Read Duff & Phelps' Oil & Gas Market Intelligence Report. As years go by, high quality crude oil reserves are increasingly scarce and difficult to access, leading to an increase in the energy needed to extract them. This situation is measured by the energy return on investment EROI for upstream activities, one of the most distinctive metrics in the Oil & Gas sector when we talk about profitability and sustainability.

1. Oil & Gas
Intelligence Report
Main Petroleum Contracts
May 2017
Contents
2 Introduction to
Petroleum Fiscal
Regimes
4 Classification of the
Main Petroleum Fiscal
Regimes
5 Concessionary Systems
7 Sharing Agreements
9 Service Agreements
10 Duff Phelps
Oil Gas Services
Duff Phelps 1

2. Duff Phelps 2
Duff Phelps — Oil Gas Intelligence Report Main Petroleum Contracts
As years go by, high quality crude oil reserves are
increasingly scarce and difficult to access, leading to
an increase in the energy needed to extract them.
This situation is measured by the energy return on investment
(EROI) for upstream activities, one of the most distinctive
metrics in the Oil Gas sector when we talk about
profitability and sustainability.
According to this ratio, by the middle of the 19th century,
it was only needed to invest one oil barrel to extract one
hundred (EROI = 100). This is easy to understand: The first
deposits contained oil of very high-quality at low depths,
accessible and easy to exploit; therefore, the energy necessary
for the search, prospecting, drilling, pumping and transportation
of the crude was minor, but as the more accessible deposits
were depleted, it was necessary to search, prospect and drill
farther or in less convenient places, far from the centers of
consumption. In this way, the costs of these extractions have
grown over time, and currently the EROI of oil extraction is in
the range of 5 to 15.
This fact affects all companies in the sector equally, whether
private oil company (POC) or national oil company (NOC),
but its impact is greater due to the difficulty or impossibility
of diversifying their investment portfolio. Countries owning
petroleum resources depend, to a large extent, on the
Oil Gas industry when building their budgets and trying
to improve the welfare state. At the same time, the starting
point is often difficult when the “first oil” has not been
produced yet.
Considering the current scene showed by the EROI, the solution
will come from the investment community, but only if it is
showed a promising framework. In this sense, the proposal of
a balanced and attractive tax system will be key for investors.
Figure 1.1: EROI by Energy Source
Source: “EROI of Global Energy Resources: Preliminary Status and Trends” and Duff Phelps
Figure 1.2: EROI for Oil Gas Value Chain Activities
Source: “EROI of different fuels and the implications for society” and Duff Phelps
Figure 1.3: EROI associated with Oil Gas discoveries in United States
Source: U.S. Energy Information Administration and Duff Phelps
Introduction to Petroleum Fiscal Regimes
EROI
0
20
40
60
Oil and Gas
Production
Oil Shale Wind Solar (PV) Hydropower
80
100
Upstream
Extraction
Losses
Transport
Losses
Refining
Losses
Commercialization
Losses
UPSTREAM
Midstream Downstream Infrastructure
Oil Remaining
as Consumer-
Ready Fuel
EROI
MIDSTREAMEROI
DOWNSTREAMEROI
INDUSTRYEROI
0
10
20
30
40
50
60
70
80
90
100
1954
2016e
2014e
2012e
2010e
2008e
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956

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Duff Phelps — Oil Gas Intelligence Report Main Petroleum Contracts
Another aspect that should be added to the equation is the
maturity of the Oil Gas endeavour. A government attempting
to develop its first discoveries will often need to ensure cash
collections at a very early stage, so deferring first profits
may not be the most desirable option. Financial instruments,
like a “carry,” are often applied in this event, but even so,
the cohabitation of very regressive parameters like upfront
signing bonuses and royalties should be accepted by the
investors.
In summary, the implemented tax regime should develop,
at the same time, a competitive, dynamic and attractive
environment where investors will negotiate their offers
against solvent and robust fiscal parameters.
The principal policy decision that will define the profitability
of a country’s national oil industry is the design of a fiscal
system which is balanced between maximizing collections in
the short run and ensuring an adequate investment inflow in
the long run, as taxation and terms and conditions in petroleum
agreements are the basis for many technical and commercial
decisions. This is especially important in countries in exploratory
phases, like Senegal, in need of cash reserves to start
developing their oil industry but needing to offer attractive
overall economic returns to investors.
In most countries, all the resources contained in the land are
the property of the state, thus the taxonomy of the petroleum
fiscal system will be defined based on the point at which the
property of the hydrocarbons changes hands. As a result,
an important consideration when determining the appropriate
fiscal regime is the correct election of the terms and conditions
of the petroleum agreement, as well as the taxation mechanisms.
These factors will be noted as the main petroleum
agreements are analyzed, outlining the characteristics of
each of them.
Figure 1.4: World Oil Consumption
Source: BP Statistical Review of World Energy (June 2016)
Figure 1.5: Oil and Natural Gas World Reserves
Source: U.S. Energy Information Administration
Figure 1.6: World’s Top Oil Producers
Source: International Energy Agency (IEA), 2016
Introduction to Petroleum Fiscal Regimes
24.9%
34.2%
7.5%
10%
19.4%
4%
ThousandMillionBarrels
TrillionCubicMeters
500
1,100
900
700
1,300
1,500
1,700
1,900
1980 201520101985
50
70
90
110
130
150
170
190
210
2005200019951990
Natural GasOil
0%
2%
4%
6%
8%
10%
12% 11%
Russia Saudi
Arabia
United
States
Iraq China ChinaIran UAE Kuwait Brazil
10%
9%
5%
4% 4%4%
3% 3% 3%

4. Duff Phelps 4
Duff Phelps — Oil Gas Intelligence Report Main Petroleum Contracts
Due to the diversity of ownership of oil and gas interests
during the exploration and production phases and the need
to share costs and risks among the parties involved, the
industry has developed different types of agreements.
The details and specific characteristics of each contract must
be analyzed on by country (or even individually), but all of them
can be integrated into two big groups, depending on the
moment the ownership of the hydrocarbons is transferred:
Concessionary Systems and Contractual Systems.
Under a Concessionary System, the oil company (hereinafter,
“OilCo”) has the ownership of the crude oil produced in the
moment the hydrocarbon is extracted from the subsoil, while
in a Contractual System the government retains title of the
obtained production up to an agreed-upon point. Contractual
arrangements are divided into Service Agreements and Sharing
Agreements. The difference between them depends upon
whether the contractor receives compensation in cash or in crude.
Normally, the general terms and conditions of the contracts
are guided by a hydrocarbon law, formulated at parliamentary
level, while non-tax forms of rent collection (signing bonus,
production sharing parameters) are defined in each individual
contract. In addition, all matters related to taxation, both
specific to the oil industry and applicable to all other sectors
of the economy, are defined in the tax code. An appropriate
contract will depend on the characteristics of each oil field.
However, in every case, both fiscal terms and block’s
prospects should be balanced.
In nearly all countries the subsoil is state owned, so govern-
ments can use this right to grant a monopoly to a NOC or
develop a system that permits the participation of third
parties to cover the areas in which additional know-how or
availability to funds is required but unattainable by the host
country at a given point in time.
Figure 2.1: Classification of Main Petroleum Agreements
Source: Daniel Johnston and Duff Phelps
Figure 2.2: Terms and Conditions — Petroleum Agreements
Defined in: Petroleum Tax Code Contract Specific
Main Operational Aspects • Carried working interest
• Title transfer
• Minimum work program
• Relinquishment
• Commercial viability
Main Economic Aspects • Royalties
• Surface rents
• Depreciation rates
• Deductions
• Income taxes
• Signing bonus
• Cost recovery limit
• Production sharing %
Source: “Fiscal Systems for Hydrocarbons — Silvana Tordo” and Duff Phelps
Figure 2.3: Differences — Main Petroleum Agreements
General
Features
License
Agreements
Sharing
Agreements
Service
Agreements
Title transfer Wellhead Delivery point No transfer
OilCo entitlement Net production Cost oil + profit oil None
Facilities’
ownership
Oil company Government Government
Management
and control
Oil company Mixed Government
Government
participation
Less likely More likely Most likely
Source: “Fiscal Systems for Hydrocarbons — Silvana Tordo” and Duff Phelps
Classification of the Main Petroleum Fiscal Regimes
Classification of Main Petroleum
Agreements by System
Gross
Production
Concessionary
Systems
Contractual
Systems
Profit Oil +
Unused Cost Oil
License Agreements Sharing Agreements Service Agreements
Profit
Sharing
Profit Oil
Production
Sharing
Fee + %
Revenue
Flat Fee

5. Duff Phelps 5
Duff Phelps — Oil Gas Intelligence Report Main Petroleum Contracts
Concessionary Systems
In Concessionary Systems, OilCos are granted the right to
explore a designated area and, if they are successful, keep
the produced hydrocarbon reserves. When the production
phase starts, the OilCo is entitled to the hydrocarbons
extracted at the wellhead.
License Agreements are the most common type of contract
in this fiscal regime. As OilCos are granted exclusive rights to
explore and produce the concession area, they typically are
subject to the payment of royalties; surface rentals for the
areas occupied, which vary according to the phase in which
the conceded area is in; special petroleum taxes, which can
take the form of an additional percentage added to the
royalties or an additional levy to compensate for the full
entitlement to the hydrocarbons; and regular corporate
income taxes of the nation where the petroleum is extracted.
The ownership of all production and exploration equipment
belongs to the OilCo but is generally transferred to the state
at the expiry of the concession. The decommissioning process
at the end of the concession will be the responsibility of the
OilCo. In this kind of system, petroleum rights are granted
based on a special petroleum law. If the petroleum rights are
granted under special terms, conditions will be specified in a
self-contained document.
Despite being the first of petroleum agreements, its
importance has been gradually balanced over time with
Production Sharing Contracts, which we will analyze in the
following section. Most countries are reluctant to hand over
their natural resources to private foreign companies and as
a result have little control on how these companies carry out
their operations. Under Contractual Systems, this issue can
be mitigated by sharing some risks with the OilCos while
maintaining control.
Figure 3.1: Pros and Cons of License Agreement
License Agreements
PROS
• Opportunity to earn an up-front bonus payment at the start of the project, which
gives the government liquid resources early
• When production phase is reached, government earns cash from royalty, petroleum
taxes and corporate tax based on the commodity price or production levels
• If licensing is granted through bidding, successful bidders will pay the
government a premium over the original conditions
CONS
• Government loses control of its national resources and has very limited influence
and control over the operations
• As characteristics of the blocks are uncertain, investors will be cautious in
bidding for uncertain returns. This might harm licensing rounds for countries
which seek extensive exploration work through biddings
• All payments are received in cash, which limits the options from a strategic point
of view (i.e., government affecting in its imports/exports with its hydrocarbons)
Source: Duff Phelps
Figure 3.2: License Agreements Revenue Flow
Source: Duff Phelps
Total Production
License Agreements Revenue Flow
Gross
Production
Income TaxSPT
Signing
Bonus
Royalties
OilCo Take Government Take
Figure 3.2: License Agreements Revenue Flow

6. Duff Phelps 6
Duff Phelps — Oil Gas Intelligence Report Main Petroleum Contracts
Concessionary Systems
If the country is in yet extract first oil or needs an intensive
exploratory campaign to increase production through new
discoveries, this kind of system might not be ideal. In
Concessionary Systems, OilCos must make a series of
payments up front and, if licensing is by bidding, they will
bid for contract terms without knowing if they will be suitable
for the characteristics of the block. As a result, governments
might find it difficult to attract investment, and therefore must
offer terms that might mean inefficient economic collections
in the future, when production phases start. In Contractual
Systems, especially in sharing agreements, taxation
mechanisms are more flexible (e.g., royalty sliding scales),
which gives OilCos a clearer picture.
Figure 3.3: License Agreements Typical PL
Taxes
Production (in barrels)
x Price/barrel
= Gross revenues (World Average AGR: 90%)
- Signing bonus
- Royalties (World Average: 8.9%)
- Special petroleum taxes
= Net revenues
- OPEX
- CAPEX
- Surface rent
= Cash Flow (before Corporate Tax)
Deductions
Gross revenues
- Signing bonus
- Royalties
- Special petroleum taxes
- OPEX
- CAPEX (amortization)
= Taxable income
- Income Tax
= Net Profit for the OilCo
Source: Duff Phelps

7. Duff Phelps 7
Duff Phelps — Oil Gas Intelligence Report Main Petroleum Contracts
Under a Sharing Agreement the OilCo is granted exploration
and evaluation rights over an area in the host country in
exchange for a share of the produced hydrocarbons.
The principle of these contracts is for the OilCo and the
government to define from the start how they will share
the costs and profits once the exploration phase concludes
and results are successful.
Production Sharing Contracts (hereinafter, “PSCs”) are the
most common contracts in this type of fiscal regime (and
around the world), In PSCs such an agreed-upon amount
of production is divided in kind between the OilCo and the
government. Despite PSCs being the most widespread,
some countries like Mexico offer the possibility to share
monetary gains from the sale of hydrocarbons by the
government’s trading house. These types of agreements
are called Profit Sharing Contracts.
As we have mentioned before, PSCs divide hydrocarbons
extracted in kind at an agreed percentage. Countries differ,
however, in how they apply that percentage. The most common
way to split production is using the Cost Recovery Mechanism,
which divides the extracted hydrocarbons into two categories:
Cost Oil and Profit Oil.
Cost Oil represents a percentage of the value of total production,
called the cost recovery limit. This amount is fully allocated to
the OilCo in compensation for bearing the risks, investments
and operational expenditures involved in Oil Gas activities.
Once the value of Cost Oil is deducted from gross production
value, the remaining value of hydrocarbons is Profit Oil, which
will be split between the government and the OilCo per the
agreed-upon terms of each contract.
Figure 4.1: Pros and Cons of Sharing Agreements
Sharing Agreements
PROS
• Possibility of receiving a cost recovery consideration prior to the establishment of
the operating profit ensures a minimum return for the investor
• Both parties receive production as part of the consideration, allowing them to be
flexible with the commercial strategy (i.e., storing production waiting for price rise)
• Government keeps a portion of its national resources and maintains control in
the operations, and if petroleum legislation provides carried working interest
clauses, there is know-how and technology transfer
CONS
• Less sensitive than other agreements to potential rallies of hydrocarbon prices
• The cost of storage of the hydrocarbons between the time of initial entitlement
and sale or delivery to refining is an additional cost for the government
• Profit higher than initially expected will be captured by the state through
adjustment mechanisms, (i.e., adjustments to royalty by price) thus adding fiscal
uncertainty to the contract
Source: Duff Phelps
Figure 4.2: Sharing Agreements Revenue Flow
Source: Duff Phelps
Sharing Agreements
Total Production
Cost Oil Income TaxRoyaltiesProfit Oil
OilCo Take Government Take
Joint Venture
Government
Share
NOC %
Share
OilCo %
Share
Sharing Agreements Revenue Flow
Figure 4.2: Sharing Agreements Revenue Flow

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Duff Phelps — Oil Gas Intelligence Report Main Petroleum Contracts
Sharing Agreements
As we have already mentioned, Profit Oil sharing is the most
common way to split production, but some countries use
alternative methods. One alternative of determining the base
for oil sharing can be found in PSCs in Egypt, which add any
unused Cost Oil (invested capital and operating expenses are
less than the cost recovery limit) to the remaining Profit Oil.
Another example can be found in Indonesia, where as of
January 2017 the government introduced a type of PSC in
which the sharing parameter is the value of gross production,
the Gross Split scheme.
PSCs are mostly found in Asia and in Africa. They are popular
here due to the need of many countries in these regions to
acquire qualified partners (especially for offshore fields) and
access to funding, as the experience of the local NOCs is
limited and financial resources of the government are normally
allocated to other areas. Thus, governments in host countries
normally require companies entering a PSC agreement to
pair with the local NOCs. In this way, the governments can
control the development of the national reserves and gain
experience and technology while not having to face heavy
disbursements in the early stages of the fields.
PSCs moving away from the cost recovery mechanism toward
Gross Split schemes are difficult to assess in terms of their
ability to attract investment, especially in fields in the early
stages of development. Since all risks and investments are
assumed by the OilCo during the phases of exploration and
development, where there is no guarantee of success, removing
the possibility of additional returns during the early years of
production through cost recovery schemes can significantly
harm the overall economic return over the life of the project.
.
Figure 4.3: Sharing Agreements Typical PL
Taxes
Production (in barrels)
x Price/barrel
= Gross revenues (World Average AGR: 73%)
- Signing bonus
- Royalties (World Average: 5.7%)
- Cost recovery (World Average: 65%)
= Net revenues
- OPEX
- CAPEX
- Surface rent
= Profit Oil
% OilCo
% Government
Deductions
Gross revenues
- Signing bonus
- Royalties
- Government % of profit oil
- OPEX
- Taxable income
= CAPEX (amortization)
- Income tax
= Net Profit for the OilCo
Source: Duff Phelps

9. Duff Phelps 9
Duff Phelps — Oil Gas Intelligence Report Main Petroleum Contracts
Service Agreements
Service Agreements are a solution sought by countries
concerned with losing sovereignty over the natural
resources of the nation and in need of acquiring the
expertise and technology of International OilCos
(hereinafter, “IOCs”) and access to investment.
In this kind of agreement, there is no need for the host
government to provide any funds, as it is up to the IOC to
provide all capital and know-how associated with exploration
and development. Only when the production phase starts will
the government start paying back, making it very attractive
for countries with liquidity shortages, as they only should
face payments when the project generates cash inflows.
With this setup, host nations keep control over their natural
resources, as they are owners of the fields and, in most
cases, no production must be allocated to the IOC.
Depending on the risks assumed by the IOC and the form
of payment, Service Contracts may be classified as:
• Flat Fee: IOCs are paid a flat fee for the services.
These contracts are subject to general corporate
taxation but not to higher special petroleum taxes.
• Fee + % Revenue: The IOC supplies services and
know-how to the state from exploration through
production phases in exchange for an agreed fixed
fee and a percentage of remaining revenues.
Through Service Agreements, governments get the maximum
entitlement compared to other petroleum contracts, as the
government keeps all the production of hydrocarbons. They
also allow access to certain projects in which local NOCs
lack the necessary expertise or financial capabilities. In
addition, Service Agreements eliminate the risk of deficiencies
in the election of contractual terms. For example, if fiscal
terms in a PSC are not properly defined, unexpected additional
income will not be efficiently collected. Terms of Service
Agreements are less complex than other petroleum contracts
in terms of tax and royalty provisions, which makes it more
difficult for inefficiencies to appear.
Despite all their positive aspects, Service Agreements have
a flaw that makes them a less popular choice compared to
other types of contracts previously discussed: They are prone
to economically inefficient outcomes, as the primary goal of
the IOC is not profit maximization but recovering invested
capital and obtaining a margin on the service fee. In addition,
as no joint operations take place, the local NOC cannot fully
benefit from technological and know-how sharing.
Figure 5.1: Pros and Cons of Service Agreements
Service Agreements
PROS
• Not subject to oil taxes, thus simpler implementation of the agreement as no
negation of fiscal terms is required
• The fixed service fee gives the IOC certainty of the economic flow
• Government has full entitlement to the national resources and is in control
of the operations
• Possibility to choose specific IOCs for each kind of block depending on the
specialization and expertise
CONS
• There is no potential upside for superior performance, as the main goal of the
IOC is recovering the investments as soon as possible and not profit
maximization
• Most IOCs prefer a portion of the reimbursement of costs in kind rather than
100% cash rewards
• The government does not collect additional taxes for petroleum activities
Source: Duff Phelps
Figure 5.2: Service Agreements Revenue Flow
Source: Duff Phelps
Service Agreements Revenue Flow
Risk Service ContractPure Service Contract
OilCo
Take
Government Take OilCo Take Government Take
OilCo
Share
Govt.
Share
Flat Fee
Total
Production
Income
Tax
Flat Fee
Profit
Share
Total
Production
Income
Tax
Figure 5.2: Service Agreements Revenue Flow

10. Duff Phelps 10
Duff Phelps — Oil Gas Intelligence Report Main Petroleum Contracts
Duff Phelps Oil Gas Solutions
Our Oil Gas team underpins our success in a unique capability to translate former experience as consultancy and
investment banking high professionals into a deep understanding of the industry, and particularly NOCs, leveraging the
fat that we have worked closely with most industry members for years to create solvent solutions in complex situations.
This expertise allows us to be a valued interlocutor between both sides of the deal. Our services include:
Transaction Advisory
• Farm-in and farm-out analysis;
• Optimized cost allocation;
• Joint venture analysis;
• Contract due diligence; and
• Acquisition or vendor due diligence.
Valuation
• Valuation of blocks;
• Valuation of business;
• Valuation of working interest in a joint venture;
• Valuation in a migration context;
• Valuation of contracts;
• Valuation of tax schemes; and
• Valuation of common shares.
Mergers and Acquisitions
• Non-core business units divestment;
• Management Buyout and Management Buy-in for oil services
companies;
• Development of negotiation frameworks; and
• Screening of potential investors looking for Oil Gas opportunities.
Financial Advisory
• Loan convenant review;
• Risk modeling;
• Analysis of loan portfolio;
• Collateral analysis;
• Securitization; and
• Project finance.
Strategic Advisory
• Design of fiscal schemes;
• Advisory in the context of energy reforms;
• Expertise in privatization processes; and
• Advisory on transitions from fossil fuels to
renewable energies.

11. Duff Phelps 11
Duff Phelps — Oil Gas Intelligence Report Main Petroleum Contracts
Duff Phelps is the premier
global valuation and corporate
finance advisor.
Duff Phelps has a worldwide
Oil Gas team with extensive
experience in accounting,
assets valuation, financial
valuation, MA and strategic
advisory services;
The Oil Gas team has been
involved in the major Oil Gas
transactions;
The Oil Gas team is made up
of former investment banking
professionals and Big Four
consultants and engineers, all of
them specialized in the industry;
Excellent access to industry
experts, banks and investors;
Leading-edge technical
expertise in valuation and
simulation, transaction strategies
and financial impact analysis;
Extensive track record advising
on complex valuation, MA and
internal control assignments.
The Duff Phelps Difference

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About Duff Phelps
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Published by
Duff Phelps – Oil Gas Corporate Finance
Fernando Ramirez de Verger, Ph.D.
Managing Director
Global Leader, Oil Gas Corporate Finance
fernando.ramirezdeverger@duffandphelps.com
Adrián Torres
Director, Oil Gas Corporate Finance
adrian.torres@duffandphelps.com
Juan García
Vice President, Oil Gas Corporate Finance
juan.garcia@duffandphelps.com
Juan Gil
Analyst, Oil Gas Corporate Finance
juan.gil@duffandphelps.com
Manuel Gran
Analyst, Oil Gas Corporate Finance
manuel.gran@duffandphelps.com
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