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Optimizing PSC Contracts for Development of Marginal

Fields: An Equatorial Guinea Study

Antonio C. Fernandez

Texas A&M University


Master of Engineering
Petroleum Engineering

December 2008


Table of Contents

1. Abstract ..................................................................................................................... 4
2. Conclusion ................................................................................................................ 4
3. Introduction ............................................................................................................... 5
4. Method ...................................................................................................................... 7
4.1. Commercial Uncertainties ............................................................................................................... 7
4.2. Operational Uncertainties ............................................................................................................... 8
4.3. Geotechnical Uncertainties ............................................................................................................. 8
4.4. Contract Uncertainties ..................................................................................................................... 9
4.5. Technical/Commercial Parity ........................................................................................................ 10
4.6. IRR-Based Production Sharing ..................................................................................................... 10

5. Discussion................................................................................................................ 10

List of Figures
Figure 1Target Marginal Fields ...............................................................................................................
Figure 2R-Factor System Sensitivity Analysis (From Johnston 2003) ...................................................
Figure 3Risk Analysis Flow Diagram (From Johnston 1994) ..................................................................
Figure 4Historical Oil Prices and Projections (From Johnston 2003) .....................................................
Figure 5The Effect of Shrinking Excess Capacity on Price Volatility (Data from EIA) ............................
Figure 6Forecasted Oil Prices (Historical Data from EIA) ......................................................................
Figure 7Random Samples from Monte Carlo Simulation of Oil Prices ...................................................
Figure 8License Status in Equatorial Guinea (From GEPetrol) ..............................................................
Figure 9Exploration & Production Activity Map in Equatorial Guinea (From GEPetrol) .........................
Figure 10Seismic Activity on Equatorial Guinea Shelf (From GEPetrol) ................................................
Figure 11Technical vs. Commercial Success Probability Plot Showing Threshold Field Size ...............
Figure 12Random Sample From Monte Carlo Simulation of Well Shedule ............................................
Figure 13Monte Carlo Results (Current Fiscal System) .........................................................................
Figure 14Scatter Plot Under Current Fiscal System ...............................................................................
Figure 15Monte Carlo Results (No Fiscal System, i.e. Technical Success Scenario) ...........................
Figure 16Scatter Plot Under No Fiscal System, i.e. Technical Success ................................................
Figure 17Monte Carlo Results (Under Proposed IRR-Based Profit Oil Splits) .......................................
Figure 18Scatter Plot Under Proposed IRR-Based Profit Oil Splits .......................................................
Figure 19Contractor Profit Under Proposed IRR-Based Profit Oil Splits ................................................
Figure 20Government Profit Under Proposed IRR-Based Profit Oil Splits .............................................

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List of Tables
OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage2

Table 1Equatorial Guinea Sample Profit Oil Splits .................................................................................. 9


Table 2Sample IRR-Based Sliding Scale Profit Oil Splits ....................................................................... 10

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage3

Optimizing PSC Contracts for Development of Marginal Fields: An


Equatorial Guinea Study
Antonio C. Fernandez

1. Abstract
Production Sharing Contracts (PSCs) with profit oil splits dictated by production rates make the
exploration of marginal fields those fields uneconomic under current terms but economic
given parity between technical success and commercial success (Fig. 1) prohibitive because
royalties become regressive. Although widely used throughout the industry because of their
simplicity, production-rate splits are so regressive that they penalize smaller fields while at the
same time cheat the government of upside from large fields. So strongly regressive are these
royalties that with most marginal discoveries, government take is invariably higher and the
economics for producing such fields becomes exorbitant.
The purpose of this study is to produce profit oil splits that are progressive, increasing the
government take as the project creates more profit. Rate of return (IRR)-based profit oil splits
optimize the states objective to bring bypassed oil to market by reducing minimum field size
and production requirements without prejudicing the states entitlement to share in upside.
Marginal fields in Equatorial Guinea (EG) were studied and used as exemplary cases of the type
of marginal fields that oil companies are beginning, and will continue, to encounter as world
demand rises and global production/reserves decline.

2. Conclusion
The profit oil splits within current EG PSCs, which are based on cumulative production, are
regressive. In fact, around 65% of potential projects would actually lose money under current
tax schemes (IRR of 0%). The average project stands to make an IRR of only 8.5%, far below
the typical hurdle rate of potential projects for international oil companies (IOCs) to consider
(typically 15%-25%). Given parity between technical success and commercial success, however,
the same fields present a mean IRR of 59%, with only a 13% chance that the project suffers a
negative cash flow; therefore, there is room for negotiations between the IOC and the
government such that downside risk in the part of IOCs is mitigated whilst at the same time the
government can be entitled to share in the upside of a discovery.
The IRR-based profit-oil splits model devised in this study mitigated the downside risk by
ensuring that the average IRR is approximately 30% with only a 16% chance of an IRR of 0%,
while at the same time it ensured that the state collected its share of the upside, as the IOCs IRR
maxed out at around 56% in a process that allowed the state to capture most of the incremental
profit oil.

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage4

3. Introduction
EG is a well-established, major West Africa hydrocarbon province that, unlike Nigeria, Gabon,
and to a lesser extent Angola, still retains a large portion of its hydrocarbon potential unexplored
and underdeveloped. Because existing PSC terms impose a large minimum field size to achieve
commerciality, Equatorial Guinea possesses stranded oil & gas and exploration opportunities.
Companies have cursorily explored these relinquished blocks in the past and abandoned them
because accumulations of 10 million barrels or less are generally unattractive at the current onesize-fits-all production sharing terms mandated by Equatorial Guinea. This cookie cutter
approach to PSCs is currently mandated by the EG government on every concession block
agreement, but the government has indicated willingness to negotiate more moderate PSC terms
to develop these fields.
The inherent instability of the current PSC contracts has resulted in some projects not being
developed although they are economically attractive in general. On the National Oil Company
(NOC, usually acting on behalf of the governments interest) side, when it enters into
negotiations with an IOC which it expects to provide capital, technology, and expertise it wants
to ensure that it obtains the best possible deal given the countrys specific circumstances
(Bindemann 1999). The NOC will take a number of elements into account and evaluate them
under different scenarios such as reserve discoveries, variations in oil prices, operating costs, and
field development. The objective, presumably, is to maximize the countrys revenue under each
scenario. However, the derivation of PSC terms often produces inefficient contracts that make
the development of marginal fields financially prohibitive. A marginal field, although still
commercially attractive, is small and therefore its project economics are greatly affected with
even the slightest change in PSC terms.
The government, therefore, has to find the optimal, or efficient, contract for its country.
Applying the definition of economic efficiency with Pareto optimality from welfare economics
to contract theory, it can be concluded that a contract is efficient when there is no way to
rearrange the allocation of goods in a way that makes one person better off without harming
another (Bindemann 1999; Hall and Lieberman 2001). But how can an NOC make the contract
such that every possible Pareto improvement is exploited given the varying degrees of
uncertainty that should be taken into account during negotiations? Indeed, it must create a
contract which addresses the main unknown factors in oil exploration and development, which
according to Bindemann (1999) are:
- Existence of commercial hydrocarbon accumulations
- Type of resource (i.e. oil, gas, and/or condensate)
- Size of deposit
- Economic viability of development
- Technological requirements
- Commodity uncertainties
- General economic and political risks
On the other hand, the IOC faces uncertainties in both the exploration and production periods.
The following uncertainties affect a projects economics in the exploration period (Bindemann
1999):
OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage5

No discovery
Discovery is not commercial
Costs

The two main uncertainties encountered by the IOC during production are:
- Operating costs
- Commodity prices
Whether a contract has production-based sliding scale profit oil or a fixed production share, the
economics of such contracts are too rigid to allow for the commercialization of small fields. In
other words, the rigidity of the production share splits makes the risks associated with the
uncertainties above too great. A rate-of-return based scale, on the other hand, would ensure
development projects for marginal fields to be lucrative because the governments take is not
dictated prior to exploration, thereby economically limiting exploration if the economics do not
match. In other words, the project can come online without getting terminated prematurely.
This type of flexibility will allow the market to effectively exploit the countrys natural
resources. It will also create cash-generating projects for the government, stimulate the economy
by increasing local investment, and create jobs. On the other spectrum of field-size, a rate-ofreturn-based contract will allow the government to obtain a larger piece of the pie. For example,
if a large field is discovered and a fixed production share or production-based sliding scale profit
oil dictates the profit oil splits, the country may be missing out on the incremental production. In
essence, it has a dampening effect: contractor potential upside from price increases is
diminished, but the downside is also protected. Likewise, if costs are relatively higher, the IRR
sliding scale mitigates the negative impact, and if costs are lower both the contractor and
government benefit. Fig. 2 illustrates this dampening effect using a fiscal system dictated by RFactors, profit factors that some countries have begun to use and are determined from a formula
or series of formulas. For this example, the R-Factor system accomplishes the dampening effect,
although R-Factor formulas can be biased by the NOC and are therefore not the method of
choice in this study.
The objective with sliding scale systems is to create a relationship whereby the government
percentage flexes upward as profitability increases. In general, it is better for both parties when
government take is a function of profitability, but sliding-scale taxes and other attempts at
flexibility should be based on profitability, not production rates, in order to be truly efficient.
The aim of this new profit-sharing scheme, therefore, will be to optimize the states objective to
bring bypassed oil to market by reducing minimum field size and production requirements
without prejudicing the states entitlement to share in upside. Regardless of the volatility of
uncertainties in the exploration and production stages, a fair division of benefits between the
government and the oil company will be achieved. The PSC scheme will also allow the state to
skim-off possible windfall profits without prejudicing the commercial viability of marginal or
average fields. As a result of such PSC terms, marginal fields will be developed, thereby
stimulating the economy and creating jobs stemming from renewed industry investment in the
country.

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage6

4. Method
The main uncertainties in exploration and production, as outlined in Fig. 3, were divided into
commercial, operational, geotechnical, and contract inputs into the discounted cash flow (DCF)
analysis of the sample project, which culminated in an IRR for the project. In order to determine
the difference between technical and commercial success, all government-related taxes, royalties,
participation, and fees were zeroed. Finally, an IRR-based PSC contract was created whereby
the government participation in the marginal field was determined only after calculating the IRR
of the project.
4.1. Commercial Uncertainties
Overoptimism has plagued the oil industry for the past 30 years, as companies have dramatically
overestimated oil prices and, to a lesser extent, underestimated costs. Fig. 4 illustrates this
phenomenon, plotting oil price estimates from reputable firms and think tanks versus actual
prices. Further, going over-budget seems to happen a lot more often than bringing projects in
on-time and under budget, particularly with frontier regions. Since the expectations of these
variables are amongst the most significant drivers behind competitive bidding, encapsulating
realistic ranges over time will help in ensuring that these economic drivers do not provide a
substantial bias in the project, as the main goal is to study the fields that are uneconomic under
current terms but economic given parity between technical success and commercial success.
4.1.1 Oil Prices

The single most important variable that affects a projects bottom line is oil prices. Several
agencies and independent analysts have published their own projections on what crude prices
will look like in the long-term, and there are conflicting opinions about oil price trends for the
next couple of years, let alone decades. A stochastic model proposed by Costa Lima, Suslick,
and Avansi (2008), based on a simple multiple regression considering a two-year lagged price,
has an overall coefficient of determination (R2) of 0.917. In other words, 91.2% of the variation
in annual crude oil prices between 1982 and 2007 can be explained by the combined variation in
the two lagged years. The equation is:
pt = -0.128 0.244p(t-1) + 1.299p(t-2) ............................................................................... (1)
where pt is the price in time; pt-1 is the lagged price in the time t-1; and pt-2 is the lagged price in
the time t-2.
Given that the DCF in this study goes to 2050, the purpose of estimating crude prices is not to
guess the price, but instead to probabilistically capture the volatility that crude prices could
follow. Macroeconomically, as excess capacity (i.e. world oil capacity minus world oil
production) decreases, the price of crude oil has become more and more volatile. Fig. 5 shows
how this phenomenon has affected crude prices, particularly after 2002. Keeping this in mind,
the oil price forecast used in this study uses Eq. 1 above as the backbone for the upward trend in
the forecast, but ensures volatility month-to-month through a series of triangular distributions for
downside and upside volatility factors. These volatility factors were used in the price estimate
for each month. The ultimate estimate was also a triangular distribution, with the minimum
being the result from the downside volatility, the maximum being the result from the upside
OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage7

volatility, and the most likely parameter being the result of the two-year lagged simple
multiple regression. Fig. 6 shows the upward trend of the forecasted prices, as well as a range of
1 standard deviation and 2 standard deviations over time. Examples of forecasts resulting from
this probabilistic manipulation are provided in Fig. 7. The results were used in the Monte Carlo
simulation of the DCF for the project. Note that although there is a general upward trend,
volatility month-to-month, as well as price in general, can vary greatly using this model. This is
precisely the type of uncertainty that should be captured when forecasting oil prices.
4.1.2 Cost and Timing Estimates

In order to portray an accurate cash flow over time, cost and time estimates were escalated and
determined probabilistically from a distribution of values. Current-day estimates of exploration
well costs, development well costs, tie-in costs, facilities costs, operating expenses, abandonment
costs, and time lags for facilities/pipeline construction were probabilistically inserted into the
DCF calculations and escalated at an annual rate of 3% for inflationary considerations.
4.2. Operational Uncertainties
The proper way to determine when a well should be shut-in is to determine its economic limit,
the production rate where it costs more to produce the hydrocarbons than those hydrocarbons are
worth (Allen 2003). Given the computational complications that determining the economic limit
presents, a minimum rate per well was probabilistically assessed to each well.
Since the time to drill a well varies greatly depending on the geology, infrastructure, and rig
capacity, the time to drill a well was probabilistically inserted into the well schedule using a
triangular distribution with a most likely case being 5 months, the current industry average for
onshore/nearshore drilling in West Africa.
4.3. Geotechnical Uncertainties
Specific to the region, Fig. 8 shows the Equatorial Guinea open and licensed acreage, while Fig.
9 shows the recent exploration and development activity. Note the area around Ceiba
(discovered in 1999) and Okume (discovered in 2001) is open and on the shelf. Fig. 10 shows
the regional seismic data on the shelf. From the figures, it seems that the industry has explored
the area in several campaigns, found two fields, and subsequently left the area.
The two fields produce from the Albian (younger) system, a post-salt system that generates from
the drift section source sequences deposited during the period of restricted circulation prior to the
final detachment of Africa from South America. The rest of the system is likely to be oil
because the downdip fields are oil. Since the charge is coming from downdip, if there were a
large gas component it would likely have displaced the oil in the basinward fields.*
After reviewing the geologic setting of Equatorial Guinea, it is obvious that the hydrocarbon
potential of the eastern part of the Rio Muni Basin has not been exhausted. The location of the
Ceiba and Okume oil fields in this area, plus a number of other undeveloped discoveries in the
area, show the presence of at least one active petroleum system.

PersonalcommunicationwithRSKExecutiveDirectorofGeology.

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage8

More, but smaller fields are therefore expected, as the area was historically explored with a
strategy that required prospects to have amplitude anomalies. A different strategy of finding
smaller fields and not requiring amplitude anomalies will probably locate the prospects previous
operators found uneconomic. These fields are on average 10 million barrel accumulations or
less, with geotechnical chances of success in the post-salt play of 25-40%.
4.4. Contract Uncertainties
The Ministry of Mines and Energy is the overall regulatory and administrative body for the
petroleum industry in Equatorial Guinea. GEPetrol was established as the NOC of the Republic
of Equatorial Guinea, and new upstream contracts provide for direct state participation through
GEPetrol, as it acts as an agent for the states share of hydrocarbons.
Under new PSCs, work obligations are negotiable, as is the overall structure of the PSC:
- Bonuses: signature bonus, discovery bonus, and production bonus;
- Cost oil/gas: after royalty a fixed percentage of production is available for the recovery
of operating and capital costs;
- Profit oil/gas: remaining production after cost recovery is divided between the investor
and the government on a sliding scale basis linked to cumulative production;
- Royalty and income taxes: paid by the contractor, usually 10% and 25%, respectively;
- Training fees: paid by the contractor, usually $100,000 per annum during the
exploration stage and $200,000 per annum during the production stage.
New PSCs provide for a minimum of 20% state participation, and GEPetrol is carried for all
costs prior to first production, at which time the contractor is reimbursed for its pro-rata share of
costs incurred prior to the date of first production. The cost recovery ceiling has been mixed
between contracts, but is a minimum of 60% and typically the contractor is allowed 100% cost
recovery. Typical cumulative production based profit splits are given in Table 1.
Table1EquatorialGuineaSampleProfitOilSplits**
CumulativeProduction
(mmbbl)

GovernmentShare(%)

ContractorShare(%)

0200

20

80

200350

30

70

350450

40

60

450550

50

50

>550

60

40

For the sake of simplicity, all contract uncertainties in the study have been grouped into the
government take umbrella, as it can be argued that each government provision is, in fact, a tax.

**PersonalcommunicationwithWoodMackenzie.

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage9

4.5. Technical/Commercial Parity


The range of field sizes not economic under EGs current PSCs but economic given parity
between technical and commercial success were determined by modeling the DCF twice, once
with all the contract uncertainties as detailed above and once with the contract uncertainties (i.e.
government take) zeroed out. In effect, these fields are the marginal fields this study attempted
to make economic. According to Johnston, the subject of success probability centers on the
difference between technical and commercial success. The difference, he states, is development
threshold field size. As the threshold field size approaches zero, as it virtually has in the United
States, the difference begins to disappear. However, this difference has not disappeared in
countries like Equatorial Guinea, so threshold analysis is used as a decision analysis metric
whether or not to even attempt exploration efforts. Fig. 11 illustrates the effect of development
threshold field size on success probability.
4.6. IRR-Based Production Sharing
A well schedule was used to determine the production on a monthly basis (Fig. 12) based on the
geologic chance of success as outlined above, which was then fed to the DCF to populate
production and drilling data. Using the DCF for technical parity (that is to say, government take
is zero), the IRR for the project after the end of each month was calculated. Based on the IRR at
the end of each month, government take was subsequently calculated based on the tranches from
Table 2.
Table2SampleIRRBasedSlidingScaleProfitOilSplits

Project IRR
< 20%
21% - 25%
> 26%

Government Take
0%
50%
95%

Contractor Take
100%
50%
5%

For example, if the IRR at the end of a month is 30%, then the first 20% would get taxed at 0%,
while the next 5% would get taxed at 50%, and the remaining IRR would get taxed at 95% for an
overall government take of 24.2% and a contractor take of 75.8%. In other words, the net
revenue interest (NRI) for the contractor during that month would be 75.8%.

5. Discussion
The ultimate objective of a flexible system is to create a framework that can honor the mutuality
of interest between the host government and the contractor and provide an equitable arrangement
for both the highly profitable and the less profitable discoveries. Systems with flexible terms are
becoming standard in the industry, as countries attempt to encompass a range of economic
conditions to their PSCs. The most common method used today for creating a flexible fiscal
system is with sliding scale terms, which typically impose a progressively smaller share of profit
oil for the contractor as production rates increase (Johnston 2003).
However, in order to truly be a progressive system, government take should be a function of
profitability, not the other way around. Production rate sliding scale terms, which attempt at
OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage10

creating a progressive taxation system, are actually regressive. In fact, marginal fields in EG are
uneconomic under the current production-based sliding scale terms, with expected IRR of 8.5%
and 65% of cases netting an IRR of 0% (Figs. 13 and 14), but are lucrative given parity between
technical and commercial success (Figs. 15 and 16), and can be economic under IRR-based
sliding scale terms, with expected IRR of 30% and only 16% of cases netting an IRR of 0%
(Figs. 17 and 18). This is because the current terms are essentially based on gross revenues and
do not take into account any of the other uncertainties that affect a project. IRR contracts
directly take into account such things as production profiles, commodity prices, capital and
operating costs, and time value of money because government take is based on project
profitability.
The argument for royalties, bonuses, cost recovery limits, and other forms of taxation is that they
provide a guarantee that the government will benefit in the early stages of production (Johnston
2003), but this is a point of view that is too short-term. Adopting such fiscal conditions actually
hinders activity in the country, as evidenced by the low expected IRR of the marginal fields
when compared to their otherwise healthy IRR under no taxation. Even if a project is already
on-line, royalties can prematurely cause production to become uneconomic to the disadvantage
of both industry and government (Johnston 2003). Using IRR-based sliding scale terms, not only
will the project be lucrative to industry as evidenced by the expected IRR using those terms and
Fig. 19, which shows the expected profit by the contractor, but as Fig. 20 shows, the government
still receives the lions share of profits, as new projects come on-line and the government
captures most of the upside of a project.
One disadvantage to the IRR-based sliding scale system is that the progressive nature of the
fiscal system delays the governments share of revenues, whereas royalties and bonuses
guarantee some revenue. Although beyond the scope of this study, it would be beneficial to
study how much royalties/bonus a potential PSC scheme with both IRR-based sliding scale profit
oil splits and royalties and bonuses could accommodate before the time value of money effects
of royalties and bonuses make the fiscal system regressive. Another perceived disadvantage is
that the projects IRR is directly affected by the contractors decisions, and contractors can
implement gold plating whereby operation and maintenance costs are unnecessarily accrued to
hamper the true IRR of the project. According to Johnston (1994), generally speaking
companies would likely develop an oilfield in the same way under an IRR system as any other
system. However, the integration that large IOCs present could offer a scenario whereby a
division of the company performs work and is charge by another division of the same company,
but a different subsidiary. Although beyond the scope of this study, this potential problem
should easily be solved with moderate involvement on the part of the NOC in the project and/or
the hiring of a third-party, independent auditing firm.
Other future studies could combine Kokolis, et al.s scenario selection for valuation of multiple
prospect opportunities (1999) with the IRR-based sliding scale economic models to obtain a
more realistic scenario, for concession blocks often have more than one prospect and/or
producing horizons.
Lastly, more imaginative variables could be studied for PSCs, particularly incentivized PSCs
linked to specific key performance indicators. Wadood (2006), for example, suggests incentives
OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage11

to reduce costs and reserve replenishment rate, i.e. encourage contractors to continue investing
beyond the initial exploration stage such that reserves are replenished towards the end of the
agreement.

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage12

References List
Allen, Fraser H. and Seba, Richard D. Economics of Worldwide Petroleum Production. Oil & Gas
Consultants International (OGCI), Inc. (January 1993) 12.
Bindemann, K. Production-Sharing Agreements: An Economic Analysis. Oxford Institute for Energy
Studies. (October 1999) 29-32.
Costa Lima, E.G. et al. The Impact of Some Real Options on the Efficient Frontier of Portfolios of Oil
Production Projects. SPE-116440-MS presented at 2008 SPE Annual Technical Conference and
Exhibition, 21-24 September 2008, Denver, CO, USA.
Hall, R. and Lieberman, M. 2001. Microeconomics Principles and Applications, Second Edition, 409-11.
Cincinnati, Ohio: South-Western College Publishing.
Johnston, D. 1994. International Petroleum Fiscal Systems and Production Sharing Contracts, 94-115.
Tulsa, Oklahoma: PennWell Publishing Company.
Johnston, D. 2003. International Exploration Economics, Risk, and Contract Analysis, 25-88. Tulsa,
Oklahoma: PennWell Publishing Company.
Kokolis, G. et al. Scenario Selection for Valuation of Multiple Prospect Opportunities: A Monte Carlo
Play Simulation Approach. SPE-52977 presented at 1999 SPE Hydrocarbon Economics and Evaluation
Symposium, 20-23 March 1999, Dallas, TX, USA.
Wadood, S. Production Sharing AgreementsAn Initiative to Reform. SPE-103603 presented at 2006 SPE
Annual Technical Conference and Exhibition, 24-27 September 2006, San Antonio, TX, USA.

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage13

List of Figures
Figure1TargetMarginalFields

ThresholdFieldSizesUnder
CurrentPSCTerms

ThresholdFieldSizesUnder
ProposedPSCTerms

LargeFields

LargeFields

CurrentEconomic Limit

TARGET
FIELDS
NewEconomicLimit

SmallFields

Small Fields

Key
Field
Economic
Subeconomic

Figure2RFactorSystemSensitivityAnalysis(FromJohnston2003)

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage14

Figure3RiskAnalysisFlowDiagram(FromJohnston1994)

Figure4HistoricalOilPricesandProjections(FromJohnston2003)

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage15

Figure5TheEffectofShrinkingExcessCapacityonPriceVolatility(DatafromEIA)

Figure6ForecastedOilPrices(HistoricalDatafromEIA)

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage16

Figure7RandomSamplesfromMonteCarloSimulationofOilPrices

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage17

Figure8LicenseStatusinEquatorialGuinea(FromGEPetrol)

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage18

Figure9Exploration&ProductionActivityMapinEquatorialGuinea(FromGEPetrol)

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage19

Figure10SeismicActivityonEquatorialGuineaShelf(FromGEPetrol)

Figure11Technicalvs.CommercialSuccessProbabilityPlotShowingThresholdFieldSize(Johnston1994)

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage20

Figure12RandomSampleFromMonteCarloSimulationofWellShedule
Project Month
0
1
2
3
4
5
6
7
8
9
10
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71

# Wells
Online
0
0
0
0
0
0
0
0
0
0
0
0
1
1
1
1
1
1
2
2
2
2
2
2
3
2
2
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2
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3
3
3
3

# Wells
Total Production
Abandoning (bbls/month)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
49798
0
48027
0
46348
0
44754
0
43240
0
41801
0
63789
0
61630
0
59571
0
57606
0
55729
0
53936
0
52221
1
50581
0
49012
0
47509
0
46068
0
44688
0
43364
1
42094
0
40875
0
39704
0
38579
0
37498
0
53775
0
52254
0
50791
0
49383
0
48028
0
46723
0
45466
0
44254
0
43087
0
41961
0
40874
0
39826
0
38815
0
37838
0
36895
0
35983
0
35102
0
34251
0
33427
0
32630
0
31860
0
31114
0
30391
0
29692
0
29014
0
28358
0
27722
0
27105
0
26507
0
25927
0
25365
0
24819
0
24289
0
23774
0
23275
0
22790

2
0
0
0
0
0
0
0
0
0
0
0
0

ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON
ON

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
ON
0
0
0
0
0
0
ON
ON
0
0
0
0
0
0
ON
0
0
0
ON
ON
0
0
0
0
0
ON ON
0
0
ON OFF
ON
0
0
0
0
0
0
ON
0
0
0
ON
ON
0
0
0
0 ON
0
ON
ON
OFF
0
0
0
0
0
ON
0
0
0
ON
ON
0
0
0
0
0
0
ON
0
0 ON
ON
ON
0
0 ON
0
0 ON
ON
0
0 ON
ON
ON
0
0 ON
0
0 ON
ON
ON
0
0 ON
0
0 ON
ON
0
0 ON
ON
ON
0
0 ON
0
0 ON
ON
0
0 ON
ON
ON
0
0 ON
0
0 ON
ON
0
0 ON
ON
ON
0
0 ON
0
0 ON
ON
ON
0
0 ON
0
0 ON
ON
0
0 ON
ON
ON
0
0 ON
0
0 ON
ON
0
0 ON
ON
ON
0
0 ON
0
0 ON
ON
0
0 ON
ON
ON
0
0 ON
0
0 ON
ON
ON
0
0 ON
0
0 ON
ON
0
0 ON
ON
ON
0
0 ON
0
0 ON
ON
0
0 ON
ON
ON
0
0 ON
0
0 ON
ON

7
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

8
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

Well Schedule
9 10 11 12 13 14 15 16 17 18 19 20
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage21

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0.0

-0.1

Figure13MonteCarloResults(CurrentFiscalSystem)

60

50

40

30

20

10

-10

-20

IRR

Figure14ScatterPlotUnderCurrentFiscalSystem

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage22

Figure15MonteCarloResults(NoFiscalSystem,i.e.TechnicalSuccessScenario)

IRR
0.000

1.227

5.0%

0.14

90.0%

5.0%

0.12
0.10
IRR
Minimum
Maximum
Mean
Std Dev
Values
Filtered

0.08
0.06

0.0000
1.7218
0.5919
0.3834
4973 / 5000
27

0.04
0.02

1.8

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

0.00

Figure16ScatterPlotUnderNoFiscalSystem,i.e.TechnicalSuccess

IRR vs Field Size (mmbbls)

2.0

1.5

IRR vs Field Size


(mmbbls)

@RISK Student Version

0.5

X Mean
19.9905
X Std Dev
10.8216
Y Mean
0.5919
Y Std Dev
0.3834
Pearson Corr Coeff 0.2375

For Academic Use Only

0.0

-0.5

60

50

40

30

20

10

-10

-1.0
-20

IRR

1.0

Field Size (mmbbls)

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage23

Figure17MonteCarloResults(UnderProposedIRRBasedProfitOilSplits)

New IRR
0.000
0.18

0.490

5.0%

90.0%

5.0%

0.16
0.14
0.12

New IRR

0.10

Minimum
Maximum
Mean
Std Dev
Values

0.08
0.06

0.0000
0.5636
0.3037
0.1714
5000

0.04
0.02

0.6

0.5

0.4

0.3

0.2

0.1

0.0

-0.1

0.00

Figure18ScatterPlotUnderProposedIRRBasedProfitOilSplits

New IRR vs technical / Field Size (mmbbls)

1.0
0.8

New IRR vs technical /


Field Size (mmbbls)

0.4

X Mean
X Std Dev
Y Mean
Y Std Dev
Pearson Corr Coeff

0.2

19.9999
10.8023
0.3037
0.1714
0.1895

0.0
-0.2

60

50

40

30

20

10

-10

-0.4
-20

New IRR

0.6

technical / Field Size (mmbbls)

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage24

Figure19ContractorProfitUnderProposedIRRBasedProfitOilSplits

Contractor Profit
0.0

147.4

5.0%

0.25

90.0%

5.0%

0.20

Contractor Profit

0.15

@RISK Student Version

Minimum
Maximum
Mean
Std Dev
Values

For Academic Use Only

0.10

0.0000
367958691.6771
50364471.7034
48934239.2675
5000

0.05

400

350

300

250

200

150

100

50

-50

0.00
Values in Millions

Figure20GovernmentProfitUnderProposedIRRBasedProfitOilSplits

Government Profit
0.000
5.0%

0.40

0.521
90.0%

5.0%

0.35
0.30
Government Pro fit

0.25

@RISK Student Version

0.20

Minimum
Maximum
Mean
Std Dev
Values

For Academic Use Only

0.15

0.0000
1.567E+009
156903652.6136
183211006.4588
5000

0.10
0.05

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

0.00
Values in Billions

OptimizingPSCContractsforDevelopmentofMarginalFields:AnEGStudyPage25

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