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  1. 1. Fiscal and Contractual Overview Andrew Caddy Managing Director – Finance Timor Sea Designated Authority
  2. 2. Legal & Fiscal Framework • Drafting of legal framework began in 2003 – Multi disciplined team comprising specialists in: • Legal • Commercial • Technical – Brought experience from working with other governments and with major oil companies – Representatives from Timor-Leste, Australia, US, Norway, Canada, Portugal, and the UK
  3. 3. Legal & Fiscal Framework • Fundamental drafting principles: – Design both regimes to be as similar as possible • Why? Administrative simplicity – Make attractive: structurally and fiscally • stable, • uncomplicated & • competitive – Recognise transparency principles – Allow state participation for Timor-Leste • (not including JPDA)
  4. 4. The Framework Timor-Leste JPDA Empowering Legislation Constitution Timor Sea Treaty Legal & Fiscal Framework Petroleum Act Petroleum Mining Code Model PSC Model PSC Petroleum Taxation Act TL & Australian taxation (Treaty tax relief) Timor-Leste Petroleum Fund
  5. 5. Legal & Fiscal Framework • Timor-Leste constitution allocates ownership of all resources (including petroleum) to the State • Timor Sea Treaty allocates ownership of petroleum resources in the JPDA 90% to Timor-Leste and 10% to Australia
  6. 6. Legal & Fiscal Framework • Structures of the Timor-Leste Petroleum Act and the Petroleum Mining Code are essentially similar: – The Timor-Leste Petroleum Act empowers a Ministry, presently the Ministry of Natural Resources, Minerals and Energy Policy, to authorise petroleum operations including exploration for and development of petroleum via a PSC and to enforce laws – The Petroleum Mining Code empowers the TSDA to authorise petroleum operations including exploration for and development of petroleum in the JPDA via a PSC and to enforce laws
  7. 7. Legal & Fiscal Framework • The model Production Sharing Contract will be the basis for all contracts: – In the case of Timor-Leste, the PSC will be made between the Ministry and the petroleum company concerned – In the case of the JPDA, the PSC will be made between the TSDA and the petroleum company, and requires the approval of the Joint Commission – Ownership of petroleum remains with the Ministry or the TSDA until it passes the field export point
  8. 8. Legal & Fiscal Framework • State participation – At the time of the declaration of a commercial discovery, Timor-Leste may elect to take up to 20% equity through a State-owned contractor (if enacted) – The State-owned contractor will pay its equitable share of costs from the date of making the election.
  9. 9. Legal & Fiscal Framework • Under a PSC petroleum companies: – will have an exclusive right in a defined area, to explore for, develop, and market petroleum; – will pay for and provide all required human, financial and technical resources needed for those purposes; and – will, in exchange, receive a share of the petroleum from the area to recover the cost of their investment, plus a reasonable return, through a defined cost recovery and profit sharing formula.
  10. 10. The Model PSC Exploration Period Exploration Period 1st 2nd 3rd Years 3 2 2 Relinquishment * (% of Initial 25% 25% 100% Contract Area) Surface Rentals 20 40 60 ($US/km2)/year ***Note: 1. Except areas retained under approved plans for Appraisal and Development Plan or designated as a Gas Retention Area 2. Additional relinquishment allowed at the end of any year and can be credited against minimum relinquishment requirements in the future. 3. Cannot relinquish without fulfilling minimum work obligations
  11. 11. The Model PSC • Gas Retention Area – If a gas discovery has been made but is not commercially viable, then a retention period of 5 years is allowed – In the JPDA, but not Timor-Leste, an oil retention period of up to 5 years may also be allowed • Minimum Work Program – A work program will be included in each PSC – Work program will be for a 7 year period – First 3 year work program is minimum required • Discovery & Appraisal – Obligation on contractor to diligently appraise all discoveries – When a discovery made, the contractor shall submit an Appraisal work program to the Ministry or TSDA
  12. 12. The Model PSC • Declaration of Commerciality – Contractor may declare a discovery commercial – Must submit data & information in relation to the discovery area as required by the Ministry or TSDA – Discovery area can be adjusted by agreement between the Contractor and the Ministry or TSDA • Development Plan – No more than 12 months after commercial discovery, contractor must submit a Development Plan to the Ministry or the TSDA – The Development Plan must be accompanied by a Security Decommissioning Agreement
  13. 13. The Model PSC • Decommissioning – As part of the development Plan a Decommissioning Agreement must be submitted for approval. – The agreed estimates of the money required for decommissioning can then be recovered from production – The contractor is required to obtain Decommissioning Security equal to the sum of the decommissioning cost reserve. • Domestic market obligation – Under the Timor-Leste model PSC, in the event of National need, a requirement exists for petroleum to be used to meet the needs of the local market.
  14. 14. The Model PSC • Assignment – No assignment can take place without written agreement by the Ministry or TSDA – PSC requires companies to be sole purpose for the contract • 3rd party access – The PSC requires the contractor to provide 3rd party access to all facilities, installations and equipment in the contract area on reasonable terms & conditions
  15. 15. The Fiscal Framework • PSC fiscal terms: – Identical rules for Timor-Leste and JPDA – First 5% of production revenues are allocated to the TSDA and Timor-Leste – Contractor recovers costs from 95% of revenues remaining – Eligible unrecovered costs are allowed an annual “Uplift” (equal to long term bond rate + 11%)
  16. 16. The Fiscal Framework • PSC fiscal terms (continued): – Costs may be classified as Exploration, Development, Operating or Decommissioning; however, all eligible costs are treated the same – Revenue remaining after cost recovery (Profit Petroleum) is shared 40% to Timor-Leste/TSDA and 60% to Contractor – Detailed accounting procedures are set out in an annex to the PSC • Specifies which costs are allowed to be recovered • No separate accounting between oil & gas
  17. 17. Timor-Leste Production Sharing Unincorporated Share of production TL Ministry JV Income Tax Petroleum sales Royalty - 5 percent Cost recovery Uplift 60% Profit oil 40% Timor-Leste Petroleum Fund
  18. 18. JPDA Production Sharing Unincorporated Share of production TSDA JV 10% Income Tax Petroleum sales 90% Royalty - 5 percent Cost recovery Uplift Profit oil Timor-Leste Petroleum Fund Australia
  19. 19. Application Process - JPDA
  20. 20. Bidding Guidelines –Essential Elements • Fixed non-refundable processing fee of US$ 10,000 • One application per contract area, per company • Demonstrate the willingness to enter into a joint venture agreement • Application to include technical and financial details and satisfy legal requirements • 7 year work programme with the first three years being mandatory
  21. 21. Bidding Guidelines - continued • Inclusion of technical ability relevant to operating in the proposed contract area • Information on the short and long term financial commitments supported by annual reports from the past three years • Include proposals for the use of Timor- Leste goods and services, training, employment and transference of technology • Statement of the applicant’s acceptance of the PSC
  22. 22. Bid Assessment Guidelines • Assessment based on the bidding guidelines • DA to look at technical work programme, financial capability and future viability of the joint venture • The work programme to be consistent with the perceived prospectivity • Where bids are similar based on the above criteria, additional criteria will be applied as follows: - T-L participation - Training and transfer of technology - Content of the work programme for years 4-7 • Bidding and Assessment Guidelines to be released on the TSDA website