2016 – Newsletter N°3 08/16

Project objectives are key to success. “Don’t lose track of your goals” and ensure that integrated teams always follow the easiest path to reach the objectives !

Africa does not have a shortage in oil & gas expertise. When you look at countries thathave been producing even before their independence, you will realize that they havevery qualified maintenance engineers and operators.Fields in production in these countries use most of the time 100% of local staff. InExploration and Field Development, you also have very experienced and talented G&Gand Petroleum Engineers.In Africa we have technical experts but we lack local people able to manageexploration and integrated field development projects. This is where our States shouldfocus to ensure that local companies (LOC) public or/and private can operate one day.Today many countries can follow the Nigeria example where several privateindigenous E&P Companies are successful. However, is not only about technicalcapabilities but it is also a question of mindset – and the first step to operatorship is tobelieve in ourselves...

Africa Oil & PowerCape Town - June 6-7, 2016Projects & Prospects Panel

PROJECT MANAGEMENT

“ We have technical experts but we lack local people able to

manage integrated Projects ”.

2016 – Newsletter N°3 08/16

R-Factor in Production Sharing Contracts (PSC)

R-Factor in Oil & Gas Fiscal Terms is the ratio between a project cumulated revenues oncumulated expenses (Capex and Opex).Before going through the R-Factor benefits for the State and the PSC partners, let’s introducetwo of the main economical values to benchmark a project’s robustness.

NPV: The Net Present Value is a measurement of the profitability of an undertaking that iscalculated by subtracting the present values (PV) of cash outflows (including initial cost) fromthe present values of cash inflows over a period of time.IRR: The Internal Rate of Return is a method of calculating rate of return. The term internalrefers to the fact that its calculation does not incorporate environmental factors.

Oil & Gas companies use the above two parameters to benchmark and rank their projects tosee the ones that they will give investment priority.For each industrial project, and more specifically petroleum project, the investment is inhundreds of millions or billions of dollars. The revenues are generated only when the projectgets to the production phase. The return on investment duration after “first oil” will dependon the amount of investment done during the Exploration and the Development phases, theoperating costs of the project, and the revenues the project is generating during theProduction Phase – Oil Price and fiscal terms being key factors to the project revenues.

R Factor deals with all variables that affect project economics. Contractor potentialupside from price increase is diminished, but the downside during low oil price is alsoprotected. On the State side, the R Factor will guaranty maximum revenues in high oilprice periods.

Let’s use an example with an Onshore Project

On Graph 1 below, the blue curve represents the revenues as the red curve the expenses. Wehave 10 years of investment before the first oil and the two curves cross at year 12, whereproject cumulated revenues gets above cumulated expenditures. This graph represents aviable project! “Train wreak” projects have R-Factor below 1!

$MM

100

200

300

400

500Cumulated RevenuesCumulated Expenses

Years

Year 12

Year 10, First Oil

Graph 1 - ONSHORE FIELD DEVELOPMENT

How do you apply R-Factor to your Fiscal Terms ?

The Profit Oil split between the State and the Contractor(s) shall vary with the R-Factor. Thehigher the R-Factor, the greater the Profit Oil Split for the State. See the example in the Tablebelow (values are for information only).

2016 – Newsletter N°3 08/16

Year 12 R-Factor = 1

Year 10, First Oil

R-Factor

R-Factor

0.5

1.0

1.5

2.0

2.5

Graph 2 - ONSHORE FIELD DEVELOPMENT

Years

On Graph 2 below, the Return on Investment happens in Year 12 when the R-Factor is at 1.0!Note that in this example the R-Factor goes beyond 2.0 which shows the attractiveness of aproject. Highly commercial projects can have an R-Factor above 3.0 !

R-Factor State PO Contractor(s) PO

0 – 1.0 35% 65%

1.0 – 1.4 40% 60%

1.4 – 2.0 45% 55%

2.0+ 48% 52%

Conclusion :It is key for the State in all PSC negotiations to run economic model simulation to testdifferent fiscal term ranges. The Profit Oil split between the State and the Contractor(s) shallvary with each project – Block potential, proven basins, nearby discoveries, country businessand political stability are amongst the parameters that define the attractiveness of a project.

The R-Factor can be applied to Cost Oil; and also an incentive based on the Contractor(s)performance are highly recommended in a PSC negotiation to ensure that the operator andits partners will not only focus on their own revenues, but also maximize the revenues of theState.

The R-Factor protects the Contractor(s)in a low outcome scenario. A deepwaterproject with reserves between 300-400MMbls will be difficult to develop butwith an attractive R-Factor model, theoperator might be ready to invest in theproject !