Koya Uni/FENG/DPETE 05/02/2019

Koya University
Faculty of Engineering
Department of Petroleum Engineering
Third Stage

Petroleum Economics
Oil and Gas Contracts
Farhad Abdulrahman
Assistant Lecturer

Lecture Outlines

1. Key Characteristics of Oil and Gas

2. Licensing
3. Contracts
- Concessionary
- PSA
- JV
- SC
4. Basic Features of all types of Contracts
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Key Characteristics of Oil and Gas

• Concealed (Masked)
• Difficult and very expensive to find
• No guarantee of success – geological risk
• Subject to price volatility – price risk
• Long lead-time between discovery and production

• Owned or controlled by the state

• State must decide how exploration and production
will proceed

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What The Government Wants

• Control of its hydrocarbons

• Investment to allow extraction

• A fair and reliable share of the value generated

• Maximum economic recovery of hydrocarbons

• Domestic security of supply

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What the IOC Wants

• Access to reserves (and to book as much as possible)

• Every day of production without replacement is a day closer to

being out of business

• Market focuses on production and reserves

• Consequent imperative/authoritative to explore

• Consequent need to cover costs of failed exploration from

profits from successful

• Stability !
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Why does the IOC want stability?

• Risk
• Geological
• Political
• Operational
• Price
• Financial

• Investments undergo for decades, so exposure to risks

is long-term

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State Options: legal models

• Licenses and Taxes

• Production Sharing

• Service Contracts

• Each may also involve a joint venture with

the NOC

• How is the decision made?

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Licensing
• An authorisation to do something that would
otherwise be illegal.

• Petroleum usually reserved to the state, Licence

therefore required to explore, etc.

• State exercises control via licence

• Collects revenue via royalty and taxation

• Ownership in oil passes at the well

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Concession Contract
• This is the oldest type of the host country - oil
company agreement.

• The basis of a concession contract is that the

state grants to oil companies or group of
companies the right to carry out various types
of petroleum operations including exploration
and development of indigenous oil resources
within a given geographical area for a
specified period of time.
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The Main Features of The Concession

Agreements
1. The oil company at its own risk and expense generally has the
exclusive right to explore for exploiting petroleum reserves in the
concession area.
2. The oil company owns the production from within the concession
area (as it is produced at the wellhead since reserves in the
ground).
3. The oil company is free to dispose of it subject to its contractual
obligation to supply the host country's domestic market.
4. During the exploration and exploitation phases, the oil company is
subjected to pay surface rentals to the host country.
5. The Oil Company pays taxes to the host country on profits it
derives from the production.
6. The Oil Company owns the equipment and installations used in the
projects.

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Joint Venture Contract (Agreement)

• The Joint Venture agreement evolved as requirement to address some of
the lacks inherent in the concession agreement.

• In this type of contract, the state may participate in the concession directly
or through its own oil company.

• Through this agreement, the host country shares with the oil company the
risk and expenses of the development and exploitation phases.

• In some occasions, the oil company may carry out the project solely through
the exploration phase and may carry the state oil company through the
development phase, but in this case the risks become higher on the
international oil company.

• The primary aspect was to have a managerial say in the day-to-day

operations of the producing fields, therefore, exercising control on a vital
sector of their economy.

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The main features of the joint venture

agreements
• The government authority as a government and the government rights as a
participant in the venture are clearly separated.

• The joint venture company is assigned a concession on the same terms as

any other company, therefore, it becomes a concessionaire through the joint
venture.

• The government oil company (participating in the agreement) is usually

100% owned by the government.

• The joint venture company's risks are reduced, compared to a concession,

through the principle of 'carried interest'.

• The government oil company shares the costs in the equity proportion.
Exploration costs may not be repaid to the oil company. But when
commercial discoveries are made, the Government owned company has to
contribute in cash its share of operating costs.

• The government owned company takes its share of production in crude and
may then sell the crude to its partners or market the crude on its own.
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Production Sharing Contract (PSC/A)

• The concept of the production sharing contract
evolved in Indonesia in 1960 and since then it has
spread widely all over the world.

• Production sharing is carried out by the

government, usually through its state oil company.

• This appears to give a greater degree of control

over the operation of the private contractor but in
fact production-sharing contracts usually operate
under the management of the risk-taking partner.
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The Basic Features Of The PSA Contract

• The IOC is appointed by the GVT as the contractor for a certain area.

• The Oil Company operates at its sole risk and expense under the control of
the host country (normally through an operating agreement).

• Any production belongs to the host country.

• The state oil company gets a predetermined share of the produced oil. The
oil company is entitled to recovery of its costs out of the remaining
production from the contractual area.

• After cost recoveries, balance of production 'profit oil' is shared between the
host country and oil company. Through a formula that joins allowances from
oil price fluctuations and unexpected increase in production rates.

• The income of the Oil Company is liable to taxation. In some countries such
as, Libya, the oil company is released from payment of all taxes.

• Equipment and installation are the property of the host country, either at the
outset of production or progressively in accordance with agreed upon
harmonise schedules.

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Service Contracts (SC)

• The term service contract includes those
various contracts in which the host country
contracts with a service company or an
international Oil Company for the
performance of services related to the
exploitation of petroleum resources.

• There are two main types of service

contracts:

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Pure Service Contracts

• This type of contract is a simple arrangement whereby the oil
company acts as a contractor in the performance of the
service in the host country to explore, develop and produce
petroleum resources at an agreed fee.

• This type of contract is only used by countries with well-

established and large resource base.

• There are two categories of pure SC:

– The service running parallel to but contractually unconnected

with a purchase contract for part of the oil being produced from
the area of operations to which the service contract relates.

– The service contract is not accompanied by any access to the oil

being produced under such a contract.

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Risk Service Contract

• The risk service contract shares the usual elements of
duration and work obligations with concessions and
production sharing contracts, but it differs in that its
pays the oil company in cash not in crude oil, placing
the risk of investment on the contractor who provides
the capital for exploration and production.

• If a commercial discovery is made the Contractor

places the well on production, therefore, the
Contractor may operate it by the state. In this type of
contract, capital in reimbursed with interest and a risk
fee, also the government monitors closely the
operations of the contractor.
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