Petroleum Contractual Agreement

8/12/2019 Petroleum Contractual Agreement

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PETROLET]MCONTRACTUAL AGREEMENTS

a brief background of petroreum-Agreement1 il'-i*. -

To understand he- oncept or Malaysiaproductionsharingcontract (Psc) and to knorv he provisionsof thepsc. \To developa computer programs for petroreumeconomicanalysisncorporating hepSC terms.

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OBJECTTVES1- To giveContracts.

PETROLEUM EXPLORATION AI{D DEVELOPMENTACTN{TIES IS A FLINCTION OF :1. GeologicalPotential2. " Accessibilityof ExplorationAreas3. GovernmentCommitment policy4. PoliticalandEconomicStability5. Histor,vof the countr' '.. l.elation vithForeign nyestors6. PetroleumContractTerrns Agreement

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FUNDAI\,IENTAL SPECToF PETROLEUMARRANGEMENT1. Risk and Financing

fnternationaloi l companies rovide financialand technicaresourcesor explorationandassumehe risk of failure.2. Profitability

rn eventof success,he oil companyexpects,-t6--e'6rnprofit-commensuratevith risk.ManagementAmount of influence and direction that the international 'company s allorved o exercisen the conduct of its operationsand planningof its development nd exproration chedule.

OBJECTTVESOF THE PETROLEUMCONTRACT TERMS1. To attract nvestmentromforeignoil company.2. fncreaseeserYendmaximizeeyenue f thehostcountries.

CURREI\T CONTRA CTUAL ARRA}.IGEMENT BET\\TEENPETROLET]M CON{PANIESAND HOST GOVERNMENT1. Concessiongreement2. ProductionSharingContract pSC)3. SerriceContract4. Joint \rentureAgreement

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CONCESSIONAGREEMENT# original system sed n ,ro.ld petroreum rrangement.li Traditionu,rr.on.ernprimarily on financialaspect.# Absence f direct government articipation n operations.# The oil companyreceive he right to explore,produce andmarket the petroleum n exchangeof .royalty, tax and bonuspayment.

Usualll'extraprovisionsadded training programs. rri\{ethodof grantingconcessionontract :

Negotiation r competitive iddingBid may bemadeon the basisof :i) sizeof bonusii) Ievelof explorationexpenditureiii) numbersof rvelldrill ov_erpecificperiodir) royalty, etc.

# Practicen UK, Norrvay,U.S.A,and Australia

PRODUCTION SHARING CONTRACT# Origin from Indohesia n 1966.# ProductionSharingbut rvithoutequity and cost sharing fromthe government.# Divide productionbetrveen overnmentand contractor afier. allowingpoition for recoverycost.,I -# Impose ax and royalty.# 3 basicelementn the PSC


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i) costof recover-Tii) production plitii i) income axiv) otherprovisionsPracticedn Malaysia, ndonesia.

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SER\TCE COI\TRACTSThe foreign oil company executes he rvishesof the hostcountry and has no resources nterest in the resourcesthemselves.Usuallytheservice spaid in cash.Tlvo typesof seryices ontract :i) Risk Contractsii) J.{o isk or PureServieeContracts

ConfractAll the risk fall upon the contractingcompanies,hey providethe capital equired or explorationand production.If no discoverysmade, he contract s terminated.In the event of discovery, he company brings it intoproductionand its expensesre reimbursed vith interestandrisk fee.Most of the casgNationaloil company (NoC) rvouldoperatethe fieldounce t brought nto production.Practicen Argentina,Braziland Peru.

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Risk or Pure Service ContractThe private oil company s paid a fix fee or its seryices-Pract icc in Saudi Arabia, Kuwait , Qatar, Bahrain andVenezuela.

JOINT VENTURE ::Errs:tLr-irrFInvolvesoint ounershipof asset nd concessionights,sharingof a certaincostof operationand a sharingof net rlvenuenUsually, he private companyalmost alwaysdesignated s theoperatorand the NOC usuallyparticipate n the managementthrough a oint management ommittee.Generally trvo typesof_arrangementsi) NOC doesnot share the costs until a commercialfieldhas been discovered, o that the joint cost sharing doesnot occur until after the developmentand explorationperiod.ii) NOC shares n cost"oa ,irt s during explorationas rvellasduring the development nd exploitationperiod.

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MALAYSIA PRODUCTIONSHARING CONTRACT (PSC)ECONOMIC S AND FINANCIAL STUDYl. THE PASI'.... r ior to t97S

@ CONCES:IpryS^ ranted by State Government (i .e.Sararvak, abah& Terengganu;contractor had excrusiveights to Exproreand produceSHELL had oil production n BARAM DELTA,Area.EPMI rvas till exploringn WestMalaysia.SI{ELL paid Royaltyand Taxes o Government.profitabout40Vo fgrossrevenue.ThecoNcESSIoNceasednAprir r, rg7sasaresurtofPetroleumDevelopment ct (pDA).PETRONAS becameorvner and r\,Ianagerof resourcesn'ith exclusivelgl$ to Explore and proiuce, otr hor. ",yellasonshoreMalaysia.

@ SHELL and EPMI became ,,C0NfRACTOR,, toPETRONASunder he pSC.f-_l- t2- PETROLEUM DEVELOPI\{ENT ACT and productionSharingContract

rh. JVlalaysianMinister of e.i*".y rndustries rvhenintroducing he pDA in parriarn.ni-ir,Lgi4, exprained heproduction sharing conceptas ollo\r,s _PETRONASshailha'e theexcrusi'e ights to exprore orand produce etroleumn the country.i:TgYS shalllglqpolqibte for themanagementfthe petroleLetr.oleumperationina ihe oircornpaniirrarr e:..:I:Tible to pETRONAS for theseopei"tions as

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Cbntractor.

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o The orvnershipof oir and Gas shal l vest in theGovernment or PETRONAS and shall pass to thecontractor only after the Governmenthas decidedontheproduction hatshouldaccrue o the contractor.o The contractor shall furnish ail the necessary iskcapital and provide atl technical assistance or theexp_lorationnd productionof oir and gas.cost recoverywill be allorvedonly if oil or gas s producedand then ii";,bhall e imited to a maximumof a0voof the production

- perannum. Presentlyt is 20vo or oil and25vo or gas).o The remaining production, after deduction gf thepercentageor cost recovery,shall be split rvith thebiggersharegoing o PETRONAS.(presently this split is70:30n favor of PETRONAS)o The

_orvnershipf all project-relatedassets cquired bythe Contractorshallpass o pETRONAS.fo I Th" Iau'sof Plala-vsiahall apply to PSC. i

After a seriesof negotiation, PETRONAS entered into PSCs rvithEPMr for Terengganu and rvith sSB and SSPCIPECTEN forSararvakand Sabah, espectively.The Contracts lvere signed at.theend of L976(Nov./Dec.)with ietroactive effect from lst April l97S;they reflect heconcepts utlinedabove.ThesePSC'sare referred toas he "L976PSC".since then,PETRONAShassigned everar therpSC's,namely :1- 1985Jv PSCrvith SSB and carigali for 5 Baram Delta Fieldsrelinquished y SSBat variousstages.2. BARAI\'IDELTA'PSC signed n 1989 vith ssB and carigalifor 9 Baram Deltaoii fields.3- NEw PSC's incorporat ing several at tract ive terms ascomparedo the 1976PSC.TheseNervpSC's are referred tob1' he ContractArea name(e.g.SB1, SK5, pMl, pMS etc.,some 0PSC's vere ignedn 1987/88.

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3. THE PSCPROVISIONS

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Tlr. provisions f rhe t97 pscs -of EPMI, ssB "rXSPClPectenre virtually hesameand ryeshall refer to themsimply as the oLD PsC. lve shall first revierv he provisionsand terms of the oLD PSCand summarized t the end thesalidnt ncorporatedn theNEW pSCs.,"v The major provisions f OLD pSC are :.a

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EXPLORATIONPERIODDEVELOPMENTPERIODPRODUCTION EKIOD- MANAGEMENT OT OPERATIONS- CONSULTATIONandAppROVALS- PRODUCTION SHARING, OIL and GASUnder the PSC,Contractor s givena contractarea rvhich tmay explore or and producepetroleum.The contract areadivided nto a numberof sub-blocks asedon geographicalco-ordinates3.1 DPLORATION PERIOD

o coMMENcE rvithin 3 months after signing the* PSC

If in a part icul ir SUB-BLOCK Commercialquantitiesof OIL are not found within 5 years (3 +2 years?) such block has to be returned toPETRONAS.The 2 yearextensions at PETRONAS,discretion.PSC containsminimum explorationcommitment.Contractorhas to spenda specificminimum sumon variousexplorationactivities.

3.2 DEVELOPNIENTPERIODo COMNIENCE vhenoil is found in commercialquantity.o The sub-block in quest ion is cal led DEVELOPMENTarea.

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o - ltithin 4 years thereafter (Z + Z years) thecontractor has o produce oir from the sub-brock.o The2 yearextensionis at *ETR.NAS discretion.

J o should hisdeadrine ot bemet,contractorhas oreturn thesub-block o PETRONAS.o Dur ing the deveropmentperiod. cont ractorprepares a comprehensivepran (FDp) ror ttr"derelopme"t^".n9 production of Oif (*_;_r;;;different or GAS).o once PETR.NAS' approvarhasbeenobt*ned forFDP, the n.".rs" ly . -deqign, fro.urernent,construct ion, insiat lat i ; " , -dr i i l ing &commissioningactivities take pi^.. so that orlPRODUCTION can commence.PRODUCTION PERIODo coMMENcE rvhen FrRST coMN{ERcrALLIFTING of OIL from rhe sub-btoct takespl;;.-o From th-en onrvards the sub-brock is called aRoDucTroNanEal";;." ;i't.".tor mayproduceo'from the production "r." fo. " p;;;of 15years.(r\Dp fields on negofiated erms).o The overat duration of psc-in 24 years 20+2+2).As a result, the production of o' ,rrrd.. the currentPSCwill come o an end n lggg.o certain oil fields in ssB area were arready onproductionat the time psc rvassign"a. ro. thesefields, he,I5-year production periodls from thedate of l i f r ing and rh9 p.oau.i ion periodterminates rior to the end oi psc. severar ierdsin the Baram Delta fall in this cate*o.r, the areno\r' co*ered by the BARAN{ DEL:TA'pSC,-;;discussedater.

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Associated-gasNon-associated' period of up toFIELD. Wirhin

follou's he same ule as OIL. Forgas,PSC provides a HOLDING5 years'afterdiscoveryof a GASthis S-_veareriod,Contractorhas-9-


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lo_prepareand.agreeaPETRONAS.prodiction development planperiod is 15 ).ears.3.1 i\{ANf GEMENTOF OPERATTONSIo vrnrno.ryAS-astheNatiolatoir corporarionsesponsibreor the overat-"not.-'.nt

of theetroleum esources f Malaysia.Contractor is 'responsible for the n*".rra,"#.exp. lorat ion, deve' lop-.nt and prod;; i l ;act iv i t ies, as _an independent cont ractor toETRONAS._Contraci;;-;; independbnt n thesensehat it {oes not ,uorf"unaer the day_to_dar-direct ions of . pETRONAS but develops th;necessaryransandactivitiesat its own niiiitio".PETR.NAS furfirs its managerialand supervisorvrole. hrough theapprovalsth"atare required il;;1ar io19 stages "f Contractor ,s plans andoperat ions, such as the approval of thedevelopment lans,and thel,earif *o.t p.Jg."*,and budgets.

Tl.: ,p{9 specifies hat PETRONAS shatl notrvithhold its approvals unreasonably. Thisprovisionhas o be-vierveq-gainst h. ;;;ig.o,rrrathat Contractor. utsup all ,,l."r.".y funds for thecostly'exploration,.dei.loprrr.rrt and productionactivi t ies. Natural ly, Cint i" . to. expects anadequateeturn onits ;pi;iirroot-.nt, expertiseand resource ommittea o nf"Jaysia.

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o fl:'rr*:1111.:__-C*ont.3:t9lisdirectryresponsibrel:,:1:ff ."l.Iii:,li.hti'.;p*;;;r;=,:J:#i.';H:,::::Y-,:glri. .v;;:d;;# f #,T?S"":t::;:l'^l:ff.r"tio"rlnir,ir-.[r0..',,'iilt?t#gf:,:# l{ il.:ili"r ha co" "-*l J ',".ii"i,i;:*:11^Oen accordance"iu,-l.;r; Hil:.#ractice.

3.5 CONSULTATIONAND APPROVALSo' rn the course f imprementingthe psc, numerousmeetings,discussions nd .6_,,,,rni.-irion, takeraceat various evers etrveen'ETR.NAS and

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contractor- Regurarry recurr ing er.ents arediscussedelory.Each year Contractor s required to prepare awolk programme ndbudgetdescribing il aspectsof the_proposedperations n the folrJr'ing uyear.The draft rvork programme and budgit aresubmitted by Ist October for pEfRbNAS,considerationnd approval.The programmeandbudgethave o be inalizedby lst Dee6:iiii6er.The operation under the psc are reviervedquarterlyby a joint committeeconsistinggf fourrepresentativeseach from PETRONAS andcontractor-Thisope_ration ommittee,chairedbya seniorPETRONAS executive,discuss he n orkprogramsand budgefsand other relevantmatterscomingup in the courseof the operation.Contractor provides pETRONAS rvith monthlyprogress eports to enablePETRONAS to monitorthe petroleumoperations.Specialproceduresapply to the procurement ofequipment,matgrials,suppliesand the contractingout of *'ork and services.-hb proceduresairn aImaximizing Malaysian part icip.ation in thepetroleum ndustryand specify hat, rvherever t istechnicallyand economicallypracticable,ordersshall be placed rvith Malaysian suppliers andmanufacturers-o*nership of all equipment andassets acquired by Contractor rests rvithPETRONASbut contractor has their exclusive sefor the operations.PETRONASparticipatesn the tenderingexercisethrough its observerson Contractoris MajorTender Board and the Local Tender panel. Inaddition,?trycontractn excess f a specifiedimit(RM 50,000at present) required fBfnONAS,separate pproval.

3.6 PRODUCTION HARING OIL tlAs ment ioned ear l ier , Contractor pay,s al texpendi tures required for the p. t .otugm

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operations.production Th_ese osts can be recoyered f]and this works as follorys underof anybarrelnroduced,0 vo issetaside sroyartyto StateandFeder"ld"..n-.nt, andup lo .roc7nis availableor contracto. to'i."over its costs costoil). The remaining^; -of tr,. U"r.JlJ sptitbetween ETRoNa-s;;d- c"ontractorn the ratio70:30 profit oil).This , ifj.is.freted etow

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The various oir entitrement are estabrishon aquarterly basis. one aspect deserves urthermenfion' contractor incu.i its costs n cash an iscompensatedy lifting costoil. rrre cruaemust bevalued o determine lhat vorumeconl""tor maylift for eachRinggitof costsncurred. l; isaspecifieshe basii principres or tire vatuationofcrudeoil Iout of theproceedsrom the sares f its profit oir,Coi-rti-actoi.as o makea number or pa1,fients.V - First of all, Contractor has o pay corporateTax to MalaysianGoverntnent.

rf follorvs rom the above that contractor is notpaid:1,:Tlbll.ir HTd: nrioNAs tifrsand errshe royattyoil gl.,i{s pi"nt oir.sUil"l.ficontractor iftsandselrstr iort o' andprofit oir.

Contractoralso I::, o-p-o,Export Drty on anJ,barrelssold outsideMitivsio.'-

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In addition, PETRONAS /ras to be paid acontribution for the development of researcltactivities in Malaysia (Research Cess) anddiscoveryand production bonuses.Finally, there is the so-called "reifund"(Supplemental Payment or wind-fall profittax) payable by Contractor to PETRONAS inrespectof Contractor'sprofrt oil Thispaymentarnounts o,7Q-{e f the excessof the actualvalue of the oil in a quarter over the "BasePrice" specified n tlte PSC. ThisBasePrice isindexedand at presentapproxirnatesU5$22.9per barrel (in 1989). __-

3.7 PSCPROVISIONSFOR GASFor exploration and production of gas, it isgenerally correct to say that the PSC provisionsconcerning gas follow closely the principlesdiscussed bove or oil.There are a number of significant exceptions,which take into account the higher investmentcosts of gas projects and the difficulties inestablishing commercial outlets for gas. Forexample, he PSC allorvs he Contractor up to 25Voof gasproduced to recoverhis cost(this is 20Vo oroil).Furthermore, as opposed o the individual liftingsof crude oil, Contractor and PETRONAS sell theirshares n the gas produced on a joint basis toagreedoutlets.The PSC makesa distinctionbetrveen ssociatedgas (gas produced together rvith crude oil) andnon-associatedas(gasproduced ndependentll'oicrude oil). This distinction plays a role in theduration of the developmentand productionperiods.Associatedgasfollorvs he samerules asthe crudeoil rvith which t is produced.In the caseof non-associatedas, he contractorhasa longer period to developa gasproject. ThePSC provides for a holding of up to five years

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following the discoveryof a gas field. Within thfive yearperiod, he contractorhas to prepare andagreea development lan with PETRONAS. Thegas production facilities have to be on streamrvithin a subsequent eriod to be agreed rvithPETRONASaspart of thedevelopment lan.Another difference is that longer productionperiodsapply or non-associatedas.For instance,in the casp^;ef,Ml-Nc,asmay be producedfor 20years rom thedateof first lifting of LNG.Gas s also equiredat a number of locations orpetroleumoperations nd such requirements akepriority. Gas hat comes ree rvith the productionof crudeoil,cannotalwaysbe utilizedor conservedfor future projectsand, subject to PETRONAS'approval,suchgasmay be ventedor flared.

3.8 TRANSFER OF TECHNOLOGYo The transfer of technology as mentioned in thePSC has three different aspects,

First of all, the PSC reinforce Contractor,spolicy to filI position as much aspossible withMalaysian staff. However, for those positionsfor which no suitable Malaysians 'ca.n berecruited, Contractor may employ expatriatestaff, subject o PETRONAS' approval.Secondly, Contrector has to setup specialdevelopment and training prograrns for itsMalaysian staff. Such programs require,PETRONAS'approvalon an annuql basis.Finally, Contractor has to institute trainingpragroti.s ior PETROI{AS stuff to be agreedon a caseby case basis or each employee.Tltis nray include on-the-job training wherepossible.

3.9 1985JV PSCo At the time of signing he PSC, a number of fields\vere already producing and their 15 year

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production eriodsended vellbefore he expiry ofthe PSC. West Lutong, Bakau, Bhram, FairleyBaram and Baroniaare five fields n the BaramDelta hat fall in this categony.In March 1985, SBand PETRONASCARIGALIsigned as joint contractors a new PSC rvithPETRONAS or the continuedoperationof the fivefields until 1988.This PSC has sinceexpired onMarch 31,1988.The termsof thisJV PSC veregenerally he sameas thoseof theOLD PSC.Horvever, nder the JVPSC,all rights to gasproduced rom the five fields\verevestedn thePETRONAS and the contractorno longerhad an entitlement o it except or use nthepetroleumoperations.SSBand CARIGALI alsosigned.a oint OperatingAgreement JOA) which set out how the operationsrvould be conducted. SSB ryas appointed asoperator and rvas esponsible or carrying out theoperations n thefields.A Joint Operat ion Committee of threerepresentativeseach from GARIGALI and SSB,ryasset up to oversee he joint activities and to-monitor the implementationof the JOA.CARIGALI funded50Voof the expenditureof thejoint operations.Cost oil and profit oil \veredivided betryeenhe two contractors on a 50:50basis.PETRONAS and the Federal and StateGovernments maintained their shares in thebarrel.CARIGALI seconded xperienced taff to the ointoperationsas agreedon a caseby case basis.Training programssimilar to those nstituted byShellunder the PSC for PETRONAS staff \yeremadeavailableor CARIGALI.As part of theirobligations ndertheJV PSC,SSBand CARIGALI formed a joint study team andcarriedour comprehensiveechnical nd economicstudieson the five fields and identified possible

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future deveropmentso add some500 milrionof reservesnih. 8"."*;J;-l;".3.10 BARAM DELTA PSC

When he1985 V pSCexpiredn March 3I, 19gg,ssB voluntar'y^rerinqoisileathe remaining ourfields n BaramDertaai a pact


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o -,/ stiait g scaleProfit oil split up tb 50 million barrelproduction. First 10,000 bbyd - 50:50. From. 10,001o 20,000 bVd- 60:40.Above20,000 bVd_. 70:30, ll in favor of pETRONAS.o Prof i t oi l spt i t 70:30 beyond 50 mil l ion bblscumulativeproduction.i;:-' . o l;f,l.i*'f:;::3'i,1,,:lnl"J,,llt1ffi'1"of PETRONAS.

Carigal i to have a m:nimum of lSVo darriedinterest, vithparticipation option on commercialdiscoveries.ry07o of explorat ion costs to be borne byContractor, vith someminimum commitmentsonexpendituesand activities.Explorationperiod-Syears,Development eriod-4yearsandProductionperiod-15 years.Royaltyat tIVo as n the OLD PSC.PSCBASEPrice s set at US$25lbbl n 1988.

PSCECONOMICSThe upstream project evaluation always considers pscgTIgTiT to quantify the financial implication to contractors,PETRONASand Government.The salient fiscal terms or psceconomicsre summarized elorv.4.1 ROYALTIES on OIL and GAS

o For Oil - l l%o of Gross Oil production(annualbasiss oftenused)PETRONAS rlrs Royatty Oil and pays theGovernmentn cash-

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4.Export duty is25Voof profit barrels.

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Condensate nd other NGI^s roducea ;r lUpstreamare treatedunder Ciude Oil termi-For Gas - lT%oof GrossGas Sales e.g.sales toMLNG)- For ,gas utilized and flared, there rs ITVoroyalty, based_-onfair markei price. ifnt, *usuallya smallamount).

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ly roylty is payable on, gas hat is flareddirectlywithouinZingused.oPETRONAS pays the royalgr gas n cash.

ROYALTY $/yr.) g{oss oIL (bbt/yr.)orL PMCE $/bir)x 0.r%S^{4 gs (mmbtu/yr.)GASPRICE($/mmbn10.1GIS_USEDmmbtu/yr.)GASPRICE($/mminj x0.r

4.2 COSTRECOVERYf6xo

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For Oil - Up to ZTVoof GrossOil production torecoveroil relatedexpenditures.For G-as -up o ZSVo f GrossGasSales o recovergas elatedexpenditures.Cost recovery s basedon Contract Area grossproducrion. (e.g.]Bxpensesn pAi;C;ii field isnot restricted o pALAs Grossoil prodr.iir", -n"ican be recoyered rom ccsT orl BtNK-i;r theentireEPil,IIContractarea.contractor'scost oir entitrements settredon aquarterlybasis.Costs n excess f Cost Oil bank are carriedforrvard o thenextquarter.

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contractor incurscosts n cashand is compensatedto thenextquarter.o Costrecovery or gas s similar to oil.PROFIT OIL or GAS

PROFIT OIL - minimum of 70Vo, ouldbe higher.PRoFrr GAs- rninimum f *svo,courdohffier,PROFIT is shared20;30 n f,avorof pETRONAS.PETRONAS'entitlement at the end of thehay) :- minimum49.0Vo f grossOil production(70x 0.7)- minimum4S.SVof grossGas sales65x 0-7)CONTRACTOR'sentitlement- nuximum 4I.0Voof grossOil productiott(70x0,3+20)- maximum44.5Vo f gross-Gasales(65x0.3+25)PETRONAS ifts irs profit oil & Royalty oil.Contractor ifts its Profit oil and Costoil.Unlike the individual l i f t ing of crude oil ,PETRONAS & contractor sell their shares n theGasproducedon a joint basis o an agreedoutret.(e.g.MLNG or PHASE-I Gasprojecrs).

4.4 EXPORT DUTA'o Export Duty is on oir onry and none or Gas (atpresent).

Export Duty is payable on any barrels soldoverseas.

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o r_n^9.xportedcrude is not entirely profit?57o duty is adjusted dorvnwards by"apportionrnen factor".

Original intentValue. : Export Duty = ZSVyof profit

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PI9TRONASpays duty on Royalty and its profitoi l . = Crude ifted x price (49/59)"x0.25CONTRACTOR pays duty on its profit and Costoi l .

4.5= CrudeWed x price x (21/41)x 0.25

PAYMENTS TO PETRONASDISCOVERY BONUS - 2.5 miltion ringgit beforecommencement f first Commercial f,ioductionfrom eachPetroleumField.:| ?Y.CTION BONUS 5 mirrion inggirwhena[o$Io" 1T:1has eached r exceededZS .kI_f_"t:l:h m;rltigte)_per-lla1ter.hisamountsos0kbbUdproduetion ivel. "

o RESEARCH ESs - 0.5 oof cost o' prusprofitoil.o SUPPLEMENTARY PAYMENT onProfit Oil after export duty.

= 0.7x (profit Oit _Duty) x (Oil price _' BASEPRICE)o The BASE 'RICE is indexe ,SVoper ]'ear and arprescnts approximateiys$22.vp.. rr"i.Lr(1e8e).

4.6 THE BOTTOM LIIIE effecrsof pSCo contractor'sNet-backBeforeand After :

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. GROSS RODUCTIONROYALTYCOSTOtLPROFITOILLess E)PORT DUTYLess CBSSLess SupplementalAYMENTNET-BACKBeforeTaxNET-BACKAfter'TaxPETROLEUMTNCOMETAX ACT (1967)o Ta:r ate s4SVa fTaxablencome.O TAXABLE INCOME =INC)ME. EXPENSEDEDACTIONSo PETRONaS licoME = po +sp + BoNIls + GESS+ROYALTYo CONTRACTOR'SNCON{E= pROFIT OIL + COSToruo PETRONAS'S XPENSES RoyALTy + EXpoRTDUTYo coNTRACToR's EIPENSES= opEX + sp + BoNus+ CESS+DUTYo DEDUCTIONSONLYFOR CONTRACTOR,NONEPETRONAS5.1 CAPITALALI.OWA.NCE

@ FrxED CAPEX lavo peryear,straightinebasis.@ OTHER CAPEX primarl' recoyery) zTvo+ gvoper Year.@ OTHER CAPEX (secondary ecovery)- 40Vo*6Voperyear.

BeforePSC100.010.020.070.00.00.00.070.03s.0

AfterPSC100.010.020.027.04.20.2L.415.28.4

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@ DEVELOPMENT DRILLING - t\Avo \yritlol intangrbletangible rilling costs re reatedasOTHER CAPEX)EXPLOfuITIONDRILLING - treated n "unit ofproduction" asis.OTHER DEDUCTIONS Cost of Capital orinterest on borrolved money is eligible for l00vorvrite-off. :. .

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6. FINANCIAL MODELEvaluationof oil and Gaspropertiesare basedon cash lorvsobtainedby forecastingproduction and net revenueon anannual basis. As stated earl ier, the upstream projectevaluationahvaysconsiderspSC economics o q,r"rriify thefinancial implecations to contractors, PETRbNAS andGovernment.sometimes he evaluation s done on projectbasis, vithoutconsideringant pSC terms. Depending^on"thepurposeof the evaluation,a cashflow forecasi \T'i[ G beforeincometaxes or after incometaxes.The necessarynput dataand the computational ogrc or the financial modil are brieflydescribedbelorv.6.1 \'ECESSARY h?UT

Project l i fe, and PSC production period forConractor.Base ear or reference ear or evaluation.AII costsand proceare usuallyexpressedn constant$ atthebaseyear.Contractor'sequity in Oil. Condensate nd Gas(usuallyup to l00%o).Oil price (S/bbl)and Gasprice ($/mmbtu),usuallyexpressedn constant at thebaseyear.Price escalat ion o calculate uture prices innominal$.PSCBASE PRICE ($/Untl n the base ,ear,badepriceescalations5Vop.a.

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Oil andGasproduction orecast; suallyexpressedin bbVdand mmbtu/d.Capitalscheduleor Fixed Capex,Other Capexand DrillirrgCosts, sually expressedn constantgat thebase ear,FixedOperatingCostschedule usually expressedin constant at thebaseyear.Yar iable Operat ing Cost schedule, usual lyexpressedn constant$/bbl. lCostescalationo calculate uture costs n nominal$.For CostRecovery Cost Oil Ceiling and Cost GasCeiling,usuallydependson the PSC terms.Petroleum ncome Tax, and Capital allorvancerules.

6.2 COMPUTATIONALLOGIC6.2T GENERAL FOR OL, GAS & CONDENSATE

oST BANK OPENT_QALEXCOSTclf -MAXIMUM COSTRECOWRY Ndepending on Cost oil or

ACTUAL COST RECOVERY= Lesserof CostBank & tr{ax. Cost Recovery(Any excessCost Bank is camiedforward to next year)Compute Capital Allowance using each of the CAPEXcalegories.

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GROSSREVENUE= PRODUCTION* 3 65*PRICEROYALTY= GROSS EI4ENUE*0.]

=-TffiOSS EVENUE5'.RA(FRACTION anb{,J orCostgas ceiling)


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compute costof capital assunringdebt / equityratio andinterest ate.6.2.2 PRQJACTECONOMTCS

Calculare oralExport Dutywlich is 2SVo fprofit Oit.REVENUE= GROSSREVENUE"Ex NSES_d,FE ;

4id#a'l#4, 4:@-

INCOME = REVENUE- EXPENSES,P,F-pU"rqrygNSCAPITAL LLOIYANCE TCOSITOrCAPEX; \-/nAXABrENcoME Ncoi; -nnnuiTrbls jTAXES =\TAXABLE INCOME x 0.45 t. - -_ ' * ' "@ ..:_+.-J

.t *: t^lalAr rv 6 t arf id /

6.2.3

cAsHFr,owAr)=ilyg * TAXES,cApEX--rur(Using cashflow till PROJECT LIFE, compute IR&PAYOUT & NPV at different discountrates)CalculateExportDurTon Crude OiI ltftedREVENUE= PROFIT x 0.7+ SP + CESS+ BONUS+RO"YALTY GEXPENSESEXPORTDUTY+ ROYALWINCOME=REVENUE- EXPE' rS^E'SDEDaCTIONS = None, as Petronas spends nothing ortCapex.

) oo tt l I- l a 6cl-D rcr(Gljo c o< F.r^tLnrav f at-r-r-.-, TAXABLENCOME= INCOME - DEDUCTIONS

^ \'r^rl-?^)r) TAXESTAXABLENC,ME x 0.45(' i[ lnarr- 'tt (vt?2)g4snFLow (AT) = INCTME - TAXES

COtr'tt-.a,(-Of[evevrqroa PP$t otct(e'cmqaP/Sv$e l actr,ta'{ 66,zrJ

OI\AS'ECONOMICS

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Petroleum Contractual Agreement

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