Overview of PSCs Baker McKenzie IBP.Final.pdf

Mechanisms to limit cost oil recovery cost recovery

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Mechanisms to Limit Cost Oil Recovery Cost recovery (C/R) ceilings can be negotiable, and range from a low of 20% to a high of 100% Maximum Recovery Sliding Scale R-Factor (sliding scale based on R-Factor)
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68 0 10 20 30 40 50 60 0 30 40 50 100 Cost Oil (%) 2.5% 11% 24% 18% 24% Cost Oil Recovery Chart Information from EHS CERA No. of PSCs signed (74 total countries) Cost Oil Allowance %
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69 Cost Oil Recovery & Depreciation Additional limitation on IOC take by limiting depreciation on certain project assets Typically applies only to capital costs (i.e. usually development costs) As a compromise, Host government may provide an uplift in development costs
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70 Cost Oil Recovery & Royalty In addition to cost recovery and profit sharing, PSC may also include a royalty assessed against production Provisions regarding Royalties discussed earlier would apply Cost Recovery share typically net of Royalty
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71 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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72 Bonus & Taxes Bonus A source of revenue for the host country 3 types: Signature – one-time payment upon execution of PSC Production – recurring payment Discovery – payable after commercial discovery
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73 Bonus & Taxes Taxes Another source of revenue for host country High Royalty & Profit Oil Share typically = low taxes Low Profit Oil/No Royalty typically = high tax burden Some PSCs offer tax holidays Customs & Duties-should be discussed in PSC potentially limited or removed
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74 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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75 Local Content Obligations Obligation to use local subcontractors and purchase a certain amount of materials within host country Issues with Local Content: Unavailability of materials may pose a problem Inexperience among local subcontractors Host gov’t may impose heavy penalties for failure to satisfy requirement
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76 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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77 Basic Form of Stabilization Clause Freezing clauses – applicable law will be the law in effect on the Effective Date of the PSC Intangibility clauses – PSC cannot be modified/amended except by mutual consent of the parties Allocation clauses – NOC bears fiscal risk NOC pays all taxes and royalties out of its share NOC pays all taxes and royalties regardless of its source of funds NOC indemnifies IOC for IOC’s payment of taxes and royalties Renegotiation clauses – parties agree that in the event of change of law, they will negotiate to modify contract to reestablish economic equilibrium/benefit Adoption clauses – Contract provision that calls for host govt to adopt parties’ agreement as the law
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