Slide 4 – Outline for PSCs

• The following outline contains typical sections that are covered in production sharing contracts
between host governments and foreign oil companies. There are many variation but the following
descriptions are fairly standard.

GENERAL SCOPE

The first section of the contract outlines who the various parties to the contract are. This will include the
foreign oil company, or companies if there are more than one, and the national oil company or the
agency acting on behalf of the host nation. The oil companies are identified and thereafter referred to as
the “contractor.” The host government national oil company or agency is also identified and then
subsequently referred to by initials or a short name.

 DEFINITIONS

This is a standard contract section that defines specifically technical and financial terms to promote a
common understanding and source of reference.

 PURCHASE OF DATA

This clause specifies that a data package consisting of geological and geophysical information must be
purchased. The purchase price is stated, and a brief description of the data package is included.

 DURATION, RELINQUISHMENT, AND SURRENDER

Sometimes these aspects of the contract are placed under separate clauses, but they are strongly
interrelated. Duration language includes a description of the length of the exploration and production
phases of the contract and the terms under which extensions may perhaps be granted and the duration
of the extensions.

 WORK PROGRAMS AND EXPENDITURES

This is one of the more important sections of the contract. The work program is ordinarily specified in
terms of kilometers of seismic data to be acquired and the number of wells to be drilled.

 PRODUCTION AREAS

Some contracts specify that once a discovery is made, the productive limits of the field must be
identified and mapped. The reason for this, in some cases, is that costs associated with development of
a discovery may be treated differently than costs associated with exploration efforts.

Slide 5 - Sharing Under PSC

This is a representation of sharing under a production sharing contract. There is production and the
various costs and profits resulting from this. There’s portions belonging to the investor and government.
Then there’s the taxation deductions and what ultimately remains at the investors share and
government’s share.

Slide 6 - PSCs Internationally

This is a graphical representation of highlighting PSCs on a global scale. Heavily concentrated in African
nations and eastern countries.

Slide 7 - Indonesian PSC

• Indonesia has been one of the most active countries in Southeast Asia with nearly half of all
contractors/licenses in the region.

• The contractor’s share is often referred to as the contractor entitlement. The contractor
entitlement in Indonesia is calculated

as follows:

Contractor

Entitlement = Cost recovery

+ Investment credit

+ Contractor equity share (profit oil)

– Domestic market requirement (adjustment)

– Government tax entitlement

The Indonesian PSCs are characterized in part by the lack of a royalty.

The first generation contracts of the 1960s had a 40% limit. The second generation contracts after 1976
did away with the cost recovery limit.

Elements that make up cost recovery are normally recovered on a first-in, first-out basis. Any costs
carried forward from prior years are recovered first.

The first tranche petroleum element requires that 20% of production be shared 71.%/28% in favor of
the government before cost recovery. The contractor’s share is taxed. The FTP is viewed by some as a
14.23% royalty because that is the government before-tax share of the 20% first tranche. However, the
contractor share of first tranche petroleum is taxed at the effective rate of 48%. The result is that 3% of
gross production goes to the contractor and 17% goes to the government. The remaining 80% of
production is available for cost recovery. Hence the FTP works exactly like a cost recovery limit.

The Indonesian contracts have allowances for investment credits (ICs) and uplifts. The difference
between the two is that the uplift applies to all capital costs, and the IC does not.

The Indonesian DMO requires the contractor to sell 25% of the contractor’s share oil to Pertamina. The
computation for the share oil is based upon the contractor pretax profit oil share of 28.8462%. After 60
months of production from a given field, the price the contractor receives for the DMO crude is 10% of
the realized price.