Product Sharing Contract with Gross Split scheme come up as an alternative solution for developing a healthy, fair and sustainable international oil and gas cooperation in Russian offshore [1]. In the application, benefits will be optimal for all parties if all legal requirements and business interests are met. Regarding that, the monitoring process on PSC GS implementation is as crucial as the negotiation process in making suitable terms and conditions for both parties. However, the real problem is negotiation participants (representatives of parties) are not fully aware of all PSC elements, which causes long, uncertain, and repetitive discussion or even results in unfair domination of one party over another. This paper shows the design of the tree and expert analysis to help all parties understand PSC elements, sensitivities, and their interactions before entering negotiation process. The methodology used is a theoretical survey (analysis & synthesis) based on world practices and Russian economical, technical, and geological characteristics. The result depicts both analyses are important materials to prepare all parties for the effective decision making process as well as support the establishment of win-win contract details.
Since the date it’s created in 2017, PSC with the new
scheme started to implement in more than 42 working
areas in Indonesia. The main differences of this hybrid of
PSC and concession from others (basic ideas) are as
follows: split starts from gross revenue; IOC takes 100%
responsibility of E&P cost; and HG can increase/decrease
IOC’s share by assessing variable (every POD) and
progressive components (monthly), design of which is
based on existing oil and gas fields calibration. Facing
difficulties to explore and develop its resources in certain
complex field condition, Russia is obviously in need of
applying PSC GS to increase its fiscal attractiveness.
Because existing contracts don’t have necessary
functionality for efficient, simple, certain and transparent
interaction with IOCs, while the international
collaboration is significant due to the absence of
sufficient technologies, facilities, human resources and
investments [
Table 1. PSC basic elements (clauses) [
National Legislation Contract Negotiation Operational Government Work commitment; Aspects participation; Relinquishment; Ownership transfer; Commerciality Conflict resolution;
Insurance Revenue or Royalties; Taxation; Bonus payments; Cost Production Depreciation rates; recovery limits; Sharing Investment credit; Production sharing Elements Domestic Market;
Obligation;
Ringfencing
It’s undeniable that there are tendencies from both parties to dominate the contract. The negotiation trade-off between HG and IOCs lies in the clauses above. Thus, every party should analytically and statistically understand how the elements mean to control each bargain position. This is necessary to establish win-win solution contracts. 2.
Based on all PSC basic elements, decision tree
analysis is presented in Fig. 1. The map shows the details
of basic elements and possible options of their
implementation. Considering a large number of different
proposed contracts, the tree allows parties to fast and
thoroughly understand how this or that project can be
economically effective for all, which is certainly based on
comprehensive analysis of their capacity, market
conditions, and specific interests. It is worth noting that
the assessment of possible solutions in this analysis
allows you to determine a strategy for public-private
partnership within the framework of commercial,
budgetary, social, technological and environmental
efficiency [
Referring to the map, onshore and Caspian offshore are not a prioritized option due to the fact that Russian companies are able to deal with those fields, except, shale and other unconventional fields, while offshore fields, which require more cost and technologies, are more challengeable. Therefore, by considering their most difficult circumstances the focus is on Sakhalin and Arctic. 3.
Fig. 1. Decision tree analysis (Created by Authors)
Gov participation Gov+NOC+ROC+IOC
Yes No
Low sunk cost, high development feasibility, & high geopotential.
Note Considering high risks in exploration phase, Contractor tends to recover sunk cost maximally.
Geopotential is the key to decide whether field development is feasible in high sunk cost.
Incremental sliding scale Base split + variable production sharing guarantees (fixed) and progressive flexibility, fairness, simplicity, (monthly) components transparency & certainty of HG and Contractor's share.
Cost Recovery by IOC after gross After gross split with
revenue split stimulates work 50% limit efficiency of the contractor Fiscal incentive supports contractor with financial risks. In Indonesian GSS profit tax is the one and only tax. But in Russia, considering the taxation habit, some key taxes are put in to Russian GSS.
Mostly, cost recovery weighs on Replaced by gross
HG's take. Therefore, to secure total revenue split and
take, HG sets 5-20% royalties, Incremental sliding
which results in increase of scale components
contractor's burden.
Drilling Data in In gross split, work commitment is exploration. Financial: valued not only by reliable seismic partial or full and drilling data and delineation, investment with but also signature bonus. In dev. & reimbursement. prod. phase, incentive components Domestic content min automatically respond to contractor 25%. Equipment, HR, work commitment. The stronger the Tech based on variable commitment is made, the more and progressive contractor's take is increased, and components (sliding vice versa.
scale system).
parties is not preferable due to different cultures. Though risk can be spread. In HG's view, involvement of National & private
Russian companies makes it easier Gov+NOC+IOC to control fraud, balance dominant power and learn science-tech from IOC. Overall, collaboration is needed but with limited players.
NOC's carried through exploration, has 15% interests.
Applying basic principles (Certainty, Efficiency and Simplicity), GSS gets rid of many conflict potentials. But when it appears, the mechanism of resolution has to be transparent, cheap, effective and efficient.
GSS facilitates contractor to better amortize its capex & opex. The tittle to equip belongs to HG. WP is working period.
HG motivates contractor to do Yes efficiency in order to maximize its total take Yes, 25%, at market IOC has already consumer. For HG, cost DMO can help fulfill national Period CAPEX ≤ ½ of WP (DDB); OPEX ≤ 2/3 of WP (SLD) 12
13 14 15 16
It also provides optimum requirements in the form of PSC GS. As it can be seen from table 2, PSC GS allows HG and IOC to come to an understanding and to identify common goals in running the collaborative projects. In addition, what will be given special attention is described in notes. Changing the ratio of costs and potential benefits when applying the PSA will significantly increase commercial, budgetary, technological and scientific efficiency (figure 2.)
Based on the table, commerciality, product sharing, cost recovery, taxation, and royalties are key elements in the contract. Therefore, all parties will focus negotiating the terms and conditions for these elements. However, all elements play crucial roles in the contract. For instance, 25% uplift and ownership transfer can significantly benefit IOC, although 5 above elements belong to HG.
To sum up, using both analyzes can prepare negotiation participants with the picture of PSC elements, sensitivities, and their interactions; improve mutual understanding in setting goals; and reduce potential disputes. Thus, all parties are able to save the time of signing contracts, minimize costs at further stages of running project, and achieve win-win solution. As we’ve known, disputes and renegotiation are timeconsuming, costly, and sometimes manipulative. In addition, the cross-analysis gave results in terms of improving project efficiency by 14.7% for the studied objects of the Arctic and Sakhalin. Thus, the decision to include the PSA synthesis model in the framework of forecast projects for the development of the continental shelf may become promising in terms of commercial efficiency. It will also present an opportunity to improve the scientific and technical potential of the oil and gas industry not only in Russia but also in other countries on the world energy market.
The study was carried out within the framework of RFBR grants 19-07-00455 and 20-04-60185.