2. Agreement enforceable by law is called
contract. –(indian contract act , 1872 sec -2(h)).
The contract is defined as an agreement, to
form agreement two elements needed:
1 offer : is making offer
2 acceptance : is giving acceptance.
3. Limitation of state – Risk capital
Growing demand of petroleum –
expeditious E&P
Fluctuations in prices of petroleum –
Risk sharing mechanism
Technology and specialization
Purpose of contract
A contract for exploration and
development of petroleum refers as to
how the produce of the earth is divided
among the labours, owners of the capital
and land owners (i.e. state).
4. Concession arrangement
Contractual arrangement
- Service Contracts
1) Pure Service Contracts
2) Risk Service Contracts
- Production sharing Contracts (PSC)
Joint Venture arrangements
Direct State Participation
5. State enters into an agreement with the
Contractor granting the right to use an
identified area for exploration and production
of petroleum
Features
– Ownership of produce remains with
contractor
– Management and control of the operations,
risks associated with the operations and
financing of operations are contractor’s
obligation
6. State got royalty in earlier contracts
State started getting higher royalties and taxes
as
its bargaining power increases
Administration is easy for state
Against the concept of State’s sovereignty over
natural resources
7. Pure Service Contract
Contractor provide service for a fee
which can be paid in cash or kind
Risk Service Contract
Contractor provide service for a fee and
participate in the profit
Contractor bears the risk of operations
and finances the operations
Similar in nature to the Production
Sharing Contract
8. Contract is entered into among State and/or
NOC and the Contractor for exploitation of
petroleum
• Ownership
Ownership of hydrocarbon remains with
the State.
The Contractor receives a share of
production to meet its cost and target
Rate of Return (RoR)
• Fiscal devices – Cost Recovery Limit & Profit
sharing are two important devices
–Other fiscal devices are Corporate Income
Tax,Royalty, Bonuses, State participation,
profit related taxes, etc.
9. Bonuses
Signature Bonus
– Cash payment to the state at the time of
signing of the contract
Relatively small value
Through negotiations (in India in discovered
field)
Production Bonus
State receives cash on achieving target of
production
Linked to barrel of oil per day produced
Linked to cumulative production achieved
10. Royalty
– It is the most commonly used fiscal tool for
the State’s revenue. Royalty can be divided into
three types:
– Fixed amount:
It can be linked to per unit of production (in
India Royalty on oil is Rs.528/ton, now 10% to
12.5% of the price)
– Fixed percentage:
It can be linked to sales value ( in India royalty
on gas is 10% of sales price)
11. Sliding scale:
Different variants of royalty based on sliding
scale are prevalent in the world. Some of the
examples are given as under:
Level of field production, e.g. in China where
royalty varies from 0% up to 50,000 tones/year
to 12.5% over 1MMT/year
Level of well production, e.g. offshore
California where royalty varies from 16.67% to
50% for production from 100 to 500 bopd.
12. Cost Petroleum Recovery Limit
Volume of production available to company to
recover its cost.
Used in association with Profit oil sharing.
Delays recovery of cost of company
Some of the examples are as under:
Fixed percentage of production e.g. Libya has
35% cost recovery limit; India earlier had 20%
cost recovery limit.
13. No Government Guarantee or Asset required
for security
Private Investment
Repayment to investor by Revenue stream and
Asset of the Project
Ownership of Project return to Government
Reasonable Rate of Return to Investor
14. • Project Serve the National Interest
• In Oil Sector, started in North Sea In 1970
• Reduce Government Budget
• Reduce Financial and Administrative burden
of Government
• Generate New Tax Revenue
• Attract Capital and New Technology
15. • State, through NOC, and Contractor share
equity in the joint operations
• Partners share risk, costs and profits as per
their Joint Venture agreement
• Ownership of produce remains with the State
• Concession or Contractual both arrangements
can have Joint Ventures
• Joint ventures can be incorporated or
unincorporated
16. • Incorporated Joint Ventures
– NOC and Contractor contribute equity to form a
new company, which undertakes operations
– Board of Directors manages all operations
– Return is given in the form of dividend
• Unincorporated Joint Ventures
– Each partner is a separate legal entity
– Enters into Joint Operating Agreement (JOA)
– JOA defines right and obligation of partners
– Pakistan, India, South Korea, Denmark, etc.
