Production Sharing Contract Research Articles

Legal and Ethical Obligations of Oil Companies in Preserving Natural Environment; a Case Study of the Kurdistan Regional Government’s Production Sharing Contracts”

Apart from having many obligations, oil companies have both legal and ethical obligations to protect natural environment in the country in which they operate. Every country has its own legislation to regulate aspects of oil companies’ operations in order not to destroy the natural surroundings of their operation area. Complying with these requirements has mutual interest for both the host country and the company as the latter can improve its reputation by taking steps toward preserving natural environment of the host country. Accordingly, there are many oil companies operating in Kurdistan Region of Iraq that should bear the same responsibilities. However, insufficient environmental legislations and the lack of enforcing the applicable laws have encouraged oil companies not to take necessary measures for both protection and providing remedies for any environmental destruction. The paper argues that the legal obligations to protect environment should be enforced in an appropriate way alongside with corporate social responsibilities toward the host country in terms of preserving natural environment and compensating all kinds of damages that cause natural environment.

Legal and Ethical Obligations of Oil Companies in Preserving Natural Environment; a Case Study of the Kurdistan Regional Government’s Production Sharing Contracts

Legal and Ethical Obligations of Oil Companies in Preserving Natural Environment; a Case Study of the Kurdistan Regional Government’s Production Sharing Contracts

A Deepwater Gasfield-Development Strategy for Trinidad and Tobago

This article, written by Special Publications Editor Adam Wilson, contains highlights of paper SPE 177102, “A Deepwater Gasfield-Development Strategy for Trinidad and Tobago,” by Ayasha Nickie, Trinidad and Tobago Ministry of Energy and Energy Affairs, prepared for the 2015 SPE Latin American and Caribbean Petroleum Engineering Conference, Quito, Ecuador, 18–20 November. The paper has not been peer reviewed. Trinidad and Tobago is the top natural-gas producer in the Caribbean, with average daily production in 2014 of 4.069 Bscf/D. With vibrant upstream, midstream, and downstream sectors, Trinidad and Tobago makes maximum use of the natural-gas value chain. Further maximization through growth in the downstream sector requires an adequate supply of natural gas in addition to the shallow-water gas fields offshore, which are currently the main supply. Because of the thriving gas sector, a large amount of infrastructure already exists that may aid with any further development. Introduction The Trinidad and Tobago Gas Development Model has shaped the growth of its natural-gas economy over the years, and, in 2014, the energy sector accounted for 45% of the country’s gross domestic product. Average production over the past 5 years was an estimated 4.2 Bcf/D, while average use for the same period was 3.9 Bcf/D, with liquefied natural gas (LNG) accounting for more than 50% of this consumption (Fig. 1). With the onset of proposed additional projects in the downstream sector, additional gas use in the near future is inevitable. Although this additional capacity can emanate from the existing proved-reserves base, another source of gas could be currently unexploited deepwater basins. In the past 5 years, nine production-sharing contracts for exploration in Trinidad and Tobago’s deepwater areas were signed. If gas is discovered, first gas can be on line within 5 to 10 years of discovery. If this occurs, additional quantities of natural gas would be available for domestic, Caribbean, and Latin American markets. While deepwater gas developments have economic challenges, existing infrastructure in Trinidad and Tobago can aid development.

Contract Concerns Loom Over Iraq’s Upstream Outlook

Middle East Special Section Iraq is producing oil at record levels this year but low oil prices have cast doubts on the economic feasibility of its licensing contracts, which some analysts and policy advisers say are holding back higher output. International oil companies (IOCs) in Iraq operate under cost-plus contracts that require them to make upfront investments before seeking government reimbursements and a per-barrel fee for their profit. This model has enabled the country to reach a new production benchmark of 4.8 million B/D—an achievement diminished by the fact that Iraq’s export revenues have plummeted by more than two-thirds in the past 2 years. As a result, reimbursements owed to the IOCs have ballooned from around 10% of the national budget to 25%. Luay Al-Khatteeb, executive director of the Iraq Energy Institute and a fellow at the Columbia Center on Global Energy Policy, said both the government and the IOCs failed to prepare for the consequences of a possible downturn in the industry when they entered into the contracts in 2009–2010. “They were signed on the basis of high oil prices and were very much technical service contracts with no risk-sharing aspect to them,” he explained. “So everything is being paid by the government, and because high oil prices helped in accommodating such huge repayments, the IOCs in general accepted that.” In response to its cash flow problems, which include a costly war, the government has held off on funding major infrastructure projects and ordered IOCs to reduce their spending programs. These decisions may limit the ability of IOCs to deliver any new supplies of crude while they are still waiting on billions of dollars from the government. Last year, the government paid USD 9 billion in arrears to IOCs for work done in 2014. This year, Iraq must make good on another USD 3.6 billion in arrears, according to the terms of a new loan agreement it secured with the International Monetary Fund. As an adviser to the Iraqi parliament and the prime minister’s office, Al-Khatteeb is recommending that new licensing rounds be issued with production-sharing agreements or tax royalty contracts to drive higher output from the areas operated by IOCs.

Reformasi Pengelolaan Minyak dan Gas Bumi Berdasarkan Konstitusi; Studi Kasus Wilayah Kerja Masela Maluku

This research besides study whether the management and culvation oil and gas in the Masela Block in accordance with rules in the article of 33 the constitution of 1945, it also examines at how the management of the Masela Block to increase state revenues and public welfare. This research using qualitative methods with the approach case study . In full view of the perspective of contract system and the power mining, management in Masela Block it can be uttered not based on conception “in all over the state” in accordance with rules of the constitution . Operation the Masela Block by Inpex Corporation, is not state control on the first rank, because state in fact has not been conducted directly management natural resources the oil and gas. Although Production Sharing Contract system used, believed to be a model contracts accommodate the article of 33 the constitution of 1945, but in practice, the state could not do mastery entirely in the Masela Block. The state potentially losing sovereignty in managing all of economic resources oil and gas in the Masela Block, because mastery itself be turned over or authorized to corporate or form permanent business. It is required to reform governance regional development in the Masela Block which includes; first, to ensure how big state revenues; second, to ensure the realization of welfare the local community and regional economic progress; third, to ensure the involvement of National Oil Company (NOC) Indonesia, which is that PT. Pertamina; fourth, keep investment climate. Key Words: Masela Block; management of oil and gas.

Comparative Economic-Performance Analysis of Production-Sharing Contracts in Angola, Equatorial Guinea, Gabon, and Nigeria

Summary The petroleum fiscal system (PFS) is a key determinant of investment decision in the exploration and production (E&P) of oil and gas. It describes the relationship among the host governments, the investors, and community stakeholders with respect to how costs are recovered and profits are shared equitably. A comparative economics of the performance of fiscal regimes becomes imperative because it affects stakeholders in making informed decisions on the oil-and-gas business investments worldwide. This paper evaluates the structure, conduct, and performance of production-sharing contracts in Angola, Equatorial Guinea, Gabon, and Nigeria in the Gulf of Guinea (GOG). These countries hold approximately 90% of the GOG proved reserves. Economic analysis of the same E&P phases with hypothetical field and cost data under different PFSs are presented and discussed for comparative PFS performance evaluations. Comparison of the effects of front-loaded government take, profit oil split, and taxation show that production-sharing contract fiscal terms and instruments in Angola, Equatorial Guinea, Gabon, and Nigeria are relatively competitive among these nations. We found that as the risk in deepwater investment increases with water depth, return on investment rises in Nigeria. Monte Carlo simulation process incorporated to account for risk and uncertainties reveals early discounted payout for investors in these GOG countries with significant degree, ceteris paribus.

International Agreement or Private Agreement? Uplift Policy in Oil and Gas Taxation in Production Sharing Contracts between Foreign Contractors and the Indonesian Government

This article examines two questions: (1) whether the Production Sharing Contract in oil and gas sectors between different countries should be considered as an international agreement or a private agreement; and (2) how to formulate uplift in the PSC which contains the value of equity for investors and the State. In the Production Sharing Contract, there is problem of setting the tax on oil and gas sector particularly uplift policy relating to the taxation of income in the state revenue sources. This issue is related to the return of controversy of operational costs recognized by the contractor (cost recovery claim). This tax controversy gave rise to uplift that is only levied on oil and gas State owned Enterprises contracting partners in the scheme of the Joint Operating Body, especially in the old fields with advanced technology (Enhanced Oil Recovery). The controversy is related to the declining production and increased production costs that are recognized by the contractor.

Overseas oil investment projects under uncertainty: How to make informed decisions?

To better address the complexity of overseas oil investment and help investors to make the informed decision in overseas oil investment, this paper applies real options theory and Monte Carlo simulation to study overseas oil investment evaluation. The model has incorporated not only the uncertainties of oil price and investment cost but also the uncertainties of exchange rate and investment environment. These unique features have enabled our model to be best equipped to evaluate the value of oil overseas investment projects of three oil field sizes (large, medium, small) and under different resource tax systems (royalty tax and production sharing contracts). In our empirical setting, we have selected China as an investor country and Indonesia as an investee country as a case study. Our results show that, although production sharing contract (PSC) is convertible to that of resource royalty system, given the flexibility in PSC, it can to great extent increase the bargaining power of investee country. As there is an important tradeoff between oil resource investee country and overseas oil investor, in medium and small sized oil investment negotiation the oil company should try to increase the cost oil limit in production sharing contract and avoid the term of a windfall profits tax to reduce the investment risk of overseas oil fields.

Kesenjangan Implementasi Dalam Penatausahaan Barang Milik Negara Yang Berasal Dari Kontraktor Kontrak Kerjasama

Oil and gas industry began in the Dutch colonial era. Based on Article 78 Government Regulation No. 35 Year 2004 on Upstream Oil and Gas, that all goods and equipment which directly used in the Upstream Oil and Gas Activity that purchased by Contractor becomes to State assets which is developed by the government and managed by SKK Migas. Enactment of Government Regulation No. 6 of 2006 about the management of State assets / Regional assets (BMN / BMD) as the implementation of the mandate of Law Number 17 Year 2003 on State Finance and Law No. 1 of 2004 on State Treasury is a new chapter for the management of state assets more orderly , accountable, and transparent. SKK Migas as an institution whose function is to supervise the implementation of the Production Sharing Contract (PSC) has purpose to provide maximum benefit for the country. On the other hand, state asset management by the Government aims to achieve accountability through the orderly administration and better management of State assets. The difference between that purpose, can lead to implementation gaps. This research was conducted with the aim of knowing the activity of administration of State assets originating from Contractor of Cooperation Contract which has the highest implementation gaps, find the source of the cause and finding the impact on the administration of State assets originating from Contractor of Cooperation Contract. Measurements implementation gaps using tools that called integrity scorecard. Integrity scores obtained by submitting some questionnaires to the respondents. The respondents in this study is the contractors which have commercial production. The research results illustrate the reporting activity has the highest implementation gap. It can also be seen from the BPK findings on Internal Control System in State assets administration originating from Contractor of Cooperation Contract on LKPP Year 2007 - 2013. Based on the descriptive analysis of the State assets which originating from Contractor of Cooperation Contract enforcement background and administration activity analysis, it can be concluded that the cause of the implementation gap is the political pressures, bureaucratic overlap, and resource constraints in the implementation of the regulation.Based on the inductive analysis of the weakness symptoms that occur in the administration of State assets originating from Contractor of Cooperation Contract, can be concluded that the data presented in the central goverment financial report (LKPP) potentially not comply with the qualitative characteristics standards such us relevant, reliable, comparable and understandable.Keywords: Implementation Gaps, Administration, State assets which originating from Contractor of Cooperation Contract.

Study of optimum incentive mechanism based on principal-agent theory for petroleum licence

Government take of oil producing country can be enhanced by optimising the incentive mechanism of petroleum fiscal system. This paper establishes a principal-agent model to improve the production sharing contract (PSC), which is the most popular fiscal regime in hydrocarbon exploitation. It also conducts a numerical analysis to achieve the optimum fiscal design and applies the new model into a deep-water petroleum contract of China. The application results show that the expected income of host government increases by 18% compared with the old fiscal system.

Uplift in Taxation of Petroleum and Natural Gas Sector in Indonesia

Oil and gas industry is an industry that is risky, expensive and complicated. Oil and gas industry which has the characteristics of high cost and high risk technology should be managed by experts in the field of oil and gas. In accordance with Law No. 44 Year 1960 regarding oil and gas mining and Law No. 8 year 1971 regarding Pertamina, exploitation of oil and gas can be cooperated with the contractor in the form of a Production Sharing Contract. The main problem in terms of the production sharing contracts viewed from national interest is how to optimize resource utilization contribution of oil and gas for the State's economy, employment opportunities, creating opportunities for national private companies to participate and ensuring the supply of fuel and gas for domestic needs. Meanwhile, the interest of foreign investors and national private entrepreneurs are to gain the profit as much as possible. With regard to the management of oil and gas in the Production Sharing Contract, there is problem of setting the tax on oil and gas sector particularly uplift policy relating to the taxation of income in the state revenue sources. This issue is related to the return of controversy of operational costs recognized by the contractor (cost recovery claim). Uplift tax culminated by this controversy is only levied at state-owned enterprises as partners in the oil and gas with contracting scheme of Joint Operation Body (JOB), especially the old fields with advanced technology (Enhanced Oil Recovery/EOR). The controversy that developed in line with the declining number of production and increased production costs are recognized by the contractor with respect to the reasonableness of operational expenses charged by contractors, both in terms of quantity and cost classification.

Effects of Fiscal Regime Changes on Investment Climate of Malaysia's Marginal Oil Fields: Proposed Model

The paper proposes a model to examine the effect of the 2010 fiscal regime changes on investment climate of Malaysia's marginal oil fields. It proposes the use of investment appraisal tools, such as Net Present Value, Internal Rate of Return, Profitability Index, Saving Index and Access to Gross Revenue, for the study. Two scenarios would be considered using the fiscal terms of Production Sharing Contract (PSC) and Risk Service Contract (RSC), respectively. Each scenario would be of a fifteen-year simulation. Sensitivity analysis will also be conducted for both the scenarios under different prices and reserves levels. The study, when undertaken, will be beneficial to both industry and the government.

An Integrated Approach to State Decision-Making in Upstream Hydrocarbon Operations With Application to Lebanon

In the exploration, development, and production of hydrocarbons, a sovereign state faces conflicting challenges: maximizing its welfare while maintaining an attractive investment environment for developers. The terms and conditions of a production sharing contract (PSC) between the government and international oil companies (IOC) are usually finalized prior to the commencement of operations and with partial knowledge of the reserve level. In addition, hydrocarbons have several potential uses. This paper formulates an optimization model that assists the government in these challenges. Given an initial estimated reserve volume and hydrocarbon price, the model determines values for both the PSC's key parameters and the allocation of the government share into different uses to generate the maximum benefit to the state while providing an acceptable rate of return for the IOC. The model is applied to Lebanon. We find that an optimal PSC for Lebanon involves no royalty for all reasonable values of potential reserves, and a high cost recovery and profit share for low reserve volumes. In addition, sensitivity analysis indicates that the preferred export mode is via the Arab pipeline, due to the low level of the current gas price and high cost of the alternative liquefied natural gas export mode.

A progress report on Indonesian coal bed methane development

This article examines the progress made towards achieving material commercial coal bed methane (CBM) production in Indonesia during the period since the publication in 2010 of ‘Coal Bed Methane Development in Indonesia: Golden Opportunity or Impossible Dream?’ (2010 Paper; P Godfrey, Tan Ee and T Hewitt, ‘Coal Bed Methane Development in Indonesia: Golden Opportunity or Impossible Dream?’ (2010) 28(2) JERL 233–64) by the Journal of Energy and Natural Resources Law. Although blessed by favourable geology, and despite some quite extensive exploration activities, Indonesia has not yet seen CBM become a significant contributor to its energy supply mix. This is the case both in relation to domestic gas demand and in terms of contribution to spare capacity in liquefied natural gas export facilities. The Government of Indonesia has continued to use the production sharing contract (PSC) as the centrepiece of its regulation of the CBM sector. Except for the issue of a newish regulation on bidding for unconventional gas acreage, the regulatory regime pertaining to CBM exploration and production (E&P) has remained basically unchanged since 2010. Generally speaking, bureaucratic inertia at central and local levels of Government continues to be an unfortunate characteristic of the administration of the sector. However, at the same time, a lack of suitable specialized drilling equipment together with a lack of commitment by some CBM operators has also played a significant part in disappointing progress overall.

Production Sharing or Joint Venturing: What Is the Optimum Petroleum Contractual Arrangement for the Exploitation of Nigeria Oil and Gas?

Over time, stakeholders in the Nigerian oil and gas industry have been experimenting different contractual arrangement with the view of coming up with a best contractual arrangement for the industry. However, any shift from one contractual arrangement to another may affect the revenue generation position of the government and investments potentialities of the foreign oil companies. Similarly, the growing concern ranging from challenges of sustainability to transparency and accountability of transactions in the industry put the contractual arrangements on which the industry operates under question. Therefore, this study is aimed at finding out which among joint venture (JV) and production sharing contract (PSC) is optimal for exploitation of the Nigerian oil and gas industry in terms of economic rent, transparency and accountability derivable from the contract. Using contractual elements, pattern-matching and content analysis was used as the main techniques in analysing data. The results of the study have proved JV optimal in terms of economic rent, while PSC was found optimal in terms of accountability and transparency. On the overall, the results proved JV as optimal for the stakeholders in the Nigerian oil and gas industry. The study recommends government to place more emphasis on JVs in the industry, increase efforts towards fight against corruption in its agencies and officials, and increase the disclosure requirements of both its agencies and other operators in the industry particularly on those aspects of the processes that are more prone to corruption. Lastly, the FOCs operating in the industry should embrace and implement internationally acceptable good industry practices.

Comments: Mexico's Next Step

Editor's column The opening of Mexico’s energy sector to private foreign investment continues to move forward, with more details of the landmark legislation expected soon. The potential impact this will have on Mexico, its state oil company, and the upstream industry in general is hard to overestimate. Mexico, with all its hydrocarbon riches, has essentially been closed to outsiders since 1938, when the country declared that all mineral and oil reserves in Mexico belong only to the nation. Mexico has watched its neighbor to the north, the United States, reap the benefits of shale development and ultradeepwater production in the Gulf of Mexico with oil prices hovering around USD 100/bbl. The country now would be reversing decades of resource nationalism, allowing foreign oil firms access to potentially world-class fields. In March, national oil company Pemex submitted to the government its list of fields and acreage that it would like to keep under the new energy reform regime. Fields not on the list are expected to be offered in auctions, with Pemex allowed to bid on those as well. The first licensing round is not expected to be held until 2015 with production-sharing and profit-sharing contracts both under discussion. Acreage would likely include conventional resources, unconventional, and deep water. Pemex may also seek partnerships with foreign firms for acreage under deals that could be signed as soon as this year. Published reports say that Pemex requested acreage containing 83% of Mexico’s proved and probable hydrocarbons reserves and 31% of its prospective resources. The acreage includes conventional onshore and shallow water fields, in addition to deepwater fields already under development as well as deepwater areas where discoveries have unveiled attractive prospects, such as in the Gulf of Mexico Perdido Fold Belt. Mexico’s energy ministry has a September deadline to decide what acreage Pemex can keep and what will be available for bidding. International oil companies may be particularly interested in prospective unconventional acreage, such as in the northern part of the country near south Texas, and the unexplored deep water. The state oil company is thought to have neither the finances nor the technology to develop those areas on its own. Pemex is trying to shore up its declining oil production. Current crude output is averaging slightly more than 2.5 million BOPD this year, the same level of production since 2012, and down significantly from a peak of almost 3.4 million BOPD in 2004. Enhanced oil recovery methods at mature fields and plateauing production at the main offshore Cantarell complex are helping keep output from falling further. Crude oil exports average approximately 1.27 million BOPD. Mexico’s once-prolific Cantarell field is producing about 355,000 BOPD, down from 2 million BOPD a decade ago, and the offshore Ku-Maloob-Zaap complex is expected to start declining soon from its current 860,000 BOPD output. JPT

Production Sharing Contracts in Indian Oil & Gas Sector

The case describes the policies followed by the Government of India to attract private investments for Oil & Gas exploration. This case is based around observations made by the Comptroller and Auditor General of India on some of the petroleum sharing contracts and the remedial measures suggested by a committee appointed by the Government. The case describes how such contracts are structured elsewhere and raises issue about how such contracts can be structured and managed by the state.

On oil investment and production: A comparison of production sharing contracts and buyback contracts

Production sharing contracts (PSCs) and buyback contracts are two important contract modes in the upstream oil industry. In this paper, we build a theoretical model to compare investment and production levels under these two contracts. Our model results show that PSCs lead to higher investment levels than buyback contracts. Moreover, investment level increases with international oil companies’ (IOCs') share under buyback contracts. The comparison of optimal oil production depends on IOCs' share under PSCs and the host government's marginal operating costs from oil production under buyback contracts. When IOCs' share of gross revenues or the host government's marginal operating costs are low, optimal oil production is higher under buyback contracts; otherwise, optimal oil production is higher under PSCs. Based on such a comparison, we investigate the host government's best decisions on revenue division under these two contract types. We demonstrate that optimal share ratios exist for the host government to obtain maximum oil revenues under both contract types. We also find that under both contracts the discount factor and oil price positively affect optimal investment and production levels, respectively. Our results can provide policy implications for the host government when selecting upstream oil contracts in international oil cooperation.

A Comparative Analysis of Production Sharing Contracts of Selected Developing Countries: Nigeria, Indonesia, Malaysia and Equatorial Guinea

Maximization of returns and benefits are the major determinants state considers for adopting particular petroleum fiscal regime in the course of exploiting its petroleum resources. Two major fiscal regimes are adopted for exploiting petroleum resources: Joint venture agreement (JVA) and production sharing contract (PSC). However, considering the inherent difficulties associated with Joint venture agreements, developing countries gave emphasis to production sharing contract. This study aims to compare expected returns from exploiting petroleum resources of selected countries (Nigeria, Indonesia, Malaysia and Equatorial Guinea) that have adopted the Production Sharing Contracts. A literature based methodology was adopted, and indeed, data were gathered from the PSC treaties and related documents. The findings suggest that Nigerian PSC provides less return compared to its contemporaries. Indeed, the results showed that Malaysia received the highest returns, followed by Indonesia and Equatorial Guinea. On the other hand, the findings justified the underlying hypothesis of socio-economic factors help shape the terms and conditions of oil and gas contracts in developing countries particularly production sharing contract.

Strategies for foreign investment in Iran's upstream oil industry with an emphasis on Production Sharing Contracts

Investment is an important issue in the exploitation of oil fields. Since the oil fields are typically in undeveloped countries, lack of necessary capital causes increasing and numerous problems for such countries. Fundraising arrangements are an opportunity to recruit investment from overseas. Due to increased competition in attracting foreign investment and the investee countries’ interest to participate in Production Sharing Contracts (PSC), in this paper descriptive and analytical methods are used. After investigating attracting foreign investment PSC methods and referring to the traditional sources of oil law, the results show that weakness of ownership system and the level of state control over its resources are main reasons for investee countries to accept PSCs.