Production Sharing Contract (PSC): A contract between a resource holder and (generally) an oil company where the oil produced is shared between the resource holder and contractor (oil company) in a pre-arranged manner.
Tax & Royalty regime (concession): A regime under which an oil company is granted a concession to prospect for and extract hydrocarbons. From the revenues generated the concession holder will typically pay a pre-agreed royalty on revenues together with corporation tax on profits.
Cost Oil. Share of barrels produced that is used to pay back the contractor for its capital investment in the project and/or the operating expenses incurred in the year. Typically the resource holder will allow cost oil to be recovered from c.50-60% of project revenues. Once the upfront capital costs have been recovered (generally high in the first years of a project coming on- stream), anything left over is termed profit oil. Capital or operating costs that remain un-recovered in any one year are typically carried forwards for recovery in subsequent years.
Profit Oil: The oil available for distribution to the partners in the project in line with their equity (or working interest) share. Profit oil is invariably that available after costs (capital and annual operating) have been recovered.
Capex uplift. The % increase granted by the state on capex spend for recovery against costs. For example, in Angola’’s Block 17 capex is uplifted for recovery against revenues at a rate of 50% i.e. on capital spend of $1.0bn, the contractor will be able to recover $1.5bn against cost oil. The allocation of uplift pays heed to the time that it might take to recover capex invested in a project given restrictions on cost recovery (as a % of revenues) and the time taken from breaking ground to first oil in a development project.
Trigger points (our terminology). The conditions laid out in the PSC contract, the attainment of which lead to changes in the allocation of profit oil share between the state and the contractor.
Working interest: The contractor’’s percentage interest in the project as a whole. Thus if a company has a 40% interest in a project producing 100kb/d its working interest in that project would be 40kb/d.
Entitlement share: The number of barrels of profit oil which the contractor is entitled to from the project in any one year. This will typically represent the contractor’’s share of cost oil and its equity entitlement to profit oil. Depending on the nature of the PSC terms, the entitlement share will alter over the life of the project as costs are recovered and the oil available for distribution as profit alters following the attainment of trigger points. As an illustration, if a company has a 40% equity interest in a project producing 100kb/d, the profits from which are distributed 50% government and 50% contractor after 10kb/d has been allocated for cost recovery, its share of entitlement barrels would be 22kb/d (i.e. 40% of the 10kb/d of cost oil and 40% of the 45kb/d available to the contractors as profit oil). Note this compares with the 40kb/d in which the contractor has a ‘‘working interest’’.
IRR based PSC. A PSC whose trigger points are determined by the internal rate of return achieved from the date of onset. As the returns from a project move beyond pre-defined levels, so the share of profit oil will alter in favour of the host nation. Common examples include those in Angola, Azerbaijan, Kazakhstan and Russia amongst others.
Production based PSC. A PSC whose trigger points are determined by the achievement of particular levels of production. In some production contracts the production element refers to the cumulative number of barrels produced. In others, the level of daily production achieved. In either case, as the trigger levels are attained, the share of profit oil between the state and the contractor alters. Common examples include those in the Nigerian Deepwater, Qatar, Malaysia, India and many others.
R-factor (and R-factor based PSC). A PSC whose trigger points are determined by the ratio of total revenues to total costs. Typically the contract will stipulate that as revenues meet certain multiples of costs so the share of profit oil between the state and the contractor alters. Common examples include Algeria, Qatar (often mixed with production) and the Yemen.
Fixed share PSC. A PSC which stipulates at the onset the division or post tax or pre-tax profits from the project between the state and the contractor. In effect, these contracts have economics that are similar to those of a tax and royalty regime. Indonesia represents a good example of a fixed share PSC.
Source: Deutsche Bank "Oil and Gas for beginners"
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