LEARNING SERIES: MAJOR PHASES OF UPSTREAM OPERATIONS Prelicensing Preparations By Farouk Al-Kasim 1. Ownership and Operatorship 2. Boundary Issues 3. Resource Base Assessment 4. Risk Assessment 5. Petroleum Policy 6. Optimal Pace of Operations 7. Models of Petroleum Rights 8. Contractual Regimes 9. Legal Framework 10. Sector Administration 1 Ownership and Operatorship 2 1 Legal and institutional framework for petroleum operations >> Historically, ownership of petroleum resources remained an unsettled issue until the United Nations reached an agreement for both onshore (1962) and offshore (1958) ownership. >> Now, each country is recognized internationally as the owner of the petroleum resources within its territories and has authority to administer petroleum within the coastal area up to 200 kms from its coastline. >> The host country designs and enforces the necessary legislation, public administration, and regulatory framework to govern petroleum operations. >> The host country may enter negotiated contracts with oil companies, selected discretionally or through open competition. 3 Boundary Issues 4 2 Resolution of border disputes >> The boundaries within which governments can exercise their jurisdictions on petroleum operations are, in principle, defined by international and national law. >> Disputes can arise among nations on the interpretation of international principles. Where such disputes arise, the countries involved will attempt to resolve their disputes by negotiation. Failing that, the dispute may be resolved by mediation and/or arbitration. >> Not all disputes are easily resolved. There are examples of prolonged disputes leading to violent confrontations. >> History demonstrates that it is easier to resolve disputes before force is used and before drilling begins. In each case, the host country must monitor operations to ensure compliance with legislation and the terms of the contract. 5 3 Resolution of border disputes >> Operatorship is assigned to an oil company or a service company selected by licensees and/or the host country. >> In many large producing countries, the roles of licensee and operator are assigned solely to a national oil company (NOC). Other oil companies are often engaged by the NOC as sub-contractors. >> The relationship between the host country and the oil companies is regulated by legislation and/or contracts. The fiscal terms are designed to fit the risk in the operational commitments borne by the licensees. >> Because the operator and licensees are selected for their competence, expertise and experience, the responsibility for good and safe performance is borne by the operator and the licensees. Government defines the objectives and the overall Inof standards performance. each case, the host country must monitor operations to ensure compliance with legislation and the terms of the contract. 6 Resource Base Assessment 7 4 The resource base >> Before the start of exploration, the presence of petroleum is usually only a hope. The size and value of the resource base is unknown. >> Even after production starts, the size and value of hydrocarbon resources will be subject to uncertainty and speculation. Nevertheless, a reliable assessment of the resource base is vital for optimizing resource exploitation. >> Appreciation of the risks and rewards in exploration and development is key to designing optimal frame conditions and contracts. 8 5 Early measures to enhance prospectivity • To attract oil companies, a host country may open all or parts of its territory for scientific and joint industrial reconnaissance surveys to establish broad outlines of the stratigraphic and structural history of the sedimentary strata. • If the results are encouraging, further seismic surveys may be conducted across major basins and subbasins by geophysical companies on a speculative, commercial basis • Reconnaissance surveys and geological studies may be conducted to provide broad clues about the major sedimentary basin(s). • Starting reconnaissance surveys in each area will, hopefully, attract the interest of oil companies in further exploration for hydrocarbons. 9 Risk Assessment 10 6 Factors that increase the risk factor • The absence of hydrocarbon indications is often used as a source of risk. • If some geological indices seem negative, the risk is increased: • The absence of source rock quality sediments can increase the risk associated with the basin concerned. • The presence of volcanic or igneous rocks, or violent tectonic activity in the area, will increase the risk. • The risk is increased if the area is difficult to operate. For example, if the area is in mountains, under arctic conditions, in very deep water, or far from the sea. • The risk is also greater if gas is expected in an area that is far from gas markets. 11 Petroleum Policy 12 8 The need for a petroleum policy A fundamental policy is needed as the basis for governance in the petroleum sector. The policy need not be comprehensive, but it must address major objectives and principles that shall be upheld in the exploitation of resources. Wide political backing helps facilitate policy. A long-lasting, stand-alone policy document is needed. Policy should be followed by strategies / plans for implementation. The policy may require updating within 15 years or when the resource and operations picture changes. 13 9 Overall issues in a petroleum policy Petroleum policy is also the basis for how petroleum operations are integrated into the national economy and social governance. EXTRACTION OPTIMISATION VALUE ENHANCEMENT REVENUE MANAGEMENT • Integration into social governance • Development of national expertise in other • Health, safety, and the environment sectors • Optimal resource extraction • Impact management and an economic • Data management diversification objective • Capacity and competence within the • Revenue management petroleum sector • Human resource management • Local content • Technology management 14 10 How a petroleum policy should be developed Each host country will select its preferred approach, including: • Government appoints a Petroleum Policy Commission of stakeholders to propose a policy. • The proposed policy would be considered by the Ministry of Oil. • Civil society organizations and the private sector would evaluate the policy draft and add comments. • The proposal would be finalized by the Cabinet. • After final adjustments, the proposal may be sent to Parliament or a similar entity. 15 Optimal Pace of Operations 16 11 The dark side of accelerating petroleum operations Most countries that aspire to find oil accelerate development and production. Hastening operations is often a mistake due to the following: • Accelerating operations will make it difficult to mitigate negative impacts to the national economy. • It will make the country dependent on petroleum to the exclusion of diversification and democratic governance. • Rapid rates of depletion are likely to lead to suboptimal or bad decisions on issues of vital national interests, e.g., national participation, competency and capacity development, local content, and diversification of the economy. • Simultaneous development of several fields is likely to increase cost, and may obstruct good revenue management, enabling dangerous spending of petroleum revenue. 17 Models of Petroleum Rights 18 12 Petroleum systems for granting rights There are two types of allocation regimes: Concessionary • It allows private ownership of resources. • Government revenue is generated principally through taxes. Contractual • The state retains ownership of resources. • Government revenue is generated through profit sharing and taxes. 19 13 Concessionary systems • • • The state owns the resources in the ground. For the resources, it receives royalty and taxes. The state: • Grants exclusive rights to explore and produce at the company’s own risk and expense. • The oil company: • Can book reserves • Owns production at the surface • Has full right to export the petroleum produced • Owns exploration and production equipment • Pays royalty and surface rental to the government • Pays taxes on profit 20 Contractual Regimes 21 14 Contractual regimes: production-sharing contracts Production-sharing contracts or agreement (PSCs or PSAs). • Host country retains ownership of resources in the subsoil. • Host country owns the title to installations and equipment. • Contractor has an exclusive right to explore, develop, and produce. • Contractor pays for exploration and development. • Contractor recovers its investment and operating costs from “cost recovery oil.� • Contractor and host country split the remaining “profit oil.� • Contractor has the right to dispose of its share of production. • Host country receives revenue through sales of its share of oil and gas, and from taxes and royalties on the contractor’s share. 22 15 Service contract • The host country owns the resources in the subsoil and is free to decide when to produce them. • The contractor provides and pays for exploration, development, and production services. • The contractor may recover all the agreed costs, remuneration, interest, and profit in cash or in kind. • The host country’s revenue is accomplished through the sale of production only—not through taxes! 23 16 Joint venture contract (part one) • Venezuela took steps to amend concession agreements by introducing a 50-50 profit-sharing formula in 1943–48. • The joint venture contract (JVC) first appeared in the Middle East in 1957 to overcome the pitfalls of the concessionary regime. • The PSA was introduced by Indonesia in the mid-1960s. It reflected the spirit of participation advocated by UN resolutions. • JVCs satisfy a host country’s desire for resource ownership, control over operations, higher financial returns, transfer of technology, training of nationals, and direct access to the international oil market. 24 17 Joint venture contract (part two) • There are at least two types of joint venture contracts: • Incorporated JVC: All partners form a joint operating company with shared ownership by all partners. The operator makes operational decisions while the owners meet only in shareholder meetings. • Unincorporated JVC: All partners share obligations and benefits. They vote according to their shares in meetings held by management and operations committees. the relationship between partners is governed by a partnership contract. 25 Legal Framework 26 18 Petroleum legislation The policy document will form the basis for drafting a petroleum law to enshrine the principles in provisions by which all parties must abided within the governance of petroleum operations. These include the following: • Ownership • Natural gas • Governance principles • Regulations • Roles • Use of land • Public petroleum • Right-of-way administration • Impact management • Rights and obligations of • Health, safety, and parties environment considerations • Petroleum rights • Fiscal terms • State participation • Dispute resolution • National participation • Cessation of production • Local content • Decommissioning • Data • Mid- and downstream 27 19 • • Regulations and Model Contracts In a Model Contract structure, technical and operational issues are governed by regulations. These may be subject to more frequent adjustment than the law. It is customary to enact dedicated fiscal legislation dealing primarily with the taxation of the upstream subsector to provide sufficient incentives to investors and align with the interests of stakeholders. • Model Contracts reflect the ambitions of the host country. With a properly drafted legislation, Model Contracts should be brief, covering negotiable and specific issues that cannot be addressed in legislation or regulations. 28 20 The hierarchy of the legal framework CONSTITUTION PETROLEUM POLICY PETROLEUM LAW REGULATIONS, DECREES, and INSTRUCTIONS CONTRACT CONTRACT CONTRACT 29 Sector Administration 30 21 Levels of governance EXECUTIVE UMBRELLA POLICY : CABINET IMPLEMENTATION OF POLICY: MINISTRY MONITORING AND REGULATION: DIRECTORATE SUPPORTING STATE ENTITIES 31 22 Basic three functions of government POLICY ° ° ° POLICY LEGISLATION PLANNING ° PROMOTION ° LICENSING ° LICENSING ° SOCIAL IMPACT MANAGEMENT ° APPROVAL OF DRILLING ° APPROVAL FIELD DEV. PLANS ° DEVELOPMENT PLAN APPROVAL ° REVENUE MANAGEMENT ° MONITORING ° AUDITS ° CONSENTS ° COMMERCIAL PARTICIPATION ° TAIL-END PLAN APPROVAL ° BUSINESS PROMOTION ° ABANDONMENT PLAN APPROVAL ° DOWNSTREAM BUSINESS ° DATA MANAGEMENT ° OPERATOR TASKS REGULATORY BUSINESS 32 23 Independent regulator 33 \ 34 Is a national oil company (NOC) necessary? THE NOC IS DESIRABLE, BUT NOT MANDATORY. KEY QUESTIONS TO ASK: • For what purpose is the NOC required? • Can petroleum resources sustain growth over a sufficient length of time? • Can the country afford the initial large costs of financing the NOC? • Can the country afford delaying revenue to allow the NOC to grow? • Are there mechanisms and institutions to ensure fair competition and a spirit of cooperation between the NOC and IOCs? • Are there reliable plans to protect existing industries from a brain drain? • Can the authorities control the development of the NOC? • Is there a danger of the NOC becoming a state within the state? 34 Thank you for your attention! 35