You are on page 1of 68

THE ROBERT GORDON UNIVERSITY

ABERDEEN

ABERDEEN BUSINESS SCHOOL

MSC PROJECT MANAGEMENT


OIL AND GAS MANAGEMENT BSM2519

INDIVIDUAL REPORT: CHEVRON-LNOC COLLABORATION

MANUEL SUAREZ 1117655 WORD COUNT: 3,619 MODULE COORDINATOR: Ian Phillips

MAY 2012

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

EXECUTIVE SUMMARY Within the context of the Chevron-LNOC Production Sharing Contract for the development of an onshore gas field in Libya, this report provides an overview of the different contractual elements which should be included in the agreement and defines how to address some of the key issues related to them. For this purpose, a Base Case was defined taking in account the initial estimations obtained from the FEED programme, which have been adequately updated due to the current 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 establish which 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 possible solutions to be taken in account for planning a negotiation strategy. In addition, several proposals for the development of Local Content initiatives have been included in this report to enhance the attractiveness of the offer and to demonstrate commitment to the Libyan Government. In this regard, local workforce and supplier development, as well as community focused initiatives have been outlined and costs associated to them have been estimated. Finally, it has also been undertaken an options appraisal for the selection of the most suitable type of contract which could rule the construction of the pipeline from the gas field to the coast. In this regard, a weighted system has been created to evaluate the suitability of the different types of contracts with the final objective of balancing risks allocation between client and contractor.

MANUEL SUAREZ

MANUEL ANGEL GONZALEZ SUAREZ 1117655

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

TABLE OF CONTENTS: 1. 2. INTRODUCTION .......................................................................................................... 8 1.1. PROJECT BACKGROUND .................................................................................... 8 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. 3.4.11. 3.4.12. 4. Relinquishment ........................................................................................... 18 PSC Terms Resume Table ......................................................................... 19 Base Case Financial Results Resume........................................................ 19

SENSITIVITY ANALYSIS ........................................................................................... 23 4.1. NPV SENSITIVITY DIAGRAM.............................................................................. 24 4.2. IRR SENSITIVITY DIAGRAM ............................................................................... 27 4.3. PROFIT/INV RATIO SENSITIVITY DIAGRAM ..................................................... 30 4.4. RESULTS INTERPRETATION ............................................................................. 33 4.5. PSC NEGOTIATING POSITION DEFINITION ..................................................... 34 4.5.1. Gas Price ....................................................................................................... 34 4.5.2. Contractors Share Profit Oil .......................................................................... 34 4.5.3. CAPEX (OFC) ................................................................................................ 35

MANUEL ANGEL GONZALEZ SUAREZ 1117655

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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. 8. 9. 10. 11. CONCLUSIONS ......................................................................................................... 50 RECOMENDATIONS ................................................................................................. 50 REFERENCES ........................................................................................................... 51 BIBLIOGRAFY ......................................................................................................... 52 APPENDICES.......................................................................................................... 53 APPENDIX 1: SENSITIVITY ANALYSIS CALCULATIONS .............................. 54 APPENDIX 2: LOCAL WORKFORCE DEVELOPMENT ................................... 56 APPENDIX 3: SUPPLIER DEVELOPMENT ..................................................... 57 APPENDIX 4: COMMUNITY DEVELOPMENT ................................................. 58 APPENDIX 2: CONTRACT TYPES .................................................................. 59 Fixed Price .................................................................................................. 59

11.1. 11.2. 11.3. 11.4. 11.5.

11.5.1.

MANUEL ANGEL GONZALEZ SUAREZ 1117655

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

11.5.2. 11.5.3. 11.5.4. 11.5.5. 11.5.6. 11.6. 11.6.1. 11.6.2.

Cost-Reimbursement Contracts ................................................................. 61 Incentive Contracts (Payment linked to results) .......................................... 62 Time and Materials and Labour-Hour Contracts ......................................... 63 Gainshare ................................................................................................... 63 Equity Investment ....................................................................................... 63 Economic Results Summary for Foreign Oil Company ............................... 66 Economic Results Summary for National Oil Company .............................. 67

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

MANUEL ANGEL GONZALEZ SUAREZ 1117655

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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

MANUEL ANGEL GONZALEZ SUAREZ 1117655

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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 Table 36: Fixed Price Contracts ........................................................................................ 59 Table 37: Fixed Price Contracts Description...................................................................... 60 Table 38: Cost Reimbursable Contracts ............................................................................ 61 Table 39: Incentive Contracts ............................................................................................ 62 Table 40: Cost Reimbursable Contracts Comparative ....................................................... 64 Table 41: Fixed Price Contracts Comparative ................................................................... 65

MANUEL ANGEL GONZALEZ SUAREZ 1117655

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

1. INTRODUCTION 1.1. PROJECT BACKGROUND


Chevron 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 identified by them in the Sahara desert.

Figure 1: Libya Map

It has been confirmed that the field development will include the tasks that have been reflected in Table 1.
Contract Requirements Drilling 150 wells Developing the field infrastructure Laying a 220 km pipeline Building a LNG terminal Building LNG vessels Investment Rate $ 500mill/year $ 1 billion/year Total Period Investment $ 2 billion $ 4 billion 4 years 4 years

$ 500mill/year

$ 2 billion

4 years

Table 1: Contract Requirements

MANUEL ANGEL GONZALEZ SUAREZ 1117655

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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 mmscfpd continuously 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, a more detailed allocation of the cost has been included in Table 2.

Contract Requirements Operating Costs Onshore facilities LNG Terminal Ships Pipeline $ 180 million/year $ 20 mill/year

Total Costs

Period

$ 3.78 billion 21 years (Aprox.) (Aprox.) $ 420 million 21 years (Aprox.) (Aprox.)

Table 2: Operating Costs Estimations

MANUEL ANGEL GONZALEZ SUAREZ 1117655

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

2. PSC PROPOSAL DEVELOPMENT METHODOLOGY 2.1. KEY FEATURES OF A PSC


The 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 the recovery 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.

Figure 3: PSC Taxation Structure

Investor Take Government Take Cost Recovery Bonus Investor Profit Oil Split Royalty Net of Royalty Government Profit Oil Split Net of Taxes Investors Taxes
Table 3: Investor/Government Take

MANUEL ANGEL GONZALEZ SUAREZ 1117655

10

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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

INITIAL FORECASTING

BASE CASE DEVELOPMENT

SENSITIVITY ANALYSIS

SPIDER DIAGRAM

ACCEPTABLE & UNACCEPTABLE ALTERNATIVES

NEGOTIATING POSITION

Figure 4: PSC Development Methodology

PROCESS

DESCRIPTION Initial forecasts for the project focused on: Production estimations Gas Price estimations Opex estimations Capex estimations Taxation estimations Development of the baseline for comparing the effects of the variation of different elements constituting the agreement on the feasibility of the project. To provide an understanding of how PSC components influence the economic outcomes of the project. Representing the results obtained from the sensitivity analysis. Interpretation of the results of the Spider Diagram to decide which are the key contract elements and to define strategies and alternatives. Based on the different alternatives a negotiation strategy may be developed by Chevron to succeed.

INITIAL FORECASTING

BASE CASE DEVELOPMENT SENSITIVITY ANALYSIS SPIDER DIAGRAM ACCEPTABLE/UNACCEPTABLE ALTERNATIVES NEGOTIATING POSITION

Table 4: PSC Development Processes Adapted from Rutledge (2004).

MANUEL ANGEL GONZALEZ SUAREZ 1117655

11

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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 results for the base case should be better than those for Chevrons conservative/pessimistic case but 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 on the 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 and unacceptable alternatives related to the negotiation of those elements.
REVENUES CAPITAL EXPENDITURE BASE CASE OPERATING COS PSC TERMS GAS PRICE GAS PRODUCTION LNG SYSTEM AND VESSEL COST WELLS DRILLING & WORKOVER ONSHORE FACILITIES CONSTRUCTION GAS PLATFORM OPERATING COSTS GAS TRANSPORTATION/PIPELINE TARIF PROFIT TAX ROYALTY BONUS

COST RECOVERY Table 5: Base Case

Figure 5: PSC Financial Elements

MANUEL ANGEL GONZALEZ SUAREZ 1117655

12

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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 natural gas for the next 25 years should follow the trend reflected on Figure 6.

Figure 6: Gas Prices trends Source: U.S Energy Information Administration

Based on these data, gas price for sensitivity calculations will be set initially on 4$ plus and annual increase of 2% (See Figure 7).
7$ 6$ 5$ 4$ 3$ 2$ 1$ 0$

Year 1

Year 5

Year 9

Year 13

Year 17

Year 21

Year 25

GAS PRICE (US$/thousand cu ft)


Figure 7: Gas Price Estimations

3.1.2. Gas Production Based on the initial assessments, the field is expected to produce 2000 mmscfpd continuously for the remainder of the 25 years of the PSC.

MANUEL ANGEL GONZALEZ SUAREZ 1117655

13

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

3.2. CAPITAL EXPENDITURE (CAPEX)


There are three main sources of capital expenditure in this project: Onshore facilities construction Wells drilling and workover LNG system and vessel costs Capital investment required has been estimated as $8.0 billion, which will be spent at US$2 billion per year for 4 years. However, due to the current situation in Libya, initial estimations will be updated in a pessimistic way. In this sense, it is expected that at least local suppliers, communications, and transportations would have been seriously affected by the war. For this reason it will be considered the cost overruns an inflation rates reflected in Table 6.
Year 1 Year 2 Year 3 Year 4 Cost Inflation ($ Mill.) ($ Mill.) ($ Mill.) ($ Mill.) Overruns Increase Onshore facilities Well drilling LNG terminal/vessels 1000 500 500 1000 500 500 1000 500 500 1000 500 500 25% 25% 20% 5% 5% 5%

Table 6: CAPEX

3.3. OPERATING COSTS (OPEX)


There are four major operational expenditures sources: Onshore facilities operations LNG terminal operation Vessels operation Pipeline operation

Due to the actual situation of the country after a civil war, initial estimations have been updated in a pessimistic way. For this reason it will be considered the cost overruns an inflation rates reflected in Table 7.
Years 5-25 Cost Inflation ($ Mill.) Overruns Increase Gas transportation/pipeline tariff
Table 7: OPEX

$20 mm

10% 10%

5% 5%

Onshore facilities, LNG terminal & ships $180 mm

MANUEL ANGEL GONZALEZ SUAREZ 1117655

14

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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 the execution of petroleum operations in accordance to the terms of the contract. The contractor is required to submit annual work programs and budgets for scrutiny and 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 and bore 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 the contractor 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) Royalty Cost Recovery Profit Allocation Profit Tax Accounting Standards Foreign Exchange Export Rights Duration of Contract Relinquishment

Table 8: PSC Terms

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

Figure 8: Revenues Distribution (Adapted from Center for Energy Economics, 2012)

MANUEL ANGEL GONZALEZ SUAREZ 1117655

15

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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 an additional offer for developing local content will be included within the agreement to demonstrate 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 the gross revenues before the Cost Recovery Oil rate is applied. The Gross Profit Share is reduced by the amount of the Royalty. It has been established a Royalty scale directly related to the gas production rate as may be seen in Table 9.
Daily gas production rate (mmscf/d) 500 1000 1500 2.000 Over 5000 25% 20% 15% 10% 5% 0% OPTION 1 OPTION 2 OPTION 3 OPTION 4 OPTION 5 Royalty Rate 3.75% 7.5% 11.25% 15% 20% 5500 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

Table 9: Royalty Rate

ROYALTIE PRODUCTION

Figure 9: Royalty/Gas Production Relationship

MANUEL ANGEL GONZALEZ SUAREZ 1117655

16

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

3.4.3. Cost Recovery Before sharing of production, the contractor is allowed to recover costs out of net revenues. 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 been recovered.
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 profit gas. The contractor share of profit oil or gas is a specified percentage. In this sense, it has been established a Profit Share scale directly related to the R-factor as may be seen in Table 10.
R-factor less than 1,0 1,5 2,0 2,5 over 2.5 Local Company share 10% 10% 10% 10% 10%
Table 10: Profit Oil Split

Foreign Oil Company share 90% 90% 90% 90% 90%

R-factor R = Cumulative Receipts / Cumulative Costs Receipts = revenue from sale of gas/oil Costs = 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 been charged at 25%, the same as for all other companies in Libya. 3.4.6. Accounting Standards The purpose of this is to further define the manner in which the costs and expenses of Petroleum Operations will be recorded, in this regard: Accounting Standards will be in accordance with generally accepted accounting procedures and standards of the international petroleum industry Metric units and barrels shall be employed for measurements and quantities under this Agreement. The Accounting Records, and all reports to the Designated Authority, will be in English. The Accounting Records, and all reports to the Designated Authority, will be in United States Dollars.

MANUEL ANGEL GONZALEZ SUAREZ 1117655

17

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

3.4.7. Foreign Exchange Costs and revenues in another currency will be translated at the exchange rate set on the day the cost is incurred or the revenue realised at a time and by a financial institution designated 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 contract area 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 handed over to LNOC. 3.4.10. Relinquishment Relinquishment of Development Area: The twenty fifth (25th) anniversary of the date on which the Development Plan in respect of the Development Area was approved by the Libya Government.

MANUEL ANGEL GONZALEZ SUAREZ 1117655

18

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

3.4.11. PSC Terms Resume Table


BASE CASE PSC TERMS CONCEPT BONUS SUBTRACTED FROM LINKED TO Local Content PROPOSED VALUE 5 Mill.
Daily gas production rate (mmscf/d) Royalty Rate 3.75% 7% 11.25% 15% 20% 90% Foreign Local R-factor Oil Company less than Company share share

ROYALTIES

GROSS REVENUE

Gas Production Rate

500 1.000 1.500 2.000 5000

COST RECOVERY

NET REVENUE (after royalties)

Investment Recovering

CONTRACTORS SHARE PROFIT OIL

PROFIT OIL

R-Factor

1,0 1,5 2,0 2,5 Over 2.5

10% 10% 10% 10% 10%

90% 90% 90% 90% 90%

PROFIT TAX

CONTRACTORS SHARE PROFIT OIL

25%

Table 12: Base Case PSC Terms

3.4.12. Base Case Financial Results Resume See Appendix 6 for further details about the Base Case Financial Results.
Economic Results Summary for Foreign Oil Company Profit / Investment Ratio 1,63 NPV (Discounted at 15%) $687,878,476 16,31% IRR Economic Results Summary for National Oil Company NPV (Discounted at 15%) $2,799,050.571
Table 13: Financial Results Resume

MANUEL ANGEL GONZALEZ SUAREZ 1117655

19

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

Discounted Net Cash Flow


2.000 $ 1.500 $ 1.000 $ 500 $ 0$ 1 -500 $ -1.000 $ -1.500 $ -2.000 $ -2.500 $ Foreign Oil Company National Oil Company 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Figure 10: Discounted Net Cash Flow Comparative

Cumulative Discounted Cash Flow


4.000 $

2.000 $

0$

1
-2.000 $

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

-4.000 $

-6.000 $

-8.000 $

-10.000 $

Foreign Oil Company

National Oil Company

Figure 11: Cumulative Discounted Cash Flow Comparative

MANUEL ANGEL GONZALEZ SUAREZ 1117655

20

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

Before Investment has been recovered, revenues distribution will follow pattern reflected in Figure 12.

Figure 12: Revenues Distribution (Adapted from Binderman, 1999)

MANUEL ANGEL GONZALEZ SUAREZ 1117655

21

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

After Investment has been recovered, revenues distribution will follow pattern reflected in Figure 13.

Figure 13: Revenues Distribution (Adapted from Binderman, 1999)

MANUEL ANGEL GONZALEZ SUAREZ 1117655

22

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

4. SENSITIVITY ANALYSIS
Decisions on the design of an appropriate PSC framework can be supported by an understanding of how its various components influence decision making and outcomes.
DECISION MAKING TOOLS Profit/Inv Ratio IRR NPV PSC COMPONENTS Gas Price CAPEX (Onshore Facilities Construction) CAPEX (Wells Drilling & Workover) CAPEX (LNG Systems & Vessels) OPEX(Oil transp./Pipeline Tariff) OPEX(Platform) Royalty Rate Cost Recovery Contractors Share Profit Oil Profit Tax Signature Bonus

To this end a simplified economic model including this components and decision making tools was developed to design a suitable PSC framework for the development of this project. In particular, simulations were conducted to show the effect on project economics of alternative PSC terms and their relative responsiveness to changes in economic conditions. (Rutledge, 2004). (See further details and calculations in Appendix1).

MANUEL ANGEL GONZALEZ SUAREZ 1117655

23

SAHARA DESERT ONSHORE GAS FIELD 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 showing the sensitiveness of the different elements.
CHEVRON NPV SENSITIVITY DIAGRAM
6.000

5.000

4.000

3.000

2.000

1.000

NPV (US$ Mill.)

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

-1.000

-2.000

-3.000

-4.000

-5.000

GAS PRICE NPV CAPEX (Wells Drilling & Workover) NPV OPEX(Oil transp./Pipeline Tariff) NPV ROYALTY RATE NPV CONTRACTOR S SHARE PROFIT OIL NPV

CAPEX (Onshore Facilities Construction) NPV CAPEX (LNG Systems & Vessels) NPV OPEX(Platform) NPV COST RECOVERY NPV PROFIT TAX NPV

Figure 14: NPV Spider Diagram

MANUEL ANGEL GONZALEZ SUAREZ 1117655

24

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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 the various economic parameters. This will also provide an in-depth understanding of the different variables that significantly affect the reported NPV of US$ 687.88M. Based on the diagram it may be concluded that variables which reflected the strongest relationship with the NPV are: Gas Price Contractors share profit oil Capex (Onshore Facilities construction) Cost Recovery
NPV Variation(%) 578,19% 452,38% 326,57% 267,51% 133,80% 0,00% -93,12% -234,52% -350,23% -541,99% -685,19% Gas Price Variation(%) 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Contractor Share PO Variation(%) 10 0 -10 -20 -30 -40 -50

NPV 4.665.093.460,38 3.799.703.056,18 2.934.312.651,97 2.528.004.733,57 1.608.263.477,88 687.878.476,45 47.303.910,40 -925.343.275,56 -1.721.291.719,60 -3.040.321.725,95 -4.025.415.817,44

NPV Variation(%) 78,83% 0,00% -79,89% -160,55% -242,51% -326,22% -412,61%

NPV 1.230.133.473,66 687.878.476,45 138.320.287,28 -416.531.070,12 -980.316.337,29 -1.556.128.920,87 -2.150.402.430,51

NPV Variation(%) -173,39% -129,16% -84,92% -40,68% -43,70% 0,00% 43,49% 86,97% 130,46% 173,95% 217,34%

NPV -504.860.180,55 -200.568.340,98 103.723.498,59 408.015.338,17 387.271.477,01 687.878.476,45 987.013.529,81 1.286.148.583,17 1.585.283.636,52 1.884.418.689,88 2.182.912.354,76

Capex (OFC) Variation(%) 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%

NPV Variation(%) 18,91% 0,00% -19,38% -38,76% -58,19% -78,32% -98,46%

NPV 817.965.836,76 687.878.476,45 554.567.389,07 421.256.301,70 287.604.227,76 149.106.569,11 10.608.910,46

Cost Recovery Variation(%) 10 0 -10 -20 -30 -40 -50

Table 14: NPV Sensible Variables

MANUEL ANGEL GONZALEZ SUAREZ 1117655

25

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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.
Variation Limit Gas Price 10% Contractors Share Profit oil 12% Capex (OFC) 32% Cost Recovery 49% Contractual Element
Table 15: NPV Variation Limits

MANUEL ANGEL GONZALEZ SUAREZ 1117655

26

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

4.2. IRR SENSITIVITY DIAGRAM


CHEVRON IRR SENSITIVITY DIAGRAM
25% 24% 23% 22% 21% 20% 19% 18%

Internal Rate of Return (IRR)

17% 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 50 40 30 20 10 0 -10 -20 -30 -40 -50

GAS PRICE IRR CAPEX (Wells Drilling & Workover) IRR OPEX(Oil transp./Pipeline Tariff) IRR ROYALTY RATE IRR CONTRACTORS SHARE PROFIT OIL IRR

CAPEX (Onshore Facilities Construction) IRR CAPEX (LNG Systems & Vessels) IRR OPEX(Platform) IRR COST RECOVERY IRR PROFIT TAX IRR

Figure 15: IRR Spider Diagram

MANUEL ANGEL GONZALEZ SUAREZ 1117655

27

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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 normally preferred, thus a sensitivity analysis on the IRR with respect to this agreement was conducted 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 the strongest relationship with the NPV were: Gas Price Contractors share profit oil Capex (Onshore Facilities construction)
IRR Variation(%) 41,03% 32,67% 24,02% 20,11% 10,28% 0,00% -7,47% -19,38% -29,68% -47,89% -63,24% Gas Price Variation(%) 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Contractors Share PO Variation(%) 10 0 -10 -20 -30 -40 -50

IRR 23,00% 21,64% 20,23% 19,59% 17,99% 16,31% 15,09% 13,15% 11,47% 8,50% 6,00%

IRR Variation(%) 5,79% 0,00% -6,35% -13,32% -21,13% -30,04% -40,54%

IRR 17,25% 16,31% 15,27% 14,14% 12,86% 11,41% 9,70%

IRR Variation(%) -13,08% -10,09% -6,94% -3,59% -3,65% 0,00% 3,87% 8,01% 12,46% 17,24% 22,40%

IRR 14,18% 14,66% 15,18% 15,72% 15,71% 16,31% 16,94% 17,62% 18,34% 19,12% 19,96%

Capex (OFC) Variation(%) 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Table 16: IRR Sensible Variables

MANUEL ANGEL GONZALEZ SUAREZ 1117655

28

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

It has also been calculated for each variable the maximum variation limit from which the IRR will be minor than 14% and therefore the project will be considered unattractive for Chevron. The results have been reflected in Table 17.
Variation Limit Gas Price 15% Contractors Share Profit oil 21% Capex (Onshore Facilities 49% construction) Contractual Element
Table 17: IRR Variation Limits

MANUEL ANGEL GONZALEZ SUAREZ 1117655

29

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

4.3. PROFIT/INV RATIO SENSITIVITY DIAGRAM


CHEVRON PROFIT/INV RATIO SENSITIVITY DIAGRAM
3,00

2,50

2,00 Profit/Inv. Ratio

1,50

1,00

0,50

0,00 50 40 30 20 10 0 -10 -20 -30 -40 -50 Sensitivity Range % GAS PRICE Profit/Inv Ratio CAPEX (Onshore Facilities Construction) Profit/Inv Ratio CAPEX (Wells Drilling & Workover) Profit/Inv Ratio CAPEX (LNG Systems & Vessels) Profit/Inv Ratio OPEX(Oil transp./Pipeline Tariff) Profit/Inv Ratio OPEX(Platform) Profit/Inv Ratio ROYALTY RATE Profit/Inv Ratio COST RECOVERY Profit/Inv Ratio CONTRACTOR S SHARE PROFIT OIL Profit/Inv Ratio PROFIT TAX Profit/Inv Ratio
Figure 16: PIR Spider Diagram

MANUEL ANGEL GONZALEZ SUAREZ 1117655

30

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

The Profit/Investment Ratio (PIR) is a useful tool for ranking projects because it allows quantifying 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 the Chevron-LNOC Collaboration Project was conducted and the results were included in Appendix 1. The Spider diagram (Figure 16) represents the different sensitivity scenarios that were developed. Based on it, may be concluded that variables which reflected the strongest relationship with the PIR were: Gas Price Contractors share profit oil Opex (Platform)
Profit/Inv Ratio Variation(%) 67,26% 53,04% 38,82% 28,98% 14,11% 0,00% -11,43% -26,38% -38,68% -57,39% -71,82% Profit/Inv Ratio Variation(%) -23,81% -19,72% -15,34% -10,65% -5,62% 0,00% 5,67% 12,03% 18,94% 26,48% 34,74% Profit/Inv Ratio Variation(%) 11,88% 0,00% -12,26% -24,33% -36,39% -48,46% -60,53% Contractors Share PO Variation(%) 10 0 -10 -20 -30 -40 -50

Profit/Inv Ratio 2,73 2,49 2,26 2,10 1,86 1,63 1,44 1,20 1,00 0,69 0,46 Profit/Inv Ratio 1,24 1,31 1,38 1,46 1,54 1,63 1,72 1,83 1,94 2,06 2,20

Gas Price Variation(%) 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% OPEX (Platform) Variation(%) 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%

Profit/Inv Ratio 1,82 1,63 1,43 1,23 1,04 0,84 0,64

Table 18: PIR Sensible Variables

MANUEL ANGEL GONZALEZ SUAREZ 1117655

31

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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

Variation Limit Gas Price 15% Contractors Share Profit oil 16% OPEX (Platform) 39% Contractual Element
Table 20: PIR Variation Limits

MANUEL ANGEL GONZALEZ SUAREZ 1117655

32

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

4.4. RESULTS INTERPRETATION


Based on the results of the sensitivity analysis it can be concluded that the elements which majorly affect to the economic feasibility of the project are: Gas Price Contractors Share Profit oil Capex (OFC) OPEX (Platform) Cost Recovery

Furthermore, it has also been calculated the variation limits for each one of those elements and it has been established a trigger value based on the effect over the financial tools used in the assessment. (See table 21)
Contractual Element Gas Price Contractors Share Profit oil Capex (OFC) OPEX (Platform) Cost Recovery Variation Limit IRR 15% 21% 49% Trigger value 10% 12% 32% 39% 49%

NPV 10% 12% 32% 49%

PIR 15% 16% 39% -

Table 21: Variation Limits Resume

Gas Price

OPEX (Platform)

Contractor s Share Profit Oil

Cost Recovery

Capex (OFC)

Figure 17: Elements Importance

MANUEL ANGEL GONZALEZ SUAREZ 1117655

33

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

4.5. PSC NEGOTIATING POSITION DEFINITION


The PSC terms included within the Base Case should be modified after interpreting the results obtained from the sensitivity analysis. In this regard the main elements affecting to the feasibility of the project will be analysed in this section and different options will be proposed 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.
Limit Increase (%) Contractual Elements Royalties Profit Tax Gas Price 10% Strategy options Clauses linking Gas price reductions on Royalties Rate. Clauses linking Gas price reductions on Profit Tax rates. decreases decreases to to

Clauses affecting the length of the contract: it could be increased by a period of 1-5 years to Length of the contract recover losses due to an unusual decrease of gas prices. Clauses giving the option to Chevron to operate Operate the pipeline the pipeline to recover losses due to an unusual decrease 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 it would be necessary to negotiate this contractual element taking in account that only compensatory measures could balance changes upper 12% in this element. See Table 23 for strategy options.
Limit Increase (%) Contractor SPO Contractual Elements Royalties 12% Profit Tax Strategy options Clauses linking reductions on the Contractor SPO to reductions on Royalties Rate. Clauses linking reductions on the Contractor SPO to reductions on Profit Tax Rate.

Table 23: Strategy Options (Contractors SPO)

MANUEL ANGEL GONZALEZ SUAREZ 1117655

34

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

4.5.3. CAPEX (OFC) Due to the current political situation in Libya it would be acceptable to include some clauses about extraordinary circumstances affecting to the normal construction and development of the facilities. In this regard Royalties and Profit tax could be included within this agreement. See Table 24 for strategy options.
Limit Increase (%) Contractual Elements Royalties Profit Tax CAPEX 32% Length of the contract Strategy options Clauses linking CAPEX extraordinary increases to reductions on Royalties Rate Clauses linking CAPEX extraordinary increases to reductions on Royalties Rate Clauses affecting the length of the contract (it could be increased by a period of 1-5 years to recover losses due to an extraordinary increase of CAPEX.

Clauses giving the option to Chevron to operate Operate the pipeline the pipeline to recover losses due to an extraordinary 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 been added some options to include clauses in the contract. (See Table 25)
Limit Increase (%) Contractual Elements Royalties OPEX 39% Profit Tax Strategy options Clauses linking OPEX extraordinary increases to reductions on Royalties Rate Clauses linking OPEX extraordinary increases to reductions on Royalties Rate

Table 25: Strategy Options (OPEX)

4.5.5. Cost Recovery In a lower level of importance, this element also affects to the viability of the project, in this sense it has been added some options to include clauses in the contract. (See Table 26)
Limit Increase (%) Cost Recovery Contractual Elements Royalties 49% Profit Tax Strategy options Clauses linking reductions on the Cost Recovery to reductions on Royalties Rate. Clauses linking reductions on the Cost Recovery to reductions on Profit Tax Rate.

Table 26: Strategy Options (CR)

MANUEL ANGEL GONZALEZ SUAREZ 1117655

35

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

5. ADDITIONAL OFFERINGS
With the aim of improving Chevrons offer, some additional activities will be included as part of the agreement. These additional elements will consist of:
LOCAL CONTENT ACTIVITIES Workforce development: Investments in supplier development Community/Infrastructure development DETAILS Employment of national, regional & local workforce Training of national, regional & local workforce Developing supplies and services locally Procuring supplies and services locally Infrastructure development Supporting Education Health Programmes
Table 27: Local Content Activities (Source: www.ipieca.org)

LOCAL CONTENT

WORKFORCE DEVELOPMENT

SUPPLIER DEVELOPMENT

COMMUNITY DEVELOPMENT

EMPLOYMENT OF NATIONAL, REGIONAL & LOCAL WORKFORCE

TRAINING OF NATIONAL, REGIONAL & LOCAL WORKFORCE

DEVELOPING SUPPLIES AND SERVICES LOCALLY

PROCURING SUPPLIES AND SERVICES LOCALLY

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

MANUEL ANGEL GONZALEZ SUAREZ 1117655

36

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

5.1. LOCAL WORKFORCE DEVELOPMENT (LWD)


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

Figure 19: Local Workforce Development

5.1.1. LWD Estimated Investment


Period Investment Sub total Year 1 to 4 US$ 100;000/year US$ 400,000 Year 5 to 10 US$ 150;000/year US$ 900;000 Year 11-25 US$ 50;000/year US$ 750;000 Total US$ 2,050;000

5.2. SUPPLIER DEVELOPMENT


Two key strategies will be proposed to achieve local firms participation in the supply chain: the modification of procurement systems and the use of dedicated supplier or enterprise development programmes. Further details about this initiative have been included in Appendix 3.

Figure 20: Supplier Development

5.2.1. Supplier Development Estimated Investment


Period Investment Sub total Year 1 to 4 US$ 150;000/year US$ 600,000 Year 5 to 10 US$ 100;000/year US$ 600;000 Year 11-25 US$ 25;000/year US$ 375;000 Total US$ 1,575;000

MANUEL ANGEL GONZALEZ SUAREZ 1117655

37

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

5.3. COMMUNITY DEVELOPMENT


Improvement of education, health and infrastructures in Libya is a necessary foundation for economic growth and development, and is critical to helping achieve the companys business objectives as well. (Marathon Oil, 2012) In this regard different programmes will be designed for repairing infrastructures damaged during the war; in addition educational and health improvement initiatives will be also developed. 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 Year 1 to 4 US$ 100;000/year US$ 400,000 Supporting Year 5 to 10 US$ 100;000/year US$ 600;000 Education Year 11-25 US$ 25;000/year US$ 375;000 US$ 1,375,000 Year 1 to 4 US$ 100;000/year US$ 400,000 Health Year 5 to 10 US$ 100;000/year US$ 600;000 Programmes Year 11-25 US$ 25;000/year US$ 375;000 US$ 1,375,000 Year 1 to 4 US$ 500;000/year US$ 2,000,000 Infrastructure Year 5 to 10 US$ 200;000/year US$ 1,200;000 Development Year 11-25 US$ 25;000/year US$ 375;000 US$ 3,575,000 Total US$ 6,275;000

MANUEL ANGEL GONZALEZ SUAREZ 1117655

38

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

6. PIPELINE CONTRACT SELECTION 6.1. SCOPE OF THE CONTRACT


Before selecting the most suitable contract type, it must be analysed the different options of scope for the work to be undertaken by PIPECO. DPC (Design, Procurement and Construction) DPCO (Design, Procurement, Construction and Operation)

CONTRACTS SCOPE COMPARISON


350 300 US $ Millions 250 200 150 100 50 0 CONTRACT VALUE (US$ Mill) 225 325 TYPICAL PROFIT (US$ Mill) 28,125 38,125

DPB DPBO

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 total profit of the work. 6.1.1. Design, Procurement and Construction Contract
DPC CONTRACT VALUE
(US$ Mill.)

TYPICAL PROFIT
(US$ Mill.)

% TOTAL PROFIT

ENGENIERING & DESIGN PROCUREMENT CONSTRUCTION TOTAL

22,5 67,5 135 225


Table 28: DPC Option

1,125 6,75 20,25 28,125

4% 24% 72% 100%

MANUEL ANGEL GONZALEZ SUAREZ 1117655

39

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

CONTRACT ELEMENTS COMPARISON


170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

US $ Millions

ENGENIERING & DESIGN 1,125 22,5

PROCUREMENT 6,75 67,5

CONSTRUCTION 20,25 135

TYPICAL PROFIT CONTRACT VALUE

Figure 23: DPC Option Contract Value Comparative

25 20 US $ Millions 15 10 5 0

80% 70% 60% 50% 40% 30% 20% 10% ENGENIERING & DESIGN 1,125 4,00% 0% PROCUREMENT 6,75 24,00% CONSTRUCTION 20,25 72,00% % Total Profit 40

TYPICAL PROFIT % TOTAL PROFIT

Figure 24: DPC Option Profit Comparative

MANUEL ANGEL GONZALEZ SUAREZ 1117655

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

6.1.2. Design, Procurement, Construction and Operation Contract


DPCO TYPICAL PROFIT
(US$ Mill.)

CONTRACT VALUE
(US$ Mill.)

% TOTAL PROFIT

ENGENIERING & DESIGN PROCUREMENT CONSTRUCTION OPERATION TOTAL

22,5 67,5 135 100 325


Table 29: DPCO Option

1,125 6,75 20,25 10 38,125

3% 18% 53% 26% 100%

CONTRACT ELEMENTS COMPARISON


170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

US $ Millions

ENGENIERING & DESIGN 1,125 22,5

PROCUREMENT 6,75 67,5

CONSTRUCTION 20,25 135

OPERATION 10 100

TYPICAL PROFIT CONTRACT VALUE

Figure 25: DPCO Option Contract Value Comparative

25 20 US $ Millions 15 10 5 0

60% 50% 40% %Total Profit 41 30% 20% 10% ENGENIERING & DESIGN 1,125 3 0% PROCUREMENT 6,75 18 CONSTRUCTION 20,25 53 OPERATION 10 26

TYPICAL PROFIT % TOTAL PROFIT

Figure 26: DPCO Option Profit Comparative

MANUEL ANGEL GONZALEZ SUAREZ 1117655

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

6.1.3. Scope Preferences: Based on these figures it can be concluded that the key stage within the pipeline laying contract (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 profit is obtained from this phase. Furthermore it has also been noticed that adding an operation phase to the contract is not especially profitable. The undertaking of this operation phase means a huge increase on the investment for the project; however the perceptual profit increase is not at the same level. For this reason, adding to the contract this operations phase is a strategic decision which can be linked to the final negotiation of the contract.

6.2. TYPES OF CONTRACTS


There are several possible types of contractual relationships which can be considered to help PIPECO to create an attractive proposal. For the purpose of this report it has been considered the contract types included in Table 30.
TYPES OF CONTRACTS FFP FPE FPRP FPRR FFPLOE FPIF FPAF CR/CS CPFF CPAF CPIF Time & Materials Gainsharing Equity Investment Firm Fixed Price Fixed Price Fixed Price Fixed Price Fixed Price Fixed Price Fixed Price Cost Reimbursable Cost Plus Fixed Fee Cost Plus Award Fee Cost Plus Incentive Fee Time and Materials Gainsharing Agreement Equity Investment Agreement
Table 30: Type of Contracts

Figure 27: Contract Risk Allocation

(See Appendices 5 and 7 for further information about types of contracts)

MANUEL ANGEL GONZALEZ SUAREZ 1117655

42

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

6.3. CONTRACTS COMPARATIVE


Before comparing the contracts, it must have been defined the main criteria affecting to the suitability of the different types contracts. To define which is the best type of contract, client and contractors perspectives must be assessed 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 a profit 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 relative importance for the decision about the type of contract
CRITERIA Exposure to cost risk (Contractors perspective) Exposure to cost risk (Clients perspective) Likelihood of claims and disputes Contract management Costs External Factors (Contractors perspective) DESCRIPTION Based on the allocation of cost risks in that type of contract from a contractors perspective Based on the allocation of cost risks in that type of contract from a clients perspective Based on the likelihood of claims and disputes associated to that type of contract Based on the costs of managing and controlling the contract. WEIGHT 0.2 0.15 0.1 0.1

Associated to the level of suitability of the contract under conditions of lack of clear definition of the product/service to provide, abundance of modifications, or other external factors affecting to the scope of the work. Level of motivation to Based on the level of motivation for the contractor to control control cost cost under that type of contractual relationship. Financial benefits Based on the financial benefits associated to the type of (Contractors perspective) contract and related to the payment structure and therefore to the amount of financing necessary for the project. Commitment/Collaboration Based on the type of relationship associated to the contract in terms of length and collaboration necessities.
Table 31: Contract Selection Criteria

0.2

0.1 0.1 0.05

MANUEL ANGEL GONZALEZ SUAREZ 1117655

43

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

6.3.1. Engineering & Design Phase Basing on the selection criteria included in Table 31, an assessment has been undertaken to determine which type of contract would fit better for this stage. The results of the assessment have been reflected in Table 32.

CONTRACT SELECTION MATRIX


Contract Management Costs Commitment/Collaborations 3 3 4 4 5 5 4 3 3 4 5 4 6 6 Motivation to Cost Control Contractor Risk Exposure Client Risk Exposure Disputes Likelihood

TYPE OF CONTRACT

Financial Benefits

External Factors

Weight 20% 15% 10% 10% 20% 10% 10% 5% FFP FPE FPRP FPRR FFPLOE FPIF FPAF CR/CS CPFF CPAF CPIF Time & Materials Gainsharing Equity Investment 1 2 3 3 3 3 2 7 7 7 6 7 5 5 10 8 6 6 6 7 6 1 2 2 3 4 5 5 8 8 6 6 6 6 6 3 4 4 5 7 6 5 10 7 7 7 6 6 6 1 2 2 2 4 3 3 2 4 5 5 3 3 3 8 7 6 6 5 6 6 10 9 9 9 9 9 9 2 4 5 5 5 5 5 1 2 2 2 2 3 3 7 7 7 7 5 5 6 5,15 5,15 5,10 5,10 4,65 4,90 4,50 4,60 4,95 4,90 5,00 5,30 5,15 5,15

Table 32: Contract Selection Matrix (Eng & Design)

Based on the results of the assessment, it has been concluded the most suitable type of contract would be a T&M contract; table 32 also reflects that a FP contract could be also an appropriate selection depending on the circumstances.

MANUEL ANGEL GONZALEZ SUAREZ 1117655

WEIGHTED TOTAL

44

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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

CONTRACT SELECTION MATRIX


Contract Management Costs Commitment/Collaborations 3 3 4 4 5 5 4 3 3 4 5 4 6 6 Motivation to Cost Control Contractor Risk Exposure Client Risk Exposure Disputes Likelihood

TYPE OF CONTRACT

Financial Benefits

External Factors

Weight 20% 15% 10% 10% 20% 10% 10% 5% FFP FPE FPRP FPRR FFPLOE FPIF FPAF CR/CS CPFF CPAF CPIF Time & Materials Gainsharing Equity Investment 1 2 3 3 3 3 2 8 8 8 7 7 5 5 10 8 6 6 6 7 6 1 2 2 3 4 5 5 8 8 6 6 6 6 6 3 4 4 5 7 7 5 10 7 7 7 6 6 6 1 2 2 2 4 3 3 2 4 5 5 3 3 3 8 7 6 6 5 6 6 10 9 9 9 9 9 9 2 4 5 5 5 5 5 3 3 3 3 3 3 3 7 7 7 7 5 5 6 5,35 5,25 5,20 5,20 4,75 4,90 4,50 4,80 5,15 5,10 5,20 5,30 5,25 5,15

Table 33: Contract Selection Matrix (Procurement)

Based on the results included in table 33, it has been concluded that the most suitable type of contract would be a FFP. Furthermore, this table also reflects that a T&M contract could also be an appropriate contract option and therefore could be considered as an alternative just in case the client disagrees to the first option.

MANUEL ANGEL GONZALEZ SUAREZ 1117655

WEIGHTED TOTAL

45

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

6.3.3. Construction Basing on the criteria included in Table 31, an assessment has been undertaken to determine which type of contract would fit better for the construction phase of the pipeline execution project. The results of the assessment have been reflected in Table 34.

CONTRACT SELECTION MATRIX


Contract Management Costs Commitment/Collaborations 3 3 4 4 5 5 4 3 3 4 5 4 6 6 Motivation to Cost Control Contractor Risk Exposure Client Risk Exposure Disputes Likelihood

TYPE OF CONTRACT

Financial Benefits

External Factors

Weight 20% 15% 10% 10% 20% 10% 10% 5% FFP FPE FPRP FPRR FFPLOE FPIF FPAF CR/CS CPFF CPAF CPIF Time & Materials Gainsharing Equity Investment 1 2 3 3 3 3 2 8 8 8 7 7 7 5 9 8 6 6 6 7 6 1 2 2 3 4 5 5 7 8 6 6 6 6 6 3 4 4 5 7 7 5 9 7 7 7 6 6 6 1 2 2 2 4 4 3 2 4 5 5 3 3 3 8 7 6 6 5 6 6 9 8 8 8 8 8 9 2 4 5 5 5 5 5 2 2 2 2 2 3 3 7 7 7 7 5 6 6 4,80 5,05 5,00 5,00 4,55 4,80 4,50 4,80 5,15 5,10 5,20 5,30 5,85 5,15

Table 34: Contract Selection Matrix (Construction)

Based on the results included in table 34, it has been concluded that the most suitable type of contract would be a Gainsharing. Furthermore, this table also reflects that a T&M contract could also be an appropriate contract option and therefore could be considered as an alternative just in case the client disagrees to the first option.

MANUEL ANGEL GONZALEZ SUAREZ 1117655

WEIGHTED TOTAL

46

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

6.3.4. Operation Basing on the criteria included in Table 31, an assessment has been undertaken to determine which type of contract would fit better for the operation phase of the pipeline execution project. The results of the assessment have been reflected in Table 35.

CONTRACT SELECTION MATRIX


Contract Management Costs Commitment/Collaborations 3 3 4 4 5 5 4 3 3 4 5 4 6 6 Motivation to Cost Control Contractor Risk Exposure Client Risk Exposure Disputes Likelihood

TYPE OF CONTRACT

Financial Benefits

External Factors

Weight 20% 15% 10% 10% 20% 10% 10% 5% FFP FPE FPRP FPRR FFPLOE FPIF FPAF CR/CS CPFF CPAF CPIF Time & Materials Gainsharing Equity Investment 1 2 3 3 3 3 2 8 8 8 7 7 7 8 9 8 6 6 6 7 6 1 2 2 3 4 5 6 6 8 6 6 6 6 6 3 4 4 5 7 7 6 8 7 7 7 6 6 6 1 2 2 2 4 4 4 2 4 5 5 3 3 3 8 7 6 6 5 6 6 8 8 8 8 8 8 9 2 4 5 5 5 5 5 2 2 2 2 2 3 3 7 7 7 7 5 6 6 4,50 5,05 5,00 5,00 4,55 4,80 4,50 4,80 5,15 5,10 5,20 5,30 5,85 6,10

Table 35: Contract Selection Matrix (Operation)

Based on the results included in table 35, it has been concluded that the most suitable type of contract would be an Equity Investment Agreement. Furthermore, this table also reflects that a Gainsharing agreement could also be an appropriate contract option and therefore could be considered as an alternative just in case the client disagrees to the first option.

MANUEL ANGEL GONZALEZ SUAREZ 1117655

WEIGHTED TOTAL

47

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

6.4. CONTRACT TYPE RECOMMENDATION


6.4.1. Engineering & Design CONTRACT TYPE RECOMMENDATION
CONTRACT ELEMENT TYPE OF CONTRACT ENGINEERING & DESIGN Time & Materials (See Appendix 5 for further details about this type of contract)

The client might prefer a fixed price contract for this phase. However, a fixed price contract could be an issue when the contractor and client do not come JUSTIFICATION to a detailed agreement on what the work will include. PIPECO might be FOR PROPOSSAL asked to put in many more hours of work without compensation, or the client might feel that he has overpaid for the work. For these reasons, in this case a T&M contract should fit for purpose. The disadvantages could come if PIPECO charge too many hours and DISADVANTAGES exceeds the client's budget. This could cause friction between the two if the budget runs out before the contract is completed. EXPECTED ADVANTAGES 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 CONTRACT TYPE RECOMMENDATION


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

JUSTIFICATION There are reasonably definite specifications, and fair and reasonable prices FOR PROPOSSAL can be established at the outset. DISADVANTAGES PIPECO must absorb the costs of labour or materials increase during performance of the contract. Usually the purchaser pays only for completed or delivered work This element of the contract is probably the less risky for PIPECO, due to uncertainties are much lower than in the other stages, and for that reason a Firm Fixed Priced contract would be suitable from a PIPECOs perspective. On the other hand this type of contract should be positively valued from Chevrons perspective because it is simpler to administer and ensures cost overruns avoidance.

EXPECTED ADVANTAGES

MANUEL ANGEL GONZALEZ SUAREZ 1117655

48

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

6.4.3. Construction CONTRACT TYPE RECOMMENDATION


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

TYPE OF CONTRACT

JUSTIFICATION The parties cannot accurately or estimate the costs of the contract, at the FOR PROPOSSAL time of contracting. DISADVANTAGES If the initial estimations for the budget are not accurate, it could mean losses. Sharing of the risks Enhance involvement and collaboration of Chevron during the construction of the pipeline. This could mean technical support, but also external stakeholders (government) management support. There is a good possibility to increase benefits by reducing the estimated budged.

EXPECTED ADVANTAGES

6.4.4. Operation CONTRACT TYPE RECOMMENDATION


CONTRACT ELEMENT TYPE OF CONTRACT OPERATION Equity Investment Agreement (See Appendix 5 for further details about this type of contract)

Operation of the Pipeline requires a huge annual investment effort, furthermore operate pipelines is not usually included within PIPECOs core JUSTIFICATION businesses and lack of expertise managing this phase could be other FOR PROPOSSAL significant issue. For these reasons collaboration with Chevron under a Equity Investment Agreement would be the best solution to undertake this stage. DISADVANTAGES Sharing ownership and control over the development of the contract. EXPECTED ADVANTAGES Reduce Investment Effort Risk sharing Gain Chevron Collaboration and expertise

MANUEL ANGEL GONZALEZ SUAREZ 1117655

49

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

7. CONCLUSIONS
After the analysis of the different terms included within the PSC, it has been concluded that Gas price and Contractor Share Profit Oil are the most sensible components included in it, and therefore need to be properly addressed in order to ensure the feasibility of the project. In this regard, Gas price is a variable which cannot be controlled exclusively from an internal perspective, because international markets and energy trends will influence its evolution; however it should be considered within the negotiation process as an element that should be related to the taxation of the revenues to minimize exposures. In the same way it should be managed the Contractor SPO, maximising Chevrons take of the revenues till recovering of the investment. Furthermore, it has been also noticed that the Payback Period of the project (under the conditions 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 the Government and increasing Chevrons reputation. Finally, it is considered that PIPECOs pipeline contract should seek to balance the risks allocation between the contractor and the client, providing the most suitable contractual relationship during each one of the stages of the project and in this regard it is believed that 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 3 points 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 included within the PSC to the taxation should be deeply assessed to clearly define the effects on both Chevron and Libyan Government before using them in the negotiation process.

MANUEL ANGEL GONZALEZ SUAREZ 1117655

50

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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 World Bank. 23-78. 3. Manuel, K. M. & Maskell, J. (2012). Insourcing functions performed by federal contractors: An overview of the legal issues. Washington, DC: Congressional Research Service. 13-72 4. U.S Energy Information Administration (2011). Annual Energy Outlook 2011. USA: U.S Energy 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 & Resources Information 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. Last accessed 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/soci al_investment/. Last accessed 4th April 2012. 11. ExxonMobil. (2011). 2010 Corporate Citizenship Report. Available: http://www.exxonmobil.com/Corporate/Imports/ccr2010/community_ccr.aspx. Last accessed 20th Nov 2011. 12. ITWORLD. (2012). Making Gain-sharing work. Available: http://www.itworld.com/itmanagementstrategy/107881/making-gain-sharing-work. Last accessed 3th March 2012. 13. EHOW. (2012). Equity Investor Agreement. Available: http://www.ehow.com/facts_7685525_equity-investor-agreement.html. Last accessed 17th April 2012.

MANUEL ANGEL GONZALEZ SUAREZ 1117655

51

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

14. Lt Colonel Stephen B. Leisenring (2004). Department of Defence Contracting: Considerations for Selecting Contract Type. Pennsylvania: U.S Army War College. 235. 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. 846. 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. 11194. 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/issuesprices/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 Strategy and Procurement. Available: http://webarchive.nationalarchives.gov.uk/20110822131357/http://www.ogc.gov.uk. Last accessed 5th April 2012.

MANUEL ANGEL GONZALEZ SUAREZ 1117655

52

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

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

MANUEL ANGEL GONZALEZ SUAREZ 1117655

53

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

11.1. APPENDIX 1: SENSITIVITY ANALYSIS CALCULATIONS


GAS PRICE Profit/Inv Ratio 2,73 2,49 2,26 2,10 1,86 1,63 1,44 1,20 1,00 0,69 0,46 IRR NPV Sensitivity Range (%) 50 40 30 20 10 0 -10 -20 -30 -40 -50 CAPEX (Onshore Facilities Construction) Profit/Inv Ratio 1,45 1,50 1,54 1,59 1,58 1,63 1,68 1,73 1,79 1,85 1,91 IRR NPV Sensitivity Range (%) 50 40 30 20 10 0 -10 -20 -30 -40 -50

23,00% 4.665.093.460,38 21,64% 3.799.703.056,18 20,23% 2.934.312.651,97 19,59% 2.528.004.733,57 17,99% 1.608.263.477,88 16,31% 687.878.476,45 15,09% 47.303.910,40 13,15% -925.343.275,56 11,47% -1.721.291.719,60 8,50% -3.040.321.725,95 6,00% -4.025.415.817,44

14,18% -504.860.180,55 14,66% -200.568.340,98 15,18% 103.723.498,59 15,72% 408.015.338,17 15,71% 387.271.477,01 16,31% 687.878.476,45 16,94% 987.013.529,81 17,62% 1.286.148.583,17 18,34% 1.585.283.636,52 19,12% 1.884.418.689,88 19,96% 2.182.912.354,76

CAPEX (Wells Drilling & Workover) Profit/Inv Ratio 1,56 1,59 1,61 1,58 1,60 1,63 1,65 1,68 1,71 1,73 1,76 IRR NPV Sensitivity Range (%) 50 40 30 20 10 0 -10 -20 -30 -40 -50

CAPEX (LNG Systems & Vessels) Profit/Inv Ratio 1,56 1,59 1,61 1,58 1,60 1,63 1,65 1,68 1,71 1,73 1,76 IRR NPV Sensitivity Range (%) 50 40 30 20 10 0 -10 -20 -30 -40 -50

15,45% 255.869.418,38 15,72% 408.015.338,17 16,01% 560.161.257,95 15,71% 387.271.477,01 16,01% 538.218.144,18 16,31% 687.878.476,45 16,62% 837.446.003,13 16,94% 987.013.529,81 17,27% 1.136.581.056,49 17,62% 1.286.148.583,17 17,97% 1.435.716.109,84

15,45% 255.869.418,38 15,72% 408.015.338,17 16,01% 560.161.257,95 15,71% 387.271.477,01 16,01% 538.218.144,18 16,31% 687.878.476,45 16,62% 837.446.003,13 16,94% 987.013.529,81 17,27% 1.136.581.056,49 17,62% 1.286.148.583,17 17,97% 1.435.716.109,84 OPEX(Platform)

OPEX(Oil transp./Pipeline Tariff) Profit/Inv Ratio 1,58 1,59 1,60 1,61 1,62 1,63 1,64 1,65 1,66 1,67 1,68 IRR NPV Sensitivity Range (%) 50 40 30 20 10 0 -10 -20 -30 -40 -50 Profit/Inv Ratio 1,24 1,31 1,38 1,46 1,54 1,63 1,72 1,83 1,94 2,06 2,20

IRR

NPV

Sensitivity Range (%) 50 40 30 20 10 0 -10 -20 -30 -40 -50

16,22% 637.513.424,58 16,23% 647.586.434,96 16,25% 657.659.445,33 16,27% 667.732.455,70 16,29% 677.805.466,08 16,31% 687.878.476,45 16,33% 697.951.486,83 16,35% 708.024.497,20 16,36% 718.097.507,57 16,38% 728.170.517,95 16,40% 738.243.528,32

15,45% 229.194.193,97 15,62% 321.188.317,45 15,80% 413.182.440,93 15,97% 505.176.564,41 16,14% 597.170.687,88 16,31% 687.878.476,45 16,48% 778.535.569,82 16,64% 869.192.663,18 16,80% 959.849.756,55 16,97% 1.050.506.849,91 17,13% 1.141.163.943,28

MANUEL ANGEL GONZALEZ SUAREZ 1117655

54

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

ROYALTY RATE Profit/Inv Ratio 1,45 1,49 1,52 1,56 1,59 1,63 1,66 1,70 1,73 1,77 1,80 IRR NPV Sensitivity Range (%) 50 40 30 20 10 0 -10 -20 -30 -40 -50 Profit/Inv Ratio 1,65 1,63 1,61 1,59 1,57 1,55 1,53

COST RECOVERY IRR NPV Sensitivity Range (%) 50 40 30 20 10 0 -10 -20 -30 -40 -50

15,40% 203.125.525,41 15,59% 300.333.382,60 15,77% 397.541.239,79 15,95% 494.749.096,98 16,13% 591.956.954,17 16,31% 687.878.476,45 16,48% 783.570.534,78 16,65% 879.262.593,11 16,82% 974.954.651,44 16,98% 1.070.646.709,77 17,15% 1.166.338.768,10

16,56% 817.965.836,76 16,31% 687.878.476,45 16,05% 554.567.389,07 15,80% 421.256.301,70 15,55% 287.604.227,76 15,28% 149.106.569,11 15,02% 10.608.910,46 PROFIT TAX

CONTRACTORS SHARE PROFIT OIL Profit/Inv Ratio 1,82 1,63 1,43 1,23 1,04 0,84 0,64 IRR NPV Sensitivity Range (%) 50 40 30 20 10 0 -10 -20 -30 -40 -50 Profit/Inv Ratio 1,42 1,46 1,51 1,55 1,59 1,63 1,67 1,71 1,75 1,79 1,83 IRR

NPV

Sensitivity Range (%) 50 40 30 20 10 0 -10 -20 -30 -40 -50

15,70% 348.069.029,90 15,82% 416.030.919,21 15,95% 483.992.808,52 16,07% 551.954.697,83 16,19% 619.916.587,14 16,31% 687.878.476,45 16,42% 755.840.365,76 16,54% 823.802.255,07 16,65% 891.764.144,38 16,76% 959.726.033,69 16,87% 1.027.687.923,00

17,25% 1.230.133.473,66 16,31% 687.878.476,45 15,27% 138.320.287,28 14,14% -416.531.070,12 12,86% -980.316.337,29 11,41% -1.556.128.920,87 9,70% -2.150.402.430,51

SIGNATURE BONUS Profit/Inv Ratio 1,63 1,63 1,63 1,63 1,63 1,63 1,63 1,63 1,63 1,63 1,63 IRR NPV Sensitivity Range (%) 50 40 30 20 10 0 -10 -20 -30 -40 -50

16,30% 685.704.563,41 16,31% 686.139.346,02 16,31% 686.574.128,63 16,31% 687.008.911,24 16,31% 687.443.693,84 16,31% 687.878.476,45 16,31% 688.748.041,67 16,31% 689.182.824,28 16,31% 689.617.606,89 16,31% 690.052.389,50 16,31% 690.487.172,10

MANUEL ANGEL GONZALEZ SUAREZ 1117655

55

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

11.2. APPENDIX 2: LOCAL WORKFORCE DEVELOPMENT


LOCAL WORKFORCE DEVELOPMENT Employment policies: A policy on local employment to help neighbouring communities to understand 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 ethnic backgrounds). (Marathon, 2012) Training and skills development: Training and skills development elements to help local populations achieve the minimum standards required by the company (either in terms of general education or specialist skills). Activities Accelerated staff progression: Progress of local staff will be encouraged by tailoring training programmes to their development. Education and training Institutions: Investment in local education and training institutions. This approach will reduce 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 Eliminate barriers to local participation could promote the companys longterm reputation as a good corporate citizen. Increasing access to (and development of) new staff resources, ameliorating the growing global issues of the aging workforce within the oil and gas industry and a gradual shrinking of the pool of technically capable, skilled resources. (Total, 2010) Attractiveness Providing important input into the design of effective stakeholder engagement, building consensus and collaboration between parties and managing expectations. This can assist in securing trust with: The workforce, helping to prevent disputes. The local communities, to avoid protests, blockades and land access disputes. The regulatory authorities, reducing problems such as licensing delays. Period Year 1 to 4 Year 5 to 10 Year 11-25 Investment US$ 100;000/year US$ 150;000/year US$ 50;000/year Total Sub total US$ 400,000 US$ 900;000 US$ 750;000 US$ 2,050;000

Estimated cost

MANUEL ANGEL GONZALEZ SUAREZ 1117655

56

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

11.3. APPENDIX 3: SUPPLIER DEVELOPMENT


SUPPLIER DEVELOPMENT Procurement policy Corporate policy on supplier development can greatly enhance the effectiveness of local procurement initiatives. Activities Modifying procurement strategies and systems Direct procurement: This refers to goods and services procured by the oil and gas company itself. Indirect procurement: Chevrons procurement system will provide incentives to contractors to engage local enterprises. (IPIECA, 2012) Supporting local economic development by engaging local enterprises in the supply chain can lead to:

Maximizing opportunities for achieving higher levels of reliability and quality through local supplier proximity. Maximizing opportunities for lower costs on some locally-procured goods and Attractiveness services (mainly in the longer term). Increased local and national commitment to the project. Closer business alignment with government goals for development and local capacity building. It can also reduce project risk and enhance a companys reputation with local stakeholders.(Shell, 2012) Period Year 1 to 4 Year 5 to 10 Year 11-25 Investment US$ 150;000/year US$ 100;000/year US$ 25;000/year Total Sub total US$ 600,000 US$ 600;000 US$ 375;000 US$ 1,575;000

Estimated cost

MANUEL ANGEL GONZALEZ SUAREZ 1117655

57

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

11.4. APPENDIX 4: COMMUNITY DEVELOPMENT


COMMUNITY DEVELOPMENT Supporting Education Health Programmes 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. Providing assistance to improve medical care for children affected by the recent war and their families. Providing better working conditions for doctors and researchers.

Infrastructure Repair infrastructures damaged by the war with special attention to improve Development roads conditions in the areas of our operations. Government relationship: Contributing to the stability of the business environment; Meeting legislative requirements; Meeting expectations of host governments (driven in many instances by the expectations of local communities and business) for local economic and social benefits of oil and gas developments. Attractiveness Increasing the likelihood of competitive differentiation in bidding rounds/negotiations with host governments and government authorities Reputation: Delivering sustainability and corporate responsibility objectives, maximizing the impact of community investment resources. Period Year 1 to 4 Year 5 to 10 Year 11-25 Investment US$ 100;000/year US$ 100;000/year US$ 25;000/year Sub total US$ 400,000 US$ 600;000 US$ 375;000 US$ 1,375,000 US$ 400,000 US$ 600;000 US$ 375;000 US$ 1,375,000 US$ 2,000,000 US$ 1,200;000 US$ 375;000 US$ 3,575,000 US$ 6,275;000 and

Supporting Education

Estimated cost

Health Programmes

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

Year 1 to 4 US$ 500;000/year Infrastructure Year 5 to 10 US$ 200;000/year Development Year 11-25 US$ 25;000/year Total

MANUEL ANGEL GONZALEZ SUAREZ 1117655

58

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

11.5. APPENDIX 5: CONTRACT TYPES


The choice of contract type is one of the most significant strategic decisions, since it determines how the supplier is paid and how risk is allocated between the parties. As a general principle, contract type should aim to give the maximum likelihood of attaining the objectives 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 single tendered price) for the entire project. The terms fixed or firm usually indicate that the contract price will not be subject to escalation payments, whereas lump-sum contracts may. Additionally, fixed and firm contracts generally may not include variation clauses. However, the terms fixed and firm have no precise meaning. The payment terms included within 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 contract is 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 price redetermination (FPRP) Fixed-ceiling-price contract with retroactive price redetermination (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 limited to the contract price, so long as the contract does not have a price adjustment clause and the purchaser has not actually or constructively modified the contract. Additionally, the purchaser can generally rely on the contractor to finance performance under a fixed-price contract. Unless the purchaser agrees to provide financing in the form of progress payments, it pays only for completed or delivered work. (Morris & Pinto, 2007) Further, fixed-price contracts are generally simpler for the purchaser to administer because there is typically no need to audit the contactors books or determine whether particular costs are allowable under the contract. (Kate M. Manuel, 2010)

MANUEL ANGEL GONZALEZ SUAREZ 1117655

59

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

TYPE Firm-fixed-priceContracts (FFP)

DESCRIPTION Contractor agrees to provide supplies or services to the procuring activity for a specified price

Fixed-price contracts with Contractor agrees to provide supplies or services to the procuring economic price adjustments activity for a specified price that could be adjusted if certain economic conditions change during performance of the contract (FPE) Fixed-price contract with prospective price redetermination (FPRP) Fixed-ceilingprice contracts with retroactive price redetermination (FPRR) Firm-fixed-price, level-ofeffort term contracts (FFPLOE) Contractor receives a firm fixed price for a specified initial period of performance, with the price for later periods revised in an equitable manner based on variables agreed upon by the partiesb Contractor receives no more than a fixed ceiling price that was agreed upon when the contract was formed; determination of actual price occurs after the contract is performed based on variables previously agreed upon Contractor receives a fixed amount for providing a certain level of effort over a certain period of time on work that can only be stated 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 performance costs 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 the clauses do not adequately protect the purchasers interests. However, refusal to use economic price adjustment clauses where significant economic fluctuations are possible could result in the purchaser paying higher prices because fewer contractors will compete for such contracts. (Leisenring, 2004)

MANUEL ANGEL GONZALEZ SUAREZ 1117655

60

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

11.5.2. Cost-Reimbursement Contracts The various cost-reimbursement contracts, described in Table 38, provide for the purchaser to pay the contractor, at a minimum, allowable costs incurred in performing the contract up to a total cost specified in the contract. As used here, costs do not necessarily include all expenses that the contractor incurred in performing the contract. Rather, costs are expenses that are allocable to the contract and reimbursable by the purchaser under the terms of the contract. (Morris & Pinto, 2007) The types of cost-reimbursement contracts differ in whether the contractor recovers only costs (e.g., cost contracts, cost-sharing contracts) or whether there is some allowance for profit (e.g., cost-plus fixed- fee contracts, cost-plus-a-percentage-of-cost contracts). Some contracts are with vendors that are nonprofits (e.g., cost contracts) or that at least are not expecting to profit from the contract (e.g., cost-sharing contracts). Others are with contractors who anticipate making a profit (cost-plus-fixed-fee contracts). Cost (CR) Cost-sharing (CS) Cost-plus-fixed-fee (CPFF) Cost-plus-award-fee (CPAF) Cost-plus-incentive-fee (CPIF)
TYPE Cost contracts (CR) Cost-sharing contracts (CS) DESCRIPTION Contractor reimbursed for allowable costs up to a specified total cost; no allowance for profit Contractor is reimbursed for some allowable costs; pays the other costs itself

Contractor is reimbursed for Cost-plus-fixed fee allowable costs up to the specified contracts (CPFF) total cost and receives a negotiated fixed fee for its efforts Cost-plus-a percentageof cost contracts Contractor is reimbursed for its costs and receives a certain percentage of these costs as an allowance for profit.

Table 38: Cost Reimbursable Contracts

Cost-reimbursement contracts can be high risk for the purchaser because the contractor has little incentive to keep the performance costs down given that the purchaser will ultimately pay these costs. These risks are even greater when the contractor is assured of not only recovery of its costs, but also profit based on a percentage of the costs (i.e., costplus-a-percentage-of-cost contracts). Further, cost reimbursement contracts can give rise to disputes between the parties over whether particular costs are allowable under or allocable to the contract.

MANUEL ANGEL GONZALEZ SUAREZ 1117655

61

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

11.5.3. Incentive Contracts (Payment linked to results) The various types of incentive contracts (fixed-price incentive contracts, cost-plusincentive-fee contracts, and cost-plus-award-fee contracts) are often characterized as occupying a middle ground between fixed-price and cost-reimbursement contracts because the parties share the risk by basing the contractors profits, in part, on the cost or quality of its performance. (Morris & Pinto, 2007)
INCENTIVE CONTRACTS TYPES fixed-price incentive contracts: Fixed-price award-fee (FPAF) Fixed-price Incentive Firm (FPIF) Fixed-price incentive with successive targets (FPIS) cost-plus-incentive-fee contracts cost-plus-award-fee contracts
Table 39: Incentive Contracts

The various types of incentive contracts are alike in that they provide for the contractor to get: 1 A specified base fee. 2 The opportunity to earn additional fees (i.e., incentive or award fees) based upon its performance in meeting cost, schedule, or technical goals under the contract. They differ in the basis upon which the additional fee is determined and, in the case of incentive-fee contracts, the circumstances in which they can be used. Cost plus-award fee contracts With this type of contracts the award fee is entirely separate from the base fee and is determined based on the procuring activitys subjective evaluation of the contractors performance. Fixed-price/Cost-plus incentive contracts With fixed-price incentive contracts and cost-plus-incentive-fee contracts, in contrast, the incentive fee is determined based upon formulaic adjustments of the base fee. The formula for fixed-price incentive contracts focuses upon the relationship of total final negotiated cost to total target cost. The formula for cost-plus-incentive-fee contracts focuses upon the relationship of total allowable costs to total target cost and includes the target cost, the target fee, the minimum fee, and the maximum fee as components.

MANUEL ANGEL GONZALEZ SUAREZ 1117655

62

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

11.5.4. Time and Materials and Labour-Hour Contracts In a T&M contract, the contractor is paid a fixed hourly rate for direct labour expended during the contracts performance (e.g., wages, overhead, general and administrative expenses, profit), as well as the actual cost of materials. The materials covered by a timeand materials contract can include direct materials, subcontracts for supplies or incidental services, other direct costs, and applicable indirect costs. A labour-hour contract is similar to a time-and-materials contract, except the contractor supplies only direct labour, not materials. Suitability: The parties cannot accurately estimate the extent or duration of the contracts work, or reasonably estimate the costs of the contract, at the time of contracting The contracting officer prepares a determination and findings (D&F) that no other contract is suitable The contract includes a ceiling price that the contractor exceeds at its own risk. 11.5.5. Gainshare Gain sharing is a contractual structure where the organization and its service provider agree to share financial gains and losses under predefined conditions: If the project cost meets the agreed target, the contractor makes an agreed level of profit. If the project cost is lower than the agreed target, then the contractor receives some of the savings as a reward. Conversely, if the project cost is higher than the agreed target, then the contractor shares some of the cost over-run as a penalty. (ITWORLD, 2012) 11.5.6. Equity Investment Equity finance enables an organization to attract investment in exchange for an ownership stake in the business. For example, the investment can be made in exchange for shares in a company. Equity investor agreements facilitate these transactions. An organization can finance its operations in two principal ways: equity finance and debt finance. In equity finance, the organization sells equity in return for investment. In debt finance, the organization obtains funds through loans and the issuance of bonds. Advantages: Debt finance, such as loans, imposes extra costs on the organization such as interest and penalty fees. However, equity agreements enable the organization to attract investment without any obligation to repay the investor. Depending on the organization's success, an investor usually makes a return in his investment by way of dividends. (EHOW, 2012)

MANUEL ANGEL GONZALEZ SUAREZ 1117655

63

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

CPIF

CPAF

CPFF

CR or CS

LH or T&M

Use

Objective relationship can be Objective relationship between Relating fee to measures of Contractor expects substantial No other type of contract is established between the fee and fee and measures of contract performance is compensating benefits for suitable due to contract measures of contract performance are not feasible. unworkable or of marginal absorbing part of the cost delivery requirements or performance Subjective standards can be utility and/or foregoing fee; non-profit other factors fairly applied contactor

Principal Risk Purchaser assumes the majority of the risk inherent in the contract due to highly uncertain and speculative labour, materiel and other requirements Purchaser necessary to perform the contract. perspective Required contract elements Target cost; minimum, Target cost; Standards for Target cost; fixed fee maximum and target fee; evaluating performance; Base formula for adjusting fee based and maximum fee; procedures on actual costs and/or for adjusting fee based on performance performance against standards Research and development of Large scale research study the prototype for a major system Research study Target cost; If CS, an Ceiling price; per hour labour agreement on the DOD share rate that includes overhead of the cost; no fee and profit; provisions for reimbursing direct material costs Joint research with non-profit institutions Emergency procurement of repairs Make a good faith effort to meet the contract requirements within the ceiling price

Typical uses Contractor obligation

Make a good faith effort to meet the contract requirements within the estimated cost and schedule

Contractor incentive

Realize a higher fee by Realize a higher fee by Realize a higher rate of If CS, shares in providing a None Completing work at a lower cost meeting subjective return (fee divided by total deliverable of mutual benefit and/or by meeting other performance standards cost) as total cost objective performance decreases targets
Table 40: Cost Reimbursable Contracts Comparative
(Adapted from U.S Department of Defence Contracting Considerations for Selecting Contract Type)

MANUEL ANGEL GONZALEZ SUAREZ 1117655

64

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

FFP
Requirement is well defined; contractor is experienced; stable market; insignificant financial risks

FPEPA
Significant risk to market prices due to industry wide factors beyond the contractor's control; Dollars at risk outweigh administrative burden Unstable market prices for labour or materiel over period of contract Fixed-price; ceiling for upward adjustment; formula for price adjustment for market conditions Commercial materiel and services during periods of market instability Provide acceptable deliverable at specified time, place and adjusted price

FPIF
Ceiling price can be established that covers the risks inherent in the work effort; profit sharing formula motivates contractor to control costs Moderately uncertain contract labour or materiel requirement Ceiling price; target cost; target profit; delivery and quality targets; profit sharing formula Production of a major system based on a prototype

FPAF
Acceptance criteria can be fairly evaluated; fee will provide meaningful incentives and justify related administration burden Contractor may acceptance criteria not meet

FPRP
DOD requires firm commitment for materiel or services during subsequent years; dollars at risk outweigh administrative burden Costs of performance after first year cannot be accurately estimated Fixed-price for first period; Proposed subsequent periods; Timetable for pricing next periods. Lon-term production of spare parts Provide acceptable deliverable at specified time, place and at price established for each period Additional profit for reduction in performance costs for performance periods

Use

Principal Risk to Purchaser Required contract elements Typical uses Contractor obligation Contractor incentive

None. Contractor assumes all cost risk

Firm fixed price for all Contract deliverables

Commercial materiel and services Provide acceptable deliverable at specified time, place and price Additional profit for reduction in performance costs

Firm fixed-price; performance evaluation standards; procedures for calculating fee based on performance standards Performance based contracts for materiel and services Perform at the time, place, and price fixed in the contract Additional profit for reduction in Performance costs; additional fee for meeting performance standards

Provide acceptable deliverable at specified time, place and at or below ceiling price Additional profit for reduction in Higher profit for completing performance costs work below ceiling price and/or meeting objective performance targets Table 41: Fixed Price Contracts Comparative
(Adapted from U.S Department of Defence Contracting Considerations for Selecting Contract Type)

MANUEL ANGEL GONZALEZ SUAREZ 1117655

65

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

11.6. APPENDIX 6: BASE CASE FINANCIAL RESULTS RESUME


11.6.1. Economic Results Summary for Foreign Oil Company
Year 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 TOTAL Total Foreign Oil Company Gas Revenue $0,00 $0,00 $0,00 $0,00 $3.086,43 $3.148,15 $3.211,12 $2.565,93 $2.617,25 $2.669,60 $2.722,99 $2.777,45 $2.833,00 $2.889,66 $2.947,45 $3.006,40 $3.066,53 $3.127,86 $3.190,42 $3.254,22 $3.319,31 $3.385,70 $3.453,41 $3.522,48 $3.592,93 $64.388,28 Total Project Capex -$2.598,75 -$2.728,69 -$2.865,12 -$3.008,38 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 -$11.200,94 Total Project Opex $0,00 $0,00 $0,00 $0,00 -$280,78 -$294,82 -$309,56 -$325,04 -$341,29 -$358,36 -$376,27 -$395,09 -$414,84 -$435,58 -$457,36 -$480,23 -$504,24 -$529,46 -$555,93 -$583,73 -$612,91 -$643,56 -$675,74 -$709,52 -$745,00 -$10.029,32 Signature / Production Bonus payable -$5,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 -$5,00 Profit tax payable $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 -$52,76 -$604,54 -$613,52 -$622,52 -$631,54 -$640,57 -$649,60 -$658,62 -$667,62 -$676,60 -$685,53 -$694,42 -$703,24 -$711,98 -$8.613,08 Net Cash Flow -$2.603,75 -$2.728,69 -$2.865,12 -$3.008,38 $2.805,64 $2.853,33 $2.901,55 $2.240,89 $2.275,96 $2.311,24 $2.346,72 $2.329,60 $1.813,62 $1.840,56 $1.867,57 $1.894,63 $1.921,71 $1.948,80 $1.975,87 $2.002,87 $2.029,80 $2.056,60 $2.083,26 $2.109,72 $2.135,95 $34.539,94 Cumulative Cash Flow -$2.603,75 -$5.332,44 -$8.197,56 -$11.205,94 -$8.400,29 -$5.546,96 -$2.645,41 -$404,51 $1.871,45 $4.182,69 $6.529,40 $8.859,00 $10.672,62 $12.513,17 $14.380,74 $16.275,37 $18.197,08 $20.145,88 $22.121,75 $24.124,62 $26.154,42 $28.211,02 $30.294,28 $32.404,00 $34.539,94 $34.539,94 Discounted Net CumulativeDiscounted Cash Flow Cash Flow -$2.264,13 -$2.063,28 -$1.883,86 -$1.720,05 $1.394,90 $1.233,57 $1.090,80 $732,55 $646,97 $571,30 $504,41 $435,42 $294,76 $260,12 $229,51 $202,47 $178,58 $157,47 $138,83 $122,38 $107,84 $95,02 $83,69 $73,70 $64,89 $687,88 -$2.264,13 -$4.327,41 -$6.211,27 -$7.931,32 -$6.536,42 -$5.302,85 -$4.212,05 -$3.479,49 -$2.832,52 -$2.261,22 -$1.756,81 -$1.321,39 -$1.026,63 -$766,51 -$536,99 -$334,52 -$155,95 $1,53 $140,36 $262,74 $370,58 $465,60 $549,29 $622,99 $687,88 $687,88

Economic Results Summary for Foreign Oil Company Profit / Investment Ratio 1,63 NPV (Discounted at 15%) $687,878,476 IRR 16,31%
MANUEL ANGEL GONZALEZ SUAREZ 1117655

66

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

11.6.2. Economic Results Summary for National Oil Company


Year 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 TOTAL Total Project Oil and Gas Revenue $0,00 $0,00 $0,00 $0,00 $3.160,70 $3.223,92 $3.288,39 $3.354,16 $3.421,25 $3.489,67 $3.559,46 $3.630,65 $3.703,27 $3.777,33 $3.852,88 $3.929,94 $4.008,53 $4.088,70 $4.170,48 $4.253,89 $4.338,97 $4.425,75 $4.514,26 $4.604,55 $4.696,64 $81.493,38 Signature / Production Bonus Received $5,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $5,00 Royalty received $0,00 $0,00 $0,00 $0,00 $47,41 $48,36 $49,33 $503,12 $513,19 $523,45 $533,92 $544,60 $555,49 $566,60 $577,93 $589,49 $601,28 $613,31 $625,57 $638,08 $650,84 $663,86 $677,14 $690,68 $704,50 $10.918,15 Profit tax received $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $52,76 $604,54 $613,52 $622,52 $631,54 $640,57 $649,60 $658,62 $667,62 $676,60 $685,53 $694,42 $703,24 $711,98 $8.613,08 Share of profit oil received $0,00 $0,00 $0,00 $0,00 $26,87 $27,40 $27,95 $285,10 $290,81 $296,62 $302,55 $308,61 $314,78 $321,07 $327,49 $334,04 $340,73 $347,54 $354,49 $361,58 $368,81 $376,19 $383,71 $391,39 $399,21 $6.186,95 Net Cash Flow $5,00 $0,00 $0,00 $0,00 $74,28 $75,76 $77,28 $788,23 $803,99 $820,07 $836,47 $905,97 $1.474,81 $1.501,19 $1.527,95 $1.555,08 $1.582,58 $1.610,45 $1.638,68 $1.667,29 $1.696,26 $1.725,58 $1.755,27 $1.785,31 $1.815,69 $25.723,18 Cumulative Cash Flow $5,00 $5,00 $5,00 $5,00 $79,28 $155,04 $232,32 $1.020,54 $1.824,54 $2.644,61 $3.481,08 $4.387,05 $5.861,86 $7.363,05 $8.891,00 $10.446,07 $12.028,65 $13.639,10 $15.277,78 $16.945,07 $18.641,33 $20.366,91 $22.122,18 $23.907,49 $25.723,18 $25.723,18 Discounted Net Cash Flow $4,35 $0,00 $0,00 $0,00 $36,93 $32,75 $29,05 $257,67 $228,54 $202,71 $179,79 $169,33 $239,70 $212,16 $187,78 $166,18 $147,06 $130,13 $115,14 $101,87 $90,12 $79,72 $70,52 $62,37 $55,16 $2.799,05 Cumulative Discounted Cash Flow $4,35 $4,35 $4,35 $4,35 $41,28 $74,03 $103,08 $360,75 $589,30 $792,01 $971,80 $1.141,14 $1.380,83 $1.592,99 $1.780,77 $1.946,95 $2.094,02 $2.224,15 $2.339,29 $2.441,16 $2.531,29 $2.611,01 $2.681,53 $2.743,89 $2.799,05 $2.799,05

Economic Results Summary for National Oil Company NPV (Discounted at 15%) $2,799,050.571

MANUEL ANGEL GONZALEZ SUAREZ 1117655

67

SAHARA DESERT ONSHORE GAS FIELD CHEVRON-LNOC COLLABORATION


Rev: 14 Ref:O&G-CW

11.7. APPENDIX 7: CONTRACT TYPES TREE

Figure 28: Contract Types Tree

MANUEL ANGEL GONZALEZ SUAREZ 1117655

68

You might also like