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Page 1: 3. oil and regularity regime.ppt

Petroleum Regulatory Framework

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Petroleum Regime Framework

PETROLEUM LAWS/ REGULATIONS

CONSTITUTION

E & P BUSINESS REGIMES

Legislative/

Regulatory

CONCESSION

JOINT VENTURE SERVICE CONTRACT HYBRID PSC

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Global Energy Resources Management Structure

More countries adopting the "separation of roles“ for Resource

Management

Ministry Regulator

NOC/IOC/ JV

Policy Regulations

Business

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Pillars of Oil & Gas Regulatory Regimes

A good Oil & Gas Regulatory Regime addresses certain major regulatory issues in a satisfactory way:

• The Right to Monetize Resources

• Fiscal and Contract Stability

• Enforceability of Contract

A regulatory regime that fails on any one of these points puts its “investment favorability” at risk

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Country’s Objectives for Petroleum Development

Economic Agenda

• Accelerate exploration & exploitation of petroleum resources

• Invite Investments in E & P Sector

• Generate revenues from taxes and “take”

• Obtain technology transfer & “Know-how”

• Stimulate competition in the E & P sector

• Create employment and materials preference

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Country’s Objectives for Petroleum Development

Political & Social Agenda

• Make NOCs competitive by providing a level playing field

• Respond to the Interests of Local Populations

• Protect & Preserve the Environment

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Measures to promote Exploration

• No Signature Bonuses

• No high rentals during exploration

• Reasonable taxation & royalties

• 100% Cost Recovery for exploration & development

• High Cost Recovery Limit

• Import duty exemption for exploration and development

• Assured Contract validity

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Approaches to Resource Exploitation

• Many developed countries use unilateral licensing/leasing approach

• Many developing countries use consensual approach and prefer mining agreements

• Political will of host country to develop resources is key and expressed through regulatory instruments, contractual obligations, national policies and guidelines

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A Comparative Study

Types of Agreements

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Types of Agreements

Concessions

Joint Ventures

Service Contracts

Production Sharing Contracts/Risk Sharing

Contracts

Hybrids

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Concession

• Contractor has exclusive rights to explore, develop, sell, and export oil/gas from a specified area for a fixed period of time

• “Equity” or “Royalty & Tax” structure

• Maximum control to Contractor

• Oldest & most widely used

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Joint Venture

• Private/Foreign Companies and NOC form a Joint Venture

• Each JV partner pays/receives its share in proportion to its Participating Interest.

• JV pays royalty, income tax and usually some form of Petroleum Revenue Tax (PRT)

• Low success rate, less commonly used

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Service Contract

• Contractor pays all exploration and development costs

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

• Government maintains ownership and title of minerals

• Most suitable for Contractor for risk-free operations and for States having Producing Assets

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Hybrids• Combinations of Concession/JV/PSC,

royalty, tax, cost oil/profit oil shares and fees etc.

• Efforts to develop a world model Hybrid agreement have been unsuccessful because structures are becoming more diverse

• Host governments seeking structures that suit their particular needs

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Production Sharing Contract• State enters into a PSC with Contractor for a

specified period

• Contractor finances exploration and development

• If successful, Contractor will recover its costs and earn a profit by receiving a share of production

• Royalty & Income Tax are paid as applicable

• Significant control to Contractors, but State has contractual controls

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Comparative Analysis of Agreements

16

TYPE OF AGREEMENTS

CONTRACTOR GOVERNMENT

CONCESSION

ALL RISK

ALL REWARD

REWARD IS A FUNCTION OF PRODUCTION & PRICE

JOINT VENTURE

SHARE IN RISK & REWARD

SHARE IN RISK & REWARD

SERVICE CONTRACT NO RISK ALL RISK

ALL REWARD

HYBRID MIXED MIXED

PSC EXPLORATION RISK

SHARE IN REWARD

SHARE IN REWARD

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Comparative Analysis of Agreements

17

TYPE OF AGREEMENTS

EXCLUSIVE RIGHTS TO EXPLORE AND PRODUCE

OWNERSHIP OF PRODUCTION

CONCESSION

OPERATING COMPANY OPERATING COMPANY

JOINT VENTURE

SHARED SHARED

SERVICE CONTRACT STATE THROUGH SERVICE COMPANY

STATE

HYBRID MIXED MIXED

PSC OPERATING COMPANY

STATE

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Usage of Contract Types

TYPE OF AGREEMENTS NUMBER OF COUNTRIES UTILIZING THIS TYPE

CONCESSION

59

JOINT VENTURE 31

SERVICE CONTRACT 3

HYBRID 16

PSC 40

Source: CWC Workshop, 2008

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Countries and Agreement Types

TYPE OF AGREEMENTS

COUNTRIES UTILIZING

CONCESSIONS (59)

UK, US , Norway, Australia, Canada, Peru, Namibia, Thailand, Sudan, Ecuador, Kuwait, Bahamas

JOINT VENTURES (31) Colombia, Cameroon, Netherlands, Pakistan

PSC (40) Egypt, Yemen, Angola, Indonesia, India, Bangladesh, Guatemala, Sri Lanka

SERVICE CONTRACTS (3)

Iran , Mexico & Oman

HYBRID (16) Libya, China, Malaysia, Kenya, Tanzania, Gabon, Myanmar

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Concession Agreements

ADVANTAGES DISADVANTAGES

If production occurs, government earns royalties and/or profit tax. Both are based on the quantity produced and the price at which commodity is sold

Government may not realize full potential through possible extensive exploration

Successful bidder pays bidder price (usually license fee and/or signature bonus)

Companies will be cautious in bidding for uncertain returns in virgin/non-proven areas. Not suitable for countries seeking extensive exploratory inputs through bidding systems

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Joint Venture Agreements

ADVANTAGES DISADVANTAGES

Government is not alone in the decision-making and responsibility for a project

Risks and costs are also shared. Country needs to share Risk Capital. Not suitable for countries needing huge investment on exploration

Government can count on expertise of oil company

Responsibility also brings with it potential liability such as for environmental damage

Government shares profit, on top of taxes or royalties

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Service Agreements

ADVANTAGES DISADVANTAGES

Payment is made for services at pre-determined rate

Suitable for Producing Assets. Not much relevant for exploration

Most energy companies reluctant to sell services and technology for a Turnkey Contract as earning is more limited

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Hybrid Agreements

ADVANTAGES DISADVANTAGES

Incorporates the best of Concession, JV, PSC, Royalty & Taxes

Diverse & Complex structures of Model. Difficult to estimate optimal Govt./Contractor’s takes & achieve equilibrium for a win-win situation for both parties

Requires expertise and negotiation skills

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Production Sharing Contracts

ADVANTAGES DISADVANTAGES

It is considered the most attractive investment model for inviting Risk Capital and has been successful in attracting foreign/private investment to get unexplored areas explored at no cost to the government

Rigidity with regard to contractual provisions throughout the contract period.

No flexibility for adjusting to unplanned situations.

Contractor enjoys considerable autonomy in running the exploration and production operations & leaves no stone unturned to ensure exploration success in order to be entitled for “ Cost Recovery”

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Production Sharing Contracts

ADVANTAGES DISADVANTAGES

Allows for the recovery of invested sunk cost by the Contractors only in case of successful ventures.

Government shares potential profits without having to make a direct investment.

Entire cost loaded on the Contractor till recovery commences.

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Production Sharing Contracts India

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Historical Background

• First concept for PSC was introduced in Bolivia in

1950

• PSCs were successfully implemented in Indonesia

in 1966

• PSCs are being widely used in more than 40

countries

• In India, first PSC was signed in 1993 for a Pre-

NELP Block

• 231 Exploration PSCs have been signed so far

• PSC terms continuously improved in consecutive

NELP round

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Constitution of India, 1950

The Oilfields (Regulation and Development) Act, 1948

The Petroleum and Natural Gas Rules, 1959 & Amendments

Territorial Waters, Continental Shelf, Exclusive Economic

Zone and other Maritime Zones Act, 1976

Income Tax Act, 1961

Customs Act, 1962

Foreign Exchange Management Act, 1999

Environment Protection Act, 1986

Arbitration and Conciliation Act, 1996

Legal Framework

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NATIONAL OIL COMPANIES

1950s-93

1993+

POLICYMinistry of

Petroleum & Natural Gas

Prime Minister’s

Office

REGULATOR

Upstream DGH

Downstream Gas Regulator

OPERATORPublic

(Central)ONGC

OILGAIL

Public (State)GSPC

PrivateRelianceJubilant

VideoconEssar

ForeignBGENI

Cairn Niko

Planning Com

• Hydrocarbon Sector Vision

• Role for different sectors in energy fuel mix

• Managing Resource Base

• Bringing Accountability

• Managing Licensing

• Mandate for Data Repository Investing Capital and

Technology

Effective Regulatory Mechanism

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Highlights of NELP PSC

• Production Sharing Contracts signed with Government based on Pre Tax Investment Multiple (PTIM) Trenches

• Low Royalty Rates – Royalty is Cost Recoverable

• No Cess or Customs Duty

• Freedom to contractor to market Oil and Gas in the domestic market at Market Determined Price

• 100% Cost Recovery of Exploration & Development expenditure

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Production Sharing Contract Attributes

– Contract term– Relinquishment– Management Committee– Discovery, Development & Production– Unit Development– Cost Recovery & Production Sharing– Taxes, Royalties & Rentals– Domestic sourcing & supply obligations– Employment & training– Title to assets

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Petroleum Expenditure & Revenue Profile

$

5 10 20 30 40

Exploration

& Appraisal

Development

ProductionAbandonment & Reclamation

CostsRevenues

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Cash Flows Under PSC Regime

Production value

Cost Petroleum

Profit Petroleum

Contractor’s share Government’s share

Development

Exploration

Production

Royalty

Income tax Government’s take

Contractor’s take

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Pre Tax Investment Multiple (PTIM)

Gross Revenue

Gross Revenue

Profit Petroleum ( Contractor &

Government)

Profit Petroleum ( Contractor &

Government)

Cost Petroleum(includes Royalty, OPEX and

allowed cost recovery of CAPEX)

Cost Petroleum(includes Royalty, OPEX and

allowed cost recovery of CAPEX)

Contractor’s Take = Cost Petroleum + Contractor’s share of Profit Petroleum

Contractor’s Net Income = Contractor’s Take – ( Production cost (OPEX) +Royalty )

Contractor’s Cumulative Net Income

PTIM = Cumulative Exploration & Development cost


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