PETROLEUM AGREEMENTS a presentation by HEW R. DUNDAS of DUNDAS ENERGY SERVICES International Petroleum Law and Risk Management Advisers 8 th November 2002

OVERVIEW of PRESENTATION n Title to Petroleum n Forms of Exploration Right n Forms of Petroleum Agreement n Financial Arrangements n Risk Service Contracts/PSCs n PSC Cost/Profit Oil n Advantages of PSCs n Problems in/with PSCs

TITLE TO PETROLEUM n Landowner n Crown/State n Licensee/Concessionaire n Transfer of Title n Effect of International Law n Consequences on Domestic Law

FORMS OF EXPLOITATION RIGHT n Royalty Basis n Concession (old style) n Licence (eg UK model) n Licence + Crown/State Back-in n Production Sharing

FORMS OF PETROLEUM AGREEMENT n Royalty Agreement n Concession Agreement n Licence n Licence + Back-in n Risk Service Contract n Production Sharing Contract

FINANCIAL ASPECTS n Royalty Payments n Surface Rentals n Income Taxes n Petroleum Revenue Taxes n Resource Rental Tax n Turnover/Value Added Taxes n Dividend & Withholding Taxes

RISK SERVICE CONTRACTS n Title Does Not (normally) Pass n Fixed Fee n Right to Purchase Oil n Pricing Bases n Why Have RSCs ?

WHAT IS IN A PSC – 1 ? n Contractor Fulfils Work Obligations n Contractor’s Role - Risk/Expense n Cost Recovery Mechanism n State/Contractor Share Profit Oil n Taxation n Regulatory Framework n PSC Can Create Own Law

WHAT IS IN A PSC – 2 ? n Financial/Technical Guarantees n Management/Decision-Making Process n Control of Petroleum Operations n Contractor’s Obligations n Contractor’s Rights n State Rights/Obligations

WHAT IS IN A PSC – 3 ? n Title to Data/Facilities/Other Assets n Service Fees n Production/Other Bonuses n Assignment Provisions n Dispute Resolution Provisions n Choice of Law n Accounting and Reporting

PSC COST OIL n Contractor Recovery of its Costs n Capped %age Available as Cost Oil n Sliding Scale - Marginals/Elephants n Excess Cost Oil n Accounting Treatments n Recovery of Non-Ringfence Costs

PSC PROFIT OIL n Balance after Allocation of Cost Oil n First Tranche Profit Oil n %age Shares n Sliding Scales and Marginal Rates n Rate of Return and R-factors n Existing Discoveries n Incremental Production

ADVANTAGES OF PSCs n Flexibility if Volatile Oil Prices n State Retention of Title n State Control n Regulatory+ Contractual Elements n Flexibility n Co-Operation not Confrontation

PROBLEMS WITH PSCs - 1 n State Inexperience n Political Influences n Stabilisation Clauses n Expropriation and Related Risks n Gas n Press Coverage

PROBLEMS WITH PSCs - 2 n Change of Control n Jurisdictional Imprecision n Inadequate Tax Provisions n Relevant Cost Recovery Provisions n Title to Assets n Decommissioning/Abandonment n Drafting