Analysis of Foreign Petroleum Contracts

MORAN, SIDNEY S., Geological Consultant, Houston, TX

Most foreign exploration and production contracts are of two basic types: Production-Sharing contracts in which a portion of oil revenues, "cost oil," is available to the contractor for recoupment of exploration and production costs with the remainder, "profit oil," being shared according to an agreed-upon formula, and the familiar Tax-Royalty contract in which a share of petroleum revenues goes to the host country "off the top" as royalties, and operating profits are taxed at the going rate. Bottom line splits of profits between host governments and contractors, which are approximately 50-50 in the United States, are typically in the 60-40 to 85-15 range elsewhere, with lower profit shares being offset by the higher volume potential and lower costs that may be associated with less ma ure exploration areas. Foreign contract qualities can be grossly compared by walking typical field models through the contracts to arrive at the bottom line profit splits.

Variations within the contract forms include government participation, sliding scale contract elements, special taxes related to rates of return, etc. Often, contract terms are subject to negotiation and the tradeoffs between contract elements must be understood. Contract life, amortization schedules, fund repatriation, currency exchange rates, and the interaction of foreign and United States tax regimens are among the other factors that must be considered.

Final decisions on foreign ventures must combine consideration of contracts, economic projections, hydrocarbon volumes, exploration cost estimates, and the estimated probability of success into an overall project assessment.

AAPG Search and Discovery Article #91004 © 1991 AAPG Annual Convention Dallas, Texas, April 7-10, 1991 (2009)