1. Fiscal and Contractual
Overview
Andrew Caddy
Managing Director – Finance
Timor Sea Designated Authority

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Application Process - JPDA

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. 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. 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