=Paper=
{{Paper
|id=Vol-2763/CPT2020_paper_s3-4
|storemode=property
|title=Analysis of PSC Gross Split Implementation in Russian Offshore
|pdfUrl=https://ceur-ws.org/Vol-2763/CPT2020_paper_s3-4.pdf
|volume=Vol-2763
|authors=M.I. Kiat,S.I. Iliukhin,A.Kh. Ozdoeva
}}
==Analysis of PSC Gross Split Implementation in Russian Offshore==
https://ceur-ws.org/Vol-2763/CPT2020_paper_s3-4.pdf
Analysis of PSC gross split implementation in Russian offshore
M.I. Kiat, S.I. Iliukhin, A.Kh. Ozdoeva
Muhammadiksankiat95@gmail.com | savelykh@yandex.ru | 4305@bk.ru
National Research University of Oil and Gas named after I.M. Gubkin, Moscow, Russian Federation
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.
Keywords: Production Sharing Contract (PSC), Gross Split (GS), Host-Government (HG), and International Oil Company (IOC).
understand how the elements mean to control each
1. Introduction bargain position. This is necessary to establish win-win
Since the date it’s created in 2017, PSC with the new solution contracts.
scheme started to implement in more than 42 working
2. Tree analysis
areas in Indonesia. The main differences of this hybrid of
PSC and concession from others (basic ideas) are as Based on all PSC basic elements, decision tree
follows: split starts from gross revenue; IOC takes 100% analysis is presented in Fig. 1. The map shows the details
responsibility of E&P cost; and HG can increase/decrease of basic elements and possible options of their
IOC’s share by assessing variable (every POD) and implementation. Considering a large number of different
progressive components (monthly), design of which is proposed contracts, the tree allows parties to fast and
based on existing oil and gas fields calibration. Facing thoroughly understand how this or that project can be
difficulties to explore and develop its resources in certain economically effective for all, which is certainly based on
complex field condition, Russia is obviously in need of comprehensive analysis of their capacity, market
applying PSC GS to increase its fiscal attractiveness. conditions, and specific interests. It is worth noting that
Because existing contracts don’t have necessary the assessment of possible solutions in this analysis
functionality for efficient, simple, certain and transparent allows you to determine a strategy for public-private
interaction with IOCs, while the international partnership within the framework of commercial,
collaboration is significant due to the absence of budgetary, social, technological and environmental
sufficient technologies, facilities, human resources and efficiency [19].
investments [2]. After all, it’s not the same PSC GS Referring to the map, onshore and Caspian offshore
scheme to offer to implement in different countries, but are not a prioritized option due to the fact that Russian
the analogy of it by maintaining the basic ideas and companies are able to deal with those fields, except, shale
adjusting the clauses, which are shown in table 1. and other unconventional fields, while offshore fields,
Table 1. PSC basic elements (clauses) [3-18] which require more cost and technologies, are more
National Legislation Contract Negotiation challengeable. Therefore, by considering their most
Operational Government Work commitment; difficult circumstances the focus is on Sakhalin and
Aspects participation; Relinquishment; Arctic.
Ownership transfer; Commerciality
Conflict resolution; 3. Expert’s analysis
Insurance
Revenue or Royalties; Taxation; Bonus payments; Cost Table 2 presents experts’ opinion on each basic
Production Depreciation rates; recovery limits; element according to survey using multi criterial analysis.
Sharing Investment credit; Production sharing The expert Council consisted of about 80 specialists in
Elements Domestic Market; various fields of science, which allowed us to consolidate
Obligation; the information received and determine the most priority
Ringfencing
areas for analysis and evaluation. The experts score the
level of significance of each criteria and set the rank
It’s undeniable that there are tendencies from both
based on their experiences and objectives. Besides, the
parties to dominate the contract. The negotiation trade-off
table classifies general requirements that HG and IOC are
between HG and IOCs lies in the clauses above. Thus,
likely to put forward during negotiations.
every party should analytically and statistically
Copyright © 2020 for this paper by its authors. Use permitted under Creative Commons License Attribution 4.0 International (CC BY
4.0)
Fig. 1. Decision tree analysis (Created by Authors)
Table 2. Expert analysis: PSC implementation option in Russian offshore (Created by Authors)
Rank Name HG IOC (Contractor) PSC GS (Optimum) Note
Considering high risks in
exploration phase, Contractor tends
to recover sunk cost maximally.
1 Commerciality Low sunk cost, high development feasibility, & high geopotential.
Geopotential is the key to decide
whether field development is
feasible in high sunk cost.
Incremental sliding scale
Single split: 50-90% Base split + variable production sharing guarantees
Single split: 30-50%
2 Product sharing share with high (fixed) and progressive flexibility, fairness, simplicity,
with no limit CR
royalty/FTP (monthly) components transparency & certainty of HG and
Contractor's share.
30-60 %, after Cost Recovery by IOC after gross
40% and higher, No After gross split with
3 Cost recovery recovering capital cost revenue split stimulates work
limit 50% limit
15-30% efficiency of the contractor
Fiscal incentive supports contractor
Taxes (Profit, local,
with financial risks. In Indonesian
Single tax, tax road use), pipeline
GSS profit tax is the one and only
4 Taxation Multiple taxes and levies holidays, tax tariff, excise,
tax. But in Russia, considering the
deduction and TLCF mandatory conversion,
taxation habit, some key taxes are
TLCF, Tax deduction
put in to Russian GSS.
Mostly, cost recovery weighs on
Replaced by gross
HG's take. Therefore, to secure total
No or yes, with revenue split and
5 Royalties & FTP Yes, with no split take, HG sets 5-20% royalties,
balanced split Incremental sliding
which results in increase of
scale components
contractor's burden.
Tech: Seismic, &
Tech: Seismic, &
Drilling Data (exp), Tech: Seismic data.
Drilling Data in In gross split, work commitment is
digitalization, EOR Financial: partial
exploration. Financial: valued not only by reliable seismic
(Dev&Prod), max site investment with
partial or full and drilling data and delineation,
restoration; Financial: reimbursement &
investment with but also signature bonus. In dev. &
Full investment investment credit.
Work reimbursement. prod. phase, incentive components
6 with(out) Equipment: minimal
commitment Domestic content min automatically respond to contractor
reimbursement; number of wells and
25%. Equipment, HR, work commitment. The stronger the
Equipment: high platform. HR: min
Tech based on variable commitment is made, the more
domestic content, domestic content,
and progressive contractor's take is increased, and
sufficient number of sufficient reliable
components (sliding vice versa.
wells and platform. HR: workers
scale system).
high domestic content
In IOC's view, working with many
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
7 Gov participation Gov+NOC+ROC+IOC Gov+IOC 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
International
Arbitration, local Simplicity), GSS gets rid of many
Conflict Arbitration, and
8 litigation as an Arbitration conflict potentials. But when it
resolution International litigation
alternative appears, the mechanism of
as alternative
resolution has to be transparent,
cheap, effective and efficient.
GSS facilitates contractor to better
Period CAPEX ≤ ½ of
Long period with SLD Short period with amortize its capex & opex. The
9 DD&A Rates WP (DDB); OPEX ≤
scheme DDB scheme tittle to equip belongs to HG. WP is
2/3 of WP (SLD)
working period.
HG motivates contractor to do
10 Ringfencing Yes No Yes efficiency in order to maximize its
total take
Yes, 25%, at specific No DMO or 25% Yes, 25%, at market IOC has already consumer. For HG,
11 DMO
lower cost DMO at market cost cost DMO can help fulfill national
Rank Name HG IOC (Contractor) PSC GS (Optimum) Note
+ DMO Fee demand as well as activate refinery.
Production bonuses to HG is
regulated in progressive component
Signature, prod and with sliding scale approach. While
Signature and
12 Bonus payments Ministerial ministerial (sliding ministerial bonuses to contractor
production Bonus
scale) depends not only on uneconomic
condition, but also commitment to
efficiency
Government will decide whether or
No extension of Extension of
not extension is worthy to be
exploration and dev exploration, transfer Possible extension of
13 Relinquishment granted. HG considers contractor
phase, surrender full or surrender part of exploration
commitments to seismic & drilling
territory territory
data, & appraisal)
Such an incentive has been
Investment credit Replaced by sliding
14 No Yes, 5-20% represented by variable and
& uplifts scale components
progressive components
Contractors and subcontractor are
Regulated based on strict No regulation (free Regulated: Determined obliged to be adequately insured in
15 Insurance
HG's supervision to determine) based on white list reputable companies written on the
white list
Ownership belongs to HG.
Partially in the form of
Ownership Contractor can transfer not the
16 No Yes participation, not
transfer ownership, but participation
ownership
interests.
It also provides optimum requirements in the form potential disputes. Thus, all parties are able to save the
of PSC GS. As it can be seen from table 2, PSC GS time of signing contracts, minimize costs at further
allows HG and IOC to come to an understanding and to stages of running project, and achieve win-win solution.
identify common goals in running the collaborative As we’ve known, disputes and renegotiation are time-
projects. In addition, what will be given special consuming, costly, and sometimes manipulative. In
attention is described in notes. Changing the ratio of addition, the cross-analysis gave results in terms of
costs and potential benefits when applying the PSA will improving project efficiency by 14.7% for the studied
significantly increase commercial, budgetary, objects of the Arctic and Sakhalin. Thus, the decision to
technological and scientific efficiency (figure 2.) 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.
Acknowledgments
The study was carried out within the framework of
RFBR grants 19-07-00455 and 20-04-60185.
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