a n r /r c scheme in emedia.arpel2011.clk.com.uy/foro/ppts/jalfin.pdf · 16/07/2012 1 schlumberger...

16/07/2012

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Schlumberger Production ManagementSouth America

SERVICE CONTRACT WITH FINANCING:

A NEW RISK/REWARD CONTRACTUAL

SCHEME IN ECUADOR

Guillermo Jalfin*, Wilson Pastor**, Andres Donoso**, Maria Augusta Cueva*, Patricio Machado**, Marco Calvopina***, Roberto Dipinto*, Joao Vieira*, Carlos Sarmiento*, Pedro Serrano*, Francisco Giraldo****, and Alex Garcia*

Ministerio de Recursos Naturales No RenovablesRepública del Ecuador

* ** *** ****


Legal Framework and Business Environment

Contract Characteristics

Negotiation Process and Key Elements for Success

Conclusions and Final Remarks

AGENDA

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LEGAL FRAMEWORK AND BUSINESS ENVIRONMENT


TIMELINES PHOTOSEVOLUTION OF HYDROCARBON LEGISLATION

1985Legal reforms introduced service contracts; state

pays costs to IOCs to extract crude

2006Law 42 requires that 50% of “windfall

profits” derived from higher oil prices be shared with the state

1973Hydrocarbons Law

Association ContractCEPE 25% with Texaco Gulf

1993 Law reforms participation contract (state

production volumes range from 12% to 30%)

1960s–1970sConcession contract

royalties(Texaco-Gulf Consortium)

2007Regulations to Law 42 give

99% of “windfall profits” to the state

2009 New Public Companies

Law

2010 Hydrocarbons Law

1970 1980 1990 20001960 2010

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Law of Public Companies New Hydrocarbon Law EPP Contracting Regulation

LEGAL FRAMEWORK

• Granted financial, administrative, and economic autonomy to public companies

• Aligned objectives with government’s national planning system

• NOCs (EPP/PAM) maintained their existing fields

• Legally allowed to enter into new contracts.

• Provides legal mechanisms to prevent decline in a country’s oil production

• Enables the renegotiation of the existing participation contracts into service contracts (tariff per barrel)

• State maintains ownership of oil production

• Seeks additional investments

• State keeps oil price upside

• Reinforces EPP autonomy

• Enables new contracting models (specific services with financing)

2009 2010 2011


TRANSFORMATION OF BUSINESS ENVIRONMENT

• Three negotiation processes were conducted in parallel by the Ecuadorian government in 2010 after the announcement of the new Hydrocarbon Law.

• As a result, all contracts were turned into services contracts.

2010

2010

Operated Fields

2011

2010 2011

Marginal Fields

2010 2011 2012

Mature Fields

Negotiation Period

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CONTRACT CHARACTERISTICS


Increase nationaloil production

Revert the trend of declining production in mature fields

Encourage overseas investment

Create a new business model

Open opportunities for new players (service companies)

Access to new technologies As a requirement for participating in the process (i.e., EOR experience)

PAM and Petroecuadorintegration and expansion

NOC’s modernization and growth

IDENTIFYING COMPELLING EVENTS

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Rules of Engagement

Production and reserves belong to the Ecuadorian State

Contractor is responsible for 100% of the investments (CAPEX)

EP Petroecuador is responsible for 100% of the operative costs (OPEX)

Remuneration is independent of oil price fluctuation (incremental oil fee per barrel)

National oil company remains the operator of record

BASES OF THE ECUADORIAN CONTRACT MODEL


SCHEMATIC COMMERCIAL MODELProduction

Time

Baseline production

Incremental production

NFA

Incremental fee,cost per barrel

Sharing Savings on Variable OPEX (VO):VOt-1 – VOt = Saving VO (cost per barrel)

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NEGOTIATION PROCESS AND KEY ELEMENTS FOR SUCCESS


MILESTONES IN THE NEGOTIATION PROCESS

EPP invites international and local service companies

Service companies submitted technical and financial credentials

(“cartilla”)

EPP announces partners of choice

Selected companies present technical

proposal

Tariff negotiation ends

Proved experience in EOR was mandatory

Technical negotiation ends

Contract signature

2010 2011 2012

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MAIN STAKEHOLDERS AND ROLES

Schlumberger TCP KKR

Nonrenewable Natural Resources MinistryContract negotiator

Nonrenewable Natural Resources MinistryContract negotiator

Secretary of Hydrocarbons Process guardian(defines production baseline)

Secretary of Hydrocarbons Process guardian(defines production baseline)

EP PetroecuadorOperator(defines technical scope)

EP PetroecuadorOperator(defines technical scope)

Shushufindi Consortium

Financing muscleOperator’s expertiseTechnological partner


ACTIVATING THE DIFFERENTIATORS

OperationalOperational RiskRiskCommercialCommercial

• In-house financial capacity• Strategic alliances with first-class international financing groups and recognized E&P companies

• Service company identity• Do not book reserves nor hold equity interest• Would not be the operator of record

• Leading-edge technology • Efficient operative processes• Globally recognized QHSE standards• Experts in all disciplines • International experience and local knowledge• Leadership and teamwork• Philosophy of continuous improvement

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FACTORS IN SUCCESSFUL NEGOTIATION

TECHNICAL KNOWLEDGE

BUSINESS KNOWLEDGE CULTURAL KNOWLEDGE

Cultural intelligence

Personal interrelationship

Focus on contract execution

Focus on key legal elements

Focus on value-creation elements

Better definition of contractual objectives

Better definition of the fee structure (cost per

barrel)

Better recognition of operational liabilities

BUSINESS SUCCESS


2D Negotiation

Claiming value on the battle line:The tension results in only one zone of

possible agreement (ZOPA)

Value Creation

3D Negotiation

Value is created on common ground and through shared interest; value is created successively by reconciling differences of

interest or priority

CLAIMING VALUE VS. CREATING VALUE THROUGH NEGOTIATION

David Lax & James Sebenius, 2006

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NEGOTIATION TEAM

The maximum value creation occurs once the parties reach a high level of trust and form only one negotiation team.

That decision turns the negotiation into a 3D negotiation scheme.

Contract Model


Type of contract• Service contract• Duration: 15 years

Type of contract• Service contract• Duration: 15 years

Investment• CAPEX: 100% financed by contractor (exclusive services provider)• OPEX 100% EP Petroecuador (operator of record)

Investment• CAPEX: 100% financed by contractor (exclusive services provider)• OPEX 100% EP Petroecuador (operator of record)

Remuneration• Cost per barrel on incremental production• 50% on the savings in the annual VO

Remuneration• Cost per barrel on incremental production• 50% on the savings in the annual VO

Technology• Technology transfer• Training

Technology• Technology transfer• Training

MAIN CONTRACTUAL ELEMENTS

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10

15

20

25

30

35

40

45

50

-500 500 1500Tarapoa Bloque 14 Bloque 17Bloque 10 Bloque 16 Shushufindi

Investment, MUSD

Tariff, USD/bbl

Radiusinvestment in exploration,

MUSD

Operated fields

Mature fields

ECONOMIC OUTCOMES

SP4


CONCLUSIONS AND FINAL REMARKS

Diapositiva 19

SP4 M is thousand, MM is million, not sure which one is being used hereSamantha Perkins, 05/06/2012

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CONCLUSIONS

• The Shushufindi services contractmarks a milestone in the Ecuadorian oilindustry, bringing investments andstate-of-the-art technology to thecountry.

• A deep understanding of the businessenvironment, technical challenges, andthe counterparts’ needs is required toproperly and successfully address anybusiness opportunity.

• A sustainable contract is the result ofsetting fair, clear rules and objectiveswhere success is only possible througha high level of trust and a shared goal.

FINAL REMARKS

• Capital investments, expertise, andtechnology are critical to adequately facethe increasing challenges in the oilindustry, but it is the flexibility to adaptbusiness models to the real needs ofcountries that can make the difference.

a n r /r c scheme in emedia.arpel2011.clk.com.uy/foro/ppts/jalfin.pdf · 16/07/2012 1 schlumberger...

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