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  • 9 Pongsiri

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    bob edwards
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    energy law

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    energy law

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    8 vues12 pages

    9 Pongsiri

    Transféré par

    bob edwards
    energy law

    Droits d'auteur :

    © All Rights Reserved
    Téléchargez comme PDF ou lisez en ligne sur Scribd
    Signaler comme contenu inapproprié
    sur 12
    “Tow Ener Research Retr br tis joual a avaleble at QIN. Tho cunt issu and fl text archive f thi jours avaiable a wrowremeraldinsghtcomfresearchregistor ‘wove emeraldinsight.com/0951-S558.htm + + ; Partnerships in Partnerships in oil and gas viland ges production-sharing contracts Nutavoot Pongsiri Centre on Regulation and Competition (CRO), University of Manchester, 431 Manchester, UK Keywords Public sector orgenizations, Privale sector organizations, Partnership, Production management, Coniracts Abstract In countries with erge or potential large ot and gas deposits, the resource and its ‘extraction tend to become vita! cornerstones ofthe economy. However, uncertainties involed in nding commercial quantities of oll and gas and the jutensive capital required for undertaking ‘exploration and production result in significant business risks, The petroleum fiscal systems in ‘many developing countries arenow opting for production shaving contracts (PSO) as a new model of agreement forthe exploration and production of ol and gas resources. This paper extends the ‘rinipatagent theory to foster understanding of partnership belween the ost goverment and its ‘Soreign contractor inthe realm of PSC. The theory highlights the importance of moral hazard and ‘adverseselection problems. To avoid these wicertainties and asymmetric information, the Drincipal (national oil compary) needs to design an incentive contract that iuduces the agent (Guternationa olf company (10%) to undertake actions that will maximise the principal's welfare. ‘Under a PSC, the state has to ofer contract terms that are attractive enough fr the TOC to enter into an agreement. At the same tie, the terms must allow thesiate fo receive masinum economic returns from the venture 1. Introduction ‘The important and wide-ranging roles of energy in economic growth are well known. Iwayemi (1998) suggests that there is a strong relationship between energy development and the national economy, as energy demand, supply, and pricing have ‘enormous impacts on economic growth, With the rapid pace of economic expansion ‘over the past decades, many developing countries experienced a sharp annual growth in peroleam demand, Nevertheless, of those with large or potentially large petroleum, deposits, very few had sufficient financial resources for supply side investments, especially for the development of oil and gas exploration and production, Oil and gas development projets are characterised by large capital investments Exploration and productin operations encompass various activities, ranging from undertaking geological surveys, identifying hydrocarbon resources, and commercially exploiting them. Ventures in this sector are of a high risk nature in the physical, e commercial, and political sense as itis difficult to determine in advance the existence, extent and quality of hydrocarbon resources, as well as production costs and the future price in the world market (Bindemann, 1999, p. 5). Owing to difficulties in gaining, access to risk capital and lack of expertise needed for resource exploration and development, most developing countries grant development rights to foreign Eo peti ic ‘The views expressed herein ate those ofthe author and do not necessarily reflect the views ofthe Senso (CRC. This article was fst presented atthe th International Conference on Public and Private Sector Partnerships: Sustinasle Success held atthe Karol Admiecki University of Economics, Katowice, Poland, 2831 May 2002 PSM 175 432 companiss, which have adequate capital, technology and expertise, including ‘capabilities to manage investment risks towards their diversified portfolios. Develapment rights can be divided into two basic contract types (1) concession licenses; and 2) contractual arrangements. ‘The differences between them arise from different attitudes towards levels of control ranted 10 companies, compensation and reward-sharing schemes, including levels of involvement by governments Johnston, 1994a; Bindemann, 1999). Under concession licenses, the sate owns all mineral resources but the rights to produce the minerals will be granted in exchange for a royalty payment and income taxation from the company to the government. ‘The most common type of contractual arrangement is the production sharing contract (PSC). Under a PSC, mineral resources are owned by the state, which brings in a foreign company as a contractor to provide technical and financial services for exploration and development operations. The foreign company usually assumes the entire exploration cost risk, and receives a specified share of production as a reward for its initial investment, operating expenses, and the work performed. SCs are widely used in developing and transitional economies as they are in fine ‘with government aspirations to be more proactive and involved in managing the oil and gas resources. The most common combination of agents in a PSC is a host ‘governirent, or one of its authorities such as the national oil company (NOO, and an internatinal oil company (100) which can be an individual firm or a join venture or 2 consortium, PSCs generally requite the establishment of a partnership organisation between the public and private sectors to monitor operations and participate in decisions regarding production levels and accounting practices. The aim of the partnerstip effort is to ensure that both parties bring different strengths to the relationship to utilise known sources of energy in the most economical and effective way. In strong and active partnerships, both parties benefit from co-operation However, the main aim of the [OC as a private entity is profit maximisation, whereas the NOCof the host country is mainly interested in maximising economic values of the owned sesources. As a result, it is not surprising that the objectives of the two frequently clash (Bindemann, 1999). Conflicting views may lead to renegotiation of contracts and less efficent running of the business. Provan (1984) suggests that the {formation of partnering relationships between two distinct organisations often leads to some negative outcomes such as increasing complexity, loss of decision-making autonomy, and information asymmetry. In addition, cultural and institutional differences, together with the uncertainties over risk and reward shating, can also constiture a serious threat to successful partnerships Qacobs, 1992), This may cause considerable tensions in relationships as the government may seek to alter the IOC's priority towards the NOC to achieve its own organisational goals; for example, by altering energy pricing provisions to reflect and accommodate macroeconomic needs. Mikesell (1975) also found that disagreement often arises if the government changes existing legislation and applies the new rules to existing contractual agreements such as increases in taxation of the IOC contractor and changes in the split of revenue between the IOC and the NOC. ‘This paper begins with a review of the development of PSCs in Indonesia, as it is the country which first introduced this type of contractual arrangement. In addition, Indonesia has been one of the most active countries with regard to standard PSC forms, not only in Asia but also world-wide, This study is followed with some theoretical considerations of the prinepalagent model to foster understanding of partnership between the host government and its foreign contractor in the realm of PSCs. This will clude a discussion of certain key issues, such as the problems of moral hazard and adverse-selection caused ty the presence of uncertainty and the existence of formational asymmetries 2etween the two parties. 2, Provisions for private participation in oil and gas exploration and production: evidence from Indonesia ‘The frst type of oil and gas agreement was the concession system, in which an TOC is permitted by the host government to explore and produce petroleum in a certain area, with the condition that it mast pay the government compulsory taxes at a fixed rate, plus royalties. The petroleum fiscal systems in many developing counties are now opting for the PSC as a new model of agreement for the exploration and production of cil and gas resources. This trend began in the 1960s and the past four decades have seen a significant inerease in the range of terms offered by PSCs. Now, nearly half of ‘the countries with petroleum potential have a system based on the PSC Gohnston, 19946). Under the PSC, the state engages the IOC to explore for hydrocarbons and, in the event of a discovery, to exploit them. The IOC is responsible for financing the petroleum exploration and production development. It carries the entire exploration risk. If no gas or oil is found, the company receives no compensition, The government owns both the resource and the installations upon being placed in service, ‘Traditionally, the government or its authorities, such as the NOC, has the option to participate in different aspects ofthe exploration and development process. Division of profits is one of the most important benchmarks for the PSC fiscal systems. Tt correlates directly with reserve values, field size thresholds, and other measures of relative economics. Once eash flow is projected, the TOC pays: a royalty on gross production to the government. After the royalty is deducted, the OC receives revenues or production as reimbursement of its costs 28 compensation in kind (cost recovery). ‘The remainder ofthe ol or gas (profit ol or gas) is then allocated between the NOC and the IOC ata stipulated share. The TOC then has to pay income tax on its share ofthe profit oil (or gas). The profit share combined with cost recovery is the total IOC entitlement, In this basic form, the government has three sources of revenue: royalty, its share of profit oil (or gs), and income tax. A general fiscal arrangement of PSC is outlined and presented in Figure 1. Contractual terms in the PSC include a variety of items, including definition of exploration blocks, duration of exploration and production, minimum work and expenditure obligation, basic rights, duties, and privileges of the contractor, fiscal regime, sanctity of contract, and arbitration. In addition to royalty, petroleum income tax, and profit split, a PSC also contains a clause covering special advantages that contractor may offe to the government in return for being awarded the contract. These advantages normally offered are items such as scholarships, training, grants to government authorities or educational institutions, production bonuses, domestic ‘market obligations (DMO), and public participation options Partnerships in oil and gas 433 Gross Revenue 175 (eg. one arr ofl * s20.00 Government Take | loctake 20 Royal 434 aly $600 Cost Recovery (Operating Coss eg. deprecation, depletion, ee.) 4499) Sip00 Profit Oil Split so (040) —_ 0 (anaes Taxes 10 — 0%) —_ sw) $960 Sioa xan A ng bare of ot $0 red rough yom ATO repay pid en corte nhs he IOC slowed o eons it of reves we Simted at tom th gros even es yay, The renang revenue shared ito nove of he Goverment. The 10s 4% rae pad eto he Govereas Stef poi. Cxidring evens lst andr ec PSC sytem, he TOC on fica eiement comet 5 “The PSC fal magnet Souree: Adopted fom Johnston (19948) Provisions of private participation in the PSC originated in Indonesia in 1966. It has ‘now spread around the world, though there has been a noticeable shift back towards the devetoped country model of concessions, in particular in Latin America (Machmud, 2000). The PSC was introduced in response to increasing criticism and hostility towards the existing concession system, The benefit of the PSC system in comparison swith the concession system in the envionment of Indonesia, is the flexibility that enables the international oil ompany to enter into an agreement with the Government ‘na wide range of issues, especially on the principle of ensuring the right of investors during the period of the project. The PSC is attractive to foreign firms, particularly those based in the USA, because they can book the reserves in their balance sheets notwithstanding the fact that they do not own them (Bindemann, 1999, p. 85). The form of the PSC in Indonesia has continuously progressed, with its main objectives being to encourage foreign investors to ensure equity between the revenue ofthe State and the profit of the company, while strengthening the role of Stale management in the ‘operation of oil and gas activities (COOP, 2002). Since 1986, the PSC concept has been the principal form of co-operation between Pertamina, the Indonesia stateowned oil and gas mining company, and the IOC for petroleum exploration and production. Under this principle, the Government has focused not only on the tale, but also on how the take has been extracted, From the 10C's perspective, any participation by the host country tends to be unattractive as the partner can interfere with the day-to-day management of the operations (Bindemann, 1999, p. 17), Nevertheless, because of its positive geological potential, Indonesia's oil ‘exploration activities increased continuously after the frst PSC was introduced. The PSC now covers about 90 per cent of the contracted petroleum acreage, thereby representing the dominant share of all the petroleum activites in the country. Under PSC co-operation, the government has a high participating interest, normally 60-85 per cent, and the right to assign its own staff to the joint operating company from the beginning, The IOC’ profits after tax and cost recovery are about 15-35 per cent on ol and 30-40 per cent on gas (CCOP, 2002). ‘The Indonesia PSC corprises a number of terms that include its legal and organisational structuring of a complex relationship between the state-owned ‘company and its foreign contractor. It has been considerably influenced over the contract by the changes in the politcal and even personal context of the parties, thus ‘creating institutional, political and commercial tensions (Mlachmud, 2000). As a result, Pertamina and its international contractor have from time to time modified the PSC, not in terms of its principal features, but more in its fiscal terms, Such modifications were made to adapt to prevailing situational issues, such as forms of income taxation and much tighter management by Pertamina, as well as to non situational factors, such as the natural conditions of the acreage affecting the risk and cost of exploration. ‘Machmud (2000) reviewed the history of PSCs in Indonesia. His study revealed that the results were remarkable during the first ten years after 1966. Exploration and development funds were pouring in and Indonesia was the favourite place to invest the corporate dollar. The government was in favour because it had control by virtue of the approval requirement, The IOC contractor was also in favour due to eligibility to access a guaranteed share cf the ol (or gas) under a reasonable level of contol in the field. Other countries, most notably Indonesia's neighbour Malaysia, copied Indonesia's PSC system which, by the mid-1970s, had become the leading legal framework for cooperation between foreign investors and developing countries. However, after the mid-1970s, the changes in the investment climate in the Indonesian. «il industry caused frustratim on the part of foreign investors, Research by Machmud (2000) nto the problems facing the Indonesian petroleum industry has shed ight on the uncontrolled expansion of Pertamina and its financial mismanagement, resulting in a ‘much more bureaucratic rodel of Pertamina-plus-state interaction with the foreign contractors. Bureaucrats without comparable expertise or exposure to risk prescribed specific management actions to foreign contractors, The culture of corruption entered mainly through mandatory procurement. Tendering, always supposed to reduce corruption, was shown in its particular Indonesian situation to be the principal entry Partnerships in oil and gas 435 PSM 17,5 436 point for imposing “crony” contracts, which in the end made Indonesia uncompetitive and shified petroleum income from the state to the crony-politicians. As a result, Indonesia, in spite of its continuing geological attraction, has not experienced the same sowth of development of new reserves as in other competing regions. Although there ‘was an effort in 1998 to propose reforms which would deregulate and de bureaucratise the industry, it has so far not addressed certain key elements in the proposed reform package and bureaucratic interference continues. Evidence from Indonesia indicates that the PSC, by its nature, implies the existence of a pretected state company and opens up ways for governments in developing countries to focus on the value of petroleum production and the extraction cost, rather than improving financial stability and economic development. It emphasises energies and skills of extracting profits through managing politics and bureaucratic control over oil extraction on ideological grounds, such as sovereignty and nationalism, Pethaps the right way for developing countries, as argued by Walde (2002), is to expose ational oil and gas businesses as early as possible to competition and meanwhile introduce as much objectivity and transparency as possible, This could maximise accountability of the inevitable decision making that must be left with the state such as licensing, tax collection, and rule and regulation implementation for public irterest issues, eg safety and the environment, This sin fact the real challenge for policy makers in developing. countries. 3. A partnership model in the frameworlk of PSCs ‘The current issue in public private partnerships (PPPs) can be dated from the 1960s when partnerships were deployed by the federal government in the USA asa tool for stimulating private investment in development of inner-city infrastructures (Poster, 198), ‘Tae PPP can provide a broad umbrella which can shelter and protect the publie interest while bringing investment potential and added value from the private sector (Carr, 1998). Under a presumption of market incentives, the PPP seems to be more approprate. than hierarchical command relationships ot adversarial regulatory ‘processes, Nevertheless, successful implementation of the PPP depends primarily on the development of sound legal procedures, agreements, and contracts that clearly define the relationship between government agencies and private firms (Pongsir, 2002} ‘The concept of contractual partnership can be used to enhance oil and gas development efforts. Typically, any commercial exploitation of oil and gas resources ‘ean commence only after the private firms obtain either concession licenses or PSCs from the Governments of the Siate. In the case of concession licenses, the state's interest s restricted to royalties and taxes, and the licensee, usually TOC, willbe free to produceand sell oil and gas without any limitations. In the case of PSCs, the State or the NOC works with the IOC as a partnership venture, Although exceptions exist, initial exploration costs would usually have to be bore by the IOC. If commerciality Geclared and production begins, revenues earned on production of oil and ges shall first cover the costs incurred by the IOC, and the balance will be shared with the NOC as a predetermined ratio. Both parties would proportionally share the profits and

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