Petroleum Regulatory

Framework
 Petroleum Regime Framework

CONSTITUTION

Legislativ
e/Regulato
ry PETROLEUM LAWS/ REGULATIONS

E & P BUSINESS REGIMES

SERVICE
CONCESSION JOINT VENTURE HYBRID PSC
CONTRACT
 Global Energy Resources Management Structure

More countries adopting the "separation of roles“ for Resource

Management

Ministry Regulator

Policy Regulations

NOC/IOC/ JV

Business
 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
 Country’s Objectives for Petroleum Development

Economic Agenda
• Accelerate exploration & exploitation of
petroleum resources
• 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
 Country’s Objectives for Petroleum Development

Political & Social Agenda

• Make NOCs competitive by providing a

level playing field

• Respond to the Interests of Local

Populations

• Protect & Preserve the Environment

 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

 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
Types of Agreements

A Comparative Study
 Types of Agreements

 Concessions

 Joint Ventures

 Service Contracts

 Production Sharing Contracts/Risk Sharing

Contracts

 Hybrids
 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

 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

 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
 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
 Production Sharing Contract
• State enters into a PSC with Contractor for a specified
period

• 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 to Contractors, but State has

contractual controls
 Comparative Analysis of Agreements
TYPE OF CONTRACTOR GOVERNMENT
AGREEMENTS

CONCESSION ALL RISK REWARD IS A FUNCTION OF

PRODUCTION & PRICE
ALL REWARD
JOINT VENTURE SHARE IN RISK & SHARE IN RISK & REWARD
REWARD

SERVICE CONTRACT NO RISK ALL RISK

ALL REWARD
HYBRID MIXED MIXED

PSC EXPLORATION RISK SHARE IN REWARD

16
SHARE IN REWARD
 Comparative Analysis of Agreements
TYPE OF EXCLUSIVE RIGHTS TO OWNERSHIP OF
AGREEMENTS EXPLORE AND PRODUCTION
PRODUCE
CONCESSION OPERATING COMPANY OPERATING COMPANY

JOINT VENTURE SHARED SHARED

SERVICE CONTRACT STATE THROUGH STATE

SERVICE COMPANY

HYBRID MIXED MIXED

PSC OPERATING COMPANY STATE

17
 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

 Countries and Agreement Types

TYPE OF COUNTRIES UTILIZING

AGREEMENTS
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 Iran , Mexico & Oman

(3)

HYBRID (16) Libya, China, Malaysia, Kenya, Tanzania,

Gabon, Myanmar
 Concession Agreements
ADVANTAGES
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)
DISADVANTAGES
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
 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
 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
 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 and

negotiation skills
 Production Sharing Contracts

ADVANTAGES DISADVANTAGES
It is considered the most attractive Rigidity with regard to
investment model for inviting Risk contractual provisions
Capital and has been successful in throughout the contract period.
attracting foreign/private
investment to get unexplored No flexibility for adjusting to
areas explored at no cost to the unplanned situations.
government
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”
 Production Sharing Contracts

ADVANTAGES DISADVANTAGES

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 loaded on the

Contractor till recovery
commences.
Production Sharing Contracts
India
 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

 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

 Effective Regulatory Mechanism
• Hydrocarbon Sector Vision
Ministry of
Prime • Role for different sectors
Petroleum &
Minister’s in energy fuel mix
Natural Gas
Office
• Managing Resource Base Planning Com

• Bringing Accountability
1950s-93
• Managing Licensing
• Mandate for Data Investing Capital and
Repository NATIONAL OIL
COMPANIES Technology

1993+

REGULATOR OPERATOR
Public Private Foreign
Upstream (Central) Public Reliance BG
Downstream ONGC (State) Jubilant
DGH ENI
Gas Regulator OIL GSPC Videocon Cairn
GAIL Essar Niko
 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
 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
 Petroleum Expenditure & Revenue Profile
Costs
Revenues

Exploratio Developmen
n t
& Abandonment
Appraisal Production & Reclamation
$

5 10 20 30 40
 Cash Flows Under PSC Regime
Production value
Royalty

Production
Cost Petroleum

Exploration

Profit Petroleum Development

Contractor’s share Government’s share

Government’s take
Income tax

Contractor’s take
 Pre Tax Investment Multiple (PTIM)
Gross
Revenue

Cost Petroleum Profit Petroleum

(includes Royalty, OPEX and ( Contractor &
allowed cost recovery of Government)
CAPEX)

Contractor’s Take = Cost Petroleum + Contractor’s share of Profit

Petroleum
Contractor’s Net Income = Contractor’s Take – ( Production cost (OPEX)
+Royalty )

Contractor’s Cumulative Net Income

PTIM = Cumulative Exploration & Development cost