2. What is production Sharing contract (PSC) ?
Alternatives to PSC
International Scenario
Main Elements of PSC
Importance of PSC
Current developments
Conclusion
3. PSC is an agreement between Contractor and Government
whereby Contractor bears all exploration risks, production and
development costs in return for its stipulated share of
production resulting from this effort. These costs are
recoverable in case of commercial discovery.
A PSC similar to present PSCs in practice was first
implemented in Indonesia in 1960s
Indian PSC history
Source : DGH website
4. • Exclusive right to contractor
Concessi • Royalty and Tax structure and widely used
ons • Maximum control lies with contractor
• JV between National Oil Company & Contractor
Joint • Partners share proportionately
Ventures • JV pays Royalty & applicable taxes
• Risk and Ownership lies with government
Service • Government pays all costs
Contracts • Contractor gets only service fees
• Combinations of Concession /JV / PSC, royalty, tax, share
of cost oil or profit oil and fees etc.
Hybrids
5. Type of Contractor Government No. of
agreements Countries
following
Concessions All risk Reward is a function of 59
All reward production & price
Joint Share in risk & Share in risk & reward 31
ventures reward
Service No risk All risks 2
contracts All rewards
Hybrid Mixed Mixed 16
PSC Exploration risk Share in reward 40
Share in reward
Source: Macleod Dixon Workshop, 2007
7. Main clauses in PSC are clauses relating to following
Management committee
Minimum work program (MWP)
Relinquishment
Cost recovery & Profit Sharing
MANAGEMENT COMMITTEE
Management
Committee
One representative from
2 Govt. nominees each company, if only
one company, then 2
representatives
8. MANAGEMENT COMMITTEE continue…
Functions of Management committee
Approval of the annual Work Programme and Budget
Approval of Commercial Discovery
proposals for surrender or relinquishment
Determination of a Development Area
Appointment of auditors
Claims or settlement of claims for cost recovery
Proposal about abandonment plan/Site Restoration
9. MINIMUM WORK PROGRAMM (MWP)
Minimum Work Programme means with respect to Initial Exploration
Period, the Work Programme specified in the Model Production
Sharing Contract(MPSC)
Period for completion of MWP can be extended up to 6 months
If the contractor fails to fulfil MWP, then liable to pay Liquidated
Damages as specified below
Amount in USD
Onland Shallow water Deep water
Per well 10,00,000 30,00,000 60,00,000
Per sq.km. of 3D 5,000 1,500 1,500
Per line km. of 2D 2,500 1,000 1,000
Source: Model production sharing contract
11. COST RECOVERY & PROFIT SHARING
Production value
1.Royalty
Cost Petroleum* 2.Production
3.Exploration
Profit Petroleum 4.Development
Contractor’s Government’s share
( Based on pre Tax
share investment multiple)
Government’s
Income tax take
Contractor’s take *Recovery sequence – Royalty, then production, then
exploration & finally development costs
12. Cairn-Vedanta v/s ONGC
As per the clause in the PSC between ONGC-CAIRN and GOI the
royalty is to be borne by the licensee
ONGC plays the dual role of Licencesee and the Contractor
ONGC – though a 30% partner had to bear the 100% Royalty due to
above clause
However ONGC used its pre-emptive right to stop the Cairn-Vedanta
deal and forced cairn to accept proportional royalty
13. Reliance v/s MOPNG( Ministry of Petroleum and Natural
Gas)
MOPNG tried to disallow a portion of expenditure on KG D6
block based on under utilisation of facilities
Ministry could not disallow based above reason, as there is no
specific provision in PSC
Finally ministry resort to non- fulfillment of development
drilling program (18 wells as against agreed 22 wells) to dis-
allow expenditure of $1.235 billian and the same also disputed by
reliance as there is no specific provision in PSC
14. GOI setup committee headed by Dr.Rangarajan to review existing
PSCs
The terms of reference of committee includes
◦ To rewrite some of the terms in the PSCs
◦ To explore "various contract models with a view to minimise
monitoring of expenditure of the contractor
◦ To review auditing mechanisms and price formulas
The Committee will submit its recommendations by August 31
15. Clearly from the above committee terms of reference the GOI is
concerned about curbing of inflating costs by contractors and
protect its own share
To achieve the above GOI should considered revenue sharing to
production sharing
Under revenue sharing all costs are borne by contractor and govt.
gets fixed portion of revenue from the beginning
The benefits of revenue sharing is
◦ Govt. gets fixed share from the beginning
◦ Increases cost consciousness in the industry
◦ Speedy implementation of projects as there is no budgetary
approval requirement from ministry
