MALAYSIA PRODUCTION

SHARING CONTARCT (PSC)

THE PAST … prior to 1975

 CONCESSIONS granted by State Government (i.e. Sarawak,

Sabah & Terengganu).
 Contractor had exclusive eights to Explore and Produce.
 SHELL had oil production in BARAM DELTA area.
 EPMI was still exploring West Malaysia.
 SHELL paid Royalty and Taxes to Government. Profit about
40% of gross revenue.
 The CONCESSION ceased on April1, 1975 as a result of
Petroleum Development Act (PDA).
 PETRONAS became Owner and Manager of resources with
exclusive rights to Explore and Produce, offshore as well as
onshore Malaysia.
PETROLEUM
DEVELOPMENT ACT
and Production
The Malaysian Sharing
Minister of Primary Industries when
introducing the PDA in Parliament in 1974, explained the
Contract
production sharing concept as follows:-
 PETRONAS shall have the exclusive rights to explore for
and produce petroleum in the country.
 PETRONAS shall be responsible for the management of the
petroleum operations and the oil company shall be
responsible to PETRONAS for these operation as Contractor.
 The ownership of Oil and Gas shall vest in the Government
or PETRONAS and shall pass to the Contractor only after
Government has decided on the production that should
accrue to the contractor.
 The Contractor shall furnish all the necessary risk capital and
provide all technical assistance for the exploration and
production of oil and gas. Cost recovery will be allow only if oil
or gas is produced and then it shall be limited to a maximum of
40% of the production per annum. (Presently is 20% for oil and
25% for gas).
 The remaining production, after deduction of the percentage for
cost recovery, shall be split with the bigger share GOING to
PETRONAS. (Presently this split is 70:30 in favor of
PETRONAS).
 The ownership of all project-related assets acquired by the
Contractor shall pass to PETRONAS.
 The laws of Malaysia shall apply to PSC.
After a series of negotiation, PETRNOAS entered into PSC’s with EPMI for
Terengganu and with SSB and SSPC/PECTEN for Sarawak and Sabah,
respectively. The Contracts were signed at the end of 1976 (Nov/Dec) with
retroactive effect from 1st April 1975; they reflect the concepts outlined
above. These PSC’s are referred to as the “1976 PSC”.

Since then, PETRONAS has signed several other PSC’s, namely:-

 1985 JV PSC with SSB and Carigali for 5 Baram Delta Fields relinquished by SSB at
various stages.
 BARAM DELTA PSC signed in 1989 with SSB and Carigali for 9 Baram Delta oil
fields.
 New PSC’s incorporating several attractive terms as compared to the 1976 PSC. These
New PSC’s are referred to by the Contract Area name (e.g. SB1, SK5, PM1, PM4 etc.,
some 20 PSC’s were signed in 1987/88).
THE PROVISIONS
The provisions of the 1976 PSCs of EPMI, SSB and SSPC/PECTEN are virtually the same and
we shall refer to them simply as the OLD PSC. We shall first review the provisions and terms
of the OLD PSC and summarized at the end the salient incorporated in the NEW PSCs.

The major provisions of OLD PSC are:

 EXPLORATION PERIOD
 DEVELOPMENT PERIOD
 PRODUCTION PERIOD
 MANAGEMENT OF OPERATIONS
 CONSULTATION AND APPROVALS
 PRODUCTION SHARING, OIL and GAS
 TECGNOLOGY TRANSFER

Under the PSC, Contractor is given a contract area which it may explore for and produce
petroleum. The contract area divided into a number of sub-blocks on geographical coordinates.
EXPLORATION PERIOD

 COMMENCE within 3 months after signing the PSC.

 If in a particular SUB-BLOCK Commercial quantities of
OIL are not found within 5 year (3+2 years?) such block has
to be returned to PETRONAS.
 The 2 year extension is at PETRONAS’ discretion.
 PSC contains minimum exploration commitment,
Contractor has to spend a specific minimum sum on various
exploration activities.
DEVELOPMENT PERIOD

 COMMENCE when oil is found in commercial quantity.

 The sub-block in question is called DEVELOPMENT area.
 Within 4 year thereafter (2 + 2 years) the Contractor has to produce oil
from the sub-block.
 The 2 year extension is at PETRONAS discretion.
 Should this deadline not be met, Contractor has to return the sub-block to
PETRONAS.
 During the development period, Contractor prepares a comprehensive
plan (FDP) for the development and production of OIL (somewhat
different for GAS).
 Once PETRONAS’ approval has been obtained for FDP, the necessary
design, procurement, construction, installation, drilling & commissioning
activities take place so that OIL PRODUCTION can commence.
PRODUCTION PERIOD

 COMMENCE when FIRST COMMERCIAL LIFTING of

OIL from the sub-block takes place.
 From the onwards the sub-block is called a PRODUCTION
AREA and the Contractor may produced oil from the
production area for a period of 15 years. (NDP fields on
negotiated terms).
 The overall duration of PSC in 24 years (20+2+2). As a
result, the production of oil under the current PSC will come
to end in 1999.
 Certain oil fields in SSB area were already on production at
the time PSC was signed. For these fields, the 15 year
production period is from the date of lifting and the
production period terminates prior to the end of PSC.
Several fields in the Baram Delta fall in this category; they
are now covered by the BARAM DELTA PSC, as discussed
later.
 Associated-gas follows the same rule as OIL. For Non-
associated gas, PSC provides a HOLDING period of up to
5 years after discovery of a GAS FIELD. Within this 5-year
period, Contractor has to prepare and agree a development
plan with PETRONAS. Production period is 15 years.
MANAGEMENT OF
OPERATIONS
 PETRONAS as the National Oil Corporation is responsible for
the overall management of the petroleum resources of Malaysia.
 Contractor is responsible for the necessary exploration,
development and production activities, as an independent
contractor to PETRONAS. Contractor is independent in the
sense that it does not work under the day-to-day directions of
PETRONAS but develops the necessary plans and activities at
its own initiative.
 PETRONAS fulfills its managerial and supervisory role through
the approvals that are required at the various stages of
Contractor’s plans and operations, such as the approval of the
development plans, and the yearly work program and budgets.
MANAGEMENT OF
OPERATIONS
 The PSC specifies that PETRONAS shall not withhold its
approvals unreasonably. This provision has to be viewed
against the background that Contractor puts up all necessary
funds for the costly exploration, development and
production activities. Naturally, Contractor expects an
adequate return on its capital investment, expertise and
resource committed to Malaysia.
 Furthermore, Contractor is directly responsible for the
manner in which the operations are carried out. Safety and
efficiency are the prime targets of Contractor’s operations.
In this respect, the PSC generally specifies that Contractor’s
activities should be in accordance with accepted industry
pratice.
CONSULTATION AND
APPROVALS
 In the course of implementing the PSC, numerous meeting, discussions
and communications take place at various levels between PETRONAS
and Contractor. Regularly recurring events are discussed below.
 Each year Contractor is required to prepare a work programme and
budget describing all aspects of the proposed operations in the following
year. The draft work programme and budget are submitted by 1st
October for PETRONAS’ consideration and approval. The programme
and budget have to be finalized by 1st December.
 The operation under the PSC are reviewed quarterly by a joint
committee consisting of four representatives each from PETRONAS and
Contractor. This Operation Committee, chaired by a senior PETRONAS
executive, discuss the work programs and budgets and other relevant
matters coming up in the course of the operation.
CONSULTATION AND
APPROVALS
 Contractor provides PETRONAS with monthly progress reports to
enable PETRONAS to monitor the petroleum operations.
 Special procedures apply to the procurement of equipment,
materials, supplies and the contracting out of work and services. The
procedures aim at maximizing Malaysian participation in the
petroleum industry and specify that, wherever it is technically and
economically practicable, orders shall be placed with Malaysian
suppliers and manufacturers. Ownership of all equipment and assets
required by Contractor rests with PETRONAS but Contractor has
their exclusive use for the operations.
 PETRONAS participates in the tendering exercise through its
observers on Contractor’s Major Tender Board and the Local Tender
Panel. In additional, any contract in excess of a specified limit (RM
50,000 at present) required PETRONAS separate approval.
PRODUCTION SHARING -
OIL
 As mentioned earlier, Contractor pays all expenditures
required for the petroleum operations. These costs can be
recovered from production and this works as follows under
the OLD PSC :-
 Of any barrel produced, 10% is set aside as royalty to State
and Federal Governments and up to 20% is available for
Contractor to recover its costs (cost oil). The remaining part
of the barrel is split between PETRONAS and Contractor in
the ratio 70:30 (profit oil). This is illustrated below:
PRODUCTION SHARING -
OIL
 If follows from the above that contractor is not paid in cash but
in kind. PETRONAS lifts and sells the royalty oil and its profit
oil. Similarly, Contractor lifts and sells its cost oil and profit oil.
 The various oil entitlement are establish on a quarterly basis.
One aspect deserved further mention. Contractor incurs its costs
in cash and is compensated by lifting cost oil. The crude must be
valued to determine what volume Contractor may lift for each
Ringgit of costs incurred. The PSC specifies the basic principles
for the valuation of crude oil.
 Out of the proceeds from the sales of its profit oil, Contractor has
to make a number of payments
 First of all, Contractor has to pay corporate Tax to Malaysia Government.
 Contractor also has to pay Export Duty on any barrels sold outside Malaysia.
 Out of the proceeds from the sales of its profit oil, Contractor
has to make a number of payments
 First of all, Contractor has to pay corporate Tax to Malaysia Government.
 Contractor also has to pay Export Duty on any barrels sold outside
Malaysia.
 In addition, PETRONAS has to be paid a contribution for the
development of research activities in Malaysia (Research Cess) and
discovery and production bonuses.
 Finally, there is the so-called “refund” (Supplemental Payment or wind-
fall profit tax) bay Contractor to PETRONAS in respect of Contractor’s
profit oil. This payment amount to 70% of the excess of actual value of
the oil in a quarter over the “Base Prices” specified in the PSC. This Base
Price is indexed and at present approximates US22.90 per barrel (in
1989).
PRODUCTION SHARING -
GAS
 For exploration and production of gas, it is generally
correct to say that the PSC provisions concerning gas are
follow closely the principles discussed above for oil.
 There are a number of significant exceptions, which take
into account the higher investment costs of gas projects
and the difficulties in establishing commercial outlets for
gas. For example, the PSC allows the Contractor up to
25% of gas produced to recover his cost (this is 20% for
oil).
 Furthermore, as opposed to the individual lifting of crude
oil, Contractor and PETRONAS sell their shares in the
gas produced on a joint basis to agree outlets.
PRODUCTION SHARING -
GAS
 The PSC makes a distinction between associated gas (gas
produced together with crude oil) and non-associated gas (gas
produced independently of crude oil). This distinction plays a
role in the duration of the development and production periods.
Associated gas follows the same rules as the crude oil with
which it is produced.
 In the case of non-associated gas, the contractor has a longer
period to develop a gas project. The PSC provides for a holding
of up to five years following the discovery of a gas field. Within
this five year period, the contractor has to prepare and agree a
development plan with PETRONAS. The gas production
facilities have to be on stream within a subsequent period to be
agreed with PETRONAS as part of the development plan.
PRODUCTION SHARING -
GAS
 Another difference is that longer production periods
apply for non-associated gas. For instance, in the
case of MLNG, gas ay be produced for 20 years from
the date of first lifting of LNG.
 Gas is also required at a number of locations for
petroleum operations and such requirements take
priority. Gas that comes free with the production of
crude oil, cannot always be utilized or conserved for
future projects and, subject to PETRONAS’
approval, such gas may be vented or flared.
TRANSFER OF
TECHNOLOGY
 The transfer of technology as mentioned in the PSC has
three different aspects.
 First of all, the PSC reinforce Contractor’s policy to fill position
as much as possible with Malaysian staff. However, for those
positions for which no suitable Malaysian can be recruited,
Contractor may employ expatriate staff, subject to PETRONAS’
approval.
 Secondly, Contractor has to setup special development and
training programs for its Malaysian staff. Such programs require
PETRONAS’ approval on an annual basis.
 Finally, Contractor has to institute training programs for
PETRONAS staff to be agreed on a case by case basis for each
employee. This may include on-the-job training where possible.
1985 JV PSC

 At the time of signing the PSC, a number of fields were already

producing and their 15 year production periods ended well before
the expiry of the PSC. West Lutong, Bakau, Baram, Fairley Baram
and Baronia are five fields in the Baram Delta that fall in this
category.
 In March 1985, SSB and PETRONAS CARIGALI signed as joint
contractors a new PSC with PETRONAS for the continued
operation of the five fields until 1988. This PSC has since expired
on March 31, 1988.
 The terms of the JV PSC were generally the same as those of the
OLD PSC. However, under the JV PSC, all rights to gas produced
from the five fields were vested in the PETRONAS and the
contractor no longer had an entitlement to it except for use in the
petroleum operations.
1985 JV PSC

 SSB and CARIGALI also signed a Joint Operating

Agreement (JOA) which set out how the operations would
be conducted. SSB was appointed as operator and was
responsible for carrying out the operations in the fields.
 A Joint Operation Committee of three representatives each
from CARIGALI and SSB, was set up to oversee the joint
activities and to monitor the implementation of the JOA.
 CARIGALI funded 50% of the expenditure of the joint
operations. Cost oil and profit oil were divided between
the two contractors on a 50:50 basis. PETRONAS and the
Federal and State Governments maintained their shares in
the barrel.
1985 JV PSC

 CARIGALI seconded experienced staff to the joint

operation as agreed on a case by case basis.
Training programs similar to those instituted by
Shell under the PSC for PETRONAS staff were
made available for CARIGALI.
 As part of their obligation under the JV PSC, SSB
and CARIGALI formed a joint study team and
carried out comprehensive technical and economic
studies on the five fields and identified possible
future developments to add some 500 million bbls
of reserves in the Baram Delta Area.
BARAM DELTA PSC

 When the 1985 JV PSC expired in March 31, 1988, SSB

voluntarily relinquished the remaining four fields in the
Baram Delta as a package deal for 15-year participation
in a joint Venture comprising the 9 fields in the Baram
Delta. With the singing of the Baram Delta PSC in 1989,
with retrospective effect from April 1, 1988, Carigali
became the full-fledged operator of the Baram Delta oil
fields.
 SSB and Carigali each has 50% equity in the JV.
 SSB to fund some 2 billions rgt in capital, to implement a
gas gathering scheme (BARDEGG) and to develop 400
million barrels of oil reserves.
BARAM DELTA PSC

 Under the BARDEGG scheme which involves installation

of additional platforms, gas compression stations and
pipelines, associated gas from five fields in Baram Delta
would be gathered at Baronia and piped to E-1 in the
Central Luconia to meet the onshore demands of Bintulu
area in addition to the existing supply to Miri-Lutong
areas.
 Cot oil ceiling is 15%. While SSB spends all capital.
Carigali and SSB will share all operating cost at 50:50.
 Profit Oil split is 70:30 in favor of PETRONAS as in the
OLD PSC. Specific arrangement have been agreed to
share the gas sales proceeds.
NEW PSC based on revised
terms
 Several new PSCs have been signed in 1987/88,
incorporating the revised attractive term announced by
the Government in 1985. The salient feature of the new
PSCs are as follows:
 Cost Oil ceiling is set at 50% and Cost Gas ceiling at 60%.
 Sliding scale Profit Oil split up to 50 million barrel production.
First 10,000 bbl/d – 50:50. From 10,001 to 20,000 – 60:40,
Above 20,000 bbl/d – 70:30, all in favor of PETRONAS.
 Profit Oil split 70:30 beyond 50 million bbls cumulative
production.
 Profit Gas split 50:50 up to 2 trillion cft of gas production.
Beyond this, the split is 70:30 in favor of PETRONAS.
NEW PSC based on revised
terms
 Carigali to have a minimum of 15% carried interest,
with participation option on commercial discoveries.
 100% of exploration costs to be borne by Contractor,
with some minimum commitments on expenditures and
activities.
 Exploration period – 5 years, Development period – 4
years and Production period – 15 years.
 Royalty at 10% as in the OLD PSC.
 PSC BASE Price is set at US$25/bbl in 1988.
 NEW PSC based on
revenue over cost

concept
In 1997, PETRONAS introduced a new PSC based on the "revenue
over cost" concept (the R/C PSC) to encourage additional investment
in Malaysia's upstream sector.
 The R/C PSC allows PSC Contractors to accelerate their cost
recovery if they perform within certain cost targets.
 The underlying principle is to allow the PSC Contractor a higher
share of production when the Contractor's profitability is low and to
increase PETRONAS' share of production when the Contractor's
profitability improves.
 The contractor's profitability at any time is measured by the "R/C
Index", which is the ratio of the contractor's cumulative revenue
(calculated as the sum of the contractor's cost oil and profit oil or
cost gas and profit gas, as the case may be) over the contractor's
cumulative costs.
 NEW PSC based on
revenue over cost

concept
The Contractors' ROC ratio is defined as follows:
 Revenue(R) = Contractors' Cumulative Value of Cost Oil and
Profit Oil less Supplementary Payment
 Cost(C) = Contractors' Cumulative Petroleum Costs less Non
Recoverable Expenditure & Disputed Costs.
 Threshold Volume (THV):
 For Oil : 30 MMSTB or accumulative production (whichever
is smaller) per field.
 For Gas : 0.75 TSCF or accumulative production (whichever
is smaller) per field.
DEEPWATER PSC

 Deepwater activities involve very challenging ventures and

with very high costs, thus PETRONAS has introduced
special DEEPWATER PSC to attract a major oil company to
invest in Malaysia to explore in deepwater areas in search of
new hydrocarbon prospects.
 Two types of DEEPWATER PSC’s terms: above 1000 m
depth, and 200 m to 1000 m depth.
 See details PSC terms in tabulation form attached.
SUMMARY

 To date, PETRONAS has signed more than 60 PSCs with

international petroleum companies enabling them to
participate in the exploration, development and production of
oil and gas in the country.
 In an effort to reduce the operating costs of upstream
operations, PETRONAS and its Production Sharing
Contractors (participating multinational oil and gas
companies) have initiated the Malaysian petroleum industry's
Cost Reduction Alliance (CORAL), a forum which seeks to
reduce costs and enhance efficiency via breakthrough
measures and provides for the sharing of facilities and
logistics, the standardization of equipment specifications and
the coordination of operations.
SUMMARY
EVOLUTION OF MALAYSIAN PSC
R/C PSC

To attract new foreign

investment through smart
DEEPWATER partnership concept
PSC
Target for big players
with deepwater
experience
1986 PSC

To attract other oil

companies besides
1976 PSC ESSO and SHELL

Concert existing
Concession into PSC
CONCESSION
AGREEMENT
Oil companies and
Sate government 1976 1986 1993 1997