A Production Sharing Contract (PSC) is an agreement between a contractor and a host

government whereby the contractor bears all exploration risks, development and production costs
in return for a stipulated share of the production resulting from this effort

The first Production sharing contract (PSC) was signed in 1966 in Indonesia. At least 50% of
host governments now use production sharing contracts regime. PSCs are in use are North
Korea, China, Indonesia, Philippines, Sudan, Libya, Oman, Qatar, India, Bahrain, etc.

The acreage may be given at different stages to the contractor. It may be awarded at a stage when
no exploration work has been done or after some exploration work. Such acreage or blocks are
termed as Exploration Acreage or Blocks. There may be acreage in which discovery of oil or gas
has been made such acreage is known as Discovered Fields or simply Fields. In India PSC are in
operation for Exploration Blocks, Small and Marginal Fields and Medium Size Fields.

The PSC contains provision for deciding as to appraisal program, development program and
overall sharing of oil or gas on the basis of formulae given in the PSC.

SOME POLICIES RELATED TO PSC

POLICY FOR MERGER OF EXPLORATION PHASES UNDER NELP-III & NELP-IV
(SHALLOW AND DEEP WATER BLOCKS) PRODUCTION SHARING CONTRACTS

1. The Government of India has signed 23 Production Sharing Contracts (PSCs) under NELP-III
and 20 PSCs under NELP-IV respectively, which are currently valid and are mostly in phase-I of
exploration. Out of these, 15 & 10 PSCs respectively are in offshore areas. These contracts
generally provide for 3exploration phases with phase-I, II & III comprising of 7 years (3+2+2)
for shallow water blocks & 8 years (4+2+2) for deep water blocks. The PSCs also provide for a
walk out option at the end of every phase, with the provision to relinquish 25% of the Contract
area at the end of the each phase – I & II.

2. There is a worldwide supply and availability crunch for offshore rigs. It has been examined
that the tight rig position is, particularly, impacting drilling activities in case of NELP-III & IV
blocks, as their exploration phase-I is either over (generally in April 2006 for shallow water
blocks and April 2007 for deep water blocks in NELP-III) or would be expiring within the next
10-12 months for NELPIV. In case of NELP-III offshore blocks, even extension periods granted
under the extension policy are coming to an end shortly.

3. The PSCs provide for minimum work commitments to be carried out by contractors in each
phase of exploration. The non-completion of the committed work programme within the
scheduled time as specified in PSCs has several financial implications for the Contractors by way
of payment of liquidated damages for the unfinished work programme, to the Government.
Further, the extension policy also stipulates the cash payment of 10%-30% and bank guarantees
from 50%-100% for unfinished work programme is to be paid to the Government for granting
extensions of various periods upto 18 months, beyond the time specified in the PSCs.

4. DGH had recommended the following proposal to the Government to address the unforeseen
situation of non-availability of offshore rigs in the international market:

I. To merge the duration of exploration Phase-I and Phase-II of NELP III & IV offshore
Blocks into a new phase to be called as Phase-I and to merge the MWP of Phase-II and
Phase-III to be called Phase-II.

II. The total exploration period will remain seven years for shallow water and eight years for
deepwater.

5. DGH has primarily recommended the merger of phases due to non availability of offshore rigs
on the analogy of relief given by MMS, USA in case of areas (leases) operated by companies in
Gulf of Mexico. The MMS order provides the following conditions:
“Suspensions of Operations (SOO) will be considered to allow time for the first available rig to
commence operations, provided a drilling contract has been executed prior to lease
expiration. The SOO request must include:

a) Full details, with supporting documentation, demonstrating that a timely rig search
was performed,

b) Verification that a rig contract has been executed prior to lease expiration, and

c) The anticipated date for the rig to arrive on location and commence operations.”

6. Accordingly, Government has now decided to adopt the following transparent policy with
regard to merger of exploration phases for NELP-III & IV blocks:

I. To merge the period of existing phase-I & II to be named as the New Phase-I and merge
the minimum work programme (MWP) of existing phase-II & III into a New Phase-II to
be completed in the period provided for the existing phase-III. This will be applicable in
case of offshore blocks of NELP-III & IV. However, before the merged period of the
erstwhile phase-II commences, the contractor has to avail 18 months extension in terms
of extant extension policy.

II. The contractors who have already entered into exploration phase-II or who have only
seismic work programme and no drilling commitments in phase-I will not be covered
under this dispensation.

III. The contractors who avail of this dispensation would be required to relinquish 50% of the
area at the end of new exploration phase-I.

IV. This new scheme will be optional and available to those contractors who are presently in
the phase-I or have not relinquished their blocks after completion of phase-I. Contractors
will be given 60 days time from the date of announcement of this dispensation to exercise
the option. They would also be required to give consent to all the provisions of the new
dispensation.

V. The conditions stipulated by MMS, USA, as enumerated in Para 5 will be made

applicable and its compliance should be ensured / verified by DGH.
VI. Other PSCs of different bidding rounds including pre-NELP PSCs, contracted prior to
NELP-III which is presently in Exploration Phase-I and facing similar problems of
shortage of offshore rigs are also approved for this dispensation.

VII. In case the contractors complete MWP of phase-I earlier than the new phase-I period,
they shall be allowed to either enter into the next new phase-II and remaining period may
be added to new phase-II, or undertake additional work programme in the remaining
period of the new phase-I, to be set off from the new phase-II in accordance with PSC
provisions.

VIII. The contractors once elect the option under this dispensation, then subject to the
compliance of terms and conditions of the Extension Policy and compliance of terms and
conditions for merger of exploration phases in the new Exploration Phase-I & II, will be
governed by this dispensation. DGH shall ensure timely compliance of the terms and
conditions by the contractors.

IX. Other terms and conditions of PSCs shall remain unchanged.

X. DGH shall monitor the progress of the work programme, once contractors elect to opt for
this new dispensation. Each month, DG, DGH will send a monthly statement on the latest
status of these blocks, under the new dispensation.

XI. Any other consequential issue, which may arise during the implementation of this
dispensation, shall be decided by the Government.

POLICY FOR SUBSTITUTION OF ADDITIONAL METREAGE DRILLED IN DEEPER

WELLS AGAINST TOTAL METREAGE COMMITMENT AS PART OF MINIMUM
WORK PROGRAMME (MWP) IN THE PRODUCTION SHARING CONTRACTS
(PSCs)

1. The Government of India has signed 190 Production Sharing Contracts (PSCs) under pre-
NELP and NELP rounds. A few of the exploration blocks under these PSCs have been
relinquished while the remaining are currently valid and are at various stages of exploration. The
PSCs provide a minimum work programme (MWP) for each exploration phase. These MWPs
include seismic surveys and exploratory wells.

2. The PSC provides that the contractor shall complete the MWP of the relevant phase, failing
which they shall pay money to the Government for the unfinished MWP in accordance with the
provisions of respective PSCs. The Government has also put an extension policy in place,
wherein the contractors have to provide Bank Guarantees / pay Liquidated Damages for
extensions in phases not exceeding 18 months.

3. In order to encourage exploration in deeper horizons, the Government has now decided to
adopt the following transparent policy with regard to substitution of additional metreage drilled
in deeper wells against total metreage commitment as part of minimum work programme (MWP)
in the production sharing contracts (PSCs):

I. The contractors are permitted substitution of number of exploratory wells in an

exploration phase by excess metreage drilled in lesser number of exploratory wells
provided at the time of seeking depth compensation, there has been a hydrocarbon
discovery from the deeper formations and further, total points / marks calculated, as per
the Bid Evaluation Criteria (BEC) for NELP, is equal or more than the points / marks
secured based on the number of wells committed under the PSC as part of MWP in such
exploration phase.

II. This policy will apply for both NELP and Pre-NELP blocks.

III. The discovery must have been found by the contractor to be of potentially commercial
interest and an Appraisal programme for the discovery should have been approved.

IV. The excess metreage gained by drilling deeper wells over the exploratory wells
committed as a part of MWP as per the new policy or otherwise will not be set off or be
compensated from the next phase. Neither will this policy extend or be adjusted against
unfinished MWP for those contractors who relinquish a block.

V. Other terms and conditions of the contracts will remain unchanged.

VI. Any other consequential issue, which may arise during the implementation of this
dispensation, shall be decided by the Government.

POLICY FOR DETERMINATION OF COST OF UNFINISHED MINIMUM WORK

PROGRAMME/ COMMITTED WORK PROGRAMME FOR EXPLORATION BLOCKS
UNDER PRE-NELP AND NELP CONTRACTS

1. The Government has signed various Production Sharing Contracts (PSCs) during pre-NELP
and NELP rounds which provide a commitment on the part of contractor to carry out minimum
work programme (MWP), as specified in various exploration phases. The PSCs signed till NELP
V envisage three (3) exploration phases and those signed under NELP VI consist of two
exploration phases. The work programme bid by the companies is stipulated as committed work
programme in each of the exploration phases of the respective PSCs. Under NELP-VI PSCs, the
committed work programme also includes mandatory work programme in addition to the work
programme bid by the contractor.

2. The specific duration of each of the exploration phases is provided in the PSCs. For on land
and shallow water blocks, the maximum duration of exploration phases is 3 years, 2 years and 2
years for phase I, II and III respectively with the total period not to exceed 7 years. In case of
deepwater and frontier area blocks, generally, the duration of phases is 4 years, 2 years and 2
years respectively with the total period not exceeding 8 years. Under NELP-VI PSCs, the
exploration period is divided into two exploration phases of 4 years and 3 years respectively in
case of on land and shallow water blocks and 5 years and 3 years respectively in case of
deepwater and frontier area blocks. However, the duration of these phases is subject to any
extension granted by Government pursuant to the provisions of the PSCs or as per the extension
policy formulated by the Government.

3. The PSCs generally have an extension clause which provides an extension of exploration
phase by 6 months with set- off from the next exploration phase, with the approval of
Management Committee or the Government as the case may be, to complete MWP. It also
provides for an extension of 6 months to carry out additional exploration programme. Moreover
Contractors have been seeking extension in exploration phases beyond the timelines specified in
the PSCs which are being governed by the extension policy approved by the government.

4. In case the contractors do not fulfill the minimum work programme/committed work
programme within the stipulated period, they are required to pay money for the un-finished
minimum work programme, if any, to the Government and while determining the said amount, it
is provided under the PSC that all available relevant information including the budget and
modern oil field and petroleum industry practices are to be taken into account.

5. It has been observed that recently few contractors have relinquished Blocks by depositing the
money towards un-finished work programme with the government. The amount has been
calculated and paid by contractor based on certain assumptions about drilling depth; cost
calculations based on dry well principle; drilling rates on day rate basis ( as different from metre
rate basis) drawn from running contracts of drilling and services etc. It is also observed that these
assumptions are vulnerable to different interpretation as per PSC provisions. Since large stakes
of the Government are involved, a transparent and consistent policy has been framed by the
government for determination of amounts towards unfinished work programme in line with the
PSC provisions. Besides, the policy envisages that the amount determined should be such so as
not to penalize the contractor and at the same time it must act as a deterrent for contractors in
order to ensure that they complete its minimum work commitments.
6. With above objectives, the following policy has been framed which will be followed by
contractor parties while determining the amount of un-finished work programme and depositing
the same with the government:

I. The cost of unfinished Work Programme relating to an exploratory well will be

determined on dry well principle.

II. The well depth committed by companies under minimum work programme (MWP) will
be considered for purposes of computing the cost of un-finished well as this has been the
criterion for evaluating the bids and award of the blocks.

III. Well cost will be calculated by computing the number of days required for drilling
various stages as per the well construction / casing policy. The Geo-Technical order of the
well and data of related wells will be taken into consideration for estimation of drilling
time.

IV. The well design for unfinished wells will be similar to the wells drilled in the same
Block. If no wells are drilled in the same Block, the well design will be similar to wells in
neighboring blocks.

V. The day rates will be considered from the valid running contracts for Rigs, Services and
Consumables. DGH will be maintaining the cost data for each of the exploration
activities, separately for different areas/regions based on the current prevailing market
conditions, which will be revised every six months with the approval of the Government.
In case the computed rates of the un-finished work programme by the contractor are
lower than the cost data bank maintained by DGH, the amount towards un-finished work
programme will be recovered from Companies on basis of cost data of DGH.

VI. In case the contractor uses captive rigs and services for its operations, the amount of un-
finished work programme will be determined on basis of prevailing market rates in the
same area/basin and DGH will verify the amount with the figures of cost data maintained
for each area/basin.
VII. Cost of each activity of un-finished work programme will be computed as per format
given in Appendix-H of model PSC.

VIII. 2-D & 3-D seismic costs will be computed based on prevailing rates in the area for
acquisition, processing and interpretation and will not be less than the cost data of DGH.

IX. The competent authority to approve the final amount toward un-finished work
programme will be the Government based on the proposal received from DGH.

X. In blocks, where provisional payments have already been made by the contractors to the
Government, the amounts for unfinished work programme will be calculated and
finalized in accordance with this policy and the contractors will make the balance
payments, if any, to the Government within a period of 15 days from notification of the
amounts so determined expeditiously.

XI. Any consequential issue, arising out of the implementation of this policy, will be decided
by the Ministry of Petroleum & Natural Gas.