3. oil and regularity regime.ppt

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3. oil and regularity regime.ppt

  1. 1. Petroleum Regulatory Framework
  2. 2. Petroleum Regime Framework CONSTITUTION Legislativ e/Regulato ry PETROLEUM LAWS/ REGULATIONS E & P BUSINESS REGIMES CONCESSION JOINT VENTURE SERVICE CONTRACT HYBRID PSC
  3. 3. Global Energy Resources Management Structure More countries adopting the "separation of roles“ for Resource Management Ministry Regulator Policy Regulations NOC/IOC/ JV Business
  4. 4. Pillars of Oil & Gas Regulatory Regimes A good Oil & Gas Regulatory Regime addresses certain major regulatory issues in a satisfactory way: • The Right to Monetize Resources • Fiscal and Contract Stability • Enforceability of Contract A regulatory regime that fails on any one of these points puts its “investment favorability” at risk
  5. 5. Country’s Objectives for Petroleum Development Economic Agenda • Accelerate exploration petroleum resources & exploitation of • Invite Investments in E & P Sector • Generate revenues from taxes and “take” • Obtain technology transfer & “Know-how” • Stimulate competition in the E & P sector • Create employment and materials preference
  6. 6. Country’s Objectives for Petroleum Development Political & Social Agenda • Make NOCs competitive by providing a level playing field • Respond to Populations the Interests of • Protect & Preserve the Environment Local
  7. 7. Measures to promote Exploration • No Signature Bonuses • No high rentals during exploration • Reasonable taxation & royalties • 100% Cost Recovery for exploration & development • High Cost Recovery Limit • Import duty exemption for exploration and development • Assured Contract validity
  8. 8. Approaches to Resource Exploitation • Many developed countries use unilateral licensing/leasing approach • Many developing countries use consensual approach and prefer mining agreements • Political will of host country to develop resources is key and expressed through regulatory instruments, contractual obligations, national policies and guidelines
  9. 9. Types of Agreements A Comparative Study
  10. 10. Types of Agreements  Concessions  Joint Ventures  Service Contracts  Production Contracts  Hybrids Sharing Contracts/Risk Sharing
  11. 11. Concession • Contractor has exclusive rights to explore, develop, sell, and export oil/gas from a specified area for a fixed period of time • “Equity” or “Royalty & Tax” structure • Maximum control to Contractor • Oldest & most widely used
  12. 12. Joint Venture • Private/Foreign Companies and NOC form a Joint Venture • Each JV partner pays/receives its share in proportion to its Participating Interest. • JV pays royalty, income tax and usually some form of Petroleum Revenue Tax (PRT) • Low success rate, less commonly used
  13. 13. Service Contract • Contractor pays all exploration and development costs • Contractor works under government’s mandate and is paid for its work • Government maintains ownership and title of minerals • Most suitable for Contractor for risk-free operations and for States having Producing Assets
  14. 14. Hybrids • Combinations of Concession/JV/PSC, royalty, tax, cost oil/profit oil shares and fees etc. • Efforts to develop a world model Hybrid agreement have been unsuccessful because structures are becoming more diverse • Host governments seeking structures that suit their particular needs
  15. 15. Production Sharing Contract • State enters into a PSC with Contractor period for a specified • Contractor finances exploration and development • If successful, Contractor will recover its costs and earn a profit by receiving a share of production • Royalty & Income Tax are paid as applicable • Significant control contractual controls to Contractors, but State has
  16. 16. Comparative Analysis of Agreements TYPE OF AGREEMENTS CONTRACTOR CONCESSION ALL RISK GOVERNMENT REWARD IS A FUNCTION OF PRODUCTION & PRICE ALL REWARD JOINT VENTURE SHARE IN RISK & REWARD SHARE IN RISK & REWARD SERVICE CONTRACT NO RISK ALL RISK ALL REWARD HYBRID MIXED MIXED PSC EXPLORATION RISK SHARE IN REWARD 16 SHARE IN REWARD
  17. 17. Comparative Analysis of Agreements TYPE OF AGREEMENTS EXCLUSIVE RIGHTS TO EXPLORE AND PRODUCE OWNERSHIP OF PRODUCTION CONCESSION OPERATING COMPANY OPERATING COMPANY JOINT VENTURE SHARED SHARED SERVICE CONTRACT STATE THROUGH SERVICE COMPANY STATE HYBRID MIXED MIXED PSC OPERATING COMPANY STATE 17
  18. 18. Usage of Contract Types TYPE OF AGREEMENTS NUMBER OF COUNTRIES UTILIZING THIS TYPE CONCESSION 59 JOINT VENTURE 31 SERVICE CONTRACT 3 HYBRID 16 PSC 40 Source: CWC Workshop, 2008
  19. 19. Countries and Agreement Types TYPE OF AGREEMENTS COUNTRIES UTILIZING CONCESSIONS (59) UK, US , Norway, Australia, Canada, Peru, Namibia, Thailand, Sudan, Ecuador, Kuwait, Bahamas JOINT VENTURES (31) Colombia, Cameroon, Netherlands, Pakistan PSC (40) Egypt, Yemen, Angola, Indonesia, India, Bangladesh, Guatemala, Sri Lanka SERVICE CONTRACTS (3) Iran , Mexico & Oman HYBRID (16) Libya, China, Malaysia, Kenya, Tanzania, Gabon, Myanmar
  20. 20. Concession Agreements ADVANTAGES DISADVANTAGES If production occurs, government earns royalties and/or profit tax. Both are based on the quantity produced and the price at which commodity is sold Successful bidder pays bidder price (usually license fee and/or signature bonus) Government may not realize full potential through possible extensive exploration Companies will be cautious in bidding for uncertain returns in virgin/non-proven areas. Not suitable for countries seeking extensive exploratory inputs through bidding systems
  21. 21. Joint Venture Agreements ADVANTAGES DISADVANTAGES Government is not alone in the Risks and costs are also shared. decision-making and responsibility Country needs to share Risk for a project Capital. Not suitable for countries needing huge investment on exploration Government can count on expertise Responsibility also brings with it of oil company potential liability such as for environmental damage Government shares profit, on top of taxes or royalties
  22. 22. Service Agreements ADVANTAGES DISADVANTAGES Payment is made for services Suitable for Producing Assets. at pre-determined rate Not much relevant for exploration Most energy companies reluctant to sell services and technology for a Turnkey Contract as earning is more limited
  23. 23. Hybrid Agreements ADVANTAGES DISADVANTAGES Incorporates the best of Diverse & Complex structures of Concession, JV, PSC, Royalty & Model. Difficult to estimate optimal Taxes Govt./Contractor’s takes & achieve equilibrium for a win-win situation for both parties Requires expertise negotiation skills and
  24. 24. Production Sharing Contracts ADVANTAGES DISADVANTAGES It is considered the most attractive investment model for inviting Risk Capital and has been successful in attracting foreign/private investment to get unexplored areas explored at no cost to the government Rigidity with regard to contractual provisions throughout the contract period. Contractor enjoys considerable autonomy in running the exploration and production operations & leaves no stone unturned to ensure exploration success in order to be entitled for “ Cost Recovery” No flexibility for adjusting unplanned situations. to
  25. 25. Production Sharing Contracts ADVANTAGES Allows for the recovery of invested sunk cost by the Contractors only in case of successful ventures. Government shares potential profits without having to make a direct investment. Entire cost Contractor commences. loaded on the till recovery DISADVANTAGES
  26. 26. Production Sharing Contracts India
  27. 27. Historical Background • First concept for PSC was introduced in Bolivia in 1950 • PSCs were successfully implemented in Indonesia in 1966 • PSCs are being widely used in more than 40 countries • In India, first PSC was signed in 1993 for a Pre-NELP Block • 231 Exploration PSCs have been signed so far
  28. 28. Legal Framework  Constitution of India, 1950  The Oilfields (Regulation and Development) Act, 1948  The Petroleum and Natural Gas Rules, 1959 & Amendments  Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976  Income Tax Act, 1961  Customs Act, 1962  Foreign Exchange Management Act, 1999  Environment Protection Act, 1986  Arbitration and Conciliation Act, 1996
  29. 29. Effective Regulatory Mechanism • Hydrocarbon Sector Vision Ministry of Petroleum & Natural Gas Prime Minister’s Office • Managing Resource Base • Role for different sectors in energy fuel mix Planning Com • Bringing Accountability • Managing Licensing • Mandate for Data Repository 1950s-93 Investing Capital and Technology NATIONAL OIL COMPANIES 1993+ REGULATOR Upstream DGH Downstream Gas Regulator OPERATOR Public (Central) ONGC OIL GAIL Public (State) GSPC Private Reliance Jubilant Videocon Essar Foreign BG ENI Cairn Niko
  30. 30. Highlights of NELP PSC • Production Sharing Contracts signed with Government based on Pre Tax Investment Multiple (PTIM) Trenches • Low Royalty Rates – Royalty is Cost Recoverable • No Cess or Customs Duty • Freedom to contractor to market Oil and Gas in the domestic market at Market Determined Price • 100% Cost Recovery of Exploration & Development expenditure
  31. 31. Production Sharing Contract Attributes – Contract term – Relinquishment – Management Committee – Discovery, Development & Production – Unit Development – Cost Recovery & Production Sharing – Taxes, Royalties & Rentals – Domestic sourcing & supply obligations – Employment & training – Title to assets
  32. 32. Petroleum Expenditure & Revenue Profile Costs Revenues Exploratio n $ Developmen t & Appraisal 5 Production 10 20 30 Abandonment & Reclamation 40
  33. 33. Cash Flows Under PSC Regime Production value Royalty Cost Petroleum Production Exploration Profit Petroleum Contractor’s share Income tax Contractor’s take Development Government’s share Government’s take
  34. 34. Pre Tax Investment Multiple (PTIM) Gross Revenue Cost Petroleum (includes Royalty, OPEX and allowed cost recovery of CAPEX) Profit Petroleum ( Contractor & Government) Contractor’s Take Petroleum = Cost Petroleum + Contractor’s share of Profit Contractor’s Net Income +Royalty ) = Contractor’s Take – ( Production cost (OPEX) Contractor’s Cumulative Net Income PTIM = Cumulative Exploration & Development cost

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