Benny Lubiantara
(email: blubiantara@yahoo.com)
I. Introduction
II. The Concept of Economic Rent
III. Characteristic of the Upstream Petroleum Industry
IV. Classification of Upstream Petroleum Contract
V. Main Elements in Petroleum Upstream Contract
VI. Fiscal Policy Design
VII. Comparative Analysis
VIII. Economics Evaluation of Petroleum Upstream Contract
IX. Trends & Challenges
X. Summary
I. Introduction
1. The Multinational Oil Company (MOC), at its own risk and expense,
generally has the exclusive right to explore for and exploit petroleum
reserves in the concession area.
2. The MOC owns the production from within its concession area.
4. The MOC pay taxes to the host country on profit it derives from the
production.
Royalty
Royalty
Cost Oil
Production Net
of Royalty
Profit Oil (P/O)
Costs
Deductions
Investor’s
Production
Contractor’s
Tax
Concessions (Royalty Tax)
One Barrel of Oil
$20
Contractor Government
20% Royalty Share
Share
$16.00 $4.00
Deductions
$9.00 (Op.Cost, DD & A, etc)
$7.00
(Taxable Income)
Provincial Tax
$0.70
10%
$6.3
$12.78 $7.22
64% 36%
Source: Daniel Johnston, “International Fiscal System and PSC”, 1994
Production Sharing Contract
(PSC)
One Barrel of Oil
$20
Contractor Governme
Share nt Share
10% Royalty $2.00
$18.00
Cost Recovery
(Op.Cost, DD & A, etc)
$8.00 (40% Limit)
($10.00)
Profit Oil Split
$4.00 40% / 60% $6.00
(Taxable)
Taxes
($1.6) $1.60
40%
$10.40 $9.60
52% 48%
Source: Daniel Johnston, “International Fiscal System and PSC”, 1994
V. Main Elements Petroleum Upstream Contract
(Focusing on Economics and Commercial Aspects)
• Area
• Duration
• Relinquishment
• Work Program /Obligation
• Bonuses
• Royalty
• Cost Recovery Limit
• Profit Oil Split
• Taxation
• Depreciation Methods
• Domestic Market Obligation
• Gov. Participation
• Others
Main Economics & Commercial Aspects (cont.)
(Focusing on Economics and Commercial Aspects)
Duration:
• Exploration: Multiphase 2-4 years initial + extensions
• Production: From 20 to 30 years from start up
Bonuses:
• Signature Bonuses: in high, prospective areas.
• Other Bonuses: Common, discovery, production, etc.
V. Main Elements Petroleum Upstream Contract
(Focusing on Economics and Commercial Aspects)
• Profit oil: PSC phenomena; about 80% are sliding scale. Most are
based upon trenches of production.
Government Objective
• Maximize value of the petroleum resource
Company Objective
• Maximize stockholders interest
Source: Daniel Johnston, International Petroleum Fiscal System and Production Sharing Contract, (1994)
VI. Fiscal Policy Design
Regressive vs. Progressive*)
Non Profit based Government Take (Such as: Bonus, Royalty) are Regressive.
*) Source: Dr. Alfred Kjemperud, “Petroleum Fiscal Regimes”, Presentation Material for CCOP, 2003
VII. Comparative Analysis
T
G
O
R T
O A
L GOVERNMENT TAKE
S
S P
R
O
R F
I
E T CONTRACTOR TAKE
V C R
E O E OPERATING COSTS
S C
N T O
V DEVELOPMENT COSTS
U E
E R
EXPLORATION COSTS
Y
Source: Daniel Johnston, International Petroleum Fiscal System and Production Sharing Contract, (1994)
VII. Comparative Analysis
Weaknesses of the Government Take Statistic
• Signature bonus
• Ring-fencing Provisions
• Front end Loading
• Work Program Provision
• Time Value of Money (unless using Discounted GT)
• Crypto taxes
• Relinquishment Provision
Techniques:
• Payback Period
• Net Present Value (NPV)
• Internal Rate of Return (IRR)
• Profit to Investment (PI)
Economics Evaluation of Upstream Petroleum
Contract
Field
Fiscal Economics
Terms
Oil
Price
50000
40000
BOPD
30000
20000
10000
Year
VIII. Economics Evaluation of Petroleum Upstream Contract
Example of Spreadsheet Calculation
Year Gross Royalty Gr. Revenue Cost Recovery Equity Contractor Contractor CF Host Country
Revenue 10% After Royalty Depre Non Cap Inv OPEX TOTAL Recovered Unrecovered To be Split Split Total Cash in Cash Out NCF Royalty Split Tax Total HC
$M $M $M $M $M $M $M $M $M $M $M $M $M $M $M $M $M $M $M
1 (10,000) (10,000)
2 (10,000) (10,000)
3 (10,000) (10,000)
4 (10,000) (10,000)
5 (176,000) (176,000)
6 (176,000) (176,000)
7 (128,000) (128,000)
8 383,250 38,325 344,925 64,000 200,000 54,750 318,750 318,750 - 26,175 6,544 325,294 325,294 (57,629) 267,665 38,325 19,631 2,879 60,836
9 638,750 63,875 574,875 64,000 91,250 155,250 155,250 - 419,625 104,906 260,156 260,156 (137,409) 122,748 63,875 314,719 46,159 424,753
10 638,750 63,875 574,875 64,000 91,250 155,250 155,250 - 419,625 104,906 260,156 260,156 (137,409) 122,748 63,875 314,719 46,159 424,753
11 638,750 63,875 574,875 64,000 91,250 155,250 155,250 - 419,625 104,906 260,156 260,156 (137,409) 122,748 63,875 314,719 46,159 424,753
12 574,875 57,488 517,388 64,000 82,125 146,125 146,125 - 371,263 92,816 238,941 238,941 (122,964) 115,977 57,488 278,447 40,839 376,773
13 517,388 51,739 465,649 73,913 73,913 73,913 - 391,736 97,934 171,847 171,847 (117,003) 54,843 51,739 293,802 43,091 388,632
14 465,649 46,565 419,084 66,521 66,521 66,521 - 352,563 88,141 154,662 154,662 (105,303) 49,359 46,565 264,422 38,782 349,769
15 419,084 41,908 377,175 59,869 59,869 59,869 - 317,306 79,327 139,196 139,196 (94,773) 44,423 41,908 237,980 34,904 314,792
16 377,175 37,718 339,458 53,882 53,882 53,882 - 285,576 71,394 125,276 125,276 (85,296) 39,981 37,718 214,182 31,413 283,313
17 339,458 33,946 305,512 48,494 48,494 48,494 - 257,018 64,255 112,749 112,749 (76,766) 35,983 33,946 192,764 28,272 254,981
18 305,512 30,551 274,961 43,645 43,645 43,645 - 231,316 57,829 101,474 101,474 (69,089) 32,384 30,551 173,487 25,445 229,483
19 274,961 27,496 247,465 39,280 39,280 39,280 - 208,185 52,046 91,326 91,326 (62,180) 29,146 27,496 156,139 22,900 206,535
20 247,465 24,746 222,718 35,352 35,352 35,352 - 187,366 46,842 82,194 82,194 (55,962) 26,231 24,746 140,525 20,610 185,881
21 222,718 22,272 200,447 31,817 31,817 31,817 - 168,630 42,157 73,974 73,974 (50,366) 23,608 22,272 126,472 18,549 167,293
22 200,447 20,045 180,402 28,635 28,635 28,635 - 151,767 37,942 66,577 66,577 (45,330) 21,247 20,045 113,825 16,694 150,564
23 180,402 18,040 162,362 25,772 25,772 25,772 - 136,590 34,147 59,919 59,919 (40,797) 19,123 18,040 102,442 15,025 135,508
24 162,362 16,236 146,126 23,195 23,195 23,195 - 122,931 30,733 53,927 53,927 (36,717) 17,210 16,236 92,198 13,522 121,957
25 146,126 14,613 131,513 20,875 20,875 20,875 - 110,638 27,659 48,535 48,535 (33,045) 15,489 14,613 82,978 12,170 109,761
6,733,120 1,481,874 640,911 4,610,335
IRR 14.98%
Yearly Division of Gross Revenue
800,000
500,000
$M
400,000
300,000
200,000
100,000
-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Production Period
IX. Trends and Challenges
Renegotiation.
Source: Van Meurs, Maximizing the Value of Government Revenues from Upstream
Petroleum Arrangements, Fiscal Submit London, 9th February 2009
IX. Trends and Challenges
(Related to Fiscal Design)
The Parameters:
- Production (Daily or Cumulative)?
Royalty
- Oil Price?
- Water Depth?
- API Gravity?
Host Cost Oil
Country Recovery Company - Etc.
Profit Oil
Profitability Based?
- ROR
- “R” Factor
Tax
Basis for Profit Oil Split
Profitability based (?)
Gross
Production
Royalty
Profit Oil
Tax
High Oil
Prices
NET 25%
Investor
PROFIT
Low Oil
75%
Prices 20% Host Country
80%
How to Improve Government Share?
Profit Oil
Tax
Issue on Goldplating
“Goldplating” –
Inefficiencies in the fiscal
system that may encourage
the investor to spend more
than it otherwise would
“Goldplating” and Saving Index (SI) concept in upstream Petroleum Contract was originally introduced by
Daniel Johnston.
Conclusions:
The objective of a host government is, inter alia, to maximize the nation’s wealth
derived from the exploitation of its natural resources by encouraging appropriate
levels of exploration and production activity.
The objective for the IOC is to gain access to these natural resources and to
maximize the value to its stakeholders.
How costs are recovered and profits divided through time are the basic questions
when considering a fiscal system.
As risks can differ substantially for different projects and countries, a petroleum
contract model that provides an optimal outcome under all circumstances is not
likely to be developed, a “one-size-fits-all model does not exist”
Designing an adequate fiscal regime has to take into account the geological,
economic and political contexts of the country along with its short- and long-term
objectives.
Thank You