International Exploration Economics, Risk, and Contract Analysis

International Exploration Economics, Risk, and Contract Analysis
Daniel Johnston
CONTENTS
Acknowledgments
Introduction
1 International Petroleum Fiscal Systems—PSCs
2 State-of-the-Art in Petroleum Fiscal System Analysis
3 Thinking of Going International? Some UsefulTips
4 Trends and Issues in Foreign PSCs
5 Current Developments in PSCs
6 The International Gas Industry
7 Key Concerns of Governments and Oil Companies—
Alignment of Interests
8 Fiscal System Design—the Ideal System
9 Economic Auditing/Modeling—Art and Science, Part I
10 Economic Auditing/Modeling— Art and Science, Part II 177
11 Finger on the Puls
12 Kashagan and Tengiz—Castor and Pollux
13 The Bidding Dilemma—a 20-Year Retrospective
14 Retrospective, Government Take—Not a Perfect Statistic 237
15 Additional Commentary on Key Issues
16 Sample Contracts & Summaries
Glossary
Abbreviations and Acronyms
Index
Phuket 2001
Abbreviations and acronyms, 369-373
Access to gross revenues (AGR), 30, 58, 66-69, 72-74, 96, 100-102:
calculation, 101-102
Accounting. SEE Cash flow/cash flow analysis.
Acetic acid, 126
Acquisitions, 85, 255-259: international, 85, 256-259; U.S., 255-259
Acronyms and abbreviations, 369-373
After-tax equity split, 59
Algeria, 197
Alignment of interests, 133-147, 172: boundary conditions, 134;
culture
, 135; objectives, 135; policy, 136; strategy/tactics, 136-
137; fiscal system example, 137; division of profits, 138;
government take calculation, 139-140, 143-144; effective royalty’
rate calculation
, 140-142; • effect of savings, 142; marginal
government take calculation, 143-144; maximum efficient rate,
144-146; references, 147
375International Exploration Economics. Risk, a n d Contract Anal/sis
Allocation mechanism , 152
Ammonia, 121 , 126
Angola, 196, 282
Arbitration clause, 240
Argentina, 42, 86
Asia economic crisis, 1 24-125
ASR 289, 261
Association contract, 285
Auditing (economic model), 159-188: economic model example,
160-175; discussion, 165; veracity of model, 165; government
profit oil share, 165-168; field production profile, 168-175;
government take, 169-170; effective royalty rate, 170-172 ;
savings index, 172-173; entitlement index, 173-174; spot checks,
174; cost recovery limit, 174; taxation, 174-175; company cash
flow
, 175; conclusion, 176, 188; initial oil price, 177-178; capital
cost per unit, 179; exploration well costs, 179-180; capital costs
per BOPD, 180-181; capital costs as percentage of gross
revenues, 181; total costs as percentage of gross revenues, 181;
operating costs (peak year)/ totaJ capital costs, 181-182;
operating costs (early years), 182; Operating costs (full cycle),
182-183; technical aspects/assumptions, 183-188
Australia, 50, 73, 87
Authorization for expenditure (AFE), 88, 143
Azerbaijan, 50, 283
B
Bangladesh, 126
Barrels of oil equivalent, 266
Barrels under service agreements, 267
Basic unit of production, 21
Bid /bidding, 3, 136, 192, 219-236: dilemma, 219-236; examples,
225-233
376Glossary
Bidding dilemma, 219-236: history, 220-222; post mortem analysis,
220-222; oil price estimates, 222; eost/ timing estimates,
223; prospect sizes, 223-224; success ratio, 224-233; examples,
225-233; conclusions, 233-234; references, 234-236
Bidding efficiency, 234
Block offers, 112
Bonus bidding, 3, 225-227, 229-233: signature type, 225-227;
combination with terms, 229-230; highest bonus, 230-233
Bonus, 3, 15-16, 25, 30-32, 58-59, 72, 100, 153-154, 191-192,
225-227, 229-233: bidding, 3, 225-227, 229-233
Book-end-loaded contract system, 206
Booking (reserves recognition), 101
Booking barrels, 173-174, 247, 259-260, 265-269: barrels of oil
equivalent, 266; imputed entitlement barrels, 266; barrels under
service agreements, 267
Booking fuel, 265-266: imputed entitlement barrels/taxes in lieu, 266
Booking gas plant liquids, 267
Booking reserves, 101, 173-174, 194-195, 214
Booking royalty oil, 266
BOPD/foot of pay, 187-188
Bottom-line income split, 133
Boundary conditions, 1 34
Brazil
, 247
Bright spots, 265
Buyback contract, 304-305
Buybacks, 194, 198, 244, 304- 305: buyback contract, 304-305
C
California, 196
Canada, 195
Capital costs, 25, 121 , 129, 179-182: per unit, 179; per BOPD,
180-181; percentage of gross revenues, 181
377International Exploration Economics,Risk, and Contract Analysis
Capital expenditures (CAPEX), 42
Carry forward (C/ F), 20, 22-23, 25, 32 , 34: tax losses, 20, 22-23, 25
Cash flow model, 254, 271
Cash flow/ cash flow analysis, 18-19, 20-26, 30-40, 47-49, 61 , 63-64,
159-188, 251-254, 271: company, 175; model, 254, 271
Caspian Pipeline Consortium (CPC), 204
Chance factor, 110, 224
Changes (fiscal system analysis), 74: government take vs. state take, 74;
access to gross revenues, 74; other metrics, 74
Cheating/cost control, 143-144
China, 55, 87, 122, 284
Classification (petroleum fiscal regimes), 10-11
Climate (Kazakhstan), 205
Coal-fired power plant, 125
Colombia, 53, 150, 196, 247-248, 285-286
Combination bidding (bonus and terms), 229-230
Combined-cycle power generation, 125
Commentary, 56, 73-74, 92, 106, 113, 130-131: petroleum fiscal
systems, 56; petroleum fiscal system
international operations, 92; trends^ and issues,
developments, 113; gas resource
system design, 156-157
Commercial terms (Kazakhstan), 206-211: Kashagan field, 206-209;
R factor, 209-210; internal rate of return, 210; volume factor, 211
Company cash flow, 175
Company evaluation, 88-89
Company strategy, 233-234: bidding efficiency, 234
Company take, 20, 27-28, 32-33, 53-56, 58-60, 72, 99, 151-152,
227-228
Competition, 1 1 1 – 1 12, 219-236: bidding dilemma, 219-236;
competitive bidding examples, 225-233
Competitive bidding (examples), 225-233: signature bonus bidding,
225-227; terms bidding, 227-228; combination bidding (bonus
and terms), 229 – 230; highest bonus bidding, 230-233
analysis, 73-74;
106; PSC
development, 130-131; fiscal
378Glossary
Complement of government take, 27
Compound uplifting, 46, 50
Concerns (governments/companies), 133-147: boundary conditions,
134; culture, 135; objectives, 135; policy, 136; strategy/ tactics,
136-137; alignment of interests, 137-138; government take
calculation
, 139-140, 143-144; effective royalty rate calculation,
140-142; effect of savings, 42; marginal government take
calculation, 143-144; maximum efficient rate, 144-146;
references
, 147
Concessionary systems, 10, 12-13, 18, 59, 151, 317: contract, 317
Congo, 287
Conservative estimate/conservatism, 268
Consolidation restriction, 71
Contract analysis, 1, 10-13, 57-75, 104, 107-109, 149-157, 197-198,
206-21 1
, 281-327. SEE ALSO Fiscal svstem analysis, Fiscal svstem
design, AND individual contract types.
Contract elements, 104
Contract summaries (examples), 281-327: Angola, 282; Azerbaijan,
283; China, 284; Colombia, 285-286; Congo, 287; Cote d’Ivoire,
288; Ecuador, 289-291; Egypt, 292-293; Equatorial Guinea,
294; Guatemala, 295; India, 296-297; Indonesia, 298-303; Iran,
304-305; Libya, 306-307; Malaysia, 308-31 1 ; Nigeria, 312; Oman,
313; Pakistan, 314-315; Peru, 316-318; Philippines, 319; Trinidad
and Tobago, 320; Qatar, 321; Russia, 322; Syria, 323; Timor
Gap-ZOCA, 324;Turkmenistan, 325; Venezuela, 326; Zambia, 327
Contract terms (Kazakhstan), 206-21 1: Kashagan field, 206-209; R
factor
, 209-210; internal rate of return, 210;-volume factor, 211
Contract terms, 11, 107-109, 206-211: Kazakhstan, 206-211. SEE
ALSO Contract summaries (examples).
Contractor entitlement
, 172 , 214
Contractor, 2, 11 , 20, 27-29, 32-33, 53-56, 58-60, 72, 99, 151-152,
172
, 214, 227-228: contractor / company take, 20, 27-28, 32- 33,
53-56, 58-60, 72, 99, 151-152, 227-228; entitlement , 172 , 214
379International Exploration Economics. Risk, and Contract Analysis
Contractor/company take, 20, 27-28, 32-33, 53-56, 58-60, 72 , 99
151-152, 227-228
Contractual systems, 10-13. SEE ALSO Contract
(examples).
Conversion factors, 195
Corporate income tax (C1T), 20, 23, 30
Cost control, 88, 137, 141-144, 193-194: international, 88;
cheating, 143-144
Cost estimates, 223
Cost factors, 183
Cost recovery’ limit, 32, 67, 72, 101, 154, 174
Cost/ recovery (C/ R), 4, 32, 36-37, 59, 67, 72, 101, 141, 154, 174,
212, 311: cost recovery limit, 32, 67, 72, 101, 154, 174;
saturated system, 36-37; contract, 31 1
Cote d’Ivoire, 288
Crypto taxes, 58, 72-74, 105
Cultural issues, 89-91, 135: Former Soviet Union, 89-91
Cumulative production sliding scale, 211
Currency conversions (mandatory), 58
Current developments (production sharilgg contracts), 107-113:
contract terms, 107-109; prospectivity, 107-109; risk and
reward, 109-110; reserve replacement, 110-113; commentary,
113; references, 11 3
summaries
D
Decision tree analysis, 164
Decline rate, 184
Deductions (R /T systems), 19-20
Definitions, 329-368
Deflated value, 209-210
380Glossary
Depreciation rates, 56
Depreciation, depletion and amortization (DD&A), 19-20, 25,
56, 129: depreciation rates, 56
Development costs, 263
Development drilling success ratio, 188
Development options (gas), 121, 128-130
Development rights, 3
Development thresholds, 8-9
Disbursement of take, 196
Discounted cash flow (DCF), 20, 22-23, 34, 225, 229, 256-257
Discoveries, 79, 94-95, 110-113, 115-116, 118-121, 161, 201-202,
269: assumptions, 161; well, 201-202; value, 269
Discovery assumptions, 161
Discovery value, 269
Discovery well, 201-202
Division of profits, 58-66, 87-88, 91, 97-100, 137-138:
contractor/company take, 58-60; government take, 58-60,
64-66; terminology, 60-66; marginal take, 64; government
vs. state take, 64-66; international, 87-88, 91
Domestic market obligation (DMO), 61, 105
Drilling costs, 94, 179-180
Drilling success ratio, 188
Drive mechanisms, 273-274
Duration/relinquishment, 153
E
Earlyj Jyears costs, 182
East Kalimantan
, 126
Economic interest, 263
381International Exploration Economics, Risk, and Contract Analysis
Economic model assumptions, 177-188: initial oil price, 177-178;
capital cost per unit, 179; exploration well costs, 179-180; capital
costs per BOPD, 180-181; capital costs as percentage of gross
revenues, 181; total costs as percentage of gross revenues, 181;
operating costs (peak year ) / total capital costs, 181 -182; operating
costs (early years), 182; operating costs (full cycle), 182-183;
technical aspects/assumptions, 183-188; conclusion, 188
Economic model example, 160-175: discussion, 165; veracity of
model, 165; government profit oil share, 165-168; most likely
100 MMBL field production profile, 168-175; government take,
169-170; effective royalty rate, 170-172; savings index, 172-173;
entitlement index, 173-174; spot checks, 174; cost recovery
limit, 174; taxation, 174-175; company cash flow, 175
Economic modeling/auditing, 159-176: economic model example,
160-175; discussion, 165; veracity of model, 165; government
profit oil share, 165-168; most likely 100 MMBL field production
profile, 168-175; government take, 169-170; effective royalty rate,
170-172; savings index, 172-173; entitlement index, 173-174;
spot checks, 174; cost recovery limit, 174; taxation, 174-175;
company cash flow, 175; conclusion, fe76
Economic modeling/auditing, 177-188: initial oil price, 177-178;
capital cost per unit, 179; exploration well costs, 179-180; capital
costs per BOPD, 180-181; capital costs as percentage of gross
revenues, 181; total costs as percentage of gross revenues, 181;
operating costs (peak year )/ total capital costs, 181-182;
operating costs (early years), 182; operating costs (full cycle),
182-183; technical aspects/assumptions, 183-188; conclusion,
188. SEE ALSO Economic model assumptions.
Economic profits, 138-1 39
Economic rent, 2-5, 1 33
Ecuador, 196, 289-291
Effective royalty rate ( ERR ), 30, 36-40, 55, 66, 74, 100-101 , 140-142,
170-172, 196, 269-271: calculation, 140; cost control, 141-142
Egypt, 155, 195, 292-293
382Glossary
Energy Policy and Conservation Act of 1975, 260
Entitlement barrels, 251, 266-268
Entitlement index, 74, 102-103, 173-174: calculation, 102-103
Equatorial Guinea, 50, 294
Equity split, 59
Estimating problems, 86
Ethane, 126
Expectations, 220, 222
Expected monetary value (EMV), 7, 109-110: model, 7
Expected ultimate recovery, 272-274
Expected value theory, 2, 7
Expected value formula, 159, 163-164
Expected value (EV), 2, 7, 109-110, 159, 163-164, 225-227,
229-233: theory, 2, 7; model, 7; formula, 159, 163-164
Exploration agreement, 41
Exploration and development production-sharing agreements
(EDPSA), 1
Exploration costs, 94, 179-180, 262: well costs, 179-180
Exploration production-sharing agreements (EPSA), 1
Exploration rights, 3, 190-191: and development, 3
Exploration well costs, 179-180
Export tariffs, 89
F
Factor R-based systems, 42-44, 154-155, 209-210: R thresholds,
42-43; payout/yield, 43; royalty rate, 43-44
Farm-in strategy, 84-85
FAS 19
, 259-261
FAS 25, 261
FAS 69, 260-263
Fast-track approach, 85
Federal Securities Laws, 260
383International Exploration Economics,Risk, and Contract Analysis
Feedstock (gas ), 125-126
Feedstock requirement, 125
Fertilizer, 121, 126
Field development thresholds, 8-9 *
Field production profile (example), 168-175: government take,
169-170; effective royalty rate, 170-172; savings index, 173-173;
entitlement index, 173-174; spot checks, 174; cost recovery
limit, 174; taxation, 174-175; company cash flow, 175
Field size, 110, 121, 129
Financial Accounting Standards Board (FASB), 259-260
Financial split, 133
First tranche petroleum, 67
Fiscal marksmanship, 1 52
Fiscal net, 133
Fiscal system analysis, 57-75: division of profit, 58-60, 64-66;
terminology, 60-66; royalties, 66; cost recovery limits, 67; access
to gross revenues, 67-69, 74; government participation/carrv,
69-70; ringfencing, 70-71; crypto/other taxes, 72; world average
fiscal system, 72-73; commentary, 73-74; changes since 1996,
74; references, 75 V
Fiscal system design, 149-157: key elements, 150-151; productionsharing systems, 151-152; allocation mechanism, 152; work
program, 152-153; duration/relinquishment, 153; bonus, 153-154;
royalties, 154; cost recovery limit, 154; profit oil split and tax,
154-155; government participation, 156; commentary, 156-157
Fiscal system development trends, 13-28: progressive systems, 13-18;
royalty/ tax (R/T) systems, 18-26; contractor take/government
take statistics, 27-28; production sharing contracts (PSC), 28-44
Fiscal systems, 1-75, 83, 87-88, 93, 96, 133, 137, 149-157, 161,
192, 194, 197-198: development trends, 13-28; analysis, 57-75;
efficiency, 66; international, 87-88; design, 149-157; evaluation,
197-198
Fiscal take, 133, 192
Fiscal terms, 6, 61 -62, 83, 93, 96, 161
384Glossary
Fluctuating entitlement, 267-268
Fluid properties, 273
Formaldehyde, 126
Former Soviet Union (FSU), 50, 86, 89-91, 94, 196: export tariffs,
89; ownership, 89-90; partner chemistry, 90; division of profits,
91; petroleum law/precedence, 91
Forum for concerns, 198
Frondizi contracts, 42
Fuel booking, 265
Fuel cells, 131
Full cost accounting, 260, 262-263
Full cycle costs, 182-183
Future outlook (gas resource), 131
G
Gas clause, 130
Gas composition, 127
Gas compressibility, 119
Gas conversion factor, 266
Gas curse, 118-121
Gas cycling, 121, 124
Gas flaring, 115, 130
Gas hydrates, 131
Gas industry, 115-131: gas curse, 118-121; development options,
121
, 128-130; gas sales, 122; liquids extraction , 122-124; gas
cycling, 124; gas-fired power generation , 124-125; methanol ,
125-129; fertilizer, 126; liquefied natural gas (LNG), 126-128;
commentary, 1 30-131; future outlook, 1 31
Gas liquids extraction, 121-124
Gas plant liquids, 267
Gas products, 1 31
Gas sales, 121-122
385International Exploration Economics, Risk, and Contract Analysis
Gas to liquids process, 1 31
Gas volumetric estimate, 1 19
Gas/oil ratio (GOR), 179-180
Gaseous fuel, 124-125
Gas-fired power generation, 121, 124-126: power plant, 125-126
Gas-fired power plant, 125-126
Geological and geophysical (G&G) work, 85
Geology, 53-56
Geopotential, 10-11, 53-55, 93-95, 107-109
Getting started (international operations), 84-86: grassroots
exploration, 84; farm-in strategy, 84-85; acquisitions, 85;
problem areas, 86
Gliding scale, 206
Global market, 53-56
Glossary, 329-368
Gold plating, 14, 50
Goods and services taxes, 105
Government back-in, 64-65
Government entitlement, 172 <
Government Government guaranteed grief index share (GGI)of , 96 revenue ^ , 137, 139-140
Government options (negotiations), 5-12
Government participation/carry, 15-16, 58-59, 65, 68-70, 72, 156
Government profit oil share, 165-168
Government take calculation, 139-140, 143-144: government
guaranteed share of revenue, 139-140
Government take, 15-18, 26-28, 56, 58-60, 64-66, 98-99, 133,
139-140, 143-144, 151, 169-170, 192, 196, 212-214, 227-228,
237-246: calculation , 139-140, 143-144; disbursement, 196;
statistical properties, 237-246; explanation, 241-242;
macroeconomic scope, 241-243; relevance, 244-246; references, 246
386Glossary
Governments perspective (international), 87-89: type of system
(profits/ revenue), 87-88; cost control, 88; authorization for
expenditure, 88; maximum efficient rate, 88; companv
evaluation
, 88-89
Grassroots exploration, 84
Gravity-drainage reservoirs, 146
Greed concept, 189-193: national oil company, 189-190; government
take, 192; Indonesia terms, 192-193
Gross benefits
, 242-243
Gross revenues, 181
Grossed up, 267
Ground floor deals, 85
Guatemala
, 295
Guerilla vaccine, 196
Gulf of Mexico
, 87, 145
H
Highest bonus bidding, 230-233
History (bidding), 220-222
Horizontal wells, 185-187
Host government contract, 241-242
Host government, 1 -3, 5-12, 87-89, 241-242: contract, 241-242
Hot spots (international), 86-87, 94-95: Argentina, 86; West Africa,
86; United Kingdom, 86-87; Australia, 87; Gulf of Mexico, 87;
China
, 87
Hydrocarbon potential, 10-11, 53-55, 199-206, 222-224: Kashagan
field, 199-202;Tengiz field, 202-206; expectations, 222; prospect
size, 223-224
387International Exploration Economics, Risk, and Contract Analysis
I
Import duties, 58
Imputed entitlement barrels, 266
Incremental production contract (IPC), 286
India
, 296-297
Indonesia, 6, 27, 29-30, 59, 61, 67, 73, 107, 116, 127, 142, 145,
192-193, 196, 275, 298-303
Infrastructure (Kazakhstan), 205
Initial oil price, 177-178
Initial production rate/ well, 186
Intangible drilling costs (IDC), 19
Interest alignment (governments/companies), 133-147: boundary
conditions, 134; culture, 135; objectives, 135; polio*, 136;
strategy/tactics, 136-137; fiscal system example, 137; division of
profits, 138; government take calculation, 139-140, 143-144;
effective royalty rate calculation, 140-142; effect of savings, 142;
marginal government take calculation, 143-144; maximum
efficient rate, 144-146; references, 147
Internal rate of return (IRR), 44, 50-51Xl 54-155, 210, 244-245
International gas industry, 115-131: gas curse, 118-121; development
options, 121, 128-130; gas sales, 122; liquids extraction,
122-124; gas cycling, 124; gas-fired power generation, 124-125;
methanol, 125-129; fertilizer, 126; liquefied natural gas (LNG),
126-128; commentary, 130-131; future outlook, 131
International oil company (IOC), 135, 140, 144
International operations, 77-106: U.S., 77-78; production rates,
78-79; stripper wells, 78; discoveries, 79; production statistics,
80-82; fiscal terms, 83; getting started, 84-86; hot spots
worldwide, 86-87; government’s perspective, 87-89; Former
Soviet Union , 89-91; commentarv, 92; trends and issues
(production sharing contracts), 93-106
International production acquisitions, 85, 256-259
Intranational gas production, 115-116
388Glossary
Investment credit
, 61
Iran
, 180, 194, 198, 244, 304-305
Iraq, 180
Ireland
, 83
j
Japan, 128
Joint ventures (JV), 52-53
K
Kashagan field, 199-202, 206-209: hydrocarbon potential, 199-202;
discovery well, 201-202; commercial terms, 206-209
Kazakhstan, 50, 199-218: hydrocarbon potential, 199-206; Kashagan
field
, 199-202, 206-209; Tengiz field, 202-206; climate, 205;
infrastructure, 205; reservoir depth/pressure, 205-206; productive
area, 206; commercial terms, 206-211; profit/profitability,
211-214; value, 214-217; references, 217-218
Kuwait, 135, 180, 244
L
Lease acquisition costs, 262
Liberia, 50
Libya, 306-307
License contract, 317
License rounds, 112
License trading, 84
389International Exploration Economics, Risk, and Contract Analysis
License/licensing, 84, 112, 190-191, 317: trading, 84; rounds, 112;
contract, 317
Lifting entitlement, 173-174, 267
Liquefied natural gas (LNG), 126-128: LNG plant, 126-127
Liquefied petroleum gas (LPG), 121-124
Liquids extraction (gas), 122-124
Lowest known hydrocarbons, 265
M
Macroeconomics, 241-243
Malaysia, 6, 73, 142, 308-311
Marginal government take calculation, 143-144: cost control and
cheating, 143-144
Marginal government take, 142-144: calculation, 143-144; cost control
and cheating, 143-144
Marginal take, 64, 133, 142-144: marginal government take, 142-144
Maximum efficient rate (MER), 88, 1^7, 144-146, 271-280: rate
sensitivity, 144-146; water-drive r^ervoirs, 145-146; solution
gas-drive reservoirs, 146; gravity-drainage reservoirs, 146;
expected ultimate recovery, 272-273; drive mechanisms, 273-
274; production to reserves ratio, 274-279; references, 280
Methane, 126
Methanol, 121, 125-129
Mexico, 272-272
Middle East, 42, 244
Mineral interests, 263-264
Most likely recoverable reserves, 268
Most likely reserves, 254
MTBE, 126
Mutuality of interests, 137, 172
Myanmar, 196
390Glossary
N
National employment quotas, 58
National oil company (NOC), 37, 52, 65, 68-70, 1 36- 1 37, 140, 150,
152, 156, 189-190
Natural gas, 115-131:gas curse, 118-121; development options, 121,
128-130; gas sales, 122; liquids extraction, 122-124; gas cycling,
124; gas-fired power generation, 124-125; methanol, 125-129;
fertilizer
, 126; liquefied natural gas (LNG), 126-128; commentary,
130-131; future outlook, 131
Negotiations, 5-12, 93: government options, 5-12
Net take on marginal barrel, 64
New reserves value, 248-249
New Zealand
, 73
Nigeria, 196, 312
Non-exploration contract, 145
Non-risk service contract, 41-42
North Sea
, 177-178, 191, 276-277
Norway, 157
Notional volume
, 211
Nuclear power plant, 125
O
Objectives (alignment of interests), 135
Offset fields, 188
Oil price, 177-178, 22: estimates, 222
Oil volumetric estimate, 120
Oman, 155, 195, 313
Operating expenditures/costs (OPEX), 19, 25, 42, 93, 181-183,
263: peak year/total capital costs, 181-182; early years, 182; full
cycle
, 182-183
391International Exploration Economics. Risk, and Contract Analysis
Operating service agreement, 244
Options (negotiations), 5-12
Outcome maximum/ minimum
, 164
Ownership, 11-12, 56, 89-90
P
Pakistan
, 314-315
Papua New Guinea, 50, 196
Partners/partnership, 52, 90, 135
Payback, 210
Payout formula, 210
Payout/yield, 43, 51, 210: formula, 210
Peak production/ total reserves, 183-184
Percentage (take), 212-214
Peru, 43, 316-318
Peruvian model, 316
Petrochemicals, 125-126 <
Petroleum Accounting and Financial Minagement Journal (PAFMJ),
237-238, 241
Petroleum fiscal system analysis, 57-75: division of profit, 58-60, 64-66;
terminology, 60-66; royalties, 66; cost recovery limits, 67; access to
gross revenues, 67-69, 74; government participation/carry, 69-70;
ringfencing, 70-71; crypto/other taxes, 72; world average fiscal
system, 72-73; commentary, 73-74; changes since 1996, 74;
references, 75
Petroleum fiscal systems (PFS), 1-75: economic rent, 2-5; negotiations,
5-12; concessionary systems, 13; contractual systems, 13; trends in
fiscal system development, 13-2S; production sharing contracts,
28-44; rate of return systems, 45- 51; joint ventures, 52-53; global
market, 53-56; commentary, 56; state-of-the-art analysis, 57-75
Petroleum law / precedence (FSU ), 91
392r
Glossary
Philippines, 12, 73, 155, 195, 319
Phuket 2001 roundtable, 189-198: greed concept, 189-193;
government take, 192; Indonesia terms, 192-193; cost control,
193-194; booking reserves, 194-195; taxes in lieu, 195-196;
government disbursement of take, 196; fiscal system evaluation,
197-198; forum for concerns, 198
Policy (alignment of interests), 136
Power plants, 124-125: construction cost, 125; plant capacity, 125
Present value theory, 2
Price estimates (oil), 222
Probabilistic reserve estimation, 110, 254-255
Problem areas (international), 86
Producing reserves value, 248, 250
Production acquisitions, 255-259: U.S., 255-259; international, 256-259
Production rate, 78-79, 183-188: peak production, 183-184; decline
rate
, 184; well spacing, 184-185; initial production, 186; vertical
vs. horizontal wells, 185-187; BOPD/foot of pay, 187-188
Production sharing agreements (PSA), 1
Production sharing contracts (PSC), 1, 3, 10-12, 28-44, 68, 72, 93-113,
151-152, 194-195, 197, 266, 282-284, 287-303, 308-310, 312,
315-316, 320-321, 323-325, 327: revenue flow, 31; bonus, 31-32;
royalty, 32, 36-40; cost/ recovery, 32; profit oil/gas, 32-33;
taxation
, 33-35; government take, 35-36; effective royalty rate,
36-40; access to gross revenues, 36-40; risk service contracts, 41;
pure service contract, 41-42; R factor-based systems, 42-44; trends
and issues, 93-106; current developments, 107-113
Production sharingsystem, 1, 3, 10-12, 28-44, 68^72, 93-113, 151-152,
194-195, 197, 266
Production statistics, 80-82
Production/foot of pay, 187-188
Production-to-reserves (P/ R) ratio, 116, 144-145, 183-184, 274-279
Productive area (Kazakhstan), 206
Productivity index, 187-188
Profit oil split, 1 54- 1 55
393International Exploration Economics. Risk, and Contract Analysis
Profit oil/gas (P/ O ), 14- 15, 32-33, 41, 154-155, 165-168, 207-208
,
211, 227-228, 267-271 , 306-307: profit oil split, 154-155;
risk/ risk analysis, 227-228
Profit sharing, 4, 12, 15-16
Profit/ profitability, 4, 12, 15-16, 26, 30, 35-36, 39, 50, 58-66, 91 ,
97-100, 137-138, 154-155, 192, 211-214, 306-307: profii
sharing, 4
government take, 58-60, 64-66; terminology, 60-66; marginal
take, 64; government take, 64-66, 212-214; government vs. state
take, 64-66; royalties, 66; profits-based mechanism, 154-155;
cost recovery, 212; contractor entitlement, 214
Profits-based mechanism, 154-155
Progressive systems, 13-18
Prospect size, 223-224
Prospectivity, 10-11, 53-55, 93-95, 107-109, 138, 223-224: prospect
size, 223-224
Proved developed producing (PDP) reserve value, 65
Proved reserves, 65, 174, 254-255, 265: developed producing
reserves, 65
Pure service contract (PSC), 41-42 !
1-
1 2
, 15-16; contractor/company take, 58-60;
Q
Qatar, 321
R
R factor-based systems, 42-44, 154-155, 209-210: R thresholds, 42-43;
payout/yield, 43; royalty rate, 43-44
Rape and pillage, 144
Rape, pillage, and burn, 144
394Glossary
Rate of return (ROR) systems, 17-18, 45-51, 154-155, 210:
example, 45-51
Rate sensitivity (production), 144-146: water-drive reservoirs,
145-146; solution gas-drive reservoirs, 146; gravity-drainage
reservoirs, 146
Ratio factor. SEE R factor-based systems.
J
Reasonable certainty concept, 265
Recoverable gas vs. oil, 118
Recovery of cost (R/C) contract, 311
Recovery of costs, 4, 32, 59, 67, 72, 101, 141, 154, 174, 212, 311:
cost recovery limit, 32, 67, 72, 101, 154, 174; contract, 311
Regressive fiscal system, 15-18
Relative economics, 61
Relevance (government take), 244-246
Relinquishment, 153, 192-193
Rent theorv, 2
Rental payments (acreage), 58, 72
Reserve recognition accounting (RRA), 101-102, 259-264:
definitions, 263-264
Reserve replacement, 110-113
Reserve value estimates, 268-269
Reserve values, 27, 247-255, 268-269: value in the ground, 247-255;
estimates, 268-269
Reserves disclosure criteria, 263
Reserves estimates
, 247-269: value in the ground, 247-255; rules of
thumb
, 255-269
Reserves, 101-102, 110-113, 173-174, 183-184,-194-195, 214-215,
223-224, 247-269: values, 27, 247-255, 268-269;
recognition accounting, 101-102, 259-264; replacement,
110-113; estimates, 247-269; disclosure criteria, 263; value
estimates, 268-269
Reservoir characteristics, 205-206, 272-273:depth/pressure, 205-206;
damage, 272
Reservoir damage, 272
reserve
395International Exploration Economics. Risk, and Contract Analysis
Reservoir depth/ pressure, 205-206
Revenue allocation, 4
Revenue division, 4, 207-209
Revenue flow, 4, 18-19, 25, 31, 36-40, 43, 56: R/T systems, 18-19, 31
Revenue protection (RP), 96, 100-101
Reward evaluation, 109- 1 10
Reward side, 154, 164
Right to extract, 263
Right to take in kind, 263
Ringfencing, 56, 58, 70-71, 192-193
Risk capital/ dollars, 6-7
Risk model, 161
Risk service contracts (RSC), 12, 41, 319, 326
Risk/ risk analysis, 6-8, 12, 41, 109-110, 161, 198, 224-233, 263,
319, 326: risk capital, 6-7; risk service contracts, 12, 41, 319,
326; risk model, 161; expected value, 225-227, 229-233; profit
oil
, 227-228
Risk-weighted value, 109-110
Roundtable discussion (Phuket 2001), 189-198: greed concept,
cost 189-193 control ; government , 193-194; booking take, 19reserves ^; Indonesia , 194-195 terms ; taxes , 192 in-193 lieu;,
195-196; government disbursement of take, 196; fiscal system
evaluation, 197-198; forum for concerns, 198
Royalties, 3, 10, 12-16, 18-26, 30, 32-33, 36-40, 43-44, 56, 58-59,
66-68, 72-73, 151, 154, 195, 197, 266: R/T systems, 10, 12-13,
18-26, 32, 36-40, 72, 151, 197; sliding scale, 14-15; rate, 43-44;
rovalty oil, 266
Royaltv oil, 266
Royalty rate, 43-44
Royalty/ tax (R /T) systems, 10, 12-13, 18-26, 32, 36-40, 72 , 151,
197, 314, 318: revenue flow, 18-19; royalties, 19, 32, 36-40;
deductions, 19-20; taxation, 20-26; effective royaltv rate, 36-40
Rule 4-10(a) of Regulation S-X, 260
Rule 4-10(b) of Regulation S-X, 263-264
396Glossary
Rules of thumb, 255-269: U.S. production acquisitions, 255-259;
international production acquisitions, 256-259; booking barrels,
259-260, 265, 268-269; reserve recognition accounting, 259-263;
reserves disclosure, 263; reserves recognition definitions, 263-264;
booking fuel, 265-266; booking barrels of oil equivalent, 266;
booking royalty oil, 266; booking gas plant liquids, 267; booking
barrels under service agreements, 267; fluctuating entitlement,
267-268; reserve value estimates, 268-269
Russia, 52-53, 55, 89-91, 322
s
Sample contracts (summaries), 281-327: Angola, 282; Azerbaijan, 283;
China, 284; Colombia, 285-286; Congo, 287; Cote d’Ivoire, 288;
Ecuador, 289-291; Egypt, 292-293; Equatorial Guinea, 294;
Guatemala
, 295; India, 296-297; Indonesia, 298-303; Iran, 304-305;
Libya, 306-307; Malaysia, 308-311; Nigeria, 312; Oman, 313;
Pakistan, 314-315; Peru, 316-318; Philippines, 319; Trinidad
and Tobago, 320; Qatar, 321; Russia, 322; Syria, 323; Timor
Gap-ZOCA, 324;Turkmenistan, 325;Venezuela, 326; Zambia, 327
Saturated system, 36-37, 140, 170, 271: cost recovery, 36-37
Saudi Arabia, 180, 197-198, 244-245
Savings effect, 142
Savings index, 74, 144, 172-173
Scheduling (operations), 153
Securities Exchange Commission (SEC), 254, 259-26i
Sensitivity analysis, 44
Service agreement, 41
Service company, 190
Service contracts, 12
Service fee, 33
Sharecropper concept, 12
397International Exploration Economics. Risk, and Contract Analysis
Signature bonus bidding, 225-227
Signature bonus, 153-154, 225-227: bidding, 225-227
Sliding scale royalty, 14-15
Sliding scales, 14-15, 155, 206, 211: royalty, 14-15
Solution gas-drive reservoirs, 146
Spot checks, 174
State take. SEE Government take.
State/government, 1 -3, 5-12, 133, 192
Statistical properties, 237-246
Straight line decline (SLC), 20, 23
Stranded natural gas, 116, 120
Strategy/ tactics (alignment of interests), 1 36-137
Stripper wells, 78, 94
Success ratio, 188, 224-233: drilling, 188; competitive bidding
examples, 225-233
Successful efforts accounting, 260, 263-264
Sumatra
, 116
Supplementary petroleum tax (SPT), 20, 22-23, 26
Synthesis gas, 125
Syria, 155, 195, 323
T
Take statistics, 97, 106, 192-193, 237-246: strengths/weaknesses, 97;
government take, 237-246; statistical properties, 237-246;
explanation, 241-242; macroeconomic scope, 242-243; relevance,
244-246; references, 246
TAME
, 126
Tanzania, 50
Tax base spectrum, 16
Tax loss carry forward (TLCF), 20, 22-23, 25, 34, 257
Tax rate, 59
Tax take, 1 33, 192
398Glossary
Taxable income, 20
Taxation , 2-3, 15-16, 20-26, 33-35, 40, 46, 53, 58-59, 105, 133,
154-155, 157, 174-175, 192, 195-196, 242-243, 257, 266:
theory, 2; tax base spectrum, 16; income, 20; loss, 20, 22-23, 25,
34
, 257; R /T systems, 20-26, 33-35; rate, 59; tax take, 1 33, 192;
taxes in lieu, 266
Taxes in lieu (fuel), 266
Technical aspects/assumptions (economic model/auditing), 183-188:
peak production/total reserves, 183-184; decline rate, 184; well
spacing, 184-185; initial production rate/well, 186; vertical vs.
horizontal wells, 185-187; BOPD/foot of pay, 187-188;
development drilling success ratio, 188
Tengiz field, 202-206: hydrocarbon potential, 202-206; climate,
205; infrastructure, 205; reservoir depth/ pressure, 205-206;
productive area, 206
Terminology, 58-60, 98-100, 198, 238-239, 329-368: division of
profits, 98-100
Terms bidding, 227-230: combination with bonus, 229-230
Thailand
, 198
Third-for-a-cjuarter promote, 85
Threshold, 50
Timing, 116-117, 223: oil vs. gas development, 116-117; estimate, 223
Timor Gap, 73, 324: ZOCA, 324
Total costs (percentage of gross revenues), 181
Training obligations, 58, 72
Trends and issues (foreign PSC), 93-106: geopotential, 93-95;
operating costs, 93; negotiations, 93; fiscal terms, 93, 96; take
statistics (strengths/weaknesses), 97; division of profits (example),
97-100; government take (Venezuela), 98; terminology*, 98-100;
government take, 99; contractor/company take, 99; bonus,
100; effective royalty rate, 100-101; revenue protection, 100-101;
access to gross revenues, 100-102; cost recovery limit, 101;
entitlement index calculation
, 102-103; key contract elements,
104; crypto taxes, 105; commentary, 106
399International Exploration Econo^ cs, Risk, and Contract Analysis
Trigger tax , 46
Trinidad and Tobago, 152, 155, 191 , 193, 195, 320
Tunisia, 43
Turkmenistan, 325
Turnover, 43
Tvpe of system (international ), 87-8S
U
United Kingdom, 6, 86-87, 156-157, 242-243
United States
, 54-55, 77-78, 94, 255-259: production acquisitions,
255-259
Urea
, 126
V
Value (commercial terms), 214-217 fcj
Value of reserves, 247-255: in the ground, 247-255; new reserves,
248-249; producing reserves, 248, 250
Value-added taxes, 58, 105
Venezuela, 72, 83, 98, 196, 326
Veracity (economic model), 165
Vertical vs. horizontal wells, 1 S5-187
Volume factor, 208, 21 1
Volumetric comparison (gas vs. oil), 1 18
400
-r
Glossary
W
Water-drive reservoirs, 145-146
Well spacing, 184-187, 265, 277-279: vertical vs. horizontal wells,
185-187
Well test rates, 94-95
Well testing, 94-95, 201-202: rates, 94-95
West Africa, 86
Winners curse, 100, 231, 257
Work commitment, 6, 110
Work program, 100, 135, 152-153
Working interest, 65, 194
World average fiscal system, 72-73
World Bank model, 210
X-Z
Z values, 119
Zambia
, 327
Zero tax base concept
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