Production Sharing Contract( In terms of G&G Aspect)

October 2010

Cost Petroleum

Gross Revenue

Profit Petroleum

Royalty

Govt. Profit Contractor Profit

Income Tax

Net ContractorTake

Pre Independence era

OALPNELP era (NELP-I to IX)

Pre NELP era

Nomination era

1886-1946 1947-1990 1990-1996 1997- till date

PSC Regime

Future

Historical Back Ground of Oil Industry (India) :

Downstream(Refining, Selling

& Distribution)

Midstream(Pipelines)

Upstream(E&P)

ROLE POLICY / CONTRACT

Policy for Exploration & Production

•New Exploration Licensing Policy (NELP)

• Production Sharing Contract (PSC)

Ministry of Petroleum and Natural Gas

Petroleum and Natural Gas Regulatory Board

Ministry of Petroleum and Natural Gas

Directorate General of Hydrocarbons

POLICY MAKER / REGULATOR

Petroleum and Natural Gas Regulatory Board

Policy for Pipe lines

• Pipe Line Policy

Policy for Refining,Selling&Distribution

•Selling ,Distribution of Natural Gas

and products derived from crude oil

Effective Regulatory Mechanism of Oil Industry :

?

Effective Regulatory Mechanism of E&P Industry (upstream):

An agreement between Contractor and Government wher eby Contractor bears all exploration risks, product ion and development costs in return Contractor take sha re of profit petroleum . These cost are recoverable in case of commercial discovery.

Definition of PSC :

Reward is a function of production & priceAll risk all rewardConcession

MixedMixedHybrid

All risk all rewardNo riskService Contact

Share in risk & rewardShare in risk & rewardJoint Venture

Share in rewardExploration risk , Share in rewardPSC

GovernmentContractorType of Agreements

� In Pre-NELP PSCs under exploration rounds, National Oil Companies (NOCs) are the Licensee and have carr ied interest of 10%participating interest (PI) during exploration phas e and 30% PI during Development phase.

�This means, NOC can take 10% PI from the date of si gning of the contract and bear 10% of the explorati on cost.And after commercialdiscovery in the block, NOC can further take 30% PI in the block without paying any past cost but will share all future cost as pertheir PI in the block.

� No Mandatory State Participation , No Carried inter est by National Oil Companies, Income Tax Holiday f or First Seven years( from the date of commencement of Commercial production)

� Under PSC regime, the company invests initially its own money during Expl & Dev phase of the field.

� Once the commercial production commences from the f ield, the Company is liable to recover its full cos ts(Cost oil) after paying statutory payments.

� After full cost recovery, the profit (profit oil) f rom the field is shared between the company and the Government in a pre-agreed manner.

Salient Features of PRE-NELP PSC

Salient Features of NELP PSC

Block Offered with a MWP to CONTRACTOR(2D Seismic API, 3D Seismic API, Reprocessing of ol d 2D Seismic data,

Geochemical Survey, Exploration drilling)

GEOSCIENTIFICINTERPRETATION

APPRAISAL PLAN(To delineated the Area)

ABANDONMENT /RESTORATION

DISCOVERY

PRODUCTION

DRY

Exploratory Locations Released

TESTING

WELL DATA

Exploratory Locations Drilled

Ring Fencing PSC

SUBMISSION OF FORMAT-A

SUBMISSION OF FORMAT-B

SUBMISSION OF DoC

SUBMISSION OF FORMAT-C

SUBMISSION OF FORMAT-D

SUBMISSION OF Development Plan

END OFEXPLORATION PHASE

120 days from Format BAppraisal wells not required

30 Days60 DaysRelinquishment

After Phase-I(25%)

RelinquishmentAfter Phase-II(50%)

100% PEL

75% PEL

50% PEL

PMLOf Discovery Areas

•Retain Only Discovery areas•Hand over all Original copies of data and Informati on Discovery*

If MWP not completed within time frame/or

If Additional Potential beyond MWPNo Discovery

If potential commercial interest not established18 Months

(ON O)S)

18 Months (for ON and OS)

30 Months (for DW)

200

Day

s

GOVT takeContractor take

Net Contractor take

Income tax

PSC Milestone of G&G:

Contractual Framework :

BIDDER 1

Joint Bidding Agreement

CONSORTIUM / CONTRACTOR GOVERNMENT

Bid

License

Production Sharing Contract

� Work program & budget approvals� Exploration Activities

DISCOVERY

� Notification to Government� Appraisal and testing

COMMERICAL

mining lease� Development and production

BIDDER 2

BIDDER 3

Operating Committee (OC)

Management Committee (MC)

� In case of Consortium – one company of the consortiu m is designated as operator to carry out all the Petrol eum Operations on behalf of the Contractor (Consortium)

� Operator designated to carry out Petroleum Operatio ns on behalf of contractors vide JOA which will deal with establ ishment of operating committee

�The Committee established by that name in the Opera ting Agreement pursuant to PSC

� Government control over appointment and change of O perator (Operator ship cannot be changed without approval of Government)

Operator Ship and Operating Committee (OC)

� Any time two or more owners of working interests decide to share the risk of drilling, development, or operations related to the production of oil and gas, they enter into an agreement, in industry term it calls a joint operating agreement (JOA) or, simply, an Operating agreement

� The JOA generally provides for one of the parties to act as the Opratorfor the parties on the joint area covered by the JOA.

� It also specifies the operation for which the JOA was formed (example-the drilling of a well) and how much cost and revenues will be shared, determined and accounted for.

Joint Operating Agreement (JOA)

Management Committee (MC) Structure

MC has advisory/approval role in following matters (with the approval of Operating Committee)

�Annual Work Programme & Budget for Exploration / De velopment Phase�Proposal for relinquishment / surrender�Declaration of Commercial Discovery� Proposals for an Appraisal Programme or revisions�Proposed Development Plan &Determination of a Devel opment area�Appointment of Auditors �Any other matter required by the terms of contact t o be submitted

for review and advice

MC Responsibilities

Chairman

Secretary PartnersA

sk A

ppro

val f

or a

Mee

ting

App

rova

l fro

m C

hairm

an

Notify the Members with agenda @ 28 days before

/ Or Shorter Period if all are agree

MC Meeting

Confirm the agenda / or added if requiredFin

aliz

e @

10

days

bef

ore

Mee

ting

Confirm the Final agenda @ 7 days before Meeting

MOM Prepared by Secretary in English

Draft Minutes Sent to within 3 business day

Finalize and sent to the Secretary

Sen

t to

Par

tner

s fo

r th

eir

Sig

natu

re

Ret

urn

to O

pera

tor

afte

r S

igna

ture

Contractor signed copy submitted for signature of GOVT nominee

Sen

t the

Age

nda

Item

and

dat

e

MCM / MCR

MC Responsibilities & MCM /MCR

* MC Agenda Should OC Approve

Fluid Properties10.

Results of DST ( If any): a)Production Rate ( All Fluids)b)Well head pressure/ Temperaturec)Pressure Transient studies results

9.

Results of MDT (if any)8.

Zone and Perforation Interval Tested

7.

Number of Hydrocarbon interesting zones with Geological Age/ information

6.

Drilled Depth of the Well5.

Name of the Discovery ( if any)

Name of the Location/ Well4.

Area of the Block (Sq. Km)3.

Contractor Party (ies) with Participating Interest

2.

Block Name & Category (Pre NELP/ NELP)

1.

Likely facility to be employed

19

Preliminary techno-economic analysis (including expected development expenditure)

18

Likely date of submission of development plan

17

Expected production profile (BOPD/ MMSCFD)

16

Recoverable Reserves (proved, probable and possible categories)

15

Potential IOR/EOR techniques to be employed in future

10.

possible market (consumer/consumers)

9.

Likely date of start of production

8.

Deatail Techno-economics (CAPEX, OPEX, IRR, NPV etc.)

7.

No. of Wells to be drilled under development plan

6.

Recoverable (Ultimate Reserves)(proved, probable and possible categories)

5.

Results of reservoir studiesa. Well Production potentialsb.Reservoir propertiesc.Fluid properties/Fluid

contact (if any) d.Drive mechanism

No.of hydrocarbon interesting zones with geological age/formation.

4.

No. of wells drilled3.

Date of Commercial Discovery of the field

2.

Name of the Field1.

Oil & Gas in place ( proved & Probable category)

14.

Appraisal plan (Required /or not required)

13.

Areal extent of the pool/ field

12.

Fluid Contact ( if any)11.

Format-B +

+ +

Format-A

Format-C

APPRAI

SAL

PLAN

DEVELOPMENT

PLAN

Format-D

Discovery, Development and Production in case of Discovery

After Approval of Development plan by the management committee (the development plan, which was submitted after Format C to MC)

Format D:

Discovery notified through Format-B of Potential Commercial Interest is economic viable, and needs development.

Format C:

Based on test and analysis and interpretation, the Discovery Declare in Format A have potential commercial interest and merits appraisal.

Format B:

New Discovery in the Contract Area, but the potential commercialinterest of the said Discovery is yet to be established.

Format A:

Definition of Format A,B,C&D

•Forthwith inform to MC and Government•There are different time-frames under which the Contractor has to assess the potentiality of the Discovery and develop and produce from the field.

Reports Submitted to DGH/ MoPNG / MC Members : Appraisal* & Dev Plan Information Given to GOI / MC Member : Format A, B,C, D

CONTRACTORDEVLOPMENT PLAN

(Prepared by Contractor)

Management Committee(Generally submitted to DGH with OC Approval)

(1st Govt Nominee )

REJECTEDAPPROVED

Submitted

Approval within 110 days/ Ask additional

information within 85 days

Furnish additional information within 30 dauysFinal signed copy submitted for Govt Nominee Signature

Inform the Contractor with a MC approval for Consortium sign

GOI

Inform the Contractor with Reason

If C

ontr

acto

r fe

els

Pot

entia

l , th

en c

an s

ubm

it th

e D

EV

Pla

n di

rect

to G

OI

RejectedApprove

Gov

t Sha

ll re

spon

d w

ithin

110

day

s

Adv

ice

to C

ontr

acto

r fo

r m

odifi

catio

n an

d R

e-su

bmis

sion

Modified FDP

Submission and Approval of FDP

OC Approval

Common Reservoir in two Contractor (A&B)

Govt of India

Joint Development Plan

Info

rmat

ion

from

any

Par

ty o

r bo

th

Info

rmat

ion

from

any

bon

afid

e so

urce

Joint Development Plan(agreed by both Parties)

Joint Development Plan(Parties are Unable to agree)

(for

sec

urin

g m

ore

effe

ctiv

e re

cove

ry p

etro

leum

from

suc

h re

serv

oir)

Party A Party BIndependent Agency

Sub

mit

a P

lan

Agree

Not agreeMay cause to Prepared & Inform to Contractor

Accepted & Inform to Contractor

Make a Proposal after Discussed with both Parties

If A

ppro

ved

by G

OI

Bound to agree both Parties

Submit a Plan within 180 days

Unit Development :

Cost Petroleum

Gross Revenue

Profit Petroleum

Royalty

Govt. ProfitPetroleum

Contractor ProfitPetroleum

Income Tax

Net ContractorTake

Production Sharing of Petroleum

CONTRACTOR TAKE

GOVERNMENT TAKE

1

3

2

1

4

Service Tax

Cost Petroleum =40

Gross RevenueLet Gross Revenue =100

Profit Petroleum = 90 or 50

Royalty =10

Govt. Profit = 10 or 5 Contractor Profit = 80 or 45

Income Tax = 25 or 15

Net Contractor Take = 55 or 30

100-10- (+40 – 40) =90

100-10- (+40 ) =50

If Cost is Recoverable

100-10- (+40 – 40) =90

If Cost is not Recoverable

May Recoverable

Example of Production Sharing:

The Share of the Government and the contractor of t he Profit Petroleum is determined by the Investment Multiple achieved by the of the contractor

Government and Contractor take:

Cost recovery is a biddable component which depends upon the sharing of profit petroleum With Governme nt based on the various tranches of pre-tax investment multi ple achieved

How is Cost Recovery to be made:•First for Royalty payments•Next for the production costs•Next for the Exploration costs•Then for the Development costs

COST RECOVERY:

NON RECOVERABLE COST:

Effective date of PSC (PEL) , PML & Guarantees :

Effective Date (ED) of the Contract is the date fro m which License has been made effective by the Gove rnment .Any expenditure before ED (except PEL Fee) is non-cost recoverable

PML:

Contractor shall submit an application for grant of License to the State Government or the Central Gov ernment as the case may be, as early as possible but not later than 15 Business Days from the date of execution o f the Contract.

Petroleum Exploration License (PEL) for:

On-land Area : Granted by State Government Offshore Area : Granted by the Central Government ( MOP&NG)

Guarantees: To be submitted within 30 days of the Effective Dat e :

Bank Guarantees:Shall be an amount equal to 35% of the Company’s Pa rticipating Interest of the total estimated expenditure in respect of MWP during the relevant Y ear of a PhaseFinancial & Performance Guarantee:From the Parent Company in favour of the Government. Where there is no parent company, from the company itself.Legal opinion:A legal opinion from the legal advisors to the effe ct that the aforementioned guarantees have been duly signed on behalf of the Guarantors.

Effective date of PSC (PEL)

Protection of the Environment

Two EIA Studies required

1st study in two parts : (i) Before Seismic Survey

(ii) Before Exploratory drilling

2nd study required : before commencement of Development operations

Note: MOEF clearance required before commencement of Petroleum Operations (Sept,06 notification)

Policy Introduced Subsequently Under NELP PSC

For granting extension for an Exploration Phase by way of increasing bank guarantee amount and/ or cas h payment as LD. A maximum of 18 months extension allowed in three stages (with commitment of AWP)

Policy for substitution of additional meterage dril led in deeper wells against total meterage commitmen ts as part of Minimum Work Programme (MWP) in the Product ion Sharing Contracts

The Policy for determining the amount of Unfinished work programme for paying to the Government

Policy for Substitution

Extension Policy

The Policy for determining the amount

Note : Liquidated Damage: any loss or damage in Petroleum Operations

PRE NELP- PRODUCTION SHARING CONTRACTS:In Pre-NELP PSCs under exploration rounds, National Oil Companies (NOCs) are the Licensee and have carr ied interest of 10% participating interest (PI) during exploration phase and 30% PI d uring Development phase.

This means, NOC can take 10% PI from the date of si gning of the contract and bear 10% of the explorati on cost.And after commercial discovery in the block, NOC can further take 30% PI in the block without paying any past cost but will share all future cost as per their PI in the block.

Round 1 to 3 (1980-1986)Contract Period :Exploration-3 Years ,Work Commitme nt :Specified ,Expenditure Commitment: SpecifiedBonus & Royalty (Non Cost recoverable): Signature Bonus –Yes ,Development Bonus –Yes,Royalty @15%Bonus & Royalty waived off from 2ndRound onwardCost recovery –SpecifiedRelinquishment: 25% of the Contract area after Ph-IGovernment ParticipationONGC entitled to 50% working interest paying proportionate exploration cost of Development Area

4thto 8thROUND OF EXPLORATION, 1991-94Contract Period : Exploration –7 Yrs ,Exploitation –18 YrsWork Commitment :In case of only seismic survey in first Commitment Phase –max 2 Yrs for offshore and 3 yrs for onshoreExpenditure Commitment: No Expenditure Commitment ,Bonus & Royalty: Not payable by Companies

Cost Recovery : Allowed up to 100%Income Tax :@ 50% for Foreign Companies

@ 65% for Domestic CompaniesGovernment Participation :Exploration Period -NOCs had option to take 10% PI Development Period –NOCs can take additional 30% PI in Development Area withoutpaying post costRelinquishment::25% of the Contract Area after Ph-I,Further 50% of the original Contract Area after Ph-II,Only producing & producible areas retainable after Ph-IIINOC’s (ONGC/OIL) as licensees were also a partner in these blocks.Companies were exempted from payment of royalty, cess, annual rental charges and license fees, as per the terms of PSC (except few PSCs where cess is payable by the contractors).

JOINT VENTURE EXPLORATION PROGRAMME (JVEP) -1995Sharing of risk by NOCs from the date of signing of the Contract with Participating Interest ranging between 25 to 40 % Cess Payment by the Licensee (NOCs)Relinquishment: 30% at the end of Ph-I,Further 40% of the original Contract Area at the end of Ph-II

Status:Poor response -270 blocks offered - only 35 blocks contracted to Pvt. Companies .

� Under PSC regime, the company invests initially its own money during Expl & Dev phase of the field.� Once the commercial production commences from the f ield, the Company is liable to recover its full cos ts

(Cost oil) after paying statutory payments.� After full cost recovery, the profit (profit oil) f rom the field is shared between the company and the Government

in a pre-agreed manner.

NELP-PRODUCTION SHARING CONTRACTS( New Exploration Licensing Policy (NELP) announced in 1997, Effective since 1999)

SALIENT FEATURES OF NELP

� No Mandatory State Participation� No Carried interest by National Oil Companies� Income Tax Holiday for First Seven years from the d ate of

commencement of Commercial production� No signature, discovery or production bonus� Foreign participation up to 100%� Royalty as a percentage of well-head value of Crude Oil and Natural Gas� Concession in the Royalty rate for Deep water –Roya lty @ 5% for the

first seven years of Commercial production� Biddable Cost recovery Limits up to 100%� Freedom to the Contractor to market Oil & Gas in th e domestic market

achieved by the contractor� Provision of Only Seismic option in the first phase of Exploration Period� Revised PSC

Exploration Period (NELP-I to V):•Total exploration period for a maximum of 7 Years,divided into one to three commitment Phases•No single commitment phase for more than 3 Years,except Deep water blocks wherePhase- I may be of 4 years, making total period for 8 years .

Exploration Period (NELP -VI):•Totalexplorationperiodforamaximumof7Years(8forD/W),dividedintotwocommitmentPhases•Nosinglecommitmentphaseformorethan4Years,except Deep water blocks where Phase-I may be of 5 years, making total period for 8 years

End Of Exploration Phase•At the expiry of any Exploration Phase , provided that MWP has been completed, Contractor has to give a written notice to the Government at least 30days prior to the expiry of the Phase of its intension to go to next Phase or relinquish the Contract Area.

Relinquishment (NELP-I to V):•Contractor opting to proceed to Phase-II, shall retain up to 75% of the original Contract Area including any Discovery and Development Area.•Similarly, Contractor opting to proceed to Phase-III shall retain up to 50% of the original Contract Area including any Discovery and Development Area.•In the event the Discovery Area and the Development Area exceeds 75% or the 50% of the original Contract Area, as the case may be, the Contractor shall be entitled to retain to the extent of Discovery Area and Development Area.•At the end of third Exploration Phase, only Discovery and Development area shall be retained

Relinquishment (NELP-VI): optional•In case Contractor decided to relinquish, the area shall not be less than 25% of the original contract Area.•At the end of 2nd Phase, only Discovery area and Development Area can be retained.

Minimum Work Programme (MWP)•MWP is the Phase-wise commitment of exploration inputs viz seismic surveys, GM/ Geo-chem / MT surveys etc, and drilling of wells. •TheContractorhastocommencePetroleumOperationnotlaterthan6monthsoftheEffectiveDate.•Excess MWP done in a Phase can be off-set against MWP of subsequent Phase•If the Contractor fails to complete the MWP by the end of any Exploration Phase or due to early termination of the Contract, Contractor has to payequal amount of money to the Government which is required to complete the remaining work

New Provision•In NELP-VI, under Phase-I, Mandatory Work Programme has been introduced by the Government under which whole Contract Area is to be coveredby 2D seismic API.The Mandatory Work Programme is in addition to biddable MWP

NELP-PSC :