Optimizing PSC With New Approach of Dynamic Split Determination to Mitigate Uncertainty in The Development Phase

Abstract

It is commonly realized that in the development phase of oil fields the project still holds numerous uncertainty factors that will affect its economic value in the future. The main uncertainties associated in the development phase are production forecast, capital and operating cost and oil price. Deviation of these parameters to the actual conditions could deteriorate the project cash flow and possibly cause the company to decide to terminate their exploitation project. This paper proposes an alternative methodology of fiscal adjustment of Production Sharing Contract (PSC) to overcome uncertainties in the development phase. The concept is to apply the dynamic split to the existing fiscal term, which is determined by simple linear regression of Internal Rate of Return (IRR) and gradient of cumulative Profit/Cost (P/C) which represent probable range of uncertainties related to the project. From the regression, an equation is developed to calculate the additional (or deduction) of contractor split in each year to normalize the IRR to the ‘mean’ value or other agreed value when the deviation occurs. Contractor will get additional split if the actual contractor profitability tends to bring low IRR, otherwise host government will get additional benefit if the actual profitability tends to bring higher IRR. The application of this fiscal optimization method could minimize the standard deviation of contractor IRR. It will solidify the confidence of contractor to continue to run the business. From the case studied here, the standard deviation of contractor IRR histogram is compressed by 38.9% compared to the current PSC fiscal terms. As it could balance the tradeoff between contractor and government in terms of uncertainties, it is expected to be the alternative solution to stimulate upstream industry investment.