Overview of PSCs Baker McKenzie IBP.Final.pdf

The gross profit share is reduced by the amount of

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The Gross Profit Share is reduced by the amount of the Royalty.
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94 Examples of R-Factor Royalties Maximum of: a) 35% Net Revenue b) 5% Gross Revenue > 1.50 Maximum of: a) 20% Net Revenue b) 5% Gross Revenue 1.25 - 1.50 5% Gross Revenue 1.10 - 1.25 2% Gross Revenue 0 - 1.10 Royalty Rate R-factor (1) Royalty R-factor sample terms 25.0 - 30.0 > 3.00 12.5 - 22.5 2.50 – 3.00 10.0 - 12.5 2.00 - 2.50 7.5 - 10.0 1.75 - 2.00 5.0 1.50 - 1.75 2.5 < 1.50 Royalty Rate (%) R-factor Royalty R-factor additional sample Information from IHS CERA
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95 Income Tax in Production Sharing Systems Income taxes may sometimes also be applied in addition to other costs Taxes generally calculated using the standard methodology, i.e. income, less deductions is taxed; costs are expensed or depreciated according to the tax laws Income = Cost Recovery plus the Profit Share
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Pop Quiz: Calculating IOC/Host Government Take
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97 What is the net revenue flow for life of a PSC? Assumptions : Royalty 10% Corporate Income Tax 40% Oil Price - $100/bbl Exploration and Development costs average 33% PSC Commercial terms: Profit Oil Ratio Split 60% Government/40% Contractor What is the IOC and Government split per barrel?
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98 ANSWER: $100/bbl Royalty 10% CONTRACTOR GOVERNMENT $10 $90 Cost Recovery 33.33% (max. 50%) $30 $60 Profit Oil Split 40% / 60% $36 Tax 40% $24 -$9.60 $9.60 Revenue $44.40 $55.60 Net Cash Flow $14.40 $55.60
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99 Additional Elements - Various All types of fiscal systems may include many other means to reduce the IOC share of revenue: Data purchase fees Signature, discovery and production bonuses Training fees Acreage rentals The economic impact of carried state participation Domestic supply obligations at discounted prices Local content Etc, etc To which can be added a myriad of minor taxes/ imposts, mostly country specific, including VAT, import & export duties, currency repatriation restrictions etc.
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100 Additional Elements – Carried Interests The point at which the state/NOC can exercise its right to participate varies between contracts, but is typically: At discovery (e.g. Malaysia, Indonesia, Trinidad and Tobago, Vietnam) On approval of the development plan (e.g. China, Algeria, Cameroon, Equatorial Guinea, China, Indonesia, Papua New Guinea)
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101 Additional Elements – Bonuses IOC typically required to pay signature , discovery and production bonuses Signature bonuses are not cost recoverable, but they are usually deductible for income tax purposes Discovery bonuses are infrequently applied and are usually modest Production bonuses may be applied in R/T and PSC fiscal systems, although they are more common in PSCs (Indonesia Example)
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102 Additional Elements – Funding Abandonment Costs Absent allowance in Accounting Procedures, capex for abandonment cannot be depreciated or recovered – no income to offset Some PSCs require abandonment accounts where capital for plugging and abandonment can be depreciated The funds may either be accrued or escrowed Accrued – no cash outlay until incur costs Escrowed – funded with distributions in advance of P&A obligations
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  • Winter '14
  • Bijay K Behra
  • contractor, Petroleum industry

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