VENKATESH R. PRASAD J. Sagar Associates May 09,2005

1. INFRALINE - PREPARING QUALIFIED BIDS FOR NELP V ROUND:NELP V MODEL PRODUCTION SHARING CONTRACT - OVERVIEW VENKATESH R. PRASAD J. Sagar Associates May 09,2005

2. PART - I CURTAIN RAISER & OVERVIEW OF THE SECTOR

3. CURTAIN RAISER • Indian Energy sector has come a long way from liberalization of economy in early 1990s. • Increase in role of private sector started in power and later into oil & gas. • Next 10-15 years may provide various development opportunities to strategic investors.

4. Positive Areas • Indian Petroleum Regulatory Board Bill introduced in the parliament. • Upstream Exploration and Production • Increasing FDI in the sector.

5. Pre NELP to NELP V NELP I (1999) 24 blocks PRE NELP 25 blocks DGH NELP V (2005) 20 blocks NELP II (2000) 23 blocks NELP IV (2003) 20 blocks NELP III (2002) 23 blocks

6. Main Feature:NELP • The possibility of the seismic option in the first phase of the exploration period. • Foreign participation upto 100%. • No minimum expenditure commitment during the exploration period. • No signature, discovery or production bonus. • No mandatory state participation. • No carried interest by National Oil Companies (NOCs). • Income Tax Holiday for seven years from start of commercial production. • No customs duty on imports required for petroleum operations. • Biddable cost recovery limit upto 100%. • Option to amortise exploration and drilling expenditures over a period of 10 years from first commercial production

7. Some Interesting Data

8. Growth in the Supply for Oil in the World (1996-2030) Positive Areas… Source: http://www.iea.org/g8/world/oilsup.htm OPEC (Organization of Petroleum Exporting Countries)

9. Growth in the Demand for Oil in Regions of the World (2000-2030) (Source: IEA/World Energy Outlook 2002)mtoe (Millions tones of oil equivalent) OECD (Organization for Economic Cooperation and Development)

10. Growth in the Natural Gas Production Source: www.iea.org/g8/world/gassup.htm

11. Growth in the Demand for Natural Gas in Regions of the World (2000-2030) Source: IEA/World Energy Outlook 2002

12. PART - II OVERVIEW OF PRODUCTION SHARING AGREEMENT (PSC)

13. What is a PSC “A contract for the development of mineral resources under which the contractor’s costs are recoverable each year out of the production”

14. Key Concepts • Developed to emphasize Sovereign Control over Natural Resources. • Company enters into PSC with State as a Contractor • Company responsible for all costs and expenditure of exploration • In the event of commercial production, the State and Company share in agreed percentages the available production

15. Key Concepts … • The State is owner of all its oil & gas subsurface; the Company does not acquire an equity interest in oil & gas – only a participating interest.

16. Contractual Framework Parties PI & Operator Contractual Framework Assignment & National Economic Interest Provisions Others Take Provisions Production Sharing & Profit Petroleum Recovery of Cost Petroleum Management Committee

17. Key Terms Contractor Exploration cost & Period Operator Key Terms Of a PSC Management Committee Contract Area Participating Interest Cost Petroleum Work Programme

18. Parties COMPANY ‘A’ Govt. COMPANY ‘B’ Contractor COMPANY ‘C’ One of the Parties acts as ‘Operator’

19. Participating Interest • Each of the parties comprising the Contractor has an undivided share as a percentage of its participation in the rights and obligations… • PSC defines PI of each Party: X Company ---- [A]% Y Company ---- [B]% Z Company ---- [C]%

20. Term • The Exploration Period consists of three Exploration Phases, each phase not exceeding three years. • Total period not exceeding 7 years • For Deepwater Areas and Frontier Areas - 8 consecutive years.Each Phase not exceeding 4 years. • Term extendable with Govt’s permission

21. Term Exploration Phase(multiple exploration phase) At the expiry of any Exploration Phase of the Exploration Period, provided that the Contractor has completed the Minimum Work Programme for that Exploration Phase, the Contractor shall have the option, exercisable by giving a written notice to the Government at least thirty (30) days prior to the expiry of the relevant Phase, either: (a) to proceed to the next Exploration Phase on presentation of the requisite guarantees; or (b) to relinquish the entire Contract Area except for any Discovery Area and any Development Area and to conduct Development Operations and Production Operations in relation to any Commercial Discovery in accordance with the terms of this Contract, and the Contractor shall have no further obligation in respect of the Minimum Work Programme for any subsequent Exploration Phases of the Exploration Period

22. Term Exploration Phase(multiple exploration phase) • If at the end of the first Exploration Phase, the Contractor elects to continue Exploration Operations in the Contract Area in the second Exploration Phase, the Contractor shall retain upto seventy five percent (75%) of the original Contract Area including any Development Area and Discovery Area and relinquish the balance of the Contract Area prior to the commencement of the second Exploration Phase. • If at the end of the second Exploration Phase, the Contractor elects to continue Exploration Operations in the Contract Area in the third Exploration Phase, the Contractor shall retain upto fifty percent (50%) of the original Contract Area, including any Development Area and Discovery Area and relinquish the balance of the Contract Area prior to the commencement of the third Exploration Phase.

23. Term Exploration Phase(multiple exploration phase) • At the end of the third Exploration Phase, the Contractor shall retain only Development Areas and Discovery Areas. • If the Contractor exercises the option provided for in paragraph (b) of Article 3.5, the Contractor shall, after any Discovery Areas or Development Areas have been designated, relinquish all of the Contract Area not included within the said Discovery Areas or Development Areas .

24. Parties Rights and Obligations Rights/Obligations of Contractor: (i) the right to take Cost Petroleum in accordance with the provisions of Article 15 of MPSC ; (ii) the right to take its Participating Interest share of Profit Petroleum in accordance with the provisions of Article 16 of MPSC; (iii) the right to receive its Participating Interest share of any incidental income and receipts arising from Petroleum Operations; and (iv) the obligation to contribute its Participating Interest share of costs and expenses including Contract Costs.

25. Revenue: ‘take’ • To Contractor: Out of the Cost Petroleum and Profit Petroleum. • To Government: Out of Royalty, Profit Petroleum and Taxes

26. Recovery of Cost Petroleum • "Cost Petroleum" means, the portion of the total value of Petroleum Produced and Saved from the Contract Area which the Contractor is entitled to take in a particular period, for the recovery of Contract Costs. • Biddable cost recovery limit upto 100%. MPSC to avoid ambiguity, should have a negative definition of unrecoverable costs. • Section 2..2 of Accounting Procedures u/MPSC which provides - Exploration Costsinter alia means any other expenditures incurred in the search for Petroleum……interpretation issues.

27. Production Sharing • "Profit Petroleum” means, the total value of Petroleum Produced and Saved from the Contract Area in a particular period, as reduced by Cost Petroleum and calculated in a specified manner. • A Party's share of Profit Petroleum in any Year, calculated on the basis of the Investment Multiple actually achieved by the Contractor at the end of the preceding Year for the Contract Area • As amongst the Consortium, the Profit Petroleum shall be divided amongst the Parties constituting the Contractor, in proportion to their respective Participating Interest • Contractor’s bid on IM.

28. Production Sharing • Other than "ANG" or Non Associated Natural Gas (NANG) the Government shall have the option to take its entitlement to Profit Petroleum either in cash or in kind in any Year: an option hardly exercised by the Govt.

29. Unitization • Article 12 principles…: Calls for a Joint Development Plan (JDP) where a Reservoir in a Discovery Area is situated partly within the Contract Area and partly in an area in India over which other parties have a contract to conduct petroleum operations and both parts of the Reservoir can be more efficiently developed together on a commercial basis. • If Parties do not agree on a JDP, Government can call for a JDP from an independent agency. In case a Party disagrees it has to notify the Government that it elects to surrender its rights in the Reservoir/Discovery in lieu of participation in a joint development.

30. Management Committee • All work under supervision and review of MC.   • Composition: 2 Govt. representative (of which one shall be the Chairman and the second as deputy Chairman) 1 - member each of each Company constituting the Contractor. (If Contractor is one Company, than 2 members shall represent the Contractor)

31. Environment Protection • Petroleum Operations - due regard to protection of the environment and conservation of natural resources. • Contractor to employ modern oilfield and petroleum industry practices and standards.

32. National Economic Interest Provisions • Preference to Indian subcontractors/ suppliers/producer of goods and services over the foreign ones. • Condition: Domestic goods/services shall be equal to or better than imported goods/services. • Each year, Contractor shall provide the Government with a report outlining its achievements in utilizing Indian resources. • Domestic Supply: Selling of all entitlement within India until India becomes self sufficient.

33. Assignment of PI • Assignment with prior written consent of the Government. • Basis of such consent: • (a) the prospective transferee is of good standing • (b) the prospective transferee is not a company incorporated in a country with which the Government, for policy reasons, has restricted trade or business; • (c) the assignment not to adversely affect the performance or obligations under this Contract or be contrary to the interests of India.

34. Assignment of PI… • Assignment to affiliate - No government approval. Mgt Committee approval required. • An assignment or transfer shall not be made where the Participating Interest to be retained by the proposed assignor or the percentage interest of assignee shall be less than ten per cent (10%) of the total Participating Interest of all the constituents of the Contractor. • Deemed consent provision [in case of non reply from the government for 120 days]. Clarity required – process and procedure… • Contractor can mortgage/pledge/charge its PI at its own risk and cost for financing purposes.

35. Dispute Resolution Disputes arising out of PSC to be settled in following manner; - first amicably; - if above fails, then by sole expert; - if even the sole expert fails, then by arbitration. General: If any dispute cannot be resolved within 90 days, then such dispute shall be referred to an arbitral tribunal or for conciliation.

36. Force Majeure • Standard force majeure clause • Suspension of the parties’ obligations to the extent that they are unable to fulfill them because of events outside their sphere of influence.

37. JOA:Issues Challenges & Governance of Inter se relationship By J. Sagar Associates New Delhi, Mumbai & Banglore New Delhi, December 10, 2004

38. Designates an Operator Rights/ Duties JOA Pools the rights of the Parties Sets up OC Authorization of expenditure Financial security & Default

39. Outline • The Context: Interse allocation of Rights and obligations amongst JOA Parties • Key JOA Issues • Joint Operations • Operating Committee • Deemed Withdrawal • Final Thoughts/Key Take Away 39

40. Context • JOA r/w PSC nominates an Operation to conduct Petroleum Operation in the Contract Area on behalf of the Consortium • Operator is akin to the lead project developer with certain rights, duties and obligations to conduct Joint Operations on behalf of the Consortium • Operator binds the other Consortium members to the Petroleum Operations under PSC subject to OC and MC approval • Takes the lead in finalising the Work/ Appraisal Programmes and finalises the POD on behalf of the Consortium 40

41. RIGHTS AND OBLIGATIONS OF OPERATOR/NON-OPERATOR

42. Rights of an Operator • Operator shall have exclusive control of all Joint Operations. • To conduct all joint operations in a diligent, safe and efficient manner in accordance with good and prudent oil field practices including carrying out Petroleum Operations as per GIPP.

43. Obligations of an Operator • Perform the duties for the OC and prepare and submit to them the proposed work programs, budgets and AFE’s. • Acquire all permits, consents etc. that may be required under this JOA. • Allow the representatives of any of the parties reasonable access to the Joint Operations and to inspect all Joint Property and conduct financial audits.

44. Obligations of an Operator… • Maintain the PSC in full force and effect. • To make prompt payment and discharge all liabilities etc. in connection with joint operations and keep all the joint property free from encumbrances etc. • To make all periodic payments, taxes, fee and other payment pertaining to Joint Operations.

45. Obligations of an Operator… • To carry out the ‘obligations’ of “Contractor” pursuant to the PSC. • To represent the parties in all dealings with the Govt. with respect to matters arising under the PSC and JOA at MC meetings. • Furnishing expenses statement of joint operations to the Non-Operator(s) and to raise cash calls. • Give access to the areas of joint operations with the right to observe any and all Joint Operations.

46. Obligations of an Operator… • To defend the Non-operator any and all claims etc, relating to Joint Operations. • Operator to maintain insurance under the PSC and other laws.

47. Rights of Non-Operator… • Right of reasonable access to the Joint Operations and to inspect all Joint Property and conduct financial audits. • Receive expenses statement of joint operations from the Operator. • To receive from Operator various data and reports related to the Joint Operations. • To have access to all other data acquired in the conduct of Joint Operations.

48. KEY ISSUES: JOINT OPERATIONS/ OPERATING COMMITTEE

49. Key Issues: Joint Operations • Petroleum Operations in accordance with GIPP & HSE compliance • Transparent Data sharing

50. Key Issues: Operating Committee • Conduct of the Parties – Active vs Sleeping • Scope of Petroleum Operations • Finalisation of Plan of Development