Page 361 - Hydrocarbon Exploration and Production Second Edition

348 Constructing a Project Cashflow

2000
Gross net
Revenue cashflow
Cumulative Cashflow $m 1500 tax
capex
1000

royalty
500

0 opex
Time (years)
-500 1 2 3 4 5 6 7 8 9

Figure 14.6 Cumulative cash£ow.

14.2.2.5. Production sharing contracts
While tax and royalty fiscal systems are common, another prevalent form of
fiscal system is the PSC, also referred to in some regions as a production sharing
agreement (PSA), as introduced in Chapter 2. In these arrangements, the investor
(e.g. oil company) enters into an agreement with the host government to explore
and potentially appraise and develop an area. The investor acts as a contractor to the
host government, who retains the title of any produced hydrocarbons.
Typically, the contractor carries the cost of exploration, appraisal and
development, later claiming these costs from a tranche of the produced oil or gas
(cost oil ), should the venture be fortunate enough to result in a field development. If
the cost oil allowance is insufficient to cover the annual costs (CAPEX and OPEX),
excess costs are usually deferred to the following year. After the deduction of royalty
(if applicable) the remaining volume of production (called profit oil ) is then split
between the contractor and the host government. The contractor will usually pay tax
on the contractor’s share of the profit oil. Figure 14.7 shows the split of production
for a typical PSC.
In terms of cashflow items, for the oil company

Contractor net cashflow ¼ Revenues expenditures
¼ Cost oil recovery+net of tax profit oil CAPEX OPEX
Government net cashflow ¼ Royalty + tax + government share of profit oil

This illustrates that the government need not invest directly in the project,
which is not necessarily the case for a tax and royalty system either.
Many variations on the above theme exist, and the percentages applied will vary
from country to country and from contract to contract. Some PSC systems do not
contain royalty, but adjust the percentage split of profit oil and the amount of cost oil
available instead to achieve their requirements. The general terms of the PSC are
usually outlined by the government at the bidding stage, but then refined through