Petroleum Regulatory Framework
Petroleum Regime Framework
PETROLEUM LAWS/ REGULATIONS
CONSTITUTION
E & P BUSINESS REGIMES
Legislative/
Regulatory
CONCESSION
JOINT VENTURE SERVICE CONTRACT HYBRID PSC
Global Energy Resources Management Structure
More countries adopting the "separation of roles“ for Resource
Management
Ministry Regulator
NOC/IOC/ JV
Policy Regulations
Business
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
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
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
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
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
A Comparative Study
Types of Agreements
Types of Agreements
Concessions
Joint Ventures
Service Contracts
Production Sharing Contracts/Risk Sharing
Contracts
Hybrids
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
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
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
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
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
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
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
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
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
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
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
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
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
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”
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.
Production Sharing Contracts India
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
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
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
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
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
Petroleum Expenditure & Revenue Profile
$
5 10 20 30 40
Exploration
& Appraisal
Development
ProductionAbandonment & Reclamation
CostsRevenues
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
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