IRR Variation Limits ........................................................................................... 29 Table 18: PIR Sensible Variables ...................................................................................... 31 Table 19: PIR Acceptance Rules ....................................................................................... 32 Table 20: PIR Variation Limits ........................................................................................... 32 Table 21: Variation Limits Resume .................................................................................... 33 Table 22: Strategy Options (Gas Price) ............................................................................. 34 Table 23: Strategy Options (Contractors SPO) ................................................................ 34 Table 24: Strategy Options (CAPEX) ................................................................................ 35 Table 25: Strategy Options (OPEX) ................................................................................... 35 Table 26: Strategy Options (CR) ....................................................................................... 35 Table 27: Local Content Activities ..................................................................................... 36 Table 28: DPC Option ....................................................................................................... 39 Table 29: DPCO Option ..................................................................................................... 41

Table 30: Type of Contracts .............................................................................................. 42

Table 31: Contract Selection Criteria ................................................................................. 43 Table 32: Contract Selection Matrix (Eng & Design) ......................................................... 44 Table 33: Contract Selection Matrix (Procurement) ........................................................... 45 Table 34: Contract Selection Matrix (Construction) ........................................................... 46 Table 35: Contract Selection Matrix (Operation) ................................................................ 47


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1. INTRODUCTION

1.1. PROJECT BACKGROUNDChevron has been invited by LNOC to make a proposal for a Production Sharing Contract(PSC) to formalize the development of a large onshore gas field which has been identifiedby them in the Sahara desert.

Figure 1: Libya Map

It has been confirmed that the field development will include the tasks that have beenreflected in Table 1.

Contract Requirements InvestmentRateTotal

Investment Period

Drilling 150 wells $ 500mill/year $ 2 billion 4 years

Developing the field infrastructure$ 1 billion/year $ 4 billion 4 years

Laying a 220 km pipeline


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It has been estimated that the contract will have a duration of 25 years from the signature

date, and once the production commences the field is expected to produce 2000 mmscfpdcontinuously for the remainder of the 25 years of the agreement.

Figure 2: PSC Scope

On the other hand, the operating costs are estimated at US$ 200M/year. In this sense, amore detailed allocation of the cost has been included in Table 2.

Contract Requirements Operating Costs TotalCosts Period

Onshore facilitiesLNG TerminalShips

$ 180 million/year $ 3.78 billion(Aprox.)21 years(Aprox.)

Pipeline $ 20 mill/year $ 420 million(Aprox.) 21 years(Aprox.)Table 2: Operating Costs Estimations


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2. PSC PROPOSAL DEVELOPMENT METHODOLOGY

2.1. KEY FEATURES OF A PSCThe overall structure of the PSCs is negotiable, and it is mainly constituted by:

Bonuses: signature bonus, discovery bonus, and production bonus;Cost recovery oil/gas: after royalty a fixed percentage of production is available for therecovery of operating and capital costs.

Profit oil/gas: remaining production after cost recovery is divided between the investor and the government on a sliding scale basis linked to cumulative production.Royalty and income taxes: paid by the contractor, usually 10% and 25%, respectively.

A typical PSC taxation structure has been detailed in Figure 3 and Table 3.


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2.2. METHODOLOGYFor the development of the PSC Proposal, several processes must be followed to allowChevron to clearly define the contractual terms, and to maximise its expected benefits, aswell as offering a stable and fair return to Libya Government. The main processes to beundertaken to define a PSC proposal have been reflected in Figure 4 and Table 4.

Figure 4: PSC Development Methodology

PROCESS DESCRIPTION

INITIAL FORECASTING

Initial forecasts for the project focused on:Production estimations

Gas Price estimationsOpex estimationsCapex estimationsTaxation estimations

BASE CASE DEVELOPMENTDevelopment of the baseline for comparing the effects of the variation of different elements constituting theagreement on the feasibility of the project.

SENSITIVITY ANALYSISTo provide an understanding of how PSC componentsinfluence the economic outcomes of the project.

SPIDER DIAGRAM Representing the results obtained from the sensitivityanalysis.

ACCEPTABLE/UNACCEPTABLEALTERNATIVES

Interpretation of the results of the Spider Diagram todecide which are the key contract elements and to define

INITIALFORECASTING

BASE CASEDEVELOPMENT

SENSITIVITYANALYSIS

SPIDERDIAGRAM

ACCEPTABLE &UNACCEPTABLEALTERNATIVES

NEGOTIATINGPOSITION


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3. BASE CASE

The Base case is the expected development of the project (from an economic perspective)using the assumptions that management deems most likely to occur. The financial resultsfor the base case should be better than those for Chevrons conservative/pessimistic casebut worse than those for its aggressive/upside case.

The main reason for the Development of this Base Case is to define a baseline for comparing the effects of the variation of different elements constituting the agreement onthe overall feasibility of the project.

In this regard, this report will include an assessment of the key elements responsible for the financial feasibility of the project and it will be clearly defined the acceptable andunacceptable alternatives related to the negotiation of those elements.

BASE CASE

REVENUESGAS PRICE

GAS PRODUCTION

CAPITAL EXPENDITURELNG SYSTEM AND VESSEL COSTWELLS DRILLING & WORKOVERONSHORE FACILITIES CONSTRUCTION

OPERATING COSGAS PLATFORM OPERATING COSTSGAS TRANSPORTATION/PIPELINE TARIF

PSC TERMS

PROFIT TAXROYALTYBONUSCOST RECOVERY

Table 5: Base Case


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3.1. REVENUES

3.1.1. Gas Price

Initial estimations for this Project had considered that gas could be sold for an average of US$ 6.80 per thousand cubic feet. However, based on US Energy Information

Administration (http://www.eia.gov), it is expected that imports price as liquefied naturalgas for the next 25 years should follow the trend reflected on Figure 6.

Figure 6: Gas Prices trendsSource: U.S Energy Information Administration

Based on these data, gas price for sensitivity calculations will be set initially on 4$ plus andannual increase of 2% (See Figure 7).

0 $

1 $

2 $3 $

4 $

5 $

6 $

7 $

Year 1 Year 5 Year 9 Year 13 Year 17 Year 21 Year 25


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3.2. CAPITAL EXPENDITURE (CAPEX)

There are three main sources of capital expenditure in this project:

Onshore facilities constructionWells drilling and workover LNG system and vessel costs

Capital investment required has been estimated as $8.0 billion, which will be spent at

US$2 billion per year for 4 years. However, due to the current situation in Libya, initialestimations will be updated in a pessimistic way. In this sense, it is expected that at leastlocal suppliers, communications, and transportations would have been seriously affectedby the war. For this reason it will be considered the cost overruns an inflation ratesreflected in Table 6.

Year 1($ Mill.)

Year 2($ Mill.)

Year 3($ Mill.)

Year 4($ Mill.)

CostOverruns

InflationIncrease

Onshore facilities 1000 1000 1000 1000 25% 5%

Well drilling 500 500 500 500 25% 5%

LNG terminal/vessels 500 500 500 500 20% 5%Table 6: CAPEX

3.3. OPERATING COSTS (OPEX)

There are four major operational expenditures sources:

Onshore facilities operationsLNG terminal operationVessels operationPipeline operation

Due to the actual situation of the country after a civil war, initial estimations have beenupdated in a pessimistic way. For this reason it will be considered the cost overruns aninflation rates reflected in Table 7.

Years 5-25($ Mill )

CostOverruns

InflationIncrease


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3.4. PSC TERMS

The Basic features of production sharing contracts:

The title of the hydrocarbons remains with the state.The State maintains management control and the contractor is responsible for theexecution of petroleum operations in accordance to the terms of the contract.The contractor is required to submit annual work programs and budgets for scrutinyand approval the State Company.

The contract is based on production sharing and not profit-sharing basis.The contractor provides all financing and technology required for the operations andbore the risks.During the term of the contract, after allowance for up to a specified percentage of annual production for recovery of costs, the remaining production is split between thecontractor and State.Equipment purchased and imported by the contractor become property of the State.Service company equipment and leased equipment are exempt.(Tordo, 2007)

Basic terms that will be addressed within the PSC have been reflected in Table 8.

PSC Terms

Bonus (Signature, Production)RoyaltyCost RecoveryProfit AllocationProfit TaxAccounting StandardsForeign ExchangeExport RightsDuration of ContractRelinquishment

Table 8: PSC Terms

Depicts the distribution of how gross revenues are distributed from a barrel of oil under aPSC.


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3.4.1. Bonus

Bonus is a source of revenue for the host country. There are 3 main types:

Signature (one-time payment upon execution of PSC)Production (recurring payment)Discovery (payable after commercial discovery)

It has been considered that bonus payments could be a source of corruption, and because

of this only a minimum amount of money will be paid as signature bonus. However anadditional offer for developing local content will be included within the agreement todemonstrate commitment by Chevron.

Signature Bonus US$ 5 Mill.

3.4.2. Royalties

Royalties are taken right off the gross revenues. The royalty amount is subtracted from thegross revenues before the Cost Recovery Oil rate is applied. The Gross Profit Share isreduced by the amount of the Royalty.

It has been established a Royalty scale directly related to the gas production rate as maybe seen in Table 9.

Daily gasproduction rate

(mmscf/d)Royalty Rate

500 3.75%

1000 7.5%

1500 11.25%

2.000 15%

Over 5000 20%Table 9: Royalty Rate

450050005500

20%

25%


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3.4.3. Cost Recovery

Before sharing of production, the contractor is allowed to recover costs out of netrevenues. Cost recovery is the rate at which the contractor recovers its investment costs,and represents the percentage of revenues exempt from tax until costs have beenrecovered.

COST RECOVERY 90%

3.4.4. Profit Share/Profit Oil Split Revenues remaining after royalty and cost recovery are referred to as profit oil or profitgas. The contractor share of profit oil or gas is a specified percentage. In this sense, it hasbeen established a Profit Share scale directly related to the R-factor as may be seen inTable 10.

R-factor less than Local Company

share

Foreign Oil Company

share 1,0 10% 90% 1,5 10% 90%

2,0 10% 90%

2,5 10% 90%

over 2.5 10% 90% Table 10: Profit Oil Split

R-factor

R = Cumulative Receipts / Cumulative CostsReceipts = revenue from sale of gas/oilCosts = Capital Costs + interest + Operating Costs

Table 11: R- factor

3.4.5. Profit Tax

The contractor's share of profit oil and gas is subject to taxation. This Profit tax has beencharged at 25%, the same as for all other companies in Libya.


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3.4.7. Foreign Exchange

Costs and revenues in another currency will be translated at the exchange rate set on theday the cost is incurred or the revenue realised at a time and by a financial institutiondesignated by Chevron and approved by the Libya Government.

3.4.8. Export Rights

Chevron will have right to export any Marketable Gas Natural produced in the contractarea in the form of LNG.

3.4.9. Duration of Contract

The PSC will have a 25 years duration from the signature date to the assets being handedover to LNOC.

3.4.10. Relinquishment

Relinquishment of Development Area:

The twenty fifth (25 th) anniversary of the date on which the Development Plan inrespect of the Development Area was approved by the Libya Government.


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3.4.11. PSC Terms Resume Table

BASE CASE PSC TERMS

CONCEPT SUBTRACTEDFROM LINKED TO PROPOSED VALUE

BONUS - Local Content 5 Mill.

ROYALTIES GROSS REVENUE Gas Production Rate

Daily gasproduction

rate (mmscf/d)

Royalty Rate

500 3.75%1.000 7%1.500 11.25%2.000 15%5000 20%

COST RECOVERY NET REVENUE

(after royalties)

Investment

Recovering90%

CONTRACTORSSHARE PROFIT OIL PROFIT OIL R-Factor

R-factor less than

LocalCompany

share

ForeignOil

Companyshare

1,0 10% 90%1,5 10% 90%2,0 10% 90%2,5 10% 90%Over 2.5 10% 90%

PROFIT TAX CONTRACTORSSHARE PROFIT OIL - 25%

Table 12: Base Case PSC Terms

3.4.12. Base Case Financial Results ResumeSee Appendix 6 for further details about the Base Case Financial Results.

Economic Results Summaryfor Foreign Oil Company

SAHARA DESERT ONSHORE GAS FIELD


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Figure 10: Discounted Net Cash Flow Comparative

-2.500 $

-2.000 $

-1.500 $

-1.000 $

-500 $

0 $

500 $

1.000 $

1.500 $

2.000 $

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Discounted Net Cash Flow

Foreign Oil Company National Oil Company

-2.000 $

0 $

2.000 $

4.000 $

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Cumulative Discounted Cash Flow



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Before Investment has been recovered, revenues distribution will follow pattern reflected in

Figure 12.



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After Investment has been recovered, revenues distribution will follow pattern reflected in

Figure 13.



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4. SENSITIVITY ANALYSIS

Decisions on the design of an appropriate PSC framework can be supported by anunderstanding of how its various components influence decision making and outcomes.

DECISION MAKING TOOLS PSC COMPONENTS

Profit/Inv RatioIRRNPV

Gas PriceCAPEX (Onshore Facilities Construction)CAPEX (Wells Drilling & Workover)CAPEX (LNG Systems & Vessels)OPEX(Oil transp./Pipeline Tariff)OPEX(Platform)Royalty RateCost RecoveryContractors Share Profit OilProfit TaxSignature Bonus

To this end a simplified economic model including this components and decision makingtools was developed to design a suitable PSC framework for the development of thisproject. In particular, simulations were conducted to show the effect on project economicsof alternative PSC terms and their relative responsiveness to changes in economicconditions. (Rutledge, 2004).

(See further details and calculations in Appendix1).



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CHEVRON-LNOC COLLABORATION Rev: 14 Ref:O&G-CW

4.1. NPV SENSITIVITY DIAGRAM

Based on the tables included in Appendix1, it has been obtained the graph below showingthe sensitiveness of the different elements.

-3.000

-2.000

-1.000

0

1.000

2.000

3.000

4.000

5.000

6.000

50 40 30 20 10 0 -10 -20 -30 -40 -50

N P V ( U S $ M i l l

. )

CHEVRON NPV SENSITIVITY DIAGRAM



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This spider diagram (See Figure 14) represents the different sensitivity scenarios that were

developed to evaluate how the NPV under the PSC proposal varies with changes in thevarious economic parameters. This will also provide an in-depth understanding of thedifferent variables that significantly affect the reported NPV of US$ 687.88M.

Based on the diagram it may be concluded that variables which reflected the strongestrelationship with the NPV are:

Gas PriceContractors share profit oilCapex (Onshore Facilities construction)Cost Recovery

NPVVariation(%) NPV

Gas PriceVariation(%)

578,19% 4.665.093.460,38 50%

452,38% 3.799.703.056,18 40%

326,57% 2.934.312.651,97 30%

267,51% 2.528.004.733,57 20%

133,80% 1.608.263.477,88 10%

0,00% 687.878.476,45 0%

-93,12% 47.303.910,40 -10%

-234,52% -925.343.275,56 -20%

-350,23% -1.721.291.719,60 -30%

-541,99% -3.040.321.725,95 -40%

-685,19% -4.025.415.817,44 -50%

NPVVariation(%) NPV

Contractor Share PO

Variation(%)

78,83% 1.230.133.473,66 100,00% 687.878.476,45 0

-79,89% 138.320.287,28 -10

-160,55% -416.531.070,12 -20

-242,51% -980.316.337,29 -30

-326,22% -1.556.128.920,87 -40

-412,61% -2.150.402.430,51 -50

NPVVariation(%) NPV

Capex (OFC)Variation(%)

-173,39% -504.860.180,55 50%

-129,16% -200.568.340,98 40%

-84,92% 103.723.498,59 30%

-40,68% 408.015.338,17 20%

43 70% 387 271 477 01 10%

NPVVariation(%) NPV

CostRecovery

Variation(%)18,91% 817.965.836,76 10

0,00% 687.878.476,45 0

-19,38% 554.567.389,07 -10

-38,76% 421.256.301,70 -20



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It has also been calculated (for each variable) the maximum variation limit from which the

NPV will be minor than zero and therefore the project will become unattractive for Chevron. The results have been reflected in Table 15.

Contractual Element VariationLimitGas Price 10%

Contractors Share Profit oil 12%

Capex (OFC) 32%Cost Recovery 49%Table 15: NPV Variation Limits



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4.2. IRR SENSITIVITY DIAGRAM

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%21%

22%

23%

24%

25%

I n t e r n a

l R a

t e o

f R e

t u r n

( I R R )

CHEVRON IRR SENSITIVITY DIAGRAM

SAHARA DESERT ONSHORE GAS FIELDCHEVRON LNOC COLLABORATION


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The Internal Rate of Return is a widely used economic indicator that assesses the

performance and attractiveness of a project. Projects that return higher IRR are normallypreferred, thus a sensitivity analysis on the IRR with respect to this agreement wasconducted and the results were reflected on different tables (See Appendix 1).

The Spider diagram represents the different sensitivity scenarios that were developed(See Figure 15). Based on it, may be concluded that variables which reflected thestrongest relationship with the NPV were:

Gas PriceContractors share profit oilCapex (Onshore Facilities construction)

IRRVariation(%) IRR


41,03% 23,00% 50%

32,67% 21,64% 40%

24,02% 20,23% 30%

20,11% 19,59% 20%

10,28% 17,99% 10%

0,00% 16,31% 0%

-7,47% 15,09% -10%

-19,38% 13,15% -20%

-29,68% 11,47% -30%

-47,89% 8,50% -40%

-63,24% 6,00% -50%

IRRVariation(%) IRR

ContractorsShare PO

Variation(%)

5,79% 17,25% 100,00% 16,31% 0

-6,35% 15,27% -10

-13,32% 14,14% -20

-21,13% 12,86% -30

-30,04% 11,41% -40

-40,54% 9,70% -50

IRRVariation(%) IRR

Capex (OFC)Variation(%)

-13,08% 14,18% 50%-10,09% 14,66% 40%

-6,94% 15,18% 30%

-3,59% 15,72% 20%

3 65% 15 71% 10%

SAHARA DESERT ONSHORE GAS FIELDCHEVRON LNOC COLLABORATION


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It has also been calculated for each variable the maximum variation limit from which theIRR will be minor than 14% and therefore the project will be considered unattractive for Chevron. The results have been reflected in Table 17.


Contractors Share Profit oil 21%

Capex (Onshore Facilitiesconstruction) 49%Table 17: IRR Variation Limits



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4.3. PROFIT/INV RATIO SENSITIVITY DIAGRAM

0,00

0,50

1,00

1,50

2,00

2,50

3,00

50 40 30 20 10 0 -10 -20 -30 -40 -50

P r o

f i t / I n v . R

a t i o

Sensitivity Range %

CHEVRON PROFIT/INV RATIO SENSITIVITY DIAGRAM

GAS PRICE Profit/Inv Ratio



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CHEVRON LNOC COLLABORATION Rev: 14 Ref:O&G-CW

The Profit/Investment Ratio (PIR) is a useful tool for ranking projects because it allowsquantifying the amount of value created per unit of investment. Projects that return higher PIR are normally preferred, thus a sensitivity analysis on the PIR with respect to theChevron-LNOC Collaboration Project was conducted and the results were included in

Appendix 1.

The Spider diagram (Figure 16) represents the different sensitivity scenarios that weredeveloped. Based on it, may be concluded that variables which reflected the strongestrelationship with the PIR were:

Gas PriceContractors share profit oilOpex (Platform)

Profit/InvRatio

Variation(%)

Profit/InvRatio


67,26% 2,73 50%

53,04% 2,49 40%

38,82% 2,26 30%

28,98% 2,10 20%

14,11% 1,86 10%

0,00% 1,63 0%

-11,43% 1,44 -10%-26,38% 1,20 -20%

-38,68% 1,00 -30%

-57,39% 0,69 -40%

-71,82% 0,46 -50%

Profit/InvRatio

Variation(%)

Profit/InvRatio

ContractorsShare PO

Variation(%)11,88% 1,82 10

0,00% 1,63 0

-12,26% 1,43 -10

-24,33% 1,23 -20

-36,39% 1,04 -30

-48,46% 0,84 -40

-60,53% 0,64 -50

Profit/InvRatio

Variation(%)

Profit/Inv

Ratio

OPEX(Platform)

Variation(%)

-23,81% 1,24 50%

-19,72% 1,31 40%

-15,34% 1,38 30%

10 65% 1 46 20%



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It has also been calculated for each variable the maximum variation limit from which thePIR will be minor than 1.3 and therefore the project will be considered unattractive for Chevron. The results have been reflected in Table 19.

PIR Calculation Rules for selection/rejection of a project

If PI > 1 then accept the project If PI < 1 then reject the project

Table 19: PIR Acceptance Rules


Contractors Share Profit oil 16%OPEX (Platform) 39%

Table 20: PIR Variation Limits



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4.4. RESULTS INTERPRETATION

Based on the results of the sensitivity analysis it can be concluded that the elements whichmajorly affect to the economic feasibility of the project are:

Gas PriceContractors Share Profit oilCapex (OFC)OPEX (Platform)Cost Recovery

Furthermore, it has also been calculated the variation limits for each one of those elementsand it has been established a trigger value based on the effect over the financial toolsused in the assessment. (See table 21)

Contractual ElementVariation Limit Trigger

valueNPV IRR PIRGas Price 10% 15% 15% 10%

Contractors Share Profit oil 12% 21% 16% 12%Capex (OFC) 32% 49% - 32%

OPEX (Platform) - - 39% 39%Cost Recovery 49% - - 49%

Table 21: Variation Limits Resume

Gas Price

Contractor sShare Profit

Oil

OPEX(Platform)



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4.5. PSC NEGOTIATING POSITION DEFINITION

The PSC terms included within the Base Case should be modified after interpreting theresults obtained from the sensitivity analysis. In this regard the main elements affecting tothe feasibility of the project will be analysed in this section and different options will beproposed to minimize risks associated to them.

4.5.1. Gas Price

Gas Price affects dramatically to the profitability of the project, in this regard it would be

necessary to include clauses related to gas prices evolution to minimize its adverse effect.See Table 22 for strategy options.

LimitIncrease (%)

ContractualElements Strategy options

GasPrice 10%

Royalties Clauses linking Gas price decreases toreductions on Royalties Rate.

Profit Tax Clauses linking Gas price decreases toreductions on Profit Tax rates.

Length of the contract

Clauses affecting the length of the contract: itcould be increased by a period of 1-5 years torecover losses due to an unusual decrease of gas prices.

Operate the pipeline

Clauses giving the option to Chevron to operate

the pipeline to recover losses due to an unusualdecrease of gas prices.Table 22: Strategy Options (Gas Price)

4.5.2. Contractors Share Profit Oil

This element is also affecting enormously to the profitability of the project, in this regard itwould be necessary to negotiate this contractual element taking in account that onlycompensatory measures could balance changes upper 12% in this element.

See Table 23 for strategy options.

LimitIncrease (%)




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4.5.3. CAPEX (OFC)

Due to the current political situation in Libya it would be acceptable to include someclauses about extraordinary circumstances affecting to the normal construction anddevelopment of the facilities. In this regard Royalties and Profit tax could be includedwithin this agreement. See Table 24 for strategy options.

LimitIncrease (%)


CAPEX 32%

Royalties Clauses linking CAPEX extraordinaryincreases to reductions on Royalties Rate

Profit Tax Clauses linking CAPEX extraordinaryincreases to reductions on Royalties Rate

Length of thecontract

Clauses affecting the length of the contract (itcould be increased by a period of 1-5 years torecover losses due to an extraordinary

increase of CAPEX.

Operate the pipelineClauses giving the option to Chevron to operatethe pipeline to recover losses due to anextraordinary increase of CAPEX.

Table 24: Strategy Options (CAPEX)

4.5.4. OPEX ( Platform)

Operational cost can also affect to the success of the project, in this regard it has beenadded some options to include clauses in the contract. (See Table 25)

LimitIncrease (%)


OPEX 39%Royalties Clauses linking OPEX extraordinary increasesto reductions on Royalties Rate

Profit Tax Clauses linking OPEX extraordinary increasesto reductions on Royalties RateTable 25: Strategy Options (OPEX)

4.5.5. Cost Recovery



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5. ADDITIONAL OFFERINGS

With the aim of improving Chevrons offer, some additional activities will be included aspart of the agreement. These additional elements will consist of:

LOCAL CONTENT ACTIVITIES DETAILS

Workforce development: Employment of national, regional & local workforceTraining of national, regional & local workforce

Investments in supplier development Developing supplies and services locallyProcuring supplies and services locally

Community/Infrastructuredevelopment

Infrastructure developmentSupporting EducationHealth Programmes

Table 27: Local Content Activities(Source: www.ipieca.org)

Figure 18: Local Content(Adapted from TOTAL, 2010)

LOCALCONTENT

WORKFORCEDEVELOPMENT SUPPLIERDEVELOPMENT COMMUNITYDEVELOPMENT

EMPLOYMENT OFNATIONAL, REGIONAL& LOCAL WORKFORCE

TRAINING OFNATIONAL, REGIONAL& LOCAL WORKFORCE

DEVELOPING SUPPLIESAND SERVICES

LOCALLY

PROCURING SUPPLIESAND SERVICES

LOCALLY



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5.1. LOCAL WORKFORCE DEVELOPMENT (LWD)

Employing local staff is an established objective of Chevron. In this regard, a competencydevelopment system (See Figure 19) will be applied to ensure that local employees canperform effectively and safely in complex and hazardous environments. Further detailsabout this initiative have been included in Appendix 2.

Figure 19: Local Workforce Development

5.1.1. LWD Estimated Investment

Period Investment Sub totalYear 1 to 4 US$ 100;000/year US$ 400,000Year 5 to 10 US$ 150;000/year US$ 900;000Year 11-25 US$ 50;000/year US$ 750;000

Total US$ 2,050;000

5.2. SUPPLIER DEVELOPMENTTwo key strategies will be proposed to achieve local firms participation in the supplychain: the modification of procurement systems and the use of dedicated supplier or enterprise development programmes. Further details about this initiative have beenincluded in Appendix 3.



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5.3. COMMUNITY DEVELOPMENT

Improvement of education, health and infrastructures in Libya is a necessary foundationfor economic growth and development, and is critical to helping achieve the companysbusiness objectives as well. (Marathon Oil, 2012)

In this regard different programmes will be designed for repairing infrastructures damagedduring the war; in addition educational and health improvement initiatives will be alsodeveloped. Further details about these initiatives have been included in Appendix 4.

Figure 21:Community Development

5.3.1. Community Development Estimated Investment

Period Investment Sub total

SupportingEducation

Year 1 to 4 US$ 100;000/year US$ 400,000Year 5 to 10 US$ 100;000/year US$ 600;000Year 11-25 US$ 25;000/year US$ 375;000

US$ 1,375,000

HealthProgrammes

Year 1 to 4 US$ 100;000/year US$ 400,000

Year 5 to 10 US$ 100;000/year US$ 600;000Year 11-25 US$ 25;000/year US$ 375;000

US$ 1,375,000

InfrastructureDevelopment

Year 1 to 4 US$ 500;000/year US$ 2,000,000Year 5 to 10 US$ 200;000/year US$ 1,200;000Y 11 25 US$ 25 000/ US$ 375 000



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6. PIPELINE CONTRACT SELECTION

6.1. SCOPE OF THE CONTRACTBefore selecting the most suitable contract type, it must be analysed the different optionsof scope for the work to be undertaken by PIPECO.

DPC (Design, Procurement and Construction)DPCO (Design, Procurement, Construction and Operation)

Figure 22: Contract Scope Comparative

For doing this, both scope options will be compared on terms of the amount of estimated

profit associated to each one, as well as the percentage that this profit means to the totalprofit of the work.

6.1.1. Design, Procurement and Construction Contract

CONTRACT VALUE(US$ Mill)

TYPICAL PROFIT(US$ Mill)

DPB 225 28,125

DPBO 325 38,125

0

50

100

150200

250

300

350

U S

$ M i l l i o n s

CONTRACTS SCOPE COMPARISON


f


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Rev: 14 Ref:O&G-CW

Figure 23: DPC Option Contract Value Comparative

ENGENIERING &DESIGN

PROCUREMENT CONSTRUCTION

TYPICAL PROFIT 1,125 6,75 20,25

CONTRACT VALUE 22,5 67,5 135

0102030405060708090

100

110120130140150160170

U S $ M i l l i o n s

CONTRACT ELEMENTS COMPARISON

30%

40%

50%60%

70%

80%

10

15

20

25

% T o t a

l P r o

f i t

U S

$ M i l l i o n s

SAHARA DESERT ONSHORE GAS FIELDCHEVRON-LNOC COLLABORATION R 14 R f O&G CW


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6.1.2. Design, Procurement, Construction and Operation Contract

DPCOCONTRACT

VALUE(US$ Mill.)

TYPICALPROFIT(US$ Mill.)

% TOTALPROFIT

ENGENIERING &DESIGN 22,5 1,125 3%

PROCUREMENT 67,5 6,75 18%

CONSTRUCTION 135 20,25 53% OPERATION 100 10 26%

TOTAL 325 38,125 100% Table 29: DPCO Option

Figure 25: DPCO Option Contract Value Comparative

ENGENIERING &DESIGN

PROCUREMENT CONSTRUCTION OPERATION

TYPICAL PROFIT 1,125 6,75 20,25 10

CONTRACT VALUE 22,5 67,5 135 100

0102030

405060708090

100110120130140150160170

U S

$ M i l l i o n s

CONTRACT ELEMENTS COMPARISON

50%

60%

20

25

SAHARA DESERT ONSHORE GAS FIELDCHEVRON-LNOC COLLABORATION Rev: 14 Ref:O&G CW


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6.1.3. Scope Preferences:

Based on these figures it can be concluded that the key stage within the pipeline layingcontract (from an economic perspective) is the pipeline construction. Even if the scope of the work includes the operation phase, the higher percentage of the total estimated profitis obtained from this phase.

Furthermore it has also been noticed that adding an operation phase to the contract is notespecially profitable. The undertaking of this operation phase means a huge increase onthe investment for the project; however the perceptual profit increase is not at the samelevel. For this reason, adding to the contract this operations phase is a strategic decisionwhich can be linked to the final negotiation of the contract.

6.2. TYPES OF CONTRACTSThere are several possible types of contractual relationships which can be considered tohelp PIPECO to create an attractive proposal. For the purpose of this report it has beenconsidered the contract types included in Table 30.

TYPES OF CONTRACTS FFP Firm Fixed PriceFPE Fixed Price

FPRP Fixed PriceFPRR Fixed Price

FFPLOE Fixed Price

FPIF Fixed PriceFPAF Fixed PriceCR/CS Cost ReimbursableCPFF Cost Plus Fixed FeeCPAF Cost Plus Award FeeCPIF Cost Plus Incentive Fee

Time & Materials Time and MaterialsGainsharing Gainsharing Agreement

Equity Investment Equity Investment AgreementTable 30: Type of Contracts



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6.3. CONTRACTS COMPARATIVE

Before comparing the contracts, it must have been defined the main criteria affecting to thesuitability of the different types contracts.

To define which is the best type of contract, client and contractors perspectives must beassessed with the purpose of selecting a balanced contract acceptable from both parties.This approach will help to differentiate PIPECOs offer and will increase the likelihood of delivering the project for less than the budgeted cost and on schedule whilst making aprofit for PIPECO.

In this regard, the different criteria will be assessed using a 1 to 10 scale of suitability,furthermore each one has been weighted taken in account the perceived relativeimportance for the decision about the type of contract

CRITERIA DESCRIPTION WEIGHT

Exposure to cost risk(Contractors perspective)

Based on the allocation of cost risks in that type of contractfrom a contractors perspective 0.2

Exposure to cost risk(Clients perspective)

Based on the allocation of cost risks in that type of contractfrom a clients perspective 0.15

Likelihood of claims anddisputes

Based on the likelihood of claims and disputes associated tothat type of contract 0.1

Contract managementCosts

Based on the costs of managing and controlling the contract. 0.1

External Factors(Contractors perspective)

Associated to the level of suitability of the contract under conditions of lack of clear definition of the product/service toprovide, abundance of modifications, or other externalfactors affecting to the scope of the work.

0.2

Level of motivation tocontrol cost

Based on the level of motivation for the contractor to controlcost under that type of contractual relationship. 0.1

Financial benefits(Contractors perspective)

Based on the financial benefits associated to the type of contract and related to the payment structure and thereforeto the amount of financing necessary for the project.

0.1

Commitment/Collaboration Based on the type of relationship associated to the contractin terms of length and collaboration necessities. 0.05

Table 31: Contract Selection Criteria



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6.3.1. Engineering & Design Phase

Basing on the selection criteria included in Table 31, an assessment has been undertakento determine which type of contract would fit better for this stage. The results of theassessment have been reflected in Table 32.

CONTRACT SELECTION MATRIX

T Y P E O F C O N T R A C T

C o

n t r a c t o r

R i s k E x p o s u r e

C l i e n t


D i s p u

t e s

L i k e l i h o o

d

C o n

t r a c

t M a n a g e m e n

t C o s t s

E x t e r n a

l F a c

t o r s

M o t

i v a t

i o n

t o C o s

t C o n

t r o l

F i n a n c i a l

B e n e f

i t s

C o m m

i t m e n

t / C o l

l a b o r a

t i o n s

W E I G H T E D T O T A L

Weight20% 15% 10% 10% 20% 10% 10% 5%

FFP 1 10 8 10 2 10 1 3 5,15

FPE 2 8 8 7 4 9 2 3 5,15

FPRP 3 6 6 7 5 9 2 4 5,10

FPRR 3 6 6 7 5 9 2 4 5,10

FFPLOE 3 6 6 6 3 9 2 5 4,65

FPIF 3 7 6 6 3 9 3 5 4,90

FPAF 2 6 6 6 3 9 3 4 4,50

CR/CS 7 1 3 1 8 2 7 3 4,60

CPFF 7 2 4 2 7 4 7 3 4,95

CPAF 7 2 4 2 6 5 7 4 4,90

CPIF 6 3 5 2 6 5 7 5 5,00

Time & Materials 7 4 7 4 5 5 5 4 5,30

Gainsharing 5 5 6 3 6 5 5 6 5,15



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6.3.2. Procurement

Taking in account the different criteria included in Table 31, an assessment has beenundertaken to determine which type of contract would fit better for the procurement phaseof the pipeline execution project. The results of the assessment have been reflected inTable 33.



C o n

t r a c

t o r


C l i e n t


D i s p u

t e s

L i k e l i h o o

d

C o n t r a c t

M a n a g e m e n

t C o s t s

E x t e r n a

l F a c

t o r s

M o t

i v a t

i o n

t o C o s

t C o n t r o

l

F i n a n c i a l

B e n e f

i t s

C o m m

i t m e n

t / C o l

l a b o r a

t i o n s


Weight20% 15% 10% 10% 20% 10% 10% 5%

FFP 1 10 8 10 2 10 3 3 5,35

FPE 2 8 8 7 4 9 3 3 5,25

FPRP 3 6 6 7 5 9 3 4 5,20

FPRR 3 6 6 7 5 9 3 4 5,20

FFPLOE 3 6 6 6 3 9 3 5 4,75

FPIF 3 7 6 6 3 9 3 5 4,90

FPAF 2 6 6 6 3 9 3 4 4,50

CR/CS 8 1 3 1 8 2 7 3 4,80

CPFF 8 2 4 2 7 4 7 3 5,15

CPAF 8 2 4 2 6 5 7 4 5,10

CPIF 7 3 5 2 6 5 7 5 5,20

Time & Materials 7 4 7 4 5 5 5 4 5,30

Gainsharing 5 5 7 3 6 5 5 6 5,25



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6.3.3. Construction

Basing on the criteria included in Table 31, an assessment has been undertaken todetermine which type of contract would fit better for the construction phase of the pipelineexecution project. The results of the assessment have been reflected in Table 34.



C o n t r a c t o r


C l i e n

t R i s k E x p o s u r e

D i s p u t e s

L i k e l

i h o o d

C o n

t r a c

t M a n a g e m e n

t C o s

t s

E x t e r n a

l F a c

t o r s

M o t i v a t

i o n

t o C o s

t C o n t r o l

F i n a n c i a l

B e n e f

i t s

C o m m

i t m e n

t / C o l

l a b o r a

t i o n s

W E I G

H T E D T O T A L

Weight20% 15% 10% 10% 20% 10% 10% 5%

FFP 1 9 7 9 2 9 2 3 4,80

FPE 2 8 8 7 4 8 2 3 5,05

FPRP 3 6 6 7 5 8 2 4 5,00

FPRR 3 6 6 7 5 8 2 4 5,00

FFPLOE 3 6 6 6 3 8 2 5 4,55

FPIF 3 7 6 6 3 8 3 5 4,80

FPAF 2 6 6 6 3 9 3 4 4,50

CR/CS 8 1 3 1 8 2 7 3 4,80

CPFF 8 2 4 2 7 4 7 3 5,15CPAF 8 2 4 2 6 5 7 4 5,10

CPIF 7 3 5 2 6 5 7 5 5,20

Time & Materials 7 4 7 4 5 5 5 4 5,30



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6.3.4. Operation

Basing on the criteria included in Table 31, an assessment has been undertaken todetermine which type of contract would fit better for the operation phase of the pipelineexecution project. The results of the assessment have been reflected in Table 35.



C o n

t r a c

t o r


C l i e n t


D i s p u

t e s

L i k e l i h o o

d

C o n t r a c t

M a n a g e m e n

t C o s t s

E x t e r n a

l F a c

t o r s

M o t

i v a t

i o n

t o C o s

t C o n t r o

l

F i n a n c i a l

B e n e f

i t s

C o m m

i t m e n

t / C o l

l a b o r a

t i o

n s


Weight20% 15% 10% 10% 20% 10% 10% 5%

FFP 1 9 6 8 2 8 2 3 4,50

FPE 2 8 8 7 4 8 2 3 5,05

FPRP 3 6 6 7 5 8 2 4 5,00

FPRR 3 6 6 7 5 8 2 4 5,00

FFPLOE 3 6 6 6 3 8 2 5 4,55

FPIF 3 7 6 6 3 8 3 5 4,80

FPAF 2 6 6 6 3 9 3 4 4,50

CR/CS 8 1 3 1 8 2 7 3 4,80

CPFF 8 2 4 2 7 4 7 3 5,15

CPAF 8 2 4 2 6 5 7 4 5,10

CPIF 7 3 5 2 6 5 7 5 5,20

Time & Materials 7 4 7 4 5 5 5 4 5,30

Gainsharing 7 5 7 4 6 5 6 6 5,85



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6.4. CONTRACT TYPE RECOMMENDATION

6.4.1. Engineering & Design

CONTRACT TYPE RECOMMENDATION

CONTRACTELEMENT ENGINEERING & DESIGN

TYPE OFCONTRACT

Time & Materials (See Appendix 5 for further details about this type of contract)

JUSTIFICATIONFOR PROPOSSAL

The client might prefer a fixed price contract for this phase. However, a fixedprice contract could be an issue when the contractor and client do not cometo a detailed agreement on what the work will include. PIPECO might beasked to put in many more hours of work without compensation, or the clientmight feel that he has overpaid for the work. For these reasons, in this case

a T&M contract should fit for purpose.

DISADVANTAGESThe disadvantages could come if PIPECO charge too many hours andexceeds the client's budget. This could cause friction between the two if thebudget runs out before the contract is completed.

EXPECTEDADVANTAGES

With this type of contract, PIPECO is ensured of being paid for his time,regardless of how long the Engineering & Design phase takes.The client has the freedom to change the specifications of the project, or to add new components, as it is understood that such changes will incur more time on the project, and hence a higher invoice.

6.4.2. Procurement


CONTRACTELEMENT PROCUREMENT

TYPE OF Firm Fixed Price (FFP) (See Appendix 5 for further details about this type of



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6.4.3. Construction


CONTRACTELEMENT CONSTRUCTION

TYPE OFCONTRACT

Gainsharing agreement * (See Appendix 5 for further details)The proposal will include a both parties agreed budget for the constructionphase of the project. Furthermore, if the project cost is lower than theagreed target, then the contractor will receive 50% of the savings as areward. On the other hand, if the project cost is higher than the agreedtarget, then the contractor will assume 15% of the cost over-run as apenalty.

JUSTIFICATIONFOR PROPOSSAL

The parties cannot accurately or estimate the costs of the contract, at thetime of contracting.

DISADVANTAGES If the initial estimations for the budget are not accurate, it could meanlosses.

EXPECTEDADVANTAGES

Sharing of the risksEnhance involvement and collaboration of Chevron during theconstruction of the pipeline. This could mean technical support, but alsoexternal stakeholders (government) management support.There is a good possibility to increase benefits by reducing theestimated budged.

6.4.4. Operation


CONTRACTELEMENT OPERATION

TYPE OFCONTRACT

Equity Investment Agreement (See Appendix 5 for further details about thistype of contract)



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7. CONCLUSIONS

After the analysis of the different terms included within the PSC, it has been concludedthat Gas price and Contractor Share Profit Oil are the most sensible components includedin it, and therefore need to be properly addressed in order to ensure the feasibility of theproject.

In this regard, Gas price is a variable which cannot be controlled exclusively from aninternal perspective, because international markets and energy trends will influence itsevolution; however it should be considered within the negotiation process as an elementthat should be related to the taxation of the revenues to minimize exposures. In the sameway it should be managed the Contractor SPO, maximising Chevrons take of therevenues till recovering of the investment.

Furthermore, it has been also noticed that the Payback Period of the project (under theconditions of the Base Case) is much longer that it would be desirable (almost 18 years).For this reason measures to decrease this period should be envisaged within the

contractual terms of the PSC.

In addition, it can be concluded that Local Content Initiatives may be an important way of increasing attractiveness of chevrons offer, demonstrating commitment to theGovernment and increasing Chevrons reputation.

Finally, it is considered that PIPECOs pipeline contract should seek to balance the risksallocation between the contractor and the client, providing the most suitable contractualrelationship during each one of the stages of the project and in this regard it is believedthat a combination of contracts would be the best option for the success of the project.

8. RECOMENDATIONS

Values considered for the Base Case could be more exactly calculated by using a 3points estimating methodology which would provide better estimations by adding

pessimistic and optimistic considerations to the expected scenario.Options outlined to link the evolution of some of the contractual elements includedwithin the PSC to the taxation should be deeply assessed to clearly define the effectson both Chevron and Libyan Government before using them in the negotiation process.



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9. REFERENCES

1. Center for Energy Economics. (2012). Fiscal Terms for Upstream Projects. Available:http://www.beg.utexas.edu/energyecon/. Last accessed 12th March 2012.

2. Silvana Tordo (2007). Fiscal Systems for Hydrocarbons. Washington (USA): The WorldBank. 23-78.

3. Manuel, K. M. & Maskell, J. (2012). Insourcing functions performed by federalcontractors: An overview of the legal issues. Washington, DC: Congressional ResearchService. 13-72

4. U.S Energy Information Administration (2011). Annual Energy Outlook 2011. USA: U.SEnergy Information Administration. 12-86.

5. U.S Energy Information Administration. (2011). Natural Gas Prices. Available:http://www.eia.gov/dnav/ng/ng_pri_sum_dcu_nus_m.htm. Last accessed 12th May

2012.

6. Kirsten Binderman (1999). Production-Sharing Agreement: An Economic Analysis. UK:Oxford Institute for Energy Studies. 14-63.

7. Dr Ian Rutledge (2004). The Sakhalin II PSA. UK: Sheffield Energy & ResourcesInformation Services (SERIS). 7-33.

8. Marathon Oil. (2012). Social Responsibility. Available: 3.http://www.marathonoil.com/Social_Responsibility/. Last accessed 19th April 2012.

9. Total. (2010). 2010 CSR Report. Available:http://www.uk.total.com/environment/documents/FinalPDF-2010CSRReport.pdf. Lastaccessed 3th March 2012.

10. Shell. (2012). Shell in the society/social investment. Available:http://www.shell.co.uk/home/content/gbr/environment_society/shell_in_the_society/social_investment/. Last accessed 4th April 2012.

11. ExxonMobil. (2011). 2010 Corporate Citizenship Report. Available:



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14. Lt Colonel Stephen B. Leisenring (2004). Department of Defence Contracting:Considerations for Selecting Contract Type. Pennsylvania: U.S Army War College. 2-35.

15. Peter W. G. Morris, Jeffrey K. Pinto (2007). The Wiley Guide to Project Management,Supply Chain and Procurement Management. New Jersey (USA): John Wiley & Sons.317-344.

16. The global oil and gas industry association for environmental and social issues. (2012).Social responsibility. Available: http://www.ipieca.org/focus-area/social-responsibility.Last accessed 19th April 2012.

10. BIBLIOGRAFY

1. R.K. Corrie (1991). Project Evaluation. London: Thomas Telford Ltd. 21-47.

2. Ernst & Young (2011). Turn risks and opportunities into results. USA: EYGM limited. 8-46.

3. Ernst & young (2011). Capital project life cycle management for oil and gas. USA:EYGM Limited. 1-16.

4. International Energy Agency (2010). Natural gas information 2010. Paris: CORLET. 11-194.

5. Ernst & Young (2011). Navigating joint ventures in the oil and gas industry. USA:EYGM limited. 1-20.

6. Natural Resources Canada. (2011). Long Term Outlook: Crude Oil Prices 2030. Available: http://www.nrcan.gc.ca/energy/publications/sources/crude/issues-prices/1329. Last accessed 23th Sept 2011.

7. Al-Subhi Al-Harbi, K. M. 1998. Sharing fractions in cost-plus-incentive-fee contracts,International Journal of Project Management 5(4):231236.

8. The Office of Government Commerce (OGC). (2006). Risk Allocation Model for Project



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11. APPENDICES

APPENDIX 1: SENSITIVITY ANALYSIS CALCULATIONS APPENDIX 2: LOCAL WORKFORCE DEVELOPMENT APPENDIX 3: SUPPLIER DEVELOPMENT APPENDIX 4: COMMUNITY DEVELOPMENT APPENDIX 5: CONTRACT TYPES APPENDIX 6: BASE CASE FINANCIAL RESULTS RESUME APPENDIX 7: CONTRACT TYPES TREE



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11.1. APPENDIX 1: SENSITIVITY ANALYSIS CALCULATIONS

GAS PRICEProfit/Inv

Ratio IRR NPVSensitivityRange (%)

2,73 23,00% 4.665.093.460,38 50

2,49 21,64% 3.799.703.056,18 40

2,26 20,23% 2.934.312.651,97 30

2,10 19,59% 2.528.004.733,57 20

1,86 17,99% 1.608.263.477,88 101,63 16,31% 687.878.476,45 0

1,44 15,09% 47.303.910,40 -10

1,20 13,15% -925.343.275,56 -20

1,00 11,47% -1.721.291.719,60 -30

0,69 8,50% -3.040.321.725,95 -40

0,46 6,00% -4.025.415.817,44 -50

CAPEX (Onshore Facilities Construction)Profit/Inv

Ratio IRR NPVSensitivityRange (%)

1,45 14,18% -504.860.180,55 50

1,50 14,66% -200.568.340,98 40

1,54 15,18% 103.723.498,59 30

1,59 15,72% 408.015.338,17 20

1,58 15,71% 387.271.477,01 101,63 16,31% 687.878.476,45 0

1,68 16,94% 987.013.529,81 -10

1,73 17,62% 1.286.148.583,17 -20

1,79 18,34% 1.585.283.636,52 -30

1,85 19,12% 1.884.418.689,88 -40

1,91 19,96% 2.182.912.354,76 -50

CAPEX (Wells Drilling & Workover)

Profit/InvRatio IRR NPV

SensitivityRange (%)

1,56 15,45% 255.869.418,38 50

1,59 15,72% 408.015.338,17 40

1,61 16,01% 560.161.257,95 30

1,58 15,71% 387.271.477,01 201,60 16,01% 538.218.144,18 10

1,63 16,31% 687.878.476,45 0

1,65 16,62% 837.446.003,13 -10

1,68 16,94% 987.013.529,81 -20

1,71 17,27% 1.136.581.056,49 -30

1,73 17,62% 1.286.148.583,17 -40

1,76 17,97% 1.435.716.109,84 -50

CAPEX (LNG Systems & Vessels)



1,56 15,45% 255.869.418,38 50

1,59 15,72% 408.015.338,17 40

1,61 16,01% 560.161.257,95 30

1,58 15,71% 387.271.477,01 201,60 16,01% 538.218.144,18 10

1,63 16,31% 687.878.476,45 0

1,65 16,62% 837.446.003,13 -10

1,68 16,94% 987.013.529,81 -20

1,71 17,27% 1.136.581.056,49 -30

1,73 17,62% 1.286.148.583,17 -40

1,76 17,97% 1.435.716.109,84 -50

OPEX(Oil transp./Pipeline Tariff)



OPEX(Platform)





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ROYALTY RATE



1,45 15,40% 203.125.525,41 50

1,49 15,59% 300.333.382,60 40

1,52 15,77% 397.541.239,79 30

1,56 15,95% 494.749.096,98 20

1,59 16,13% 591.956.954,17 10

1,63 16,31% 687.878.476,45 0

1,66 16,48% 783.570.534,78 -10

1,70 16,65% 879.262.593,11 -20

1,73 16,82% 974.954.651,44 -30

1,77 16,98% 1.070.646.709,77 -40

1,80 17,15% 1.166.338.768,10 -50

COST RECOVERY



- - - 50

- - - 40

- - - 30

- - - 20

1,65 16,56% 817.965.836,76 10

1,63 16,31% 687.878.476,45 0

1,61 16,05% 554.567.389,07 -10

1,59 15,80% 421.256.301,70 -20

1,57 15,55% 287.604.227,76 -30

1,55 15,28% 149.106.569,11 -40

1,53 15,02% 10.608.910,46 -50

CONTRACTORS SHARE PROFIT OIL



- - - 50

- - - 40

- - - 30

- - - 20

1,82 17,25% 1.230.133.473,66 10

1,63 16,31% 687.878.476,45 0

1,43 15,27% 138.320.287,28 -10

1,23 14,14% -416.531.070,12 -20

1,04 12,86% -980.316.337,29 -30

0,84 11,41% -1.556.128.920,87 -40

0,64 9,70% -2.150.402.430,51 -50

PROFIT TAX



1,42 15,70% 348.069.029,90 50

1,46 15,82% 416.030.919,21 40

1,51 15,95% 483.992.808,52 30

1,55 16,07% 551.954.697,83 20

1,59 16,19% 619.916.587,14 10

1,63 16,31% 687.878.476,45 0

1,67 16,42% 755.840.365,76 -10

1,71 16,54% 823.802.255,07 -20

1,75 16,65% 891.764.144,38 -30

1,79 16,76% 959.726.033,69 -40

1,83 16,87% 1.027.687.923,00 -50

SIGNATURE BONUS





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11.2. APPENDIX 2: LOCAL WORKFORCE DEVELOPMENT

LOCAL WORKFORCE DEVELOPMENT

Activities

Employment policies:

A policy on local employment to help neighbouring communities tounderstand the companys commitment to the available workforce.Recruitment will be used to promote participation of specific groups (women,indigenous people and workers from specific geographical areas or ethnicbackgrounds). (Marathon, 2012)

Training and skills development:

Training and skills development elements to help local populations achievethe minimum standards required by the company (either in terms of generaleducation or specialist skills).

Accelerated staff progression:

Progress of local staff will be encouraged by tailoring training programmes totheir development.

Education and training Institutions:

Investment in local education and training institutions. This approach willreduce the requirement to provide basic training internally.

Construction phase employment:

Local employment in construction phase can be maximized through: Early identification of skill requirements Procurement process Information on future contracts

Attractiveness

Eliminate barriers to local participation could promote the companys long-

term reputation as a good corporate citizen.Increasing access to (and development of) new staff resources, amelioratingthe growing global issues of the aging workforce within the oil and gasindustry and a gradual shrinking of the pool of technically capable, skilledresources. (Total, 2010)Providing important input into the design of effective stakeholder



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11.3. APPENDIX 3: SUPPLIER DEVELOPMENT

SUPPLIER DEVELOPMENT

Activities

Procurement policyCorporate policy on supplier development can greatly enhance theeffectiveness of local procurement initiatives.

Modifying procurement strategies and systemsDirect procurement: This refers to goods and services procured by the oil andgas company itself.Indirect procurement: Chevrons procurement system will provide incentivesto contractors to engage local enterprises.

(IPIECA, 2012)

Attractiveness

Supporting local economic development by engaging local enterprises in thesupply chain can lead to:

Maximizing opportunities for achieving higher levels of reliability and qualitythrough local supplier proximity.Maximizing opportunities for lower costs on some locally-procured goods andservices (mainly in the longer term).Increased local and national commitment to the project.Closer business alignment with government goals for development and localcapacity building.It can also reduce project risk and enhance a companys reputation with localstakeholders.(Shell, 2012)

Estimated cost

Period Investment Sub totalYear 1 to 4 US$ 150;000/year US$ 600,000Year 5 to 10 US$ 100;000/year US$ 600;000Year 11-25 US$ 25;000/year US$ 375;000

Total US$ 1,575;000



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11.4. APPENDIX 4: COMMUNITY DEVELOPMENT

COMMUNITY DEVELOPMENT

SupportingEducation

Fund projects that construct and rehabilitate schools and make them safer.Provide teacher education and training.Offer adult literacy and vocational education for girls and women.

HealthProgrammes

Providing assistance to improve medical care for children affected by therecent war and their families.Providing better working conditions for doctors and researchers.


Repair infrastructures damaged by the war with special attention to improveroads conditions in the areas of our operations.

Attractiveness

Government relationship:

Contributing to the stability of the business environment;Meeting legislative requirements;Meeting expectations of host governments (driven in many instances by theexpectations of local communities and business) for local economic andsocial benefits of oil and gas developments.Increasing the likelihood of competitive differentiation in biddingrounds/negotiations with host governments and government authorities

Reputation:

Delivering sustainability and corporate responsibility objectives, andmaximizing the impact of community investment resources.

Estimated

cost

Period Investment Sub total

SupportingEducation


US$ 1,375,000

Health

Programmes


US$ 1,375,000


Year 1 to 4 US$ 500;000/year US$ 2,000,000Year 5 to 10 US$ 200;000/year US$ 1,200;000Year 11 25 US$ 25;000/year US$ 375;000



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11.5. APPENDIX 5: CONTRACT TYPESThe choice of contract type is one of the most significant strategic decisions, since itdetermines how the supplier is paid and how risk is allocated between the parties. As ageneral principle, contract type should aim to give the maximum likelihood of attaining theobjectives of a project; they should be regarded as a means to an end. (Manuel & Maskell,2012).

11.5.1. Fixed Price

Under this type of contracts the supplier is paid a fixed price or lump sum (a singletendered price) for the entire project. The terms fixed or firm usually indicate that thecontract price will not be subject to escalation payments, whereas lump-sum contractsmay. Additionally, fixed and firm contracts generally may not include variation clauses.However, the terms fixed and firm have no precise meaning. The payment terms includedwithin a specific contract are the key factor. (Morris & Pinto, 2007)

The risk associated with these contracts is primarily assumed by the contractor. These

contracts provide a positive profit incentive to the contractor for cost control and labor efficiency. From the purchasers perspective, the major limitation of a price-based contractis that it establishes a relatively inflexible contract structure.

Contract types in this category include:

FIXED PRICE CONTRACTS

Firm-fixed Price (FFP)Fixed-price economic price adjustment (FPE)Fixed-price contract with prospective priceredetermination (FPRP)Fixed-ceiling-price contract with retroactive priceredetermination (FPRR)Firm fixed-price level of effort term contract(FFPLOE)

Table 36: Fixed Price Contracts

Fixed-price contracts are generally favored by purchasers because the contractor assumes the risk of increases in performance costs. Purchasers liability is typically limitedto the contract price, so long as the contract does not have a price adjustment clause and



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TYPE DESCRIPTION

Firm-fixed-priceContracts(FFP)

Contractor agrees to provide supplies or services to the procuringactivity for a specified price

Fixed-price contracts witheconomic price adjustments

(FPE)

Contractor agrees to provide supplies or services to the procuringactivity for a specified price that could be adjusted if certaineconomic conditions change during performance of the contract

Fixed-price contract with

prospective priceredetermination(FPRP)

Contractor receives a firm fixed price for a specified initial periodof performance, with the price for later periods revised in anequitable manner based on variables agreed upon by the partiesb

Fixed-ceilingprice contractswith retroactive price

redetermination(FPRR)

Contractor receives no more than a fixed ceiling price that wasagreed upon when the contract was formed; determination of actual price occurs after the contract is performed based onvariables previously agreed upon

Firm-fixed-price, level-of-effort term contracts(FFPLOE)

Contractor receives a fixed amount for providing a certain level of effort over a certain period of time on work that can only bestated in general terms

Table 37: Fixed Price Contracts Description(Source:U.S Army War College)

Regardless of the type of fixed-price contract used, the purchaser runs the risk of overpaying for goods and services, especially if it overestimates its requirements. With

firm-fixed-price contracts, in particular, the purchaser could also:Pay higher prices than would have been paid under cost-reimbursement contracts.Have to convert the contract to another type to obtain completion of performance.Defend lawsuits filed by contractors attempting to recover increases in performancecosts by alleging that the purchaser constructively modified the contract.

Similarly, with fixed-price contracts with economic price adjustment clauses, the purchaser could be vulnerable to significant and unanticipated price increases, especially if theclauses do not adequately protect the purchasers interests. However, refusal to useeconomic price adjustment clauses where significant economic fluctuations are possiblecould result in the purchaser paying higher prices because fewer contractors will competefor such contracts (Leisenring 2004)


11 5 2 C R i b C


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11.5.2. Cost-Reimbursement Contracts

The various cost-reimbursement contracts, described in Table 38, provide for thepurchaser to pay the contractor, at a minimum, allowable costs incurred in performing thecontract up to a total cost specified in the contract. As used here, costs do notnecessarily include all expenses that the contractor incurred in performing the contract.Rather, costs are expenses that are allocable to the contract and re

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