Production Sharing Contract

( In terms of G&G Aspect)

Gross Revenue Royalty

Cost Petroleum

Profit Petroleum

Govt. Profit

Contractor Profit

Income Tax

Net Contractor Take

October 2010

Historical Back Ground of Oil Industry (India) :

OALP NELP era (NELP-I to IX) Pre NELP era Nomination era
Pre Independence era

PSC Regime

1886-1946

1947-1990

1990-1996

1997- till date

Future

Effective Regulatory Mechanism of Oil Industry :

ROLE

POLICY MAKER / REGULATOR

POLICY / CONTRACT

Upstream
(E&P)

Ministry of Petroleum and Natural Gas Directorate General of Hydrocarbons

Policy for Exploration & Production New Exploration Licensing Policy (NELP) Production Sharing Contract (PSC)

Midstream
(Pipelines)

Ministry of Petroleum and Natural Gas Petroleum and Natural Gas Regulatory Board Policy for Pipe lines Pipe Line Policy

Policy for Refining,Selling&Distribution

Downstream
(Refining, Selling & Distribution)
Petroleum and Natural Gas Regulatory Board

Selling ,Distribution of Natural Gas and products derived from crude oil

Effective Regulatory Mechanism of E&P Industry (upstream):

Definition of PSC :
An agreement between Contractor and Government whereby Contractor bears all exploration risks, production and development costs in return Contractor take share of profit petroleum . These cost are recoverable in case of commercial discovery. Type of Agreements PSC Joint Venture Service Contact Hybrid Concession Contractor Exploration risk , Share in reward Share in risk & reward No risk Mixed All risk all reward Government Share in reward Share in risk & reward All risk all reward Mixed Reward is a function of production & price

Salient Features of PRE-NELP PSC

In Pre-NELP PSCs under exploration rounds, National Oil Companies (NOCs) are the Licensee and have carried interest of 10% participating interest (PI) during exploration phase and 30% PI during Development phase. This means, NOC can take 10% PI from the date of signing of the contract and bear 10% of the exploration cost.And after commercial discovery in the block, NOC can further take 30% PI in the block without paying any past cost but will share all future cost as per their PI in the block.

Salient Features of NELP PSC

No Mandatory State Participation , No Carried interest by National Oil Companies, Income Tax Holiday for First Seven years( from the date of commencement of Commercial production) Under PSC regime, the company invests initially its own money during Expl & Dev phase of the field. Once the commercial production commences from the field, the Company is liable to recover its full costs (Cost oil) after paying statutory payments. After full cost recovery, the profit (profit oil) from the field is shared between the company and the Government in a pre-agreed manner.

PSC Milestone of G&G:

Exploratory Locations Released

Block Offered with a MWP to CONTRACTOR

(2D Seismic API, 3D Seismic API, Reprocessing of old 2D Seismic data, Geochemical Survey, Exploration drilling) Exploratory Locations Drilled

100% PEL

GEOSCIENTIFIC INTERPRETATION
60 Days 30 Days

WELL DATA TESTING

Relinquishment After Phase-I(25%)

SUBMISSION OF FORMAT-B
18 Months (ON O)S)

SUBMISSION OF FORMAT-A

DISCOVERY

DRY

Appraisal wells not required

120 days from Format B 18 Months (for ON and OS) 30 Months (for DW)

If potential commercial interest not established

SUBMISSION OF DoC 200 Days

75% PEL

APPRAISAL PLAN (To delineated the Area) Net Contractor take Income tax

SUBMISSION OF FORMAT-C

Relinquishment After Phase-II(50%)

SUBMISSION OF Development Plan SUBMISSION OF FORMAT-D

GOVT take

Contractor take

PML
Of Discovery Areas

50% PEL
END OF EXPLORATION PHASE

PRODUCTION

ABANDONMENT / RESTORATION

Retain Only Discovery areas Hand over all Original copies of data and Information

Discovery* No Discovery

If MWP not completed within time frame/or If Additional Potential beyond MWP

Ring Fencing PSC

Contractual Framework :
Management Committee (MC) BIDDER 1 BIDDER 2 BIDDER 3
Joint Bidding Agreement

Operating Committee (OC) CONSORTIUM / CONTRACTOR

Bid

GOVERNMENT

License Operator Ship and Operating Committee (OC)

In case of Consortium one company of the consortium is designated as operator to carry out all the Petroleum Operations on behalf of the Contractor (Consortium) Operator designated to carry out Petroleum Operations on behalf of contractors vide JOA which will deal with establishment of operating committee The Committee established by that name in the Operating Agreement pursuant to PSC Government control over appointment and change of Operator (Operator ship cannot be changed without approval of Government)

Production Sharing Contract Work program & budget approvals Exploration Activities DISCOVERY Notification to Government Appraisal and testing COMMERICAL mining lease Development and production

Joint Operating Agreement (JOA)

Any time two or more owners of working interests decide to share the risk of drilling, development, or operations related to the production of oil and gas, they enter into an agreement, in industry term it calls a joint operating agreement (JOA) or, simply, an Operating agreement The JOA generally provides for one of the parties to act as the Oprator for the parties on the joint area covered by the JOA. It also specifies the operation for which the JOA was formed (examplethe drilling of a well) and how much cost and revenues will be shared, determined and accounted for.

Management Committee (MC) Structure

MC Responsibilities & MCM /MCR

MCM / MCR
Contractor signed copy submitted for signature of GOVT nominee

Chairman
Finalize @ 10 days before Meeting

Finalize and sent to the Secretary Draft Minutes Sent to within 3 business day

MOM Prepared by Secretary in English

Return to Operator after Signature Sent to Partners for their Signature

Approval from Chairman

MC Responsibilities
MC has advisory/approval role in following matters (with the approval of Operating Committee) Annual Work Programme & Budget for Exploration / Development Phase Proposal for relinquishment / surrender Declaration of Commercial Discovery Proposals for an Appraisal Programme or revisions Proposed Development Plan &Determination of a Development area Appointment of Auditors Any other matter required by the terms of contact to be submitted for review and advice

Sent the Agenda Item and date

Ask Approval for a Meeting

MC Meeting

Confirm the Final agenda @ 7 days before Meeting Confirm the agenda / or added if required Notify the Members with agenda @ 28 days before / Or Shorter Period if all are agree

Secretary

Partners

* MC Agenda Should OC Approve

Discovery, Development and Production in case of Discovery

Forthwith inform to MC and Government There are different time-frames under which the Contractor has to assess the potentiality of the Discovery and develop and produce from the field.
15 Reports Submitted to DGH/ MoPNG / MC Members : Appraisal* & Dev Plan Information Given to GOI / MC Member : Format A, B,C, D

Format-C

Format-D
D E V E L O P M E N T P L A N
1. 2. 3. 4. Name of the Field Date of Commercial Discovery of the field No. of wells drilled No.of hydrocarbon interesting zones with geological age/formation. Results of reservoir studies a. Well Production potentials b.Reservoir properties c.Fluid properties/Fluid contact (if any) d.Drive mechanism 5. Recoverable (Ultimate Reserves) (proved, probable and possible categories) No. of Wells to be drilled under development plan Deatail Techno-economics (CAPEX, OPEX, IRR, NPV etc.) Likely date of start of production possible market (consumer/consumers) Potential IOR/EOR techniques to be employed in future

Recoverable Reserves (proved, probable and possible categories)

Format-A
11. 12. 13.

Format-B

+
Fluid Contact ( if any) Areal extent of the pool/ field Appraisal plan (Required /or not required) Oil & Gas in place ( proved & Probable category)

1. 2. 3. 4.

Block Name & Category (Pre NELP/ NELP) Contractor Party (ies) with Participating Interest Area of the Block (Sq. Km) Name of the Location/ Well Name of the Discovery ( if any)

A P P R A I S A L P L A N

16 17 18

Expected production profile (BOPD/ MMSCFD) Likely date of submission of development plan Preliminary technoeconomic analysis (including expected development expenditure) Likely facility to be employed

19

14.

6. 7.

5. 6.

Drilled Depth of the Well Number of Hydrocarbon interesting zones with Geological Age/ information Zone and Perforation Interval Tested Results of MDT (if any) Results of DST ( If any): a)Production Rate ( All Fluids) b)Well head pressure/ Temperature c)Pressure Transient studies results Fluid Properties
Format A: Format B: Format C: Format D:

7. 8. 9.

Definition of Format A,B,C&D

New Discovery in the Contract Area, but the potential commercial interest of the said Discovery is yet to be established. Based on test and analysis and interpretation, the Discovery Declare in Format A have potential commercial interest and merits appraisal. Discovery notified through Format-B of Potential Commercial Interest is economic viable, and needs development. After Approval of Development plan by the management committee (the development plan, which was submitted after Format C to MC)

8. 9. 10.

10.

Submission and Approval of FDP

Submitted

DEVLOPMENT PLAN (Prepared by Contractor)

OC Approval CONTRACTOR

Management Committee
(Generally submitted to DGH with OC Approval)

Approval within 110 days/ Ask additional information within 85 days Furnish additional information within 30 dauys

(1st Govt Nominee )

Final signed copy submitted for Govt Nominee Signature If Contractor feels Potential , then can submit the DEV Plan direct to GOI

Advice to Contractor for modification and Re-submission

APPROVED
Inform the Contractor with a MC approval for Consortium sign Inform the Contractor with Reason

REJECTED

Govt Shall respond within 110 days

Modified FDP

GOI

Approve

Rejected

Unit Development :
Information from any bonafide source Information from any Party or both

Common Reservoir in two Contractor (A&B)

Govt of India
(for securing more effective recovery petroleum from such reservoir) Submit a Plan

Submit a Plan within 180 days Accepted & Inform to Contractor

Agree Not agree

If Approved by GOI

Independent Agency

Party A

Party B

May cause to Prepared & Inform to Contractor

Make a Proposal after Discussed with both Parties

Joint Development Plan

(Parties are Unable to agree)

Joint Development Plan

(agreed by both Parties)

Joint Development Plan

Bound to agree both Parties

Production Sharing of Petroleum

Service Tax Gross Revenue

4
GOVERNMENT TAKE

1
Royalty

Cost Petroleum

Profit Petroleum

Govt. Profit Petroleum

Contractor Profit Petroleum

3
CONTRACTOR TAKE

Income Tax

Net Contractor Take

Example of Production Sharing:

Gross Revenue
Let Gross Revenue =100

Royalty =10 May Recoverable

Cost Petroleum =40 100-10- (+40 40) =90 If Cost is Recoverable If Cost is not Recoverable 100-10- (+40 ) =50

Profit Petroleum = 90 or 50

Govt. Profit =10 or 5

Contractor Profit =80 or 45

Income Tax =25 or 15

Net Contractor Take =55 or 30

Government and Contractor take:

The Share of the Government and the contractor of the Profit Petroleum is determined by the Investment Multiple achieved by the of the contractor

COST RECOVERY:
Cost recovery is a biddable component which depends upon the sharing of profit petroleum With Government based on the various tranches of pre-tax investment multiple achieved

How is Cost Recovery to be made:

First for Royalty payments Next for the production costs Next for the Exploration costs Then for the Development costs

NON RECOVERABLE COST:

Effective date of PSC (PEL) , PML & Guarantees :

Effective date of PSC (PEL)
Effective Date (ED) of the Contract is the date from which License has been made effective by the Government .Any expenditure before ED (except PEL Fee) is non-cost recoverable

Petroleum Exploration License (PEL) for:

On-land Area : Granted by State Government Offshore Area : Granted by the Central Government (MOP&NG)

PML:

Contractor shall submit an application for grant of License to the State Government or the Central Government as the case may be, as early as possible but not later than 15 Business Days from the date of execution of the Contract.

Guarantees:
To be submitted within 30 days of the Effective Date :

Bank Guarantees:
Shall be an amount equal to 35% of the Companys Participating Interest of the total estimated expenditure in respect of MWP during the relevant Year of a Phase

Financial & Performance Guarantee:

From the Parent Company in favour of the Government. Where there is no parent company, from the company itself.

Legal opinion:
A legal opinion from the legal advisors to the effect that the aforementioned guarantees have been duly signed on behalf of the Guarantors.

Protection of the Environment

Two EIA Studies required 1st study in two parts : (i) Before Seismic Survey
(ii) Before Exploratory drilling

2nd study required : before commencement of Development operations

Note: MOEF clearance required before commencement of Petroleum Operations (Sept,06 notification)

Policy Introduced Subsequently Under NELP PSC

Extension Policy
For granting extension for an Exploration Phase by way of increasing bank guarantee amount and/ or cash payment as LD. A maximum of 18 months extension allowed in three stages (with commitment of AWP)

Policy for Substitution

Policy for substitution of additional meterage drilled in deeper wells against total meterage commitments as part of Minimum Work Programme (MWP) in the Production Sharing Contracts

The Policy for determining the amount

The Policy for determining the amount of Unfinished work programme for paying to the Government

Note : Liquidated Damage: any loss or damage in Petroleum Operations

PRE NELP- PRODUCTION SHARING CONTRACTS:

In Pre-NELP PSCs under exploration rounds, National Oil Companies (NOCs) are the Licensee and have carried interest of 10% participating interest (PI) during exploration phase and 30% PI during Development phase. This means, NOC can take 10% PI from the date of signing of the contract and bear 10% of the exploration cost.And after commercial discovery in the block, NOC can further take 30% PI in the block without paying any past cost but will share all future cost as per their PI in the block.

Round 1 to 3 (1980-1986)
Contract Period :Exploration-3 Years ,Work Commitment :Specified ,Expenditure Commitment: Specified Bonus & Royalty (Non Cost recoverable): Signature Bonus Yes ,Development Bonus Yes,Royalty @15% Bonus & Royalty waived off from 2ndRound onward Cost recovery Specified Relinquishment: 25% of the Contract area after Ph-I Government Participation ONGC entitled to 50% working interest paying proportionate exploration cost of Development Area

4thto 8thROUND OF EXPLORATION, 1991-94

Contract Period : Exploration 7 Yrs ,Exploitation 18 Yrs Work Commitment :In case of only seismic survey in first Commitment Phase max 2 Yrs for offshore and 3 yrs for onshore Expenditure Commitment: No Expenditure Commitment ,Bonus & Royalty: Not payable by Companies Cost Recovery : Allowed up to 100% Income Tax :@ 50% for Foreign Companies @ 65% for Domestic Companies Government Participation :Exploration Period -NOCs had option to take 10% PI Development Period NOCs can take additional 30% PI in Development Area without paying post cost Relinquishment::25% of the Contract Area after Ph-I,Further 50% of the original Contract Area after Ph-II,Only producing & producible areas retainable after Ph-III NOCs (ONGC/OIL) as licensees were also a partner in these blocks. Companies were exempted from payment of royalty, cess, annual rental charges and license fees, as per the terms of PSC (except few PSCs where cess is payable by the contractors).

JOINT VENTURE EXPLORATION PROGRAMME (JVEP) -1995

Sharing of risk by NOCs from the date of signing of the Contract with Participating Interest ranging between 25 to 40 % Cess Payment by the Licensee (NOCs) Relinquishment: 30% at the end of Ph-I,Further 40% of the original Contract Area at the end of Ph-II

Status:
Poor response -270 blocks offered - only 35 blocks contracted to Pvt. Companies .

NELP-PRODUCTION SHARING CONTRACTS

( New Exploration Licensing Policy (NELP) announced in 1997, Effective since 1999)
Under PSC regime, the company invests initially its own money during Expl & Dev phase of the field. Once the commercial production commences from the field, the Company is liable to recover its full costs (Cost oil) after paying statutory payments. After full cost recovery, the profit (profit oil) from the field is shared between the company and the Government in a pre-agreed manner. SALIENT FEATURES OF NELP
No Mandatory State Participation No Carried interest by National Oil Companies Income Tax Holiday for First Seven years from the date of commencement of Commercial production No signature, discovery or production bonus Foreign participation up to 100% Royalty as a percentage of well-head value of Crude Oil and Natural Gas Concession in the Royalty rate for Deep water Royalty @ 5% for the first seven years of Commercial production Biddable Cost recovery Limits up to 100% Freedom to the Contractor to market Oil & Gas in the domestic market achieved by the contractor Provision of Only Seismic option in the first phase of Exploration Period Revised PSC

NELP-PSC :
Exploration Period (NELP-I to V):
Total exploration period for a maximum of 7 Years,divided into one to three commitment Phases No single commitment phase for more than 3 Years,except Deep water blocks wherePhase- I may be of 4 years, making total period for 8 years

Exploration Period (NELP -VI):

Totalexplorationperiodforamaximumof7Years(8forD/W),dividedintotwocommitmentPhases Nosinglecommitmentphaseformorethan4Years,except Deep water blocks where Phase-I may be of 5 years, making total period for 8 years

End Of Exploration Phase

At the expiry of any Exploration Phase , provided that MWP has been completed, Contractor has to give a written notice to the Government at least 30days prior to the expiry of the Phase of its intension to go to next Phase or relinquish the Contract Area.

Relinquishment (NELP-I to V):

Contractor opting to proceed to Phase-II, shall retain up to 75% of the original Contract Area including any Discovery and Development Area. Similarly, Contractor opting to proceed to Phase-III shall retain up to 50% of the original Contract Area including any Discovery and Development Area. In the event the Discovery Area and the Development Area exceeds 75% or the 50% of the original Contract Area, as the case may be, the Contractor shall be entitled to retain to the extent of Discovery Area and Development Area. At the end of third Exploration Phase, only Discovery and Development area shall be retained

Relinquishment (NELP-VI): optional

In case Contractor decided to relinquish, the area shall not be less than 25% of the original contract Area. At the end of 2nd Phase, only Discovery area and Development Area can be retained.

Minimum Work Programme (MWP)

MWP is the Phase-wise commitment of exploration inputs viz seismic surveys, GM/ Geo-chem / MT surveys etc, and drilling of wells. TheContractorhastocommencePetroleumOperationnotlaterthan6monthsoftheEffectiveDate. Excess MWP done in a Phase can be off-set against MWP of subsequent Phase If the Contractor fails to complete the MWP by the end of any Exploration Phase or due to early termination of the Contract, Contractor has to pay equal amount of money to the Government which is required to complete the remaining work

New Provision
In NELP-VI, under Phase-I, Mandatory Work Programme has been introduced by the Government under which whole Contract Area is to be covered by 2D seismic API.The Mandatory Work Programme is in addition to biddable MWP