Economic & Financial Aspects of Production Sharing Contracts

Course overview This course explores the structure and mechanisms of production sharing contracts (PSC’s) and the economic principles that underpin them. Studying the underlying processes and commercial drivers, participants will examine case studies to illustrate the economic structure of these complex agreements. The PSC Economics course brings the theory to life, allowing course attendees to build and interpret their own PSC model based on a real life field development. Course objectives Learn about the history, evolution & structure of PSC’s Investigate cost recovery & profit sharing Examine fiscal mechanisms & ring fence calculations Identify taxation liability & allowances Construct a production sharing contract spreadsheet model Interpret model outputs to enhance investment decision making Understand petroleum economic fundamentals to aid PSC negotiations and licence round bidding Who should attend Production sharing partners Economists working in the industry Lawyers involved in the industry Analysts working in the industry Auditors working in the industry Technical personnel working in the industry Business development and commercial managers
Day 1 An introduction to production sharing contracts and upstream economic analysis - The history and evolution of production sharing contracts (PSC’s) - The basic PSC, contractor and government relationship - The PSC structure, content and flowchart The fundamentals of upstream economic analysis - Discounted cashflow - Discount rate, discount factor and discount method - The cost of capital and the hurdle discount rate - Capital budgeting techniques (NPV, IRR, DPIR, payback) - Valuing an asset, making development & investment decisions - Inflation, cost escalation, real versus nominal cash flows - Managing and quantifying risk both deterministically and probabilistically Day 2 Cost recovery - Cost recovery mechanism - Recoverable costs - Cost oil, cost gas and NGL’s - Excess cost recovery - Cost recovery modelling in Excel Cost recovery case studies: Angola, Indonesia, Equatorial Guinea, Egypt, Syria, Gabon. Profit sharing - The profit pool - Profit sharing - Profit gas and profit oil - Profit sharing modelling in Excel Profit sharing case studies: Angola, Indonesia, Equatorial Guinea, Egypt, Syria, Vietnam. Bonuses - Signature & commerciality bonuses - Production bonuses - Cost recoverability - Bonus modelling in Excel Bonus case studies: Gabon, Vietnam, Sudan, Oman, Syria. Sliding scale fiscal mechanisms - Production rate sliding scales on production rate and volume - R-Factor and rate of return methods - Step versus incremental methods - Influencing activity through sliding scales Case studies: Angola, China, Equatorial Guinea, Bangladesh, Algeria, Nigeria, Sao Tome, Tunisia, Libya. Taxation - The basis of the taxation liability - The CT ring fence - Chargeable income - Capital allowances - Liability and payment phasing - The treatment of tax losses - Tax holidays - Taxation modelling in Excel Case studies: Cameroon, Albania, Sao Tome, Algeria, Indonesia, Mozambique, China, India, Jamaica, Cote d’Ivoire, Egypt, Libya, Cyprus, Gabon. Day 3 Ring fences - PSC ring fence - Taxation ring fence - Ring fence calculations and examples - Ring fences in a strategic context Case studies: Cambodia, Cuba, Malaysia, Angola. The economics of PSC’s - Contractor cash flow - Government cash flow - Cost carry arrangements - Comparison with royal and taxation systems - Optimisation of PSC terms - Working interest vs entitlement - The treatment of abandonment expenditure in PSC’s Case studies: Algeria, Angola, Libya, Vietnam, Equatorial Guinea. Summary of the Petroleum Industry Bill (PIB) - An outline of the key points of the bill will be given focussing on the revised economic terms. There will be a class discussion on how the bill may impact on the industry Nigeria PSC Economics Workshop - A Nigeria PSC based case study modelling the fiscal terms in Microsoft Excel™ - Understanding the PSC fiscal structure and algorithms of the Nigeria contract - Determining the field, economic and fiscal data and building the input decks - Step by step construction of the PSC model - Running the economic cases and evaluating the results - Analysis of the sensitivities - Model solution provided to delegates Course summary and close