By

Khalid Jamal Rajab

This return is the result of projects selected because they all exceeded the
minimum estimated internal rate of return “hurdle rates,” generally set at
15% or more, and were all financed with capital that generally costs in
the range of 9–12% or more. This would appear to indicate long-term
destruction of shareholder value. The recent period of high oil and gas
prices has ameliorated these results but not enough to offset the long-term
trend .
Uncertainty and risk have always been hallmarks of petroleum
exploration and development but it was only in the late 1950’s and 1 9 6
0 ’s that the emerging techniques of modern decision analysis began to be
applied to the industry (Arps and Roberts, 1958; Grayson, 1960; and
Kaufman, 1963). Paul Newendup (1975) wrote the seminal text on the
application of Monte Carlo simulation, and other risk analysis methods to
the uncertainties affecting individual exploration prospects and plays. .(
J.P. Brashear, SPE, A.B. Becker, SPE, and D.D. Faulder,* SPE, The
Brashear Group LLC)

Above ground uncertainties were seen to add both risks and

opportunities, but they must be explicitly analyzed and the
interdependencies among investments must be carefully assessed,
generally requiring a scenario model of one type or another as well as a

portfolio optimizer.( J.P. Brashear, SPE, A.B. Becker, SPE, and D.D.
Faulder,* SPE, The Brashear Group LLC)
 The main features of concession and contractual systems
Concession system Production Share Agreement (PSA)
Three components: fees, costs and Four components: fees, cost recovery,
taxes. production share, taxes.
Fee - a percentage of the total Fee - opposed to the concession system, fee is
revenue, determined by a variable not mandatory and generally is much lower.
scale depending on the amount of
production and the oil price.
Costs - de ned by the contract. Costs - contractor takes part of the production
costs for compensation, the contract is
determined by the maximum limit.
The rest of the production is shared between
the state and investors, mostly based on
variable scale.
Taxes - de ne the corporate tax, Taxes - corporate tax can be applied (not
which is effected by the country or necessarily), there is a possibility of payment
special oil tax is applied. by government or national oil companies on
In the case of fees and expenses behalf of the investors.
exceeding the total income, tax is not
charged.

commonly used method of revenue taken by the government. Royalties

are based on the volume of hydrocarbon production and exports.
Royalties are an attractive solution for the government because they
ensure a constant income as soon as production starts. Since the royalties
are related to the production or sale, their amount can be easily and
accurately calculated. High levels of royalties can discourage investors
and prevent to invest on time. Therefore, a variable scale is
often applied based on the level of oil production and oil prices (Waelde,
1996).
 • Calculated from Gross Revenue
• Can cause premature abandonment
• Ranges from zero to 20%
• Sliding scale

The main differences between concession and contractual systems

Concession system Production Share
Agreement (PSA)
Ownership of mineral sources State State
The percentage of part Typically 90% Between 50% and 60%
The ownership of the equipment Company State
and facilities
Management and control Usually poor control Higher state control and
by the authorities participation in decisions

politically, they are acceptable to Host Governments because they allow

them to maintain ownership of reserves and all installations and plants built
by the contactor Likewise, they are fiscally attractive to contractors as they
allow recognition of reserves in their balance sheets.

Lamb et al, price generally expresses costplus profitmargin

(2004:72) ,)Hull)2008:24)Keegan&Green,2008:369(Pricing mechanisms
are a set of rules and regulations set out by large monopolistic
companies ) The seven sisters (‫ ٭‬with the aim of pricing the barrel of
crude oil, these rules are designed to serve the interests of these
Companies and the countries they represent have also reduced
competition between high-cost and low-cost oil Cost) Competition
between American and Mexican oil, then Venezuelan and Arabian
Gulf oil (

initially proposed by Kopits and Symansky (1998). The use of these

criteria ensures that the rules will be able to correct policy biases (by
ensuring sustainability and economic stabilization) and will perform this
task efficiently (through simplicity, operational guidance, resilience, and
ease of monitoring and enforcement)
• Sustainability: Compliance with the rule should ensure long-term
debt sustainability.
• Stabilization:3 Following the rule should not increase (and might
even decrease) economic volatility. Economic stabilization requires
that the rule lets automatic stabilizers operate and/or allows
discretionary countercyclical changes in taxes or expenditures.
• Simplicity: The rule should be easily understood by decision
makers and the public.
• Operational guidance: It should be possible to translate the rule
into clear guidance in the annual budget process. Budget
aggregates targeted by the rule should be largely under the control
of the policymaker.
• Resilience: A rule should be in place for a sustained period to build
credibility, and it should not be easily abandoned after a shock.
 • Ease of monitoring and enforcement: Compliance with the rule
should be easy to verify, and there should be costs associated with
deviations from targets.

As Dr. Rabia discussed that the employment locals to international must

exceed over years to guarantee the best managementation movement
from the INOC to NOC

–The Profit Oi l is that portion of production complementary to the Cost

Recovery Oil which is split between the local state-owned oi l company
and the Oi l Compeny. For the latter it represents most of the actual
profit, but possible taxes to be paid locally must also be taken into
account. As a matter of fact, the final amount of the Profit Oil value for
the Oil Company is often limited also by taxes. It should pay for the
unsuccessful exploration, which is unrecoverable, and remunerate the
investments made in successful exploration and development, unless
other mechanisms are provided for.
Unrecoveredcosts carried over from previous years
–Operating costs
–Expensed capital costs
–Current year DD&A ( Depreciation, Depletion & Amortisation)
–Interest on Financing
–Investment Credit (Uplift)
–Abandonment cost recovery fund
•Profit oil = Net revenue -Cost recovery
–Net revenue = Gross revenue -Royalties
•Profit oil is analogue to taxable income in a concessionary system and
Service fee in a service agreement
•Profit oil is split between Government and Contractor
•Profit oil is usually, but not always taxed
Federal Government and regional states and producing governorates
manage current fields and shape strategic policies for the development of
Oil & Gas wealth.
Nature & Role of INOC Management of current Oil & Gas Fields
through subsidiaries.

LONG TERM OBJECCTIVES (2010 +) Iraq to become Gas exporter

The new oil reference price, or 'NORP', applies to conventional new oil
as defined in the September 1981, AlbertafCanada pricing agreement-
The NORP ceiling is the actual international price (in $Canadian) of oil
laid down at 1\·lontreal, adjusted for quality differences.

IRR : is the interest rate that makes the net present value (NPV) of a
project equal to zero. If a curve of NPV vs. discount rate (DR) is drawn,
the IRR ideally is the intersection of this curve with the x axis, which may
never occur or may occur one or more times.

NPV: the NPV Relative Risk Plot, compares the mean (J.l.) NPV with the
NPV relative risk ratio for the portfolio. The relative risk ratio is the NPV
standard deviation (cr) divided the J.l. NPV.

RPS. :The recovery period means the time required to recover the initial
investment value (capital cost) of the project.

Profitability guide ratio of returns to costs Benefit/ Cost Ratio

Profitabilitycriterion = current value of inflows/initial investment
The result is usually equal to the total return achieved by the monetary
unit, and the project is considered economically acceptable
If the result is greater than one, the project is considered economically
unacceptable if the result is smaller
From theone.

Sensitivity analysis examines the impact of changes in some

elements of the linear program on the current optimal solution.
That's what you're doing.
The government's ability to provide as many as $100 million in the first
year of the project will be made by the end of 2009. Change in the
value of the right side of the restrictions or the effect of adding a
new variable or deleting an old variable on the current optimal
solution. The study can determine the impact of these changes
using the drawing, using semplex, or using the outputs of some
Software such as . LINDO, Win QSB, QM for Windows, Solver by
Excel Sensitivity analysis is very important for decision makers
because it helps to speed up administrative decisions.