Overview of PSCs Baker McKenzie IBP.Final.pdf

Sample stabilization clause if any change in or to

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Sample Stabilization Clause “If any change in or to any Indian law, rule or regulation dealing with income tax or other corporate tax, export/import tax, excise, customs duty or any other levies, duties or taxes imposed on Petroleum or dependent upon the value of Petroleum results in a material change to the expected economic benefits accruing to any of the Parties after the date of execution of the Contract, the Parties shall consult promptly in good faith to make necessary revisions and adjustments to the Contract in order to maintain such expected economic benefits to each of the Parties, provided, however, that the expected economic benefits to the Parties shall not be reduced as a result of the operations of this Article” – India PSC
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79 Other PSC Provisions to Consider Definition of Petroleum Controlling Language Valuation of Production Domestic Market Obligation NOC Participation Selection of Operator
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80 Key Provisions in PSCs Minimum Work Obligation Local Content Bonus & Taxes Cost Recovery Relinquishment Commercial Discovery Term Stabilization Management and Control
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81 Term Establishes the maximum duration of the PSC Term is typically subdivided into: Exploration – typically more than 1 phase (4-6 yrs) Development/Production - (20 - 40 yrs) The PSC will automatically terminate if no commercial discovery is made during exploration period
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Analysis of Granting Instrument Fiscal Systems
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83 Production Allocation Diagram Gross Production Profit Oil Cost Recovery Oil NOC’s Share of Profit Oil Contractor’s Share Profit Oil Contractor Net Profit Contractor’s Taxes
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84 Basic Profit Sharing Profit oil is the oil remaining after allocation of royalty oil and cost oil Profit sharing provisions may be fixed, negotiable or subject to bid Early PSCs: Provided flat, fixed percentage of oil after cost recovery to IOC, with the balance going to the State/NOC
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85 Profit Sharing - Different Formulas Flat rate did not address profit variances due to: different field sizes, development of infrastructure, technological advances, or dramatic changes in the oil price To address this, PSCs moved first to sliding scale profit sharing, linked to increments either of daily production or cumulative production from the field Simple sliding scale is not sensitive to field profitability, so many modern PSCs include a formula linking production sharing to field profitability
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86 Profit Sharing - Linked Project Profitibility The concept of linking profit sharing splits in PSCs to project profitability was introduced by the World Bank in the 1980s Under this system the state collects a share of cash flows in excess of specified internal rate of return (IRR) thresholds The initial IOC reaction to the concept was negative: it was viewed as putting a limitation on the upside in a high risk business As the 1990s developed and oil prices declined the perceptions of many IOCs changed – upside is limited, but so is downside
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