Oil & Gas Exploration

Production Contracts

Nov 7
no overproduction > stability of oil market & price
production sharing contract > first signed in indonesia 1966
service contract > nationalistic state, usually do not want interference from foreign company
concussions > most important alongside with production sharing contract
OIL CONTRACTS
1. the assignment of contracts.
- negotiation by mutual agreement

- international invitation for bidding (model of contract)

- transfer of interest (wishes to sell part of interest to another company, buying interest of another)
2. different phases of a project and contractual obligation
- area ( clearly defined in the contract, geographical coordinate, surfaces depths, map attached,
geological horizon)

- E&P contract (1. exploration (state does not participate), plans on oil reserve, wells, discovery of
oil. 2. development settle the production installation, build platform, facilities, pipe lines, 3.

production, lasts according to the agreed contract, the production will also benefits the state)
DURING EXPLORATION N DEVELOPMENT, THE COMPANY IS INVESTING THEIR MONEY,
STATE DOES NOT CONTRIBUTING ANY MONEY
on a one phase different contract may took different years. ex: exploration 3/6 years,
development 2/5 years)

production profile > remuneration

no review and tax during exploration and development phase

company will enter development phases only if there is discovery. > must be commercial
discovery. no sufficient, profitable discovery = no production.
if in case already discovered > no exploration phase.

if no commercial discovery?
all risk born by the company

Obligation during exploration phase

1. duration
- period shall be as short as possible (state)

- long period of exposure (company)

- 1st, 2nd additional period
discovery commercial
1. necessary to be reimburse for tax

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Production Contracts

2. reasonable profit
3. gas utilisation in conformity with the laws
criteria of profitability?
1. 15% return profit value of expenses
plan; exploration, development
provide to the state and the state will allow into production through contract.
production will be remuneration to the state.
total 2014 with ado (abu dhabi oil company)
> over 40 years huge reserve
Production Contract
precondition: declaration of commercial discovery
presentation of development plan
duration

obligations: obligation of all activity (daily, accident) must be reported. all informations are
confidential.
UNITIZATION OF A FIELD
> may be decided when a reservoir is under two permits or two countries
8 NOV 2016
CONCESSION CONTRACT & PRODUCTION SHARING CONTRACT
1. Concession contract
> contract by which the state will transfer to company its mining rights.
> state has mining rights and transferred it to the company; to explore, development and produce.
> state will get royalty; tax.
> OECD countries; Russia, abs-dhabi, angola (onshore), cameroon, gabon, nigeria, argentina,
brazil, colombia, brunei, us, canada, australia.
Ownership of hydrocarbons and installations
before production> state keeps ownership
produces> property of the company subject to payment of royalties (art 82 Petroleum Law of
Angola)
installations> property of the company
after the end of concession?
installations transferred to the state, no indemnity(usually)
or re-use to other field in the same country
or company asked to dismantle its installation at its own expense.
Taxation rules in concession

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Production Contracts

signature bonus> company must pay to the state after tender (at the signing of the contract)
justification?
1. the state has study for the geological exploration to get informations
2. financial capacities dimension
amount would be different depending on the area.
company may offer higher bonus, to show interest to get the contract.
state will look on the technical criteria also.
in Brazil, when govt launch tender in 2012-2013, some companies pay for 10.000 dollar
the royalty:
> a percentage of the value of the production
> paid in cash or in kind (or barrel value the royalty)
> with a progressive rate according to level of production
value of production set by the state (posted price) or by the reference prices on the market (market
price)
> deductible from taxable profit (additional: company pays tax profit)
opex>operation expenses
ordinary expenses of the company; salaries, bills, supplies, services.
capex
capital expenditures> investment on installations.
recoverable.
2. Product Sharing Contract
> No transfer of mining rights
> ask company to explore, develop and produce, the production will be shared between company
and state.
> share in a specific rate
> state does not take discovery risk.
> brazil does not want to use product sharing contract
> the company will be entitle to recover with the limit 60-40% of the value of the whole production.
> company recovers part of the production with certain percentage (limit of the value of production)
> other cost that not recover? rest of the expenses?
> they are transferred to the following years
Cost recovery?
1. recoverable
2. non recoverable
1. recoverable costs
capex, open, abandonment costs
The excess oil:

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Production Contracts

when the cost incurred are smaller than the value of the cost stop, the difference between such
costs and the cost stop is called excess oil.
> usually shared between state and company
conclusion:
1. no different on amount of revenues between contracts (PSC and Concession)
2. real different? > not economically, searched out political aspect.
Other types of contract
1. services contract at risks
2. contract of technical assistance
3. buy-back contract
- 8 Nov Anton & Reza
Basic Oil and Gas Contract
Upstream & Downstream
Patrimonial Contract> Dasar contract bisa jalan dalam suatu negara
Concession> license dari government, kebebasan, fleksibelitas, high tax
PSC> KONTRAKTOR, bagi hasil dg pemerintah
Risk Service Agreement> kontraktor, dpt fee dari negara
History in Indonesia
1. Concession Era 1871 Shell, kemudian Indies Mining Law melarang.
2. Contract Work Law Prp 1960 Oil n gas law, rights controlled by IOC
3. PSC Era> since 1966

1966 first PSC signed

1970/80 oil fluctuation affected fiscal term in PSC
1996 ASR concept
2001 UU Minyak dan Gas Bumi
2008/10 Non recoverable costs (new issue: bertentangan dengan PSC sebelumnya karena tidak
investor friendly)

PSC under Law 22 of 2001

Oil and gas ownership belongs to Government (ownership will pass on at the delivery point)
Control over operational management lies on SKK Migas
Costs will be bear by the company

Parties:
1. government
2. Contractors
3. 30 years perido: divided into 2 phases exploration and exploitation

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> cost recovery mash dibagi ke government share dan contractor share.
> government share data lebih dari setengah barel yang di produksi
Bidding Round
1. bid ( ngeblok A, work plan, bonus paid to government)
2. joint bid (joint study)> has right to match in the end
Acquisition of E&P rights: transfer of PI
1. farm in / farm out
transfer cash
2. share purchase agreement
formal bidding process: pemerintah menawarkan
kontraktor juga bisa menawarkan ke pemerintah
JOA Joint Operating Agreement
operator seharusnya no gain no loss.
Crude oil
LNG Project
- contract with producers, Project Company LNG

- Operation Contract
Types of contract
based on commodity
1. goods
2. service
3. goods & services
periode
1. single year
2. multi years
payment
1. lumpsum
2. turn key
3. percentage
form of agreement
1. joint contract
2. PSC
3. call off contract
4. consignment contract
CONTENT OF CONTRACT

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Production Contracts

1. The Parties
PSC Contractor (company) and
Contractors
2. Liability on Risk
Regardless the cause, each party shall responsible to its own personnel and property, kecuali
ada kesengajaan dari pihak lain.

No party shall bear the consequential damage of the other party. (kembali ke perjanjian)
insurance term
ex: deepwater case.

3, Rights and Obligation

Supervision of work by company. scope of work
local content
company compensation

penalty application for any delay

bank guarantee> to guarantee the performance
early termination rights

4. time and implementation

effective date

contractual commencement date& actual commencement date

delay of service
take over the work by company
early termination term
assignment contract
acceptance terms

5. Financial terms and tax

Estimate Contract Value
Term of Invoicing and Payment
Tax
6. ownership of result
In general, the result os belong to company and government
no transfer of ownership in case of software license contract

7. dispute settlement
amicable settlement

BANI or International Arbitration

8. General Terms

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Production Contracts

Bilingual Language in case of contradiction, bahasa indonesia will prevail

governing law ( indonesia)
term of assignment
term of amendment
provision survive contract period
9. Specific Terms
ABC (Anti Bribery and Corruption) Clause > FCPA, UK Bribery Act, UU Tipikor
Companys right to audit
9 Nov Blumereau
Force Majeure
10 Nov
pricing
- price of gas is calculated using a formula setting a basic price adjusted with several indices

- indexation on oil price is of a common practice in Asia, but with smoothing price variation
- price also depends on the quality of relationship between the parties, the market circumstances
in which they operate, and an agreed allocation of risks

- price may be revised every 3, 6 or 12 months to reflect changes in costs, in legal or taxes
framework, in the energy market. Every 3 to 5 years in case of LNG contracts.

specificity of LNG contacts due to:

- importance of transport provisions (FOB or CIF contract)

- quality of gas more constant than pipe gas

- different options for measuring quantities: tanker, stockage tanks, others.
advantage of LNG
- flexibility

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Production Contracts