Contractual Regimes in Petroleum and Mining 11 12 May 2011 Quito, - - PowerPoint PPT Presentation

Contractual Regimes in Petroleum and Mining

11 – 12 May 2011 Quito, Ecuador

Presentation Outline

• Brief overview of common types of Contracts

in Petroleum and Mining

• PSAs
• Tax/Royalty
• Service Agreements
• Differences, Similarities and Trends

Purpose of a Contract

• A contract is the instrument by which the

State grants the right to exploit petroleum or minerals and codifies the rights the responsibilities of the parties.

• Contracts should conform to the State’s legal

regime.

Types of Contracts

e.g. UK, US, Australia e.g. Indonesia, Angola e.g. Iraq, Bolivia

Types of Agreement

• Concession (Royalty/Tax System) – Right to produce

and sell from a license area with a fixed royalty on production and tax on profit

• Production Sharing Contract – Right to produce and

sell sufficient petroleum to recover costs and an agreed share of ‘profit oil’. Government has right to lift and sell its own share of production

• Service contract – Companies are paid a fixed fee

per barrel to cover costs and an agreed margin

Fiscal Regimes are Complex in detail

Courtesy Graham Kellas

Royalty/Tax System

Revenue From Mining/Petroleum Gross Revenue To Investor Royalty

Production Cost

Profit After-Tax Profit

Profit Tax Investor’s Dividend

Govt. Equity

Dividend (minus W/H tax) W/H tax

Investor Return

Government Revenue

Angola PSA Structure

Total Oil Extracted

Cost Oil Profit Oil Sales by Private Companies Sales by Sonangol Profit Tax: 50% of their Profits

Sonangol Keeps 10% of its Revenues 90% of Revenues Go to Treasury

Bolivia Operating Contract (2006)

After-Royalty Net (50%)

Distributable Profits

C/F

P/T

Government Revenue Crude Gas Sales by YPFB IDH (32%) + Royalty (18%)

Recoverable Costs

YPFB Share*

After- Tax Profit Investor Return [C/F = Contractor Fee (Retribución al Titular)] [P/T = Company Profits Tax (25%)]

* YPFB Share in Profits ranges from 1 – 72%, based on a formula incorporating profitability, production levels, and price

US OCS Deepwater New Zealand UK Trinidad Deepwater Philippines World Average Gabon Azerbaijan AIOC Malaysia Deepwater Indonesia 3rd Gen Russia Sakhalin II Egypt Onshore Nigeria Shelf UAE ‘OPEC Terms’ Libya Avg 2005 Venezuela 1996 Libya Block 124 0-25 30 10 10 15 10 60 81.5 35 89 5 25+ 13.5 20 22 13 5 6 38 18 12.5 81.5 35 89

40% 50% 60% 70% 80% 90% Participation % ERR %

Government Take @ $20/BBL & $60/BBL R/T PSC SA World Avg

$20 $60 Oil Price

Few systems are progressive today

Government Take at $20/BBL and $60/BBL, changes are a function of design.

Source: Daniel Johnston (1994)

• Bolivia Service Contract (2010)
• Service fee with remuneration of Production

Costs

• Incentive to increase investment/costs
• Risk of “gold plating” and/or inducing corruption
• Need for Transparency in remuneration of costs
• On the other hand, is also a subsidization of Contractor investments

in new and high-technology

SERVICE CONTRACT INCENTIVES IN INTERNATIONAL COMPARISON

• Ecuador Service Contract (2010)
• Two-tier Tariff
• Tariff 1: Pure service fee based on fee-per-barrel
• Company negotiates a Tariff rate-per-barrel
• Service Fee=Tariff*production
• Incentive to reduce investment/costs
• Tariff 2: Risk Remuneration
• Not set in contract, to be negotiated after demonstrated existence of

New Fields or Increase in the recovery factor of Commercially Exploitable Reserves (Clause 12.3)

• Tariff 2 negotiation must include (1) Capital Investment, (2) estimation
• f Operating Expense, and (3) a reasonable profit of X amount (set by

contract, between 20-25%)

• Incentive to undertake risk investment

SERVICE CONTRACT INCENTIVES IN INTERNATIONAL COMPARISON

• Fee-per-barrel Service Contracts & Price Increases

SERVICE CONTRACT INCENTIVES IN INTERNATIONAL COMPARISON

• Mexico Integrated Service Contract (2010)
• Service fee based on fee-per-barrel
• Company bids on Tariff rate-per-barrel
• Service Fee=Tariff*production
• Incentive to limit investment/costs
• Progressive Remuneration Plan
• Possible adjustment for R-Factor or depletion allowance

(“squeeze”)

• Neutral to Contractor

SERVICE CONTRACT INCENTIVES IN INTERNATIONAL COMPARISON

Other types of agreements to be aware of

• Infrastructure linked agreements
• Joint Operating Agreements (JOA’s)
• Unitisation Agreements