Contract Types Oil & Gas

OMV Aktiengesellschaft Trends in oil & gas legislation Peter Seitinger OMV Exploration & Production GmbH Islamabad, February 2007 Move and more. Trends in regulatory framework in oil & gas industry Agenda „ OMV portfolio of contracts „ The investment decision IOC and host country expectations „ Legal trends „ Case study Slide no. 1, EP-INT, January 2007 Trends in regulatory framework in oil & gas industry OMV E&P activities/ portfolio Core regions: Central and Eastern Europe North Sea North Africa Middle East Australia & New Zealand Russia/Caspian Slide no. 2, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Contract types in the OMV portfolio Countries with OMV E&P activites Albania Australia Austria Bulgaria Germany Iran Ireland Kazakhstan Libya New Zealand Pakistan Romania Russia Tunisia United Kingdom Venezuela Yemen Concession Agreement Production Sharing X X X X X X X X X X X X X X (X) X X Service Agreement Joint Venture Hybrids X X Worldwide Contract spread (*) 59 40 3 31 16 Source: Macleod Dixon, Achieving an Optimal Framework for Win-Win Relationships, 2006 Slide no. 3, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Changing E&P Landscape „ Historic: Funding and technology „ New: technology, project management, HSEQ & CSR, market access New roles of IOCs Oil price uncertainty „ Effects of high oil price „ New contracts/ service contracts „ Renegotiation of contracts „ Work programmes, government/ state take „ Petro-Nationalism „ Valuation challenge „ “Reaction time” to oil price changes „ Taking lead in own country „ Going international „ Service companies ensure technology transfer New roles of NOCs Governments tightening terms Overheate d suppliers, services and labour market Fierce competitio n for assets „ Cash-rich IOCs and NOCs „ Few good opportunities „ Venture capital start-ups „ Cost and time overruns Slide no. 4, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry The challenge The challenge is to design a fiscal system that strikes the right balance and aligns the interests and incentives of private investors and states, and is durable across „ The entire life-cycle of E&P projects „ A wide range of exploration scenarios „ A wide range of production levels „ A wide range of CAPEX and OPEX „ A wide range of product prices and market conditions Slide no. 5, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Agenda „ OMV portfolio of contracts „ The investment decision IOC and host country expectations „ Legal trends „ Case study Slide no. 6, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Host country expectations „ Secure supplies of oil and gas „ Risks to be transferred to IOCs „ Funding and management of major projects by IOCs „ Generate revenues from taxes and “take” on sustained basis „ Transfer of technology and management skills „ Establish long-term relationships with IOCs and oil & gas markets „ Economic/ social development and employment „ Infrastructure development „ Environmental protection Slide no. 7, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Value creation by host country „ Risk reduction „ Carried exploration „ Carried development „ Revenue sharing „ Royalties „ Domestic pricing “regressive” regime (gross royalties): Government share decreases when profits increase “neutral“ regime (CIT): Steady Government share “progressive“ regime (PSC with R-factors): Government share increases when profits increase „ Profit sharing „ Profit related taxes „ Production sharing (PSC) „ Social benefits „ Employment, training „ Infrastructure Slide no. 8, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry IOC expectations „ A balance of prospectivity, obligations and rewards. Liabilities in line with risk/reward ratio. „ Booking of reserves and production „ Economic scale of activities „ Contractual flexibility (exit options) „ Operational flexibility „ Provide assured contract validity and enforcement „ Predictable & reasonable taxation and royalty rates „ Minimal capital and operating costs „ Fiscal regime that provides incentives even under changing market conditions Slide no. 9, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Every country is different … „ Importance of the oil & gas sector now and in future „ Engine of economic growth „ Revenue generation „ Employment „ The hydrocarbon potential „ What is the main theme ? „ Encourage exploration ? „ Maximise revenue from existing fields ? „ Develop existing discoveries ? „ Investment climate „ Energy supply and demand „ Security considerations … and every country has to find its own response. Slide no. 10, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Investment favorites of IOCs Oil reserves (**) 1. 2. 3. 4. 5. 6. 7. 8. Saudi Arabia Iran Iraq Kuwait U.A.E. Venezuela Russia Kazakhstan IOC expectations „ Contracts and legislation „ Various country criteria „ Gas reserves (**) Russia 2. Iran 3. Qatar 4. Saudi Arabia 5. U.S.A. 6. U.A.E. 7. Nigeria 8. Venezuela 1. New Ventures Survey (*) 1 2 3 4 5 6 7 8 2004 UK Libya Iraq Trinidad and Tobago Algeria Egypt Australia Brazil 2005 Libya Algeria Egypt UK Australia Mauretania Oman Eq. Guinea (*) published by Fugro-Robertson (**) BP Statistical Review of World Energy, 2006 Slide no. 11, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Agenda „ OMV portfolio of contracts „ The investment decision IOC and host country expectations „ Legal trends „ Case study Slide no. 12, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Legal trends (1) „ Sharing of benefits from higher oil/gas prices „ Introduction of windfall profit taxes and/or cut tax reliefs „ Higher states participation „ Reference pricing „ IOC competition for quality acreage „ Primary splits in PSC shifted to the benefit of host countries „ Higher bonuses „ Work programme becomes secondary „ Increasing importance of local benefits „ Employment „ Social/ economic development „ Procurement of local goods and services „ Training „ Technology transfer Slide no. 13, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Legal trends (2) „ Petro-Nationalization „ Retroactive unilateral change of contract terms „ Host country / IOC interaction „ Increase of state control over natural resources „ Production strategy and rate „ PSCs – from volume to profitability driven „ Environmental provisions (e.g. abandonment, emmissions) become more stringent „ Before: Part of Operator’s management systems „ Accountability and Transparency „ Anti corruption policies „ Wide use of tendering „ Human Rights compliance Slide no. 14, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Legal trends (3) „ Competition IOC/NOC creates new partnerships „ Non-conventional packages (integrated oil & gas, non-energy, finance) „ Political agreement (NOC – to – NOC) „ NOC – IOC Alliances „ Change of NOC importance and roles „ Legislation being amended to establish new roles of NOCs „ NOCs are split into oil company and regulator (and vice versa) „ Privatization of NOCs (and vice versa) „ Emergence of NOCs as international players, mostly with political backing „ New role to search for resources overseas „ Standardisation „ Model forms and contracts „ Dispute resolution mechanism Slide no. 15, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Agenda „ OMV portfolio of contracts „ The investment decision IOC and host country expectations „ Legal trends „ Case study “Increasing taxes is not the only way for a host country to create additional income” Slide no. 16, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Case study North Africa Oilfield. Routine investment in maintenance only: production likely to cease by 2012 „ Substantial investment is vital to realize remaining potential of field „ Incremental investment approx. USD 100 MM (100%), extends field life to at least 2020 and adds 32 MM barrels „ Incremental production adds significant value to State 50,000 40,000 Gross Field Production (bopd) 30,000 20,000 10,000 19 77 19 79 19 81 20 01 20 03 19 73 19 75 19 95 19 97 19 99 20 17 20 19 19 83 19 85 19 87 19 89 19 91 19 93 20 05 20 07 20 09 20 11 20 13 20 15 Base Production Incremental Production Slide no. 17, EP-INT, February 2007 Move & More. Trends in regulatory framework in oil & gas industry Case study North Africa OMV Proposal: „ Revised Tax rate for Incremental Production „ Base production to continue at existing tax rate NPV Base Case NPV Incremental Investment Case Incremental Investment Slide no. 18, EP-INT, February 2007 Move & More.