Page 28 - Hydrocarbon Exploration and Production Second Edition

Petroleum Agreements and Bidding 15

Figure 2.4 Example of maturing of an exploration licence block.

Table 2.1 Broad categories of fiscal systems

Fiscal System GeneralTerms
Tax and royalty Company pays royalty as a fraction of gross production and tax on
net profits
Production sharing Company receives full cost recovery from production and a share
agreement of remaining profit oil
R-factor Company pays a tax rate which is a function of the rate of return
of the project (defined as cumulative revenues/cumulative
expenditure)
Service agreement Company receives remuneration for services or expertise provided

of the Government, the incumbents may choose to trade the initial splits. At any
stage of the field life cycle, a company may choose to reduce its share in a block by
selling a fraction to another company – this is known as ‘farming out’. The
company who accepts the share is said to have ‘farmed in’. The farm-out may be for
cash or for a trade in another interest.
A company may choose to farm out if it is unable to raise the capital required for
development, or if it wishes to reduce its exposure in the project because it
considers its position to be too risky.