Production Sharing Contract Research Articles

E&P Notes (April 2021)

E&P Notes (April 2021)

Production sharing contracts and rentierism: Reforming transparency gaps in Kurdistan's oil and gas contracts

Rentierism is a significant concern for most oil-producing countries, in particular, those in the developing world. Iraq is among those countries with a long history of rentierism. Kurdistan is the only federal region in Iraq that exports oil independently and uses Production Sharing Contracts (PSCs) without the federal government's authorisation. However, the influence of PSCs on rentierism has not been discussed in the literature, particularly in the context of the Middle East. This paper argues that while PSCs contributed significantly to increasing rentierism in the region, they are not the only factor. The paper draws on findings from interviews conducted with parliamentary members and oil experts in the region to support the arguments presented. Due to the complexity, lack of transparency and other aspects of these contracts, significant revenue accumulated in the hands of influential groups in the Kurdistan Regional Government (KRG). This revenue is used for personal and political goals rather than development. The paper concludes with several findings and policy implications, including contractual and institutional reforms.

Addressing Residual Liability and Insolvency in Disused Oil and Gas Infrastructure Left in Place: The Cases of Brazil, Nigeria, and Trinidad and Tobago

This article analyses the decommissioning framework for oil and gas infrastructures in Brazil, Nigeria, and Trinidad and Tobago. It examines whether the existing provisions in each country are able to guarantee that the government and, by extension taxpayers, do not bear the costs of decommissioning and, the consequences of insolvency on residual liabilities. An additional motivation for this examination is the ongoing Coronavirus Disease 2019 (COVID-19), a pandemic with significant adverse impacts on the oil and gas industry. A likely consequence of the economic devastation from this is the insolvency of any party with decommissioning obligations.The article argues that the provisions of the Brazil petroleum legislation on the reversion of abandoned installations to the government could imply that taxpayers have to bear the residual liabilities without any compensation from the concerned concessionaires or contractors. It also argues that the provisions of the Petroleum Law to the effect that ‘the reversion of facilities does not entail any expense whatsoever for the Brazilian government ’does not certainly translate to pecuniary compensation to the latter for assuming the future residual liabilities from abandoned installations. The Nigerian and the Trinidad &Tobago Decommissioning Framework also suffer the latter risk of the government bearing the residual liabilities for such disused installations.In Nigeria, the framework is silent on who bears the residual liabilities for disused installations. However, it is argued that the provisions of the Production Sharing Contracts on the transfer of ownership to the Nigerian government implies that they would have to bear eventual liabilities for such disused installations. Even in cases where the licensee or contractor may bear the burden of residual liabilities, the problem of future insolvency and cessation of such companies may entail that taxpayers bear the burden of residual liabilities. The article concludes with key recommendations on how to address the identified gaps using lessons from best practices such as United Kingdom, Norway and United States of America. One of such proposals is on the allocation of liability where there is a transfer of interest. Another is for joint and several or at least secondary liability of responsible parties even after decommissioning activities are over; a recommended provision to this effect is also provided. The third recommendation is on how time-constrained residual liability can be used alongside lump sum payments to limit the State's financial exposure for decommissioning costs.

IMPLICATIONS OF GOVERNMENT LEGAL SUBJECT STATUS AS ONE OF THE CAUSES OF TAX DISPUTES ON PRODUCTION SHARING CONTRACTS FOR THE OIL AND GAS INDUSTRY IN INDONESIA

<em>Supreme Court Decision Number 2424/B/PK/Pjk/2020 states that the PSC (Production Sharing Contract) is a Government to Business ("G to B") agreement that applies domestic taxes. Therefore, in tax disputes over Branch Profit Tax (BPT) between a Permanent Establishment Taxpayer (BUT) and the Director-General of Taxes, the Supreme Court's decision uses a 20% domestic tax rate instead of 10% in accordance with the Tax Treaty. This study elaborates how the Government's position in the production sharing contract with the private sector or PE is related to Indonesian and international tax law. The main issues raised are the Government's position as a legal subject in the PSC agreement and the process associated with regulating BPT in international taxation. This is a library study with the juridical-normative approach method. The results showed that the Government acts as a subject of civil law in the PSC agreement. However, in the PSC contract, the relationship between the state and the private sector or PE (BUT) in natural resource management must be carried out using a public relationship by giving concessions or permits full of state control and power. For instance, the Indonesian tax law does not apply when there is a tax treaty. The Taxation Law in Indonesia cannot unilaterally interpret taxes on BPT based on Indonesian domestic provisions.</em>

COST RECOVERY ANALYSIS IN PRODUCTION SHARING CONTRACT IN UPSTREAM OIL AND GAS INDUSTRY (STUDY ON GAS UPSTREAM INDUSTRIES INDONESIA)

This study aims to: 1) analyze empirically and test the effect of cost recovery in the Production Sharing Contract (Oil and Gas Production Sharing). 2) empirically analyze and test the effect of cost recovery in the upstream Oil and Gas Industry on State Revenues. The unit of analysis of this research is the upstream oil and gas industry managed by the Indonesian government with a Production Sharing Contract system with 44 companies or contract operator cooperatives. The population includes those who work as operators of cooperation contract contractors and SKK MIGAS with 62 manager levels, 51 professionals and 18 university researchers. And the researchers also used secondary data in SKK MIGAS in the 1984-20019 period. This research uses a qualitative approach, and the analysis of the data used is descriptive analysis, because the data analysis is done not to accept or reject hypotheses, but in the form of descriptions of observed symptoms, which are not always in the form of numbers or coefficients between variables . However, the emphasis is not on hypothesis testing, but on efforts to answer research questions through formal and argumentative ways. The results of the study indicate that there is a relation between the Cost Recovery component and the terminology in the Production Sharing Contract in the Upstream Oil and Gas Industry in Indonesia . By placing the right cost post on cost recovery will be able to reduce production costs from the Cooperation Contract Contractor (KKKS).

E&P Notes (February 2021)

E&P Notes (February 2021)

Comparative Analysis of Nigeria and Malaysia’s Production Sharing Contract (PSC)

The oil and gas industry is governed by policies with the aim of smoothening the business relationship between the Government, the International Oil Companies (IOC’s) and the Host communities. Different oil producing countries have their own laws governing petroleum activities and these laws vary from country to country based on the B-PEST factors which are Biological, Political, Environmental, Social and Technology. However, reserve size and oil type can also influence petroleum laws. Countries like Nigeria relies strongly on petroleum bills such as the PIB in which this research will be analyzing the Production Sharing Contract (PSC) which is a significant subset of the PIB. Comparison between the existing PSC of Malaysia and that of Nigeria was captured in this research and the analysis of the PSC was done based on the Government Take, National Oil Company (NOC) and the Contractor’s benefits. 26.67% and 56.58% recovery cost, 28.67% and 26.28% Government revenue, 23.14% and 7.64% NOC share, 21.52% and 9.50% Contractor share of revenue per barrel was arrived at for Malaysia and Nigeria respectively, showing that the Malaysian PSC model yields more income to the country when compared to that of Nigeria without necessarily short-changing the contractors or the IOCs. Finally, the reasons behind these deficits were highlighted and recommendations made to improve the PSC and benefits for all parties to the contractual agreements.

Assessment of Net Oil and Gas Reserves and Analysis of the Influencing Factors under Production Sharing Contracts

Production sharing contract (PSC) is one of the most commonly used contract type in international petroleum cooperation practices, under which, contractors obtain net reserves composed of in kind “cost oil” and “profit oil” by taking risks, bearing exploration, development and production costs, paying royalties, income taxes and other fees to the government of the resource country (the host government). The net reserves owned by a contractor refer to the remaining economic recoverable reserves that the contractor can obtain during the remaining contract period, which represent the real revenue the contractor can realize. Taking Project XX in Africa for example, this paper analyzed the methods for estimating net oil and gas reserves under PSCs, discussed the impacts of production, decline rate, plan, prices, costs, profit oil sharing and taxes on net reserves from four aspects including technique, economics, commerciality and engineering. In addition, the paper also made sensitivity analysis of the factors having significant influence on net reserves, such as the oil production, oil prices, operation expenses and investment, and put forward some recommendations for optimizing field development strategies to maximize contractors’ economic benefits.

THE NEW PUBLIC FINANCE IMPLEMENTATION IN THE PRODUCTION SHARING CONTRACT SCHEME FOR EXPLORATION AND EXPLOITATION OF OIL AND GAS RESOURCE IN INDONESIA

<p>Abstract Indonesia is a country which have oil and gas reserve as one of the country natural resources. Until now, the government management on oil and gas resources remain plays such important role in both strategic aspect as the state income contributor and the energy resilience. The Production Sharing Contract (PSC) Scheme applies in the management system of exploration and exploitation (Upstream) of oil and gas resources that is mandated by the 1945Constitution that should be managed for the greatest people prosperity. The PSC Scheme is a type of collaboration or partnership agreement between Government Institution (Representative) with Private Parties (National or Multi-National Corporation) to mutually explore and exploit the resources for the purpose of the Government mission (to provide people prosperity) in one hand, and to produce added value for the private corporation on the other hand. PSC Scheme has been enabling both parties joint and share genera and technical management aspect, asset management aspect, as well as financial / fiscal aspect encompass, therefore this scheme should be considered as part of the New Public Finance in implementation; Key Words: New Public Finance, Production Sharing Contact, Oil and Gas Resource Exploration and Exploitation.</p><p> </p>

Petroleum Exploration and Production Contracts as Regulatory Tools: The Kurdistan Region Production Sharing Contracts

The operating activities of the petroleum sector require large amounts of money and high levels of experience and technology that cannot be provided exclusively by most oil-producing countries or their public companies. Therefore, concluding a petroleum exploration and production contract is necessary to address the rights and obligations of the host State and international oil companies; while, various types of petroleum contracts have been developed to address those rights and obligations. In the Kurdistan Region, as an oil-producing region, oil and gas resources are being explored and produced by international oil companies, under production sharing contracts. This study attempts to appraise traditional and modern types of petroleum exploration and production contracts in detail, to examine the fundamental differences and similarities between them; and also to analyse the Kurdistan Region’s production sharing contracts. This research has clarified that the traditional contracts of different types of petroleum contracts are quite different, however, the modern contracts have many provisions in common. Therefore, currently, the choice of contract type might be less important than the content of particular contractual provisions. Finally, the research has clarified that the Kurdistan Region’s production sharing contracts comprise several positive provisions that have attracted a wide range of international oil companies to invest in the Kurdistan Region. Keywords : The Kurdistan Region of Iraq, The Kurdistan Regional Government, Production Sharing Contract, Concession Contract, Service Contract, Joint Venture Contract, International Oil Company, Traditional and Modern Petroleum Contracts. DOI: 10.7176/JLPG/101-17 Publication date: September 30 th 2020

Negotiating upstream petroleum granting instrument terms with a state—what to do when the spider meets the fly

Abstract This article considers the key considerations to be borne in mind by an investor when negotiating the terms of an upstream petroleum granting instrument with a host government. In this article the term ‘granting instrument’ is used generically as a single term for ease of reference, intended to encompass all the different forms of petroleum concession, licence, contract or permit, but the article’s analysis is focused on the terms of a production sharing contract (PSC) simply because the PSC is the form of granting instrument which by far is the most widely used worldwide today for petroleum exploration and production. Despite this focus, many of the terms of the PSC which are considered in this article will also be relevant to other forms of petroleum granting instrument.

Gross Split Contract Framework Regulation on the Caring for People

<p>This study aims to determine the model of oil and gas governance in Indonesia in terms of the interests of the State to protect natural resources that should be controlled for maximum use for the prosperity of the people. This study is based on the results of normative legal studies that are descriptive. The type of data used is secondary data obtained from literature study data collection techniques, which are then analyzed by carrying out systematic interpretation of the law. Systematic means, making a classification of written legal materials, to facilitate the work of analysis and construction. The results of this study show that oil and gas management arrangements began in the Dutch colonial period and continue to change with the times up to now, specifically the regulation of upstream oil and gas. Upstream oil and gas management has changed several times, namely the Concession system, the Contract of Work system, Production Sharing Contract (PSC) and finally the Gross Split Production Sharing Contract. The emergence of Gross Split aims to improve the PSC system and improve the efficiency and effectiveness of oil and gas production sharing patterns. Even though Gross Split still has weaknesses, but when compared to the previous system, Gross Split is more in line with the country's goal of being as broad as possible for the people.</p><p> </p><p><strong> </strong><strong>Keywords:</strong> Mining; Gross Split; Welfare State.</p>

Stabilisation and Renegotiation Clauses in Iraqi Kurdistan Oil and Gas Contracts: A Comparative Study

Oil and gas contracts with the long-term characteristic are the scene of colliding between international oil companies’ interests and host government’s interests. This characteristic could make such contracts vulnerable to unpredictable political, economic and legislative changes at the time of conclusion. Therefore, the contracting parties tend to use mechanisms to protect the economic balance they have reached from the conclusion until completing the contract. Contractual clauses are an effective mechanism to maintain the economic balance, various contractual clauses have been devised, of which stabilisation and renegotiation clauses are prominent types. This article aims to examine and evaluate the stabilisation and renegotiation clauses in the Iraqi Kurdistan Region oil and gas contracts. It elaborates on the concept and consequences of these clauses and provides a comparison of the clauses in the different countries’ oil and gas contracts. The research methods adopted in this article, include comparative analysis methods and the research is conducted through extensive study of the relevant literature. The principal finding from this study is the existence of deficiencies and shortcomings in stabilisation and renegotiation clauses within the Iraqi Kurdistan production sharing contracts. It is suggested that the Kurdistan Regional Government should review such clauses for its future oil and gas contracts. Keywords : Stabilisation Clause, Renegotiation Clause, Kurdistan Region of Iraq, Production Sharing Contracts, Indonesia and Nigeria. DOI: 10.7176/JLPG/100-10 Publication date: August 31 st 2020

Constitutionality In Production Sharing Contracts: Legal Policy On Petroleum And Natural Gas

This research is focused on constitutionality issue of Law No. 22 Year 2001 on Petroleum and Natural Gas and its relation to Article 33 of the 1945 Constitution and constitutionality of production sharing contract in relation to Article 33 of the 1945 Constitution. This research uses normative juridical method. This research founds: first, the current Law on Petroleum and Natural Gas and its relation to Article 33 of the 1945 Constitution is conceptually still problematic. This is evidenced by the several law articles which had been quashed by the Constitutional Court because they contradict the 1945 Constitution. Second, the petroleum and gas business contracts still contradict the spirit of Article 33 paragraph (3) of the 1945 Constitution, this can be seen by the granting of requests for judicial review of the Law on Petroleum and Gas in the Constitutional Court.

A NECESSITY OR A PREMATURE MOVE? THE SHIFT OF INDONESIAN PRODUCTION SHARING CONTRACT IN THE OIL AND GAS INDUSTRY

This article explains the current significant change in the business activities of the Oil and Gas Industry which Indonesia is experiencing. Production Sharing Contract (PSC) has been one of the mechanisms to flourish Indonesia's Oil and Gas Industry. It creates good cooperation and understanding between the State and the Contractors. However, Cost Recovery PSC, although long-established, has been generating a lot of problems. These problems were mounting up to the point where changing the financing scheme of the PSC seemed to be more feasible rather than creating policies that would stop the Contractors from asking for reimbursement. This article will explore whether the government's shift from Cost Recovery PSC to Gross Split PSC is a necessity or a premature move. The result of this research shows that the change is both a necessity and a premature move. On one hand, it is a necessity because the deterioration of the state revenue is worrying. On the other hand, it is a premature move because concrete regulations do not follow this shift, and it discourages the Contractors.Keywords:Regulated Industries, Oil and Gas, Production Sharing Contract, Cost Recovery; Gross Split; Indonesia.JEL Classification: K230DOI: https://doi.org/10.32479/ijeep.9024

Forecasting Energy Disputes in Asia

Asia’s swift economic development has driven its demand for energy resources beyond historical limits. China and India together are expected to consume more than half of the world’s energy production and the rest of Asia continues to require significant resources. This article draws attention to the recent developments in Asia – the Belt and Road Initiative, (BRI), the expiring production sharing contracts (PSAs), the potential trend of increased gas-pricing disputes in the region, the drive to shed reliance on fossil fuels and the onset of the COVID-19 epidemic in China – to suggest that a surge of energy disputes is not far in the horizon. Whether and how these disputes will eventually play out, such players in the energy industry place confidence in the mature dispute resolution infrastructure that exists within the Asian region.

Economic Evaluation of Fiscal Regime on EOR Implementation in Indonesia: A Case Study of Low Salinity Water Injection on Field X

There are currently two fiscal regimes designated for resource allocation in Indonesia’s upstream oil and gas industry, the Production Sharing Contract Cost Recovery (PSC) and Gross Split. The Gross Split in the form of additional percentage split is designed to encourage contractors to implement Enhanced Oil Recovery (EOR) in mature fields. Low Salinity Water Injection (LSWI) is an emerging EOR technique in which the salinity of the injected water is controlled. It has been proven to be relatively cheaper and has simpler implementations than other EOR options in several countries. This study evaluates the LSWI project’s economy using PSC and Gross Split and then to be compared to conventional waterflooding (WF) project’s economy. There are four cases on Field X that are simulated using a commercial simulator for 5 years. The cases are evaluated under PSC and Gross Split to calculate the project’s economy. The economic indicators that will be evaluated are the Net Present Value (NPV) and sensitivity analysis is also conducted to observe the change of NPV. The parameters for sensitivity analysis are Capital Expenditure (CAPEX), Operating Expenditure (OPEX), Oil Production, and Oil Price. It is found that LSWI implementation using Gross Split is more profitable than PSC. The parameters that affects NPV the most in all PSC cases are the oil production and oil price. On the other hand, in Gross Split cases, the oil production is the parameter that affects NPV the most, followed by oil price. The novelty of this study is in the comparison of project’s economy between WF and LSWI using two different fiscal regimes to see whether Gross Split is more profitable than PSC on EOR implementation, specifically the LSWI at Field X.

The Possibility of Nationalization by the Kurdistan Regional Government of Iraq under the Light of Signed Petroleum Contracts and Establishment of Kurdistan National Oil Company (KNOC)

In the past 20 years, Kurdistan Regional Government (KRG) of Iraq has signed hundreds of Production Sharing Contracts with many international oil companies to expand investment and develop its oil sector. According to the applicable laws in the region, in particular Oil and Gas Law No.22 of 2007, government shall work to establish Kurdistan National Oil Company (KNOC) to take charge of petroleum operations. Meanwhile, according to the same law, the duration of petroleum production sharing contracts shall not exceed 20 years with the possibility of five years extension. Despite the fact that KRG is abided to many legal obligations to share the produced oil under production sharing contracts, there is always a question of whether KRG will be able to administer its oil industry and what will be the future of these oil contracts? This paper argues that KRG cannot nationalize (by appropriating the whole oil industry and assets of foreign oil companies) its petroleum sector even after the establishment of KNOC as there are many legal terms preventing it from nationalizing the oil industry besides the lack of technical ability to run the sector without the direct support from foreign oil companies. Moreover, the paper also discusses different possibilities after the end of oil contracts with foreign international companies; Does KRG continue with the current contractual form or it will shift to other forms of contract such as service contract to develop oil industry in the region? It suggests that the best practice for the government is to institutionalize its oil sector with receiving direct support from oil companies. The establishment of KNOC is considered to be an effective step towards institutionalization of oil sector in the Iraqi Kurdistan Region.

Utilizing Production Sharing Contracts (PSCs) as a Means for the Protection of Indonesia’s Natural Resources

Indonesia has the potential to manage natural resources in such a way that social justice, public welfare, and the prosperity of the people is also realized. Contract law is the primary legal umbrella used in efforts to protect natural resources from exploitation. This study uses normative juridical methods that prioritize secondary data as the primary sources. This study shows the form of the legal protection of state assets related to oil and gas management including the government has the right of immunity, the existence of provisions regarding state revenue, state levies, and bonuses and the existence of provisions for contractors to distribute a portion of the production share. Thus, the government uses Production Sharing Contracts (PSC) to enter into oil and gas management agreements with contractors, specifically regarding upstream business activities. The Oil and Gas Law does not elaborate on the meaning of the PSC. Rather, it only states that the PSC is one form of the contracts.
 Keywords: Production Sharing Contract, State Control, Protection of Natural Resources.

The effect of non-fiscal clauses in Host Government Instruments on the Fair Market Value of upstream opportunities

Abstract We identify nine categories of clauses in Host Government Instruments (HGIs, ie licences, concessions, production sharing contracts (PSCs), etc.) that potentially affect the Fair Market Value of petroleum exploration and production rights, in addition to the clauses quantifying the fiscal terms. The categories comprise state participation, performance bonds and penalties for failing to perform minimum work programmes, local content, decommissioning, natural gas terms, stabilization, assignment and change of control, renewals and extensions and governance issues. For each category, we review and summarize global practice in the top 50 oil-producing countries. We quantify our analysis using statistics from a data set of 55 representative HGIs, including contemporary alternative types for five countries. The age of each HGI used varies, guided by the history of oil production in each country. Texts are available for 53 HGIs and published summaries are available for the other two. The discussion provides a checklist for use in negotiating new HGIs or performing due diligence for transactions involving existing HGIs. Our choice of representative HGIs and our characterizations of some clauses are both in part subjective. Nevertheless, we suggest the statistics provide a useful guide to trends in global practice.