1 - E&P Economics - Environment +contracts FL (RGE)

E&P projects Economics
1 - E&P Industry environment
2 - Contractual and fiscal frameworks of E&P activities
3 - Investment profitability studies for E&P projects

Frdrique LANG
EG
Exploration & Production Industry
environment
Frdrique LANG
EG
Fundamentals of the Exploration & Production Industry
HIGHLY INTERNATIONAL
HIGHLY RISKY
Exploration is Risky by nature. Prices are highly uncertain
HIGHLY CAPITALISTIC
80% of the Total Investments of the Oil & Gas Industry
LONG PAY OUT TIME SPAN

Many years are required between Discovery & First Oil
Production Profiles typically over 10/15 years
HIGHLY DEPENDENT ON THE POLITICAL ENVIRONMENT
INCREASINGLY HIGH COSTS, DEPENDENT ON REGIONAL & RESERVOIR CONDITIONS

Offshore/Onshore, Weather, Geology, Depth and Type of Reservoirs,
2010 - IFP Training

HIGHLY TECHNICAL & TECHNOLOGY DEPENDENT
3D-4D Seismic, Horizontal & Multidrain Drilling, Polyphasic Pumping, Subsea, Deepwater,
Mars 2001 A101* 3

EG - CFEP - September 2011 3
Proven Oil & Gas Reserves
Gtoe
180 Ratio gas reserves / crude reserves 100%
160
Crude oil reserves

140
120 Natural gas reserves
100 80% years

50%
80 R/P gas 80
60 60
40 40
20 20
2010 - IFP Training

R/P crude oil
0 0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source : BP Statistical Review

World conventional crude oil proven reserves
World crude oil reserves: 1383 billion barrels (Gb)
189 billion tons (Gt) (01/01/2011)
9%
1% CIS
5%
Europe 126 Gb
North America 13 Gb 26 years
74 Gb 9 years
55%
15 years
10%
Africa 3%
17% 132 Gb
36 years Asia-Oceania
45 Gb
South and Central Am Middle-East 15 years
2010 - IFP Training

239 Gb 753 Gb
94 years 82 years
Source : BP Stat Review

World crude oil production
World production: 82 Million barrels per day (Mbbl/d)
3.9 billion tons (Gt) (2010)
17%
17%
5%
CIS
Europe 14 Mbbl/d
North America 4 Mbbl/d (~25 qualities)
14 Mbbl/d (~70 qualities)
(~35 qualities)
30%
12%
10%
9%
Africa
Asia-Oceania
South and Central America 10 Mbbl/d 8 Mbbl/d
(~90 qualities)
7 Mbbl/d (~70 qualities)
2010 - IFP Training

(~70 qualities)
Middle-East
25 Mbbl/d
(~50 qualities)

Natural gas proven reserves
World natural gas proven reserves: 187 100 Gm3
168 Gtoe (01/01/2011)
31%
CIS
2% 58500 Gm3
5% 77 years
North America Europe
9900 Gm3 4400 Gm3
17 years 41%
12 years
8%
4%
Africa 9%
14700 Gm3
Central and South Am 71 years Asia-Oceania
2010 - IFP Training

7400 Gm3 16200 Gm3
46 years 33 years
Middle East
75800 Gm3
>100 years
Natural gas marketed production
World natural gas marketed production: 3193 Gm3 = 2.9 Gtoe (2010)
26%
24% CIS
758 Gm3
9%
Europe
281 Gm3
North America
826 Gm3 14%
15%
7%
Africa
5% Middle East
209 Gm3 Asia-Oceania
461 Gm3
South and Central America 493 Gm3
161 Gm3
2010 - IFP Training

Main Players on the Oil Market - 2010
Country Company Crude oil % of world
production (1000 bbl/day) production
Saudi Arabia S. ARAMCO 9.7 11.8

Iran NIOC 4.2 5.1
Venezuela PDVSA 3.2 3.9
Mexico PEMEX 2.9 3.5
Chine CNPC 2.8 3.4
BP 2.5 3.1
Kuwait KPC 2.5 3.0
Iraq INOC 2.5 3.0
EXXON MOBIL 2.4 2.9
Russia ROSNEFT 2.2 2.6
Brazil PETROBRAS 2.1 2.6
CHEVRON 1.9 2.3
Algeria SONATRACH 1.7 2.0
RD SHELL 1.7 2.0
CONOCOPHILIPPS 1.6 2.0
LUKOIL 1.6 1.9
UAE ADNOC 1.4 1.7
2010 - IFP Training

TOTAL 1.4 1.7
Nigeria NNPC 1.2 1.5
Libya Libya NOC 1.2 1.5
Source : BPSR August - PIW december 2010 Total of 20 50. 7 61.7

March 2011
Main Players on the Gas Market - 2010
Country Company Production World Production
(Mm3/day) %
Russia GAZPROM 1 264 14.4

Iran NIOC 360 4.1
EXXONMOBIL 263 3.0
BP 240 2.7
RD SHELL 240 2.7
Algeria SONATRACH 208 2.4
Saudi Arabia SAUDI ARAMCO 207 2.4
China CNPC 202 2.3
Qatar QP 176 2.0
Malaysia PETRONAS 175 2.0
Uzbekistan UZBEKNEFTGAS 154 1.7
CONOCOPHILLIPS 146 1.7
CHEVRON 141 1.6
TOTAL 139 1.6
Mexico PEMEX 127 1.5
STATOIL 126 1.4
ENI 124 1.4
2010 - IFP Training

Venezuela PDVSA 115 1.3
Russia NOVATECH 89 1.0
Egypt EGPC 86 9.8
Source : BPSR August 2011 - PIW December 2010

March 2011
Total of 20 4 582 52
Crude oil price
140 $/b
130
120
110
eco
100 crisis
Katrina
Rita
90
huriccanes
80
Staff attacks in S. Arabia
70 OPEC disturbances in Irak, Nigeria
quotas
60
Iraq
Iran/Iraq Kuwait events
50 war crisis
Netback
Nationalization contracts OPEC
40 of oil fields 11 th
sept. Quotas
OPEC
30 domination 3rd OIL
SHOCK
20 2nd OIL SHOCK
Iranian
2010 - IFP Training

OPEC Agreement Mexico,
10 revolution
1st OIL SHOCK Quotas Venezuela, Saudi Arabia
Yom Kippur war Asian crisis
0
72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Source : Platt's
S 402*16 May 2011
Investment in exploration-production
600 G$ $/b 100
90
500
Invest. out of North 80
Invest. in North Am 70
400
60
300 Crude oil 50

price
40
200
30
20
100
10
2010 - IFP Training

0 0
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source : IFP, Chase Manhattan Bank

A321*26(1) March 2011
Share of the Upstream Activity in the IOCs Global Earnings
EXXON MOBIL, SHELL, CHEVRON, BP, TOTAL
Net Earnings Upstream / Company Net Earnings
83%
140 000 M$
120 000
100 000 71% 74%
72%
80 000
90%
67%
60 000 77%
60%
90%
40 000
53%
64% 64% 59%
60%
54% 67% 61% 48%
2010 - IFP Training

20 000 45% 52% 48%
0
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Critical decision points along the E&P chain
Critical Decision Point
Go into the Permit or not?
Field ECONOMICS
Development
Exploration
Appraisal
CONTRACT
Additional Development, Yes or No?
Preliminary
ECONOMICS
Conceptual
Pre-
Project
PROJECT Production Profile
INVESTMENT
DECISION
Field
Abandonment
1-3 y 3-4 y 3-4 y > 20 y Field Operations
Time
2010 - IFP Training

Discovery First Oil End
ECONOMICS
Site restored
Launch Development or not?
EG - EAM
CFEP Mod
- September
1 - Analyse
2011conomique de lE&P - Avril 2011 15
E&P projects Economics
1 - E&P Industry environment
2 - Contractual and fiscal frameworks of E&P activities
3 - Investment profitability studies for E&P projects

Frdrique LANG
EG
Contractual and fiscal frameworks of
exploration-production activities
Frdrique LANG
EG
Fundamentals and Stakes
Principles of Concession Contracts
Principles of Production Sharing Contracts (PSC)
Principles of Service Contracts
Principles of Joint Operating Agreements (JOA)
2010 - IFP Training

EG 18
Fundamentals and Stakes
2010 - IFP Training

EG 19
Objectives of the major players in the upstream sector
STATE
Promote activity to valorize its

natural resources. INTERNATIONAL OIL COMPANY
Get access to reserves and

productions.
Maximize income while allowing
investors to draw a return. Make profit and remunerate a
UPSTREAM
risk capital.
CONTRACT
Take part in the decision process
Ensure supervision and control at all stages of the projects.
while avoiding red tape.
Valorize its research programs
and know-how.
2010 - IFP Training

Acquire expertise by know-how
and technology transfer.
EG 20
Hydrocarbons ownership (before and after extraction)
General rule
Whatever the type of fiscal regime and contractual

frameworks (excluding the US regime), the host country still
the owner of its underground natural resources.
The host country gives only an authorization to explore and,

if successful, to exploit the hydrocarbons, with an entitlement
to the production for cost reimbursement plus a margin.
2010 - IFP Training

EG 21
Oil contracts awarding procedure
Negotiations
Legislation does not specify all conditions applicable to an oil agreement.
A company negotiates the terms of an oil agreement, related to a free area.
International invitation to tender (exploration rounds)

In accordance with the Hydrocarbon Law in force, the State opens blocks and
fixes the conditions of the invitation to tender.
A model contract is provided with blank terms to fill in.
Transfer of interest on fields

An international invitation to tender (bidding) is the usual rule.
2010 - IFP Training

The model contract must fit the specificity of a discovery already made or a
field already in the production phase.
EG 22
General structure of an exploration-production contract
OBJECT
Defines the rights and obligations of parties concerning

the oil and gas activities covered by the exploration-production contract for a
specified period.
UPSTREAM
CONTRACT DEFINITIONS
PROVISIONS
technical, operational, economic,
General Articles fiscal and financial, general
Parties
Cession and Transfers ANNEXES
Sanctions Accounting procedure
Force majeure Work programme
Contractual area (map)
2010 - IFP Training

Differences and Arbitration Bank or parent-company guarantee
Governing Law
EG 23
Key areas in contract building
Some standard key provisions in contract building
Duration and surrender
Work commitment
Commerciality
2010 - IFP Training

EG 24
Duration and surrender provisions
The duration of the right to explore for hydrocarbons normally ranges from
three to six years.
The exploration phase is divided into a number of periods (two or three),

each having the related work obligation.
A portion of exploration area is usually surrendered to the host country.
This relinquishment is made typically in two or three steps (for example 25%
2010 - IFP Training

every two years).
EG 25
Work commitment
The work commitment generally refers to the acquisition of seismic data with an
option to drill an exploration well.
Generally measured in kilometres of Seismic data to be acquired and number of

exploration wells to be drilled within a specified time limit.
On the expiry of exploration period, if no commercial discovery is made, the
2010 - IFP Training

contract automatically expires.
EG 26
Commerciality
In case of commercial discovery, the contractor must prove to the host Government
that a the development will be economic for both parties.
Commerciality is usually based on a predetermined Government gross take (taxation

of oil and gas activities).
The Government agreement to commerciality marks the end of exploration phase

and start of development phase.
2010 - IFP Training

The duration of exploitation period vary according to the countrys petroleum law,
generally it ranges from 20 to 25 years, which can be extended.
EG 27
Stakes in the upstream sector
Global International Market with High Competition
SUPPLY DEMAND
Opportunities offered by States Opportunities selected by
International Oil Companies
Oil contracts are designed and negotiated according to the countrys hydrocarbon law, the
attractiveness of the basin to explore and the oil market situation.
UPSTREAM
CONTRACTS
2010 - IFP Training

Satisfactory level of exploration-production activity ensured only within
a Fair and Stable Fiscal and Contractual Framework
WIN-WIN SITUATION
EG 28
Sharing the economic rent
At the center of the Host Countries - Oil Companies relationship,

the concept of the sharing of the oil rent
RENT = REVENUES TECHNICAL COSTS
STATE
RENT
PRODUCTION OIL
TECHNICAL COMPANY
COSTS
Sub-Contractors
2010 - IFP Training

The main point of any oil contract is to define the sharing methodology.
EG 29
Sharing the rent / a project full cycle evaluation
Governments Net Cash Flows (M$) Gvt. Take

If the Gvt (NOC)
invests in the fields development
Participation Fiscal Regime
Because the Gvt.

is the owner of the resources
Projects Value
Oil Companys Net Cash Flows (M$) for the Oil Company
2010 - IFP Training

Total Rent (M$) =
Price * Fields Reserves Capital Expenditures Operating Expenses
EG 30
Different Types of Contracts
CONCESSION
Delegation of Mining Rights in exchange of

Royalties and Taxes
STATE PETROLEUM
PRODUCTION COMPANIES
or
SHARING CONTRACT
NATIONAL or
Delegation of Operations in exchange of
COMPANY access to oil JV
2010 - IFP Training

SERVICE CONTRACTS
Increasing State
Control Delegation of Operations in exchange of cash
EG - Strategic Business Acumen for Oil & Gas Executives 31

Principles of Concession Contracts
(Royalty Tax system)
2010 - IFP Training

EG 32
Concession contract
State assigns its rights to explore and exploit underground resources to the
International Oil Company.
International Oil Company (Licensee or Contractor)
undertakes and finances the exploration at its own risk
if the exploration is successful, it decides on development and production

within the framework of the country's petroleum law
owns the production (hydrocarbons at the surface)
owns all the facilities financed
2010 - IFP Training

pays royalties and taxes to the State
Octobre 1999
EG 33
Concession contract
State Participation
can be inserted in the contract (NOC) with the terms
defined in an "Association Agreement ".
State revenue sources
bonuses (Paid in cash after finalization of negotiation and contract

signing)
surface rental ($/km)
royalty on production
petroleum income tax
2010 - IFP Training

special petroleum tax
EG 34
Concessionary / barrel and rent split
ROYALTY
Petroleum Rent
STATE INCOME
TAX
MARGIN
CONTRACTOR
CONTRACTOR CAPEX
2010 - IFP Training

OPEX
EG 35
Concession / example
Concession System Flow Diagram

Barrel and Rent Split / Full Cycle
Gross Revenue
$50,00
Company Share Government Share
Royalty
15,00%
Net Revenue
$6,00 Deductions
Assumed Costs Capex and Opex
Taxable Income
Special Petroleum Tax

65%
Net Income After-SPT
Petroleum Income Tax
30%
Net Income After-Tax
Division of Gross Revenues
2010 - IFP Training

BARREL SPLIT
Division of Net Cash Flow
Petroleum Rent
TAKE
EG 36
Principles of Production Sharing
Agreements
2010 - IFP Training

EG 38
History and background from concession to production
sharing contracts
First Production Sharing Contract was signed in 1966 between
the Indonesian National Oil Company (Pertamina) and IIAPCO.

Basic features:
Many aspects of the government/contractor relationship may be negotiated but

some are fixed.
The basic structure is effectively predetermined by the petroleum law
Model PSC are put forward by the host government as basis for bidding and
negotiation
Mining title remains the property of Pertamina
2010 - IFP Training

Pertamina held management control
Pertamina approved work and budgets
EG 39
History and background from concession to production
sharing contracts
Contract is based on production sharing
Contractor provided finance and took the risks.
After allowance of 40% of annual production for cost oil recovery, the remaining
production (60%) is shared between Pertamina and the contractor.
All equipment bought and imported by contractor became property of Pertamina.
These contract features are still popular with Governments.
2010 - IFP Training

EG 40
Production sharing contract
State keeps its mining rights or delegates its rights to the National Oil Company that
contracts an International Oil Company to exploit the reserves.
International Oil Company (Contractor)
Undertakes and finances the exploration at its own risk.

After the decision to develop the reservoir it undertakes and finances
development and production :
is reimbursed for its expenses by a share of production called Cost Oil.
is remunerated for the risks taken and the services offered by a share of
the remaining production (after cost oil has been deducted) called profit oil.
National Oil Company owns the facilities and may take part in the development
2010 - IFP Training

phase.
Octobre 1999 A 412*41

EG 41
State Participation
can be inserted in the contract (NOC) with the terms
defined in an "Association Agreement ".
State revenue sources

Bonuses (Paid in cash after finalization of negotiation and contract
signing)
royalty on production
a share of profit oil
2010 - IFP Training

petroleum tax
EG 42
Cost recovery and profit sharing
STATE FUNDS PROVIDED BY THE COMPANY

=
RECOVERABLE COSTS (Cost Recovery Oil)
PROFIT
COST
OIL
STOP
PRODUCTION
COMPANY
EXCESS OIL
COST
OIL
RECOVERABLE
COST
YEAR N YEAR N + 1 YEAR N + N
2010 - IFP Training

IF RECOVERABLE COSTS > COST STOP EXCESS COST OIL MAY BE
Sub-Contractors PSC IS SATURATED - ADDED TO THE PROFIT OIL
SURPLUS IS CARRIED FORWAD - OR SHARED DIFFERENTLY

EG 43
Production sharing and cost recovery
Revenues sales
EXPLO
COST STOP
DEV DEPRECIATION
OPEX
EXPLO OPEX
DEV
2010 - IFP Training

Expenses
EG 44
Production sharing and cost recovery
Revenues sales
PROFIT OIL STATE
PROFIT OIL CONTRACTOR

COST STOP
DEPRECIATION EXP+DEV
OPEX
EXPLO OPEX
DEV
2010 - IFP Training

PROFIT OIL
CONTRACTOR ACCESS TO OIL
Expenses COST OIL
EG 45
Cost recovery methods
the contractor has the right to be refunded for its costs (paid in advance) by having a
fraction of the production (cost oil).
the maximum limit of the production assigned to the recovery of the oil costs (cost stop)
varies according to the countries or the contracts.
the balance of the not yet recovered oil costs is recoverable the following years according to
the same principle.
Profit Oil Sharing Methods
at the beginning a single profit oil sharing rate was fixed in the contract whatever the
characteristics of the discovery were.
progressive sharing rate according to sliding scales were introduced. First, the sliding scales
refer to physical parameters (daily or cumulated production).
2010 - IFP Training

finally, a new mechanism of profit oil sharing based on the rate of return and another
profitability ratios were introduced in the contract rather than physical parameters (daily or
cumulated production).
EG 46
Examples of sliding scales sharing
Contractor State
Production State
Rate of Return (%) Profit Oil (%)
(000 b/d) Profit Oil (%)
<15 40
<15 30
15-20 50
15-30 40
20-25 60
30-50 50
25-30 70
50-70 60
>30 80
70-100 70
>100 80 State
R-Factor Profit Oil (%)
<1 30
1-1.5 40
1.5-2 50
2-2.5 60
2010 - IFP Training

>2.5 80
EG 47
Production sharing / barrel and rent split
ROYALTY
Petroleum Rent
PROFIT OIL STATE
STATE
PROFIT OIL
CONTRACTOR
CAPEX CONTRACTOR
OPEX
2010 - IFP Training

EG 48
Production sharing / example
Barrel and Rent Split / Full Cycle

Gross Revenue
$50,00
Company Share Government Share
Royalty
15%
$6,00 Costs Oil Recovery

Incurred Costs Capex + Opex
35% Profit Oil Split 65%
Petroleum Income Tax

30%
Net Income After-Tax
Division of Gross Revenues
BARREL SPLIT
2010 - IFP Training

Division of Net Cash Flow
Economic Rent
$44,00
TAKE
EG 49
Different methods of Profit Oil taxation
Tax (if any) deemed Tax on Investors

Profit Oil Tax on overall Profit Oil
included in State
(ex. Angola) (ex. Nigeria)
Profit Oil
PROFIT OIL PROFIT OIL

TAX
STATE STATE
PROFIT OIL PROFIT OIL

STATE TAX
INVESTOR
PROFIT OIL PROFIT OIL TAX OIL

INVESTOR INVESTOR
COST OIL COST OIL COST OIL
2010 - IFP Training

ROYALTY ROYALTY ROYALTY
EG 51
Production sharing (before and after tax) / example
SHARING AFTER-TAX SHARING BEFORE-TAX

VALUE OF PRODUCTION 100 VALUE OF PRODUCTION 100
EXPLORATION COSTS (5) EXPLORATION COSTS (5)
DEVELOPMENT COSTS (20) DEVELOPMENT COSTS (20)
OPERATING COSTS (20) OPERATING COSTS (20)
COST OIL 45 COST OIL 45
PROFIT OIL 55 PROFIT OIL 55
NET SHARING BEFORE-TAX SHARING
65% STATE 30% STATE
35% COMPANY 70% COMPANY
RENT = REVENUES COSTS TAX (50 %) (..)
- - - .. = ..
2010 - IFP Training

NET PROFIT OIL COMPANY
STATE
COMPANY (.) NET PROFIT OIL STATE
(.) %
%
EG 52
Typical terms of exploration-production contracts
DURATION
Exploration Phase 6 to 10 years (2 or 3 periods)
Production Phase 20 to 25 years
RELINQUISHMENT 25% of surface
ROYALTY 0% to 20%
COST STOP 35-40% to 70-80%
INCOME TAX around 35%
DEPRECIATION 5 years linear
2010 - IFP Training

STATE PARTICIPATION from 10% to 60%
EG 54
Principles of Service Contracts
2010 - IFP Training

EG 55
Risk-service contracts
The contractor provides all the capital required for the exploration and
development of petroleum resources.
If the exploration efforts are successful, the contractor is allowed to recover

its costs from the revenue generated by the sales of Oil/gas.
In addition, the contractor is paid a fee based on percentage of the

remaining revenues which can be or not subject to taxes.
The government remains the holder of the hydrocarbon produced.
The term risk implies that if the contractor is not successful in finding oil/gas,
all his costs of exploration are to his account with no liability to the host
government.
2010 - IFP Training

There is little difference between the risk-service contract and PSC. The
difference lies in how payments are made to the contractor (kind or cash)
EG 56
Iranian buyback contract
Risk-Service Contract
Contractor does not receive a mining title, nor have access to oil.
Reimbursement and remuneration of the contractor is made over a limited period.

conducts and finances the development, then transfers operations and know-how
to NIOC who is the owner of facilities and production.
reimbursement + remuneration = repayment oil .
buys back (without paying) part of the production as entitlement to this
repayment oil through a long-term export oil sales agreement with the State.
receives and takes freely the oil corresponding to the repayment oil over the
duration of the buyback contract.
2010 - IFP Training

Fundamental difference between the buyback contract and the production sharing contract :
the Contractors access to oil is not direct, but through an oil purchase/sales agreement.
EG 57
Technical assistance contracts
Service contracts without risk (Technical Service Agreement ):

does not take any risk and does not finance work directly.
receives a remuneration (fee), more or less related to the results, for the
services provided.
the State commits to ensure a minimal revenue ($/barrel) to the contractor

regardless of the crude oil sale price.
Technical assistance contracts relate primarily to old fields exploitation work and
sometimes to development work.
Some technical assistance contracts allow the International Oil Company to purchase
part of the production.
2010 - IFP Training

The International Oil Company is generally subjected to the General Tax Law.
EG 58
Example of worldwide global oil rent sharing
The Ireland, the United States (deep

offshore) and the United Kingdom have a
liberal oil regime.
By contrast the OPEC countries have a

radical fiscal regime.
Between the two fiscal regimes, there is

an entire spectrum of possible taxation
system.
For comparison purposes, the type of

contracts (concession, PSC or service) is not
2010 - IFP Training

significant But its the total
government take which made the
difference
EG 59
From concession to Production Sharing Agreement
The success of the Production Sharing Agreements in the 70s and the strong move from
concession to this kind of contracts is driven by the reinforcement of State control over
hydrocarbon activities.
the State (directly or through its National Oil Company) remains the
holder of the mining rights, and therefore the holder of the production.
the State calls upon the technical skill and financial means of the
International Oil Company, but remains the owner of a significant part of
the production through the concept of production sharing.
2010 - IFP Training

the highest degree of control the State can theoretically exert.
EG 60
Joint Operating Agreements
2010 - IFP Training

EG 61
Need for a Joint Operating Agreement
Petroleum exploration involves

considerable risk and large capital commitments.
While the risk decreases progressively as a petroleum project enters the

development and production phases,
capital commitments remain high.
Because of the risk and large capital commitments, few companies undertake
petroleum exploration, development and production alone.
2010 - IFP Training

Companies team up to undertake the activities as a joint venture.
EG 62
Joint ventures
In the international petroleum industry, a joint venture describes the relationship

between two or more parties who undertake joint activity in the form of a
partnership .
The rights and obligations of the partners are set out in the joint venture
agreement.
A joint venture is not a form of oil and gas agreement.
A joint venture is a form of association or partnership

between several companies, or between one or more companies
2010 - IFP Training

and a host government or its national oil company
for the purpose of operating an oil and gas venture jointly.
EG 63
Association agreement principles
The JOA defines the provisions which govern

the relationship of all the joint venture partners in great detail.
Operating committee decides work programs and budgets according to a

majority vote.
Oil operations are led by an Operator (who can be an "operating company"

created by the partners).
Partners pay the cash calls prepared by the Operator to cover the
expenditures to be made within the framework of the work programs.
2010 - IFP Training

Each partner has the right and the obligation, to take and market a share
of the production in proportion to its participating interest.
EG 64
Association agreement principles
The JV formula corresponds to a sharing of costs and production

according to each associate participating interest, not a sharing of
income.
Each associate is separately subject to taxation.
Particular provisions are designed to define the rights, advantages and

obligations applying to the State as a partner (participation date,
2010 - IFP Training

financing, etc.)
EG 65
Motivations for State participation
to have access to an additional share of production,
to increase the State oil incomes by having a direct participation in

the operations profits against the financing of a share of the costs,
to get knowledge of oil activities practices by participating in the

work programs and budgets decision-making process,
in the short term, to obtain a better control of the oil operations and
expenditure, and
in the long term, to take in hand, at least partially, the exploitation of
2010 - IFP Training

the national hydrocarbons resources by becoming oil operator.
EG 66
Main developments in the contractual framework
Reinforcement of States control.
Strong move, starting in the 70s, from Concessions to PSCs.
Modern concession regimes adopting control tools brought by PSCs.
Gvt. Take in the petroleum rent:

increase in the 70s and stability in first half of the 80s,
reduction from mid 80s to encourage investments ,
increase again in the past few years just before the crisis.
With higher volatility of prices, more flexibility in contracts.
Greater complexity of provisions relating to the oil rent sharing.
2010 - IFP Training

More precise definitions of exploration commitments.
Specific provisions relating to natural gas exploitation.

EG 67
2010 - IFP Training
68
Appendices
EG
Comparison of fundamental features of upstream
contracts
PRODUCTION SHARING CONCESSION
ROYALTY ROYALTY
Petroleum Rent
Petroleum Rent
PROFIT OIL
STATE INCOME
STATE TAX
PROFIT OIL MARGIN

CONTRACTOR CONTRACTOR
CAPEX CONTRACTOR CAPEX
OPEX OPEx
2010 - IFP Training

The State is always the owner of the hydrocarbons reserves underground,
and the International Oil Company supports all the financial risks and supplies
the funds, the equipment, the know-how and the necessary personnel.
EG 69
Comparison of fundamental features of patrimonial contracts
Identical or similar articles in modern upstream contracts
Duration
Termination / Cancellation
Exploration Phase
(duration, surface and relinquishment)
Exploration Work and Expenditure Obligations

Appraisal of a Discovery
Commercial Discovery and Production Phase
(development plan, marginal or not commercial discoveries, natural gas, production levels, unitisation)
Annual Work Programs and Budgets

Rights and Obligations of the Company
(compliance with the general rules for carrying out operations, responsibility, compensation)
2010 - IFP Training

Inspection, Information, Reports and Confidentiality
EG 70
Comparison of fundamental features of patrimonial contracts
Identical or similar articles in modern upstream contracts

Hydrocarbons Price Determination
Consolidation Rules
Imports/Exports Regime
Transfers of Funds, Exchange Control, Local Accounts
Domestic Market Obligations
Book-keeping, Accounts, Audits
Personnel and Training
Assignment and Transfer of Rights
State Participation
2010 - IFP Training

Force Majeure, Arbitration
Other Provisions
(applicable law, notifications, renunciation, etc.)
EG 71
Comparison of fundamental features of patrimonial
contracts
Concession Production Sharing Service Iranian Buy Back

State State State State
assigns its rights to retains title to retains title to retains title to
hydrocarbons to the hydrocarbons reserves hydrocarbons reserves hydrocarbons reserves
international oil company owns all facilities and production and production
receives royalties (cash / has overall management owns all facilities owns all facilities
oil) and taxes control has overall management specifies scope of work
receives profit oil, with control sets cost and
royalties and taxes remuneration upfront
International Oil Co. International Oil Co. International Oil Co. International Oil Co.
takes exploration risk takes exploration risk takes exploration risk pays development costs
pays development costs pays development costs pays development costs performs work specified
has operational has operational shares operational gives operational
management management management management to NIOC
owns all facilities is entitled to a share of recovers costs and is recovers costs and is
owns all the production the production (cost oil paid for services (cash / oil paid for services (oil
plus a share of profit oil) through a sales contract) through a sales contract)
2010 - IFP Training

EG 72

1 - E&P Economics - Environment +contracts FL (RGE)

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E&P projects Economics

1 - E&P Industry environment

2 - Contractual and fiscal frameworks of E&P activities

3 - Investment profitability studies for E&P projects

LONG PAY OUT TIME SPAN

HIGHLY DEPENDENT ON THE POLITICAL ENVIRONMENT

INCREASINGLY HIGH COSTS, DEPENDENT ON REGIONAL & RESERVOIR CONDITIONS

2010 - IFP Training

Mars 2001 A101* 3

Crude oil reserves

120 Natural gas reserves

100 80% years

2010 - IFP Training

Source : BP Statistical Review

2010 - IFP Training

Source : BP Stat Review

2010 - IFP Training

Source : BP Stat Review

2010 - IFP Training

2010 - IFP Training

Saudi Arabia S. ARAMCO 9.7 11.8

2010 - IFP Training

Source : BPSR August - PIW december 2010 Total of 20 50. 7 61.7

Russia GAZPROM 1 264 14.4

2010 - IFP Training

Source : BPSR August 2011 - PIW December 2010

2010 - IFP Training

600 G$ $/b 100

300 Crude oil 50

2010 - IFP Training

Source : IFP, Chase Manhattan Bank

100 000 71% 74%

2010 - IFP Training

EG - CFEP - September 2011 14

2010 - IFP Training

2 - Contractual and fiscal frameworks of E&P activities

3 - Investment profitability studies for E&P projects

Principles of Concession Contracts

Principles of Production Sharing Contracts (PSC)

Principles of Service Contracts

Principles of Joint Operating Agreements (JOA)

2010 - IFP Training

2010 - IFP Training

Promote activity to valorize its

Get access to reserves and

2010 - IFP Training

Whatever the type of fiscal regime and contractual

The host country gives only an authorization to explore and,

2010 - IFP Training

International invitation to tender (exploration rounds)

Transfer of interest on fields

2010 - IFP Training

Defines the rights and obligations of parties concerning

2010 - IFP Training

Some standard key provisions in contract building

Duration and surrender

2010 - IFP Training

Duration and surrender provisions