Koval Petroleum Newsletter No3

1. 2016 – Newsletter N°3
08/16
Project objectives are key to success. “Don’t lose track of your goals” and ensure
that integrated teams always follow the easiest path to reach the objectives !
Africa does not have a shortage in oil & gas expertise. When you look at countries that
have been producing even before their independence, you will realize that they have
very qualified maintenance engineers and operators.
Fields in production in these countries use most of the time 100% of local staff. In
Exploration and Field Development, you also have very experienced and talented G&G
and Petroleum Engineers.
In Africa we have technical experts but we lack local people able to manage
exploration and integrated field development projects. This is where our States should
focus to ensure that local companies (LOC) public or/and private can operate one day.
Today many countries can follow the Nigeria example where several private
indigenous E&P Companies are successful. However, is not only about technical
capabilities but it is also a question of mindset – and the first step to operatorship is to
believe in ourselves...
Africa Oil & Power
Cape Town - June 6-7, 2016
Projects & Prospects Panel
PROJECT MANAGEMENT
“ We have technical experts but
we lack local people able to
manage integrated Projects ”.

2. 2016 – Newsletter N°3
08/16
R-Factor in Production Sharing Contracts (PSC)
R-Factor in Oil & Gas Fiscal Terms is the ratio between a project cumulated revenues on
cumulated expenses (Capex and Opex).
Before going through the R-Factor benefits for the State and the PSC partners, let’s introduce
two of the main economical values to benchmark a project’s robustness.
NPV: The Net Present Value is a measurement of the profitability of an undertaking that is
calculated by subtracting the present values (PV) of cash outflows (including initial cost) from
the present values of cash inflows over a period of time.
IRR: The Internal Rate of Return is a method of calculating rate of return. The term internal
refers to the fact that its calculation does not incorporate environmental factors.
Oil & Gas companies use the above two parameters to benchmark and rank their projects to
see the ones that they will give investment priority.
For each industrial project, and more specifically petroleum project, the investment is in
hundreds of millions or billions of dollars. The revenues are generated only when the project
gets to the production phase. The return on investment duration after “first oil” will depend
on the amount of investment done during the Exploration and the Development phases, the
operating costs of the project, and the revenues the project is generating during the
Production Phase – Oil Price and fiscal terms being key factors to the project revenues.
R Factor deals with all variables that affect project economics. Contractor potential
upside from price increase is diminished, but the downside during low oil price is also
protected. On the State side, the R Factor will guaranty maximum revenues in high oil
price periods.
Let’s use an example with an Onshore Project
On Graph 1 below, the blue curve represents the revenues as the red curve the expenses. We
have 10 years of investment before the first oil and the two curves cross at year 12, where
project cumulated revenues gets above cumulated expenditures. This graph represents a
viable project! “Train wreak” projects have R-Factor below 1!
$MM
100
200
300
400
500
Cumulated Revenues
Cumulated Expenses
Years
Year 12
Year 10, First Oil
Graph 1 - ONSHORE FIELD DEVELOPMENT

3. How do you apply R-Factor to your Fiscal Terms ?
The Profit Oil split between the State and the Contractor(s) shall vary with the R-Factor. The
higher the R-Factor, the greater the Profit Oil Split for the State. See the example in the Table
below (values are for information only).
2016 – Newsletter N°3
08/16
Year 12
R-Factor = 1
Year 10, First Oil
R-Factor
R-Factor
0.5
1.0
1.5
2.0
2.5
Graph 2 - ONSHORE FIELD DEVELOPMENT
Years
On Graph 2 below, the Return on Investment happens in Year 12 when the R-Factor is at 1.0!
Note that in this example the R-Factor goes beyond 2.0 which shows the attractiveness of a
project. Highly commercial projects can have an R-Factor above 3.0 !
R-Factor State PO Contractor(s) PO
0 – 1.0 35% 65%
1.0 – 1.4 40% 60%
1.4 – 2.0 45% 55%
2.0+ 48% 52%
Conclusion :
It is key for the State in all PSC negotiations to run economic model simulation to test
different fiscal term ranges. The Profit Oil split between the State and the Contractor(s) shall
vary with each project – Block potential, proven basins, nearby discoveries, country business
and political stability are amongst the parameters that define the attractiveness of a project.
The R-Factor can be applied to Cost Oil; and also an incentive based on the Contractor(s)
performance are highly recommended in a PSC negotiation to ensure that the operator and
its partners will not only focus on their own revenues, but also maximize the revenues of the
State.
The R-Factor protects the Contractor(s)
in a low outcome scenario. A deepwater
project with reserves between 300-400
MMbls will be difficult to develop but
with an attractive R-Factor model, the
operator might be ready to invest in the
project !