1. Gas Development Master Plan
Regional PSC Competition of Fiscal Terms
Presented by:
Rita Jolly
Petroleum Development Consultants, UK
Shangri-La Hotel, Jakarta
21 June 2012

2. Contents
• Petroleum Fiscal Systems
• Elements of Fiscal Terms
• Indonesia Evolution of Fiscal Terms
• Regional PSC Country Comparison
• Designing Fiscal Terms
2

3. Petroleum Fiscal Systems
Petroleum Fiscal System
Contractual Concessionary
Production
Service Royalty/Tax
Sharing
Contracts
Contracts
Risk Service
Contracts
Pure Service
(the service fee is
linked to the profit)
3

4. Petroleum Fiscal Systems
Concessionary System
• Allows private ownership to mineral resources
• Oil company have exclusive right to explore and produce at its
own risk and expense
• Oil company owns production
• Oil Company pays royalty, surface rent and taxes
• Investor typically responsible for abandonment
Contractual System
• The State retains ownership to mineral resources
• Contractor gets share of production
• Contractor does not own the production
• Contractor shares the risk with the Government
• The State/NOC is typically legally responsible for abandonment
4

5. Main Difference Between Concessionary System
and PSC System
Concessionary Production
Systems Sharing Contracts
Ownership of nation’s
Held by sovereign state Held by sovereign state
mineral resources
Title transfer point At the wellhead At the export point
Company entitlement Gross production less royalty Cost oil/gas + profit oil/gas
Entitlement percentage Typically 90% Typically 50–60%
Ownership of facilities Held by company Held by the state
Typically less government More direct government
Management and control
control control and participation
Government participation
Less likely More likely
(carried working interest)
Ring fencing Less likely More likely
5

6. Petroleum Fiscal Systems
Production Sharing Contracts
• PSC’s are most widely used form of contracts
• Host country grants FOC right to explore and are
negotiated per acreage
• Each contract will address how FOC costs will be
recovered
• The FOC is considered a Contractor to the Government
• The Contractor takes a % of production to recover costs
and a profit split with the government from production
of oil
• PSC environment has a tendency for FOC to over explore
because in effect the government picks 65% to 85% of
the costs
6

7. Petroleum Fiscal Systems
Tax/Royalty Contracts
• Mostly occur in developing countries and account for about
50% worldwide
• Government imposed royalty and tax
• Alternative taxes may be imposed
• Applicable to all licences with fixed guidelines
Risk Service Contracts
• Most often in Latin America
• FOC explore, develop and produce reserves with no
restraints from the Host country
• FOC is reimbursed for its investment and paid for the
services only if there is a commercial production.
7

8. Simple Flow-chart comparison of Fiscal Terms
Royalty Tax PSC Service
Gross
Gross
Production Contract
Production Gross
Production
Royalty
Royalty
Cost Oil Cost Oil
Less Costs
Profit Oil State
Production
Income
Tax Contractor
State Contractor Fee
Profit Oil Profit Oil
Company’s
Production Income
Income
Tax Tax
Contractor Contractor
Profit After Profit After
Tax Tax
8

9. Fiscal Terms Around the World
Royalty/Tax PSC
EUROPE Bulgaria Italy Albania
Czech Republic Netherlands Malta
Denmark Norway Poland
France Poland Turkey
Greece Portugal
Hungary Romania
Ireland Spain
UK
AFRICA Chad Namibia Algeria Kenya
Congo (K) Nigeria Angola Libya
Madagascar Senegal Cameroon Mauritania
Malawi South Africa Congo (Br) Montenegro
Mali Cote D’Ivoire Sudan
Morocco Egypt Tanzania
Equatorial Guinea Tunisia
Gabon Uganda
Ghana
MIDDLE Abu Dhabi Ajman Turkey Bahrain Qatar
Kazakhstan Iraq Syria
EAST Jordan Turkmenistan
Libya Yemen
FAR Australia Thailand Bangladesh Mongolia
Brunei Timor Gap B Cambodia Myanmar
EAST/ASIA Korea China Nepal
Pakistan (on) India Pakistan (off)
PNG Indonesia Sri Lamka
New Zealand Laos Timor Gap A
Malaysia Vietnam
AMERICAS Argentina Costa Rica Belize Ecuador
Bolivia Falklands Cuba Peru
Brazil Venezuela Guatemala Uruguay
Canada Colombia USA Guyana Venezuela
Jamaica
9

10. Fiscal Terms Around the World
10

11. Elements of Petroleum Fiscal Systems
PSC Fiscal Terms Royalty/Tax Fiscal Terms
• Work Commitment • Work Commitment
• Bonus Payments • Bonus Payments
• Royalties • Royalties
• Cost Recovery (Cost Oil) • Government
• Profit Oil Participation
• Government • Domestic Market
Participation Obligation
• Domestic Market • Indirect Taxes
Obligation • Corporation Tax
• Indirect Taxes
• Corporation Tax
Indonesia led the world in development of Production Sharing
Contracts (1954)
11

12. Gas Fiscal Terms
There are more fiscal systems in the world than there are countries
due to:
 Negotiation of Terms
 Numerous vintages
Trends in Gas Taxation 2003- 2008
 Increases in tax percentage for gas have been much less than oil because
there are still considerable gas reserves around the World
 Government takes for gas in some countries stabilized or continued to
decline and governments seek instead greater market access: Qatar,
Venezuela, Norway and Egypt
 However, government takes for gas have also increased in some
jurisdictions: Algeria, Bolivia, UK, Trinidad and Tobago
Trend for gas taxation systems are becoming more different from oil taxation
systems.
12

13. Regional PSC Country Comparison
13

14. Indonesia – Evolution of Fiscal Terms
First Generation PSCs 1960 - 1975
Cost Recovery 40%
Second Generation PSCs 1976 - 1988
Profit split post tax:
Abolition of Cost Oil Third Generation PSCs
65% State
35% Contractor Profit Oil increased to 85% 1988 onwards
Profit Gas 70% or 65% Fist Tranche Petroleum 15% to
Investment incentives 20% of 20%
Carry forward of
unrecovered costs production subject to a guarantee Cost Recovery 80% - 85%
to the government of 49% of
revenue over life of field CT rate 48% or 44%
Oil price set by State for Interest recoverable Investment credit 17% to 20%
tax calculations DMO oil 10% of export price
Cost Recovery period improved
from 14 to 7yrs
Signature bonus $1mm to 1978 Pre-Tax PO share of 34.1% Progressive sharing split
$5mm subject to CT of 56%
1984 – CT 48%, dividend tax 20%; Deregulation in certain areas
Production bonus ranged Profit split reset at 28.86% to
from $15mm to $50mm contractor; Investment credit
reduced to 17% subject to govt Contractor provide
guarantee of 25% of gross revenue abandonment
DMO 25% ay 0.2c/bbl over life of field
14

15. Indonesia – Evolution of Fiscal Terms
Forth Generation PSCs 1995
FTP 15%
Fifth Generation PSCs Post 2001
Cost Recovery 85%
FTP 10% to BP MIGAS and not
Profit split post tax: shared New PSCs 2008 onwards
Oil 85%/15% Cost Recovery 90%
Cost Recovery 90%
Gas 60%/40% Profit split post tax:
Profit split post tax:
CT 44% Oil 75%/25%
Oil 80%/20%
DMO 25% oil at full first Gas 60%/40%
5yrs, 25% thereafter of Gas 70%/30%
export price CT 44%
CT 44%
Investment credit:
oil 17%
No investment credit
gas 55%
DMO 25% oil at full first 5yrs,
25% thereafter of export price
DMO floor % of total oil production DMO 25% proven gas reserves
DMO floor % of total gas Depreciation 5 to 10 yrs DB
production at avg contract price
No interest
15

16. Indonesia – Evolution of Fiscal Terms
Equity Share - Gas
1995 Eastern
New Contracts * Province PSC 1995 1985 - 1994 Old
Tax Rate 44% 44% 44% 48% 56%
Share of Production after Tax:
Government varies 60 70 70 70
Contractor varies 40 30 30 30
Contractor's Share of Production before Tax
44.64 - 62.5
35/(100-44) 71.43
15/(100-44) 53.57
15/(100-48) 57.69
15/(100-56) 68.18
* General combined "C&D" tax rate fell to 42.4% in 2009 and 40% in 2010. However, gross sharing rates have not been adjusted for
these new PSCs.
16

17. Indonesia – PSC Fourth Generation
Contractor Government
PO - 28.8462% PO - 71.1538%
Gross Revenue 100
5.8 14.2
First Tranche Petroleum 20%
Net Revenue 80
28
Cost Oil 35%
15 37
Profit Oil 52
Taxable Income 20.8
-10
Tax 48% 10
10.8
After Tax Cash flow 61.2
15%
===Contractor Take State === 85%
17

18. Indonesia – PSC Current gas
Contractor Government
PO – 53.571% PO – 46.429%
Gross Revenue 100
First Tranche Petroleum 10% 10
Net Revenue 90
28 Cost Oil 90%
33.2 Profit Oil 62 24.8
Taxable Income 33.2
Tax 44% 14.6
-14.6
18.6 After Tax Cash flow 49.4
25.8% ===Contractor Take State === 74.2%
18

19. Indonesia Evolution of Fiscal Terms
19

20. Regional PSC Country Comparison
Fiscal Systems in Selected Asia/Pacific Countries
Exploration Development Exploitation Extension
Fiscal System Retention (yrs) Bonuses
(yrs) (yrs) (yrs) (yrs)
THAILAND II RT 6+3 4 20 10 Negotiable
THAILAND III PSC 5 5 5 gas only Oil 25 Gas 20 Negotiable
Offshore 17 30 Onshore 23
BRUNEI RT 30 Negotiable
Onshore 8 Offshore
MALAYSIA PSC 5 Oil 15 Gas 20 Negotiable Negotiable
VIETNAM PSC 5 20 - 25 Negotiable Negotiable
PHILIPPINES SC 1 - 10 30 Negotiable Negotiable
CHINA PSC 7-8 15 Negotiable
PAKISTAN
PSC Negotiable
(Offshore)
MYANMAR PSC 3-5 20 Negotiable Negotiable
CAMBODIA PSC 8 4 30 5 Negotiable
INDONESIA PSC 6 - 10 20 - 25 20 - 30 Negotiable
20

21. Regional PSC Country Comparison
Fiscal Systems in Selected Asia/Pacific Countries
Profit Oil Contractor
Royalties Cost Recovery Excess Oil State Participation DMO
Share
THAILAND II 12.5%
5% - 15% (deep sea
THAILAND III Oil 50% Gas 60% 50%
reduced by 30%)
Cum prod <
Oil 8% - 12.5% Gas 50% will repay past
BRUNEI 80% 1.5tcf 40% >
8% costs
1.5tcf 60%
10% + 0.5% Research 20% - 100% Varies with THV Gas 30% - 80%< THV
MALAYSIA 25%
levy R/C Factor 0-3 THV 0.75tcf 10% - 40% >THV
15% will repay past
VIETNAM 65% - 70% (V)
costs
PHILIPPINES 7.50% 60%
Oil 0% - 12.5% Gas
CHINA 0% - 3% (0% post 35% - 60%
Nov 2011)
PAKISTAN oil 20% - 80% (V) Gas
0% - 12.5%
(Offshore) 20% - 90%
oil 50% - 70% Gas Oil 10% - 55% Gas
MYANMAR 10% 20% Gas
80% - 90% 60%
CAMBODIA 5% - 12.5% 40% - 65% (V)
oil 80% Gas 70% post 10% will repay past
INDONESIA FTP - 10% 90% 25%
tax costs
21

22. Regional PSC Country Comparison
Resource Rent Avg Government
VAT Export Duty Income Tax Witholding Tax Incentives
Tax Take
THAILAND II 50% Yes (A) 59%
Tax holiday 8yrs,
THAILAND III 10% 10% for next 7yrs Yes (D) 31%
thereafter 20%
BRUNEI 55% 20% Yes (A) 48%
38% JDA 0% to
MALAYSIA 10% 70% (Pr) Yes (H,D) 57%
20%
Oil 7% - 29% Gas
VIETNAM 10% 32% - 50% 15% Yes (T,RD,I) 45%
1% - 10%
PHILIPPINES 30% 15% - 32% Yes E 31%
20% - 40% above
5% on oil 17% on
CHINA $40/bbl; CCT 7% 25% 10% Yes (I) 26%
costs ???
+ ES 3%
PAKISTAN
40% Yes (D) 32%
(Offshore)
MYANMAR 30% Yes (H) 30%
CAMBODIA 30% Yes E 27%
INDONESIA 44% Yes (I,A,Cr,U) 37%
22

23. Notes
Key
D Deep water
H Tax holiday
V Sliding Production
E Costs expensed
A Accelerated depreciation
I Investment Incentive
Cr Tax credit
P Profit linked
T Reduced Tax rate
RD R&D fund
U Unconventional Resources
23

24. Regional Fiscal Terms Comparison
Fiscal Terms in selected
Asia/Pacific Countries (OIL)
Country State Take % Fiscal System
• Indonesia • 86 – 88 • PSC
• China • 84 – 88 • PSC
• Brunei • 84 – 86 • RT
• Vietnam • 82 – 88 • PSC
• Malaysia • 82 – 85 • PSC
• Myanmar • 80 – 84 • PSC
• Indonesia (gas) • 66 – 70 • PSC
• Thailand • 60 – 74 • RT
• Cambodia • 60 – 66 • RT
• PNG (gas) • 52 – 62 • RT
• Philippines • 52 – 58 • SA
• New Zealand • 44 - 48 • RT
24

25. Fiscal Comparison by Daniel Johnston
Indonesia
2008 2001
25

26. Indonesia Government take
26

27. NO GAS COMPARISON STUDIES??????
Crude calc use
with
caution!!!!
27

28. NO GAS COMPARISON STUDIES??????
Commercial
Fiscal Systems
Assumptions
Location Development
Scenarios
Fiscal Economic
Gas Field Size
Comparison Analysis
28

29. Designing of Fiscal Terms
Government
FOC Objectives
Objectives
• Impact on oil/gas output • Investment Risk
• Encourage Marginal Fields • Minimise front end loading
• Pace of development • High Returns
• Timing of abandonment • Tax stability
• Sensitive to Price • Risk/Reward portfolio
• Stability / flexibility • High Risk Takers
• Concessionary/Contractual
• Maximise Revenue
• Social Economic benefits
• Limit undue administration
• Low Risk Takers
29

30. Designing of Fiscal Terms
The following basic questions have to be addressed before a country
decides on its gas strategy:
 How much gas is available?
 What are the types and composition of the gas produced?
 What are the potential markets for selling the gas at the highest added
value?
 How the local gas industry can be organized and what is the impact of the
global outlook for gas?
 Different cost environments: deep water, onshore, LNG encouraging FOC
efficiency
Most recent forecasts estimate that the world gas demand by 2035 may reach 4,250-
4,500 Bcm(150 to 160 Tcf), an increase of 40 to 50% relative to 2008, with a share of
gas in the primary energy mix of 21%. Around 80% of the increase in gas demand may
come from non-OECD countries, namely from developing countries. Reserves and
resources are sufficient to support such gas developments if the appropriate country
gas policies are decided allowing the required investments to be made in a timely
fashion in the entire gas supply chain.
30

31. Designing of Fiscal Terms
Egypt represents today one of the most successful gas stories in the world demonstrating the impact
of selecting the right country policy. The introduction of a drastically revised gas policy in the 1980s,
with amendments to the legal, fiscal and contractual framework designed to encourage gas
exploration and to promote gas utilization in the country led to a series of discoveries holding quite
large gas reserves. Today they are developed and in production by many operators for supplying
mostly the local markets with the balance exported.
Egypt 1980 2000 2010
Proved gas
80 1,400 2,200
reserves (Bcm)
Domestic Gas
2 20 45
demand (Bcm)
Strategy Gas clause New gas pricing
Nigeria, on the contrary, ist he example of a country with major gas resources which did not adopted
the appropriate gas policy for a long time. The most obvious consequence is that today a large share
of the associated gas is still flared while the country is not producing enough electricity, a use where
the gas is so valuable. Only quite recently in 2008, a modern gas policy was decided which may
change this energy picture when implemented.
31

32. Designing of Fiscal Terms
Vietnam, where the petroleum law was amended in 2000 to introduce more favourable provisions
for gas relative to oil, in terms of extended exploration–including a retention period of up to 7 years–
and exploitation duration, royalty reduction along with the right to negotiate specific gas
development and exploitation agreements.
Indonesia, where the new Oil and Gas of 2001 covers both upstream and downstream activities–
which is not the case in most petroleum laws–and highlights the new priority to be given to
domestic gas uses versus gas exports along with the introduction for gas of a new “domestic market
supply” obligation
2000 – introduced more favourable provisions for gas
“If discovering gas with commercial value, while lacking the consumption market as well as
conditions on pipelines and suitable treatment facilities, contractors may retain the areas where gas
is found. The duration of retention of such an area shall not exceed five (5) years and may, in special
cases, be extended for two (2) more years. Pending the consumption market and the conditions on
pipelines and suitable treatment facilities, the contractors shall have to proceed with the work
already committed in the petroleum contracts.”
Article 32 as amended provides that the applicable royalty rate will be fixed in the petroleum
agreements within a more attractive range for gas: between 0 and 10% instead of 4 to 25 % for oil. In
a similar way the cost recovery gas limit and the profit gas sharing may be more favourable to the
PSC-holder.
Australia which was one of the first country to introduce the concept of a retention lease for
allowing the exploration permit-holder of an oil or gas discovery to benefit in specific cases of a
longer exploration and appraisal phase for discoveries. In addition, the possibility of joint gas
development projects combining the resources and infrastructure with third parties is encouraged
“to jointly develop or complete an access agreement for use of facilities or technology which
provides an acceptable rate of return.”
32

33. Designing of Fiscal Terms
State FOC PSA Terms
Exploration Stage Monitor Unable to recover Cost Oil
Exploration
Reserves
If Commercial recover
Production Stage Participation costs early State Participation
High Give away revenue Trade off upside for Sliding scale
Price downside
Low
Costs Depend on participation Flex Recover costs early
Maximum cost oil
Linked to Rate of
Return
DMO Secure revenue Profitability Link to world market
Infrastructure/Transport Costs – cost recovery Maximise Cost Oil for
Early recovery
Sovereign Early payback Maximise Cost Oil
33

34. Fiscal Systems comparison based on Value of
Discovery After Tax
Source: Dr Alfred Kjemperud
A 25mmb field in Ireland gives the same profit after tax for the
oil company as a144mmb field in Indonesia
34

35. Low
Government Take
High
Less
attractive
to FOC
Summary
from FOC
High Interest
35