Overview of Malaysian PSC

FIELD LOCATION MALAYSIA

Msia / Thai Development Area PM3 Commercial Arrangement MsiaVietnam
Kangar

G urun G eorgetow n K uala Terengganu K TO A U g. K R N Lum ut Kem an am Kuantan K A LU PU U LA M R K TIH ER

SABAH

M eru

PENINSULAR MALAYSIA
Segam at

LNG PLANTS

SARAWAK
OIL AND GAS FIELDS* FIELD DISCOVERED PRODUCING OIL 134 47 GAS 178 14

Serem ban M elaka Johore Bahru

MALAYSIA EXPLORATION AND PRODUCTION BLOCKS

9 98 100
THAILAND

102
Malaysia / Thailand Joint Development Area

104

106
VE A I TN M

108
200m

110

112

114

116

118
P LA A A WN

120 9

( P I LI P I N S H P E)
Pulau Bugsuk Pulau Balabac
20 0m

PM3
Commercial Arrangement Area

7
PM301
Pulau Langkawi

ND4
PM302 PM311

ND5
H

Pulau BalambanganPulau Banggi

SB303

ND1 PM313 PM306

PM314

ND2
A

ND3
C

K
G

SB302

SB304 Pulau Malawali Pulau Jambongan SB305

Sulu Sea

PM303

SB330 SB301

PM312

F F

L
E

PM320

5
PM321

Pulau Pinang

PM309
PM307 PM305

South China Sea

B
B SK301 SK3 SK302
Pulau Natuna

M
J

SABAH
SB332

SB331

Pulau Tawitawi

SK312 SK308

Pulau Labuan
EI
Pulau Sebatik
Pulau Pulau Sibutu Timbun Mata

5
SB306

Str ait so f M PM322 ela ka

SK SK 30 309 9

PENINSULAR MALAYSIA

SK 307 SK310

SK306
SK311

U BR N

SK333 SK334 SK332

PM308
Kepulauan Anambas

ND6

ND7

SK303
Pulau Subi Besar

SK5 SK305

Pulau Tioman

Pulau Djemadja

3
SK331

SK304

SARAWAK
S M TR UA A

0
S N A OE I GP R

1 98 100 102

200 Km

K LI M N N A A TA

Celebes Sea

1 110 112 114 116 118 120

104

106

108

Development & Producing PSCs : 24

CONCEPT OF PRODUCTION SHARING CONTRACT (PSC)

Entire owne rship of Nation's pe trole um re source s is ve ste d to PETRONAS. PETRONAS has e xclusive rights to e xploit Nation's pe trole um re source s. PETRONAS, as a custodian, manag e s the pe trole um re source s of the Nation. Formulate s re le vant policy and g uide line s. Provide s ne ce ssary ince ntive s and conducive inve stme nt e nvironme nt for upstre am pe trole um busine ss. Adds value to the pe trole um re source s.

GOVERNMENT

PDA

PETRONAS
Conve rte d Conce ssion Syste m to Production Sharing Contracts (PSC). Oblig ate s Partne rs to provide all financing and insulate PETRONAS from risks. Provide s a more e quitable partne rship. Stipulate s contractual pe riod, manag e me nt of ope rations, re cove ry of costs, division of profit, obligations of partie s. Plans and se cure s long te rm de ve lopme nt of Nation's pe trole um re source base . Promote s sustainable e xploration, de ve lopme nt and production of re source s for the maximum be ne fit to the nation. Manage s pe rformance of PSC Partne rs. Brings in fore ign inve stme nt and te chnolog y.

PSC

CONTRACTORS

EVOLUTION OF PSC INLINE WITH CHANGING ENVIRONMENT

Revenue-over-cost (R/C) To attract new foreign investment through smart partnership concept

DEEPWATER PSC Target for big players with deepwater experience

1985 PSC To attract other oil companies besides ESSO and SHELL

1976 PSC

Convert existing Concession into PSCs CONCESSION AGREEMENT Oil companies and State government

PSCs IN OPERATION IN MALAYSIA

(As at January 2004)

50
1 9 7 6 P S C 1 9 8 5 P S C

D E E P W A T E R & R /C P S C
42 43 41 44

46

40
37 33

30
27

30

30

31 29 29

31 27

21

20

11

10
5 4 4 4 5 5 6 6 6 6 4

1976

1980

1984

1988

1992

1996

2000

SPLIT OF THE BARREL UNDER PSC

Revenue (A) less Royalty (B) 10% of (A) less Cost Recovery (C) Max 50% of (A) equals Profit Oil (A)- (B)-(C) plus Profit to Contr equals Entitlement to Contr less Tax less Expenses equals Contractor NCF equals Contractor NCF equals GOV NCF less Tax Profit to NOC equals Entitlement to NOC plus Contr tax paid plus NOC tax paid Royalty

Cost Recovery to Contr

Contractor

National Oil Company

Government

76 PSC
Government Cash Flow

Less Royalty 10%

Gross Revenue Less Cost Cost Oil Ceiling 20% Profit Oil Split Contr : PET 30% :70%

Actual Used Cost

Contractors Profit Oil Less PITA 38%

PETRONAS Profit Oil

Less PITA 38%

PETRONAS Cash Flow

Contractor Cash Flow

85 PSC
Government Cash Flow

Less Royalty 10%

Gross Revenue Less Cost Cost Oil Ceiling 50% Oil, 60% Gas Profit Oil Split Contr : PET Sliding
Contr PETH 50 60 70 First 10 kbd Next 10 kbd Ecxess 20 kbd 50 40 30

Actual Used Cost

Contractors Profit Oil Less PITA 38%

PETRONAS Profit Oil

Less PITA 38%

PETRONAS Cash Flow

Contractor Cash Flow

ROC (Revenue Over Cost) PSC

Government Cash Flow

Less Royalty 10%

Gross Revenue Less Cost Cost Oil Ceiling Depend on R/C Profit Oil Split Contr : PET Depend on R/C

Actual Used Cost

Unused Cost Oil Contr : PET

Contractors Profit Oil Less PITA 38%

PETRONAS Profit Oil

Less PITA 38%

PETRONAS Cash Flow

Contractor Cash Flow

APPROACH : REVENUE-OVER-COST (R/C) INDEX

One of the "yardsticks" to gauge Contractors' profitability at any time is by the RATIO of Contractors' Cumulative REVENUE over Cumulative COSTS. We define the above yardstick as Contractors' R/C Index
R/C Index =
Contractor's Cum.Costs & Cum.Rev

Contractors' Cumulative Cost Oil +Profit Oil From The Effective Date Contractors' Cumulative Petroleum Costs From The Effective Date
2.50

Contractor's R/C Index

Cumulative Revenue (PO+CO)

2.00

1.50

1.00

0.50

Cumulative Costs
0.00

8 10 12 14 16 18 20 22 24 26 28

8 10 12 14 16 18 20 22 24 26 28

Year

Year

R/C = 1; Represents PAYOUT (undiscounted), but true Payout (considering time value of money, tax payment, etc.) occurs when R/C is around 1.4
Outline

R/C TABLE
Contractors R/C Ratio

COST OIL
Cost Oil Ceiling

PROFIT OIL
Unused Cost Oil PET : Cont Profit Oil PET : Cont

0.0 < R/C <= 1.0 1.0 < R/C <= 1.4 1.4 < R/C <= 2.0 2.0 < R/C <= 2.5 2.5 < R/C <= 3.0 R/C > 3.0

70% 60% 50% 30% 30% 30%

N.A.
20 : 80 30 : 70 40 : 60 50 : 50 60 : 40

20 : 80 30 : 70 40 : 60 50 : 50 60 : 40 70:30

FISCAL IMPROVEMENT
Fiscal terms are tied to rate/volume level, NOT related to PROFITABILITY Fixed Cost Oil/Gas is NOT sensitive to investment level especially in the early of the project life Fiscal terms applied to Contract Area (rather than field basis) Higher profit split benefits accrue to First field. Subsequent development does not enjoy higher profit split. NO fiscal incentives to save costs Any Unused Cost Oil/Gas becomes profit and share in a bigger proportion to PETRONAS NO fiscal incentives for re-investment Additional investment will not enjoy the same benefit as in earlier investment

COMPARISON OF PSC - OIL

100
PSC Partner
10.1

14.0

16.4

12.7

Percent of Gross Revenue

80

15.8

PETRONAS

28.7

13.3

12.5

60
42.3
42.2

30.1

40

GOVERNMENT

38.1

20
COST
23.1

44.7

28.0

28.0

0
1976 PSC
Note : The 1976, 1985 and R/C PSCs are based on 40 million bbls crude oil reserve volume. The Deepwater PSC assumes a large oil discovery in excess of 1 billion bbls.

1985 PSC

R/C

DEEPWATER

VARIABLE COST SHARING LEVELS AND PROFIT SPLITS

It allows Contractor to take more when its profitability is low and PETRONAS' take progressively increases when Contractor's profitability improves: 1. Higher Cost Tranche is given when Contractors' Profitability is low and decreases as Contractor's Profitability increases.
High COST TRANCHE

Low

Contractor's Profitability (as indicated by R/C)

High 2. Higher Contractor's share of Profit Oil/Gas is given when Contractor's Profitability is low and decreases as Contractor's Profitability increases. CONTRACTOR'S SHARE OF PROFIT OIL/GAS High

Low

Contractor's Profitability (as indicated by R/C)

High

Salient Features of ROC PSC

- Sensitivity of IRR on Oil Price and Cost
22

Oil Price
20

Cost

100 mmbbl

100 mmbbl

18

Contractor's IRR (%MOD)

40 mmbbl
16

40 mmbbl

14

12

10

Salient Features: Under the new R/C fiscal terms, Cost Reduction provides as much impact on Contractors' IRR as that caused by oil price increase Cost Reduction is fully within our control, unlike oil price. Therefore, Contractors will be enticed to reduce cost rather than to hope for oil price to improve. This leads to larger share in revenue for all parties involved.

-30%

-20%

-10%

Base Case

10%

20%

30%

Decrease

Percent Variation

Increase

PROFITABILITY BASED FISCAL REGIME : Sensitive to Re-investment

REVENUE

ANNUAL

COSTS
1st round investment 2nd round investment

CUMULATIVE

Cumulative Revenue

Cumulative Costs
2.0 1.5

RC INDEX

1.0 0.5 0.0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Dip in R/C Index as a result of additional investment.

15 16 17 18 19 20
E&P Business

ECA-1 / mcprer3c/JAN 1996 EMD

YEAR

R/C IS SELF-ADJUSTING
Costs, Reserves & Oil Price are estimated based on current conditions and current Technology when a Contract is negotiated and agreed. Estimates likely to change, New technologies may evolve over time.
CONTRACTOR'S R/C INDEX
R/C INDEX PROFILE IF OIL PRICE TURNS OUT TO BE 25% HIGHER

CONTRACTOR'S R/C INDEX

3.0 2.0 1.0

3.0 2.0 1.0

IF PRICE TURNS OUT 25% HIGHER & COSTS 25% LOWER

R/C INDEX PROFILE BASED ON ESTIMATES DURING NEGOTIATIONS

R/C INDEX PROFILE BASED ON ESTIMATES DURING NEGOTIATIONS

0.0 2 4 6 8 10 12 14 16 18 20

0.0 0 2 4 6 8 10 12 14 16 18 20

CONTRACTOR'S R/C INDEX

3.0 2.0 1.0 0.0 0

IF RESERVES & PRODUCTIVITY TURNS OUT 50% BETTER

CONTRACTOR'S R/C INDEX

3.0 2.0 1.0 0.0 1

IF NEW TECHNOLOGY IS USED TO ENHANCE RESERVES COST EFFECTIVELY

R/C INDEX PROFILE BASED ON ESTIMATES DURING NEGOTIATIONS

R/C INDEX PROFILE BASED ON ESTIMATES DURING NEGOTIATIONS

10

12

14

16

18

20

11

13

15

17

19

Sliding Scale 85 PSC

ROYALTY ( 10% )

Below 50 MMbbls 50 : 50
COST RECOVERY up to 50%

Above 50 MMbbls 30 : 70

Below 10 kbbl/d 50 : 50

Next 10 kbbl/d 40 : 60

Above 20 kbbl/d 30 : 70 12 % 12 %

PS Cont. PROFIT OIL

20 %

16 %

PETT. PROFIT OIL

28 % 20 % 24 %

28 %