PSA AND SHARE DISTRIBUTION INUPSTREAM OIL AND GAS

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PSAs and Share Distribution Fixed and Sliding
Scales
Shirley B Mushi (PhD)
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Royalties, cost oil, profit oil and production
bonuses can either be levied as
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The two most common sliding scales ways of
calculating payments
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The IOCS cumulative revenues are a sum of

• the aggregate value of Net Petroleum Production
  up to the respective calendar date, based on the
  actual price received for Petroleum.
• all other revenues received by the CONTRACTOR
  associated with the conduct of the Petroleum
  Operations.

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Important to Note
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Importance of sling scales to PSCs
These fiscal systems and rates play a critical
role in evaluation of project feasibility and the
ultimate decision to invest along with other
factors. 
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Cash flow and the feasibility of a project

•  Is it a Fair Price to Invest?

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Cash Flow

• Simply Put Cash flow refers to the net balance
  of cash moving into and out of a business at a
  specific point in time
• Cash is constantly moving into and out of a
  business

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Most common used economic indicators for
evaluation of petroleum projects for investment
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Net Cash Flow Companies mostly use cumulative
net cash flow as the basis of economic analysis
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NCF cash inflows (revenue) cash outflows
(cost)
To build this net cash flow equation information
is required from various sources.
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Resources of necessary information to build cash
flow of petroleum projects across the 6 phases of
the project cycle
Information Ressource  Information type 
Petroleum Engineering  Production Profile  Reserve type 
Drilling Engineering  Drilling and completion Costs 
Facilities Engineering  Facilities Cost 
Operating maintainance Engineering  Operating Cost  Maintenance Cost 
Human Ressource  Workforce cost  Workforce type and numbers 
Host Government  Fiscal system (Tax, royalty, etc.) 
Corporate planning  Forecasts of oil and gas prices  Discount rate, inflation rate, exchange rate, etc. 
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• After all required information is collected the
  construction of net cash flow is started and the
  total cash of the project is classified into
  revenue and cost. 

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Revenue  
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The abandonment cost is a special category of
cost it does not produce any future profit for
the company. 
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Discounted Cash Flow
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Discounted Cash Flow ctn...
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Example of discounted cash flow at the end of
year a 

• The above equation assumes that the cash flow has
  occurred at the end of the year. In reality cash
  flow transactions take place continuously or at
  least monthly.
• The discount cash flow is a significant key
  business indicator because it presents the base
  of calculation for other indicators.

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Net Present Value
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Net Present Value of a given year
The NPV of an investment at a certain discount
rate can be Positive, Negative or Zero. 
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Internal Return rate
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• The payback of a project identifies the expected
  number of years which the company needs to
  recover its project investments. 
• At the payback point, the cumulative net cash
  flow is equal to the total investment. 

Payback Period?

• where b represents the payback point at which the
  cumulative net cash flow is positive for the
  first time in the project life.
• When the project achieves a payback point, in
  principle it will then be a worthwhile
  investment. 

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Note
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PSA distribution Govt and IOC take

• The government and IOC take as discussed earlier
  do not directly reflect the economic performance
  of the project.
• They are commonly used as indicators to help the
  decision-making process for investment
  particularly by comparing similar projects
  (reserves size, field cost etc.) and fiscal
  regimes in different countries in the IOCs
  portfolio. 
• In a competitive environment, the Host government
  attracting investment would be keen to consider
  the IOCs decision-making economic indicators in
  modeling fiscal regimes.

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DESIGNING A FISCAL SYSTEM
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Comparison of fiscal models
The following simulations show the effect on
project economics of alternative fiscal terms and
their relative responsiveness to changes in
economic conditions?
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We summarize these in table 2 below (Detailed
calculations may be shared) 
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FINDINGS
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• Anticipated size and distribution of production
  in a given geological province is a key element
  in fiscal modeling. This vivid in the application
  of the same fiscal model to different size fields
  and comparing its performance.
• Variations in production considerably impacted
  project economics (plus or minus 30 percent for
  the smaller size fields, plus or minus 23 percent
  for the medium size field, and plus or minus 43
  percent for the large size field54).

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• Similar results are observed for price
  variations. Decreases in production and
  prices resulted in large percentage variations in
  project NPV because of the rigidity of capital
  investment. The higher the projects operating
  leverage, the larger the impact of a variation in
  price or production level.
• The level of production had the lowest effect on
  the projects NPV for Field C (24.9 percent
  operating leverage), while Field D (47.8 percent
  operating leverage) was affected the most. These
  are very important considerations in the design
  of a fiscal system, as market prices and
  geological conditions can be estimated only with
  a high degree of uncertainty. 

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Some Takeaways/ Lessons
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Table 3 below shows the effect on project
profitability of different levels of cost
recovery limit for the fiscal systems modelled. 
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