Chapter 3
Money and Economics
By: [Link] Alhelali
Dr. Yousif Almutairi
Second Semester 2022-2023
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Contents
Part 1 Money and Economics p.p 66-74
Section 1 Fiscal Regime of Petroleum Agreements
Section 2 History of Fiscal Regime (The origins of maths)
Section 3 Fiscal Toolkits in modern petroleum agreements
Part 2 Economic Development p.p 75-90
Section 1 Local Content
Section 2 Social Welfare
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Part 1
Money & Economics
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Section 1 Fiscal Regime of
petroleum agreements
• Income and price (Maths) of petroleum agreements is called the Fiscal Regime of
petroleum agreement.
• Define the Fiscal Regime of petroleum agreements?
It is a mechanism that consists of a set of tools known as Fiscal Toolkits to share
the divisible income of a petroleum agreement between HGC and IOC.
Sometimes, we refer to fiscal regime as Fiscal Toolkits, so they are just the same.
• What are the types of fiscal toolkits that can be adopted (used) in petroleum agreements?
There are many types of Fiscal Toolkits that can be used to create a fiscal regime in
a petroleum agreement like: royalties, taxes, bonuses, and monetary fees.
The fiscal toolkits used nowadays in modern petroleum agreements are different
than the ones used in the past in the traditional concession agreements.
The fiscal toolkits used in the modern concession agreements and production
sharing agreements are different than the ones used in modern service contracts.
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Section 1 Fiscal Regime of
petroleum agreements
• What is the objective of the Fiscal toolkits?
The main objective of the fiscal toolkits is to share the divisible income (revenues) of
the project between HGC and IOC and consequently identify the Government Take
and the Investor Take.
• What is Government Take and What is Investor Take?
Government Take: The share of the divisible income (revenues) that goes to the
HGC.
Investor Take: The share of the divisible income (revenues) that goes to the IOC as
being a service provider.
• What are the fiscal toolkits in petroleum agreements? Compare traditional
agreements to modern ones?
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Fiscal Regime (Fiscal Toolkits)
Past vs Nowadays
Traditional Petroleum
Modern Petroleum
agreements Fidcal Toolkits
Agreements
(Concessions)
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Section 2: History of Fiscal Regime (The origins of
Maths)
1- Traditional Petroleum Agreements in the past :
• How was petroleum industry running (operated) ?
In the past, petroleum industry was operated through one form of petroleum agreements which
were the traditional concessions ( refer to its features in Chapter 2).
• By whom traditional concessions were controlled in the past?
Stage 1: Standard Oil Company in the USA
• From 1870 to 1911
Stage 2: Seven Sisters Companies on the international level
• 1920s to 1960s
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Section 2: History of Fiscal Regime (The origins of Maths)
1- Traditional Petroleum Agreements in the past :
•Stage 1: Standard Oil in USA (1870 to 1911):
Standard Oil: it was company formed in 1870 by John Rockefeller and some
partners. It was dominating (controlling) concessions in the US because of their
strong relationship with railroads’ departments and governmental officials.
In 1911, the Supreme Court in US ruled that Standard Oil violated the anti-
trust or anti-competition rules as per Sherman Act of 1890 in the US. It created
a monopoly that illegally restrained trade (i.e blocked competitors from using
oil pipelines, spied on other companies, and bribed elected officials).
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Section 2: History of Fiscal Regime (The origins of Maths)
Stage 2: Seven Sisters Stage on the international level (1920s to 1960s):
As a result of the Supreme Court’s judgement in 1911, Standard Oil was broken into several
independent companies until the stage of the Seven Sisters started and again controlled
traditional concession agreements on the international level at that period (1920s to 1960s).
• Describe the Seven Sisters in the history of petroleum industry?
Seven Sisters were supermajor IOCs that dominated the petroleum industry in the world through
traditional concession agreements in the period between 1920s to 1960s, including Middle East and
GCCs. Examples: Chevron, British Petroleum (PB), Exxon Mobile, Shel Dutch ..etc.
They were under different names. For example: BP was named the Anglo-Persian Oil company, and
Chevron was named Gulf Oil Corporation. Remember: In 1934, Kuwait government granted a
concession agreement with two of the Seven Sisters companies: BP and Chevron ( Chapter 1).
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Section 2: History of Fiscal Regime (The
origins of Maths)
• Describe the Fiscal regime (Fiscal Toolkit) in the past? Why?
The fiscal toolkit was very easy as a form of full ownership of petroleum resources given to IOC with payment of
royalty to HGC and most of the time national supply as well to HGC.
The main reason was that traditional concessions at the early beginning of petroleum industry were controlling
petroleum industry as one-sided agreements which resulted in non-beneficial relationship between HGC and
IOCs. Why?
a) Full Ownership of petroleum resources given to IOCs for long period of time.
b) Full management and technical control of petroleum operations to IOCs during agreement period.
c) The only benefits provided to HGCs were royalty and national supply.
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Section 2 History of Fiscal Regime (The origins of
Maths)
• Why HGCs accepted traditional concession agreements in the past?
a) HGCs lack technical expertise and know-how of how to run this new
industry.
b) As a long-term plan, HGCs can benefit by creating new source of
income in the future.
c) No costs to be paid by HGCs.
d) HGCs were not liable for any financial, operational or environmental
risks of such new industry.
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Section 2 History of Fiscal Regime (The origins of Maths)
2- Modern petroleum agreements:
• Describe the Fiscal regime (Fiscal Toolkit) nowadays? And WHY?
The fiscal toolkits are more complex in modern petroleum agreements,
especially in concessions and PSAs, because HGCs begin to request more
fiscal toolkits to share the divisible income of the petroleum projects.
• Why HGCs refused to sign traditional petroleum agreements in modern petroleum
industry?
Many reasons forced HGCs to request bigger share of the divisible income
of petroleum agreements and refused the traditional concessions, like:
a) Recognition of the importance of petroleum and its price.
b) Independency of HGCs and being memebers of OPEC.
c) Nationalization of petroleum industry.
d) Establishing NOCs which gained technical experience in contintuing the
industry.
• So, What are the fiscal toolkits in modern petroleum agreements?
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Fiscal Regime (Fiscal Toolkits)
Past vs Nowadays
✓
Traditional Petroleum Fidcal Toolkits
Modern Petroleum
agreements Agreements
(Concessions)
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Modern Petroleum
Agreements
Concession & PSA
( & similar types Service Contracts
of agreements)
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Concessions & PSAs
Section 3: Fiscal Toolkits in ( & similar types of
agreements)
• Under concessions and PSAs, there are a number of fiscal toolkits that
can be used in a petroleum agreement to share the divisible income
(revenues).
• What are the fiscal toolkits under concessions and PSAs?
1. Signature Bonus.
2. Production Bonus.
3. Rental.
4. Royalty.
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Section 3: Fiscal Toolkits- Concessions & PSAs
( & similar types of
Signature Bonus agreements)
• What is Signature Bonus?
Signature Bonus: is payment made to HGC by the IOC at the time the petroleum
agreement is granted for the objective of conducting petroleum operations in the
HGC.
• How to determine the amount of the Signature Bonus?
Depending on the size and quantities expected to be produced from the petroleum
reserves based on the geological data of exploration. Therefore, it might be low
percentage or higher percentages.
• Is Signature Bonus linked to production level?
No, it is paid when the agreement is signed, regardless of the production, or even
finding oil.
• Compare Signature Bonus to Production Bonus?
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Section 3: Fiscal Concessions & PSAs
Toolkits- Production ( & similar types of
agreements)
Bonus
• What is Production Bonus?
Production Bonus is a payment made at certain time in the life of the petroleum agreement
when reaching certain level of production for the objective of increasing the government or
investor take as the production increases.
• Who pays the Production Bonus?
This depends on the agreement , it might be paid by IOC or HGC.
If it was paid by the IOC, it provides the HGC with a fixed amount of revenue at certain point
time during the production.
• How to determine the amount of the Production Bonus?
It can be dertermined through a defined production rate, or
A defined quantity of the total production.
• Is Production Bonus linked to production level?
Yes, it is linked to the production level and sometimes linked to commercial discoveries as well.
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Section 3: Fiscal Toolkits- Concessions & PSAs
( & similar types of
Rental agreements)
• What is Rental?
Rental is a fixed payment made on annual basis at the beginning of the calendar or contract year. It
can be paid during the exploration phase or the production phase or during both of them.
• Who pays the Production Bonus?
IOC pays the rental to HGC for using the land in conducting petroleum operations.
• How to determine the amount of the Rental?
It can be fixed amount of money linked to contract price, or
A defined amount of money per square kilometre of the operation land, or
Any other negotiated amount.
• What are the benefits of Rental?
1. It provides HGCs with a guaranteed annual income which helps in budget planning regardless of
any change to petroleum prices.
2. It contributes to governments’ administrative costs of the petroleum projects.
3. It creates a mild incentive for the IOC voluntarily relinquish any part of land that is unused. 18
(Remember what is relinquishment?)
Section 3: Fiscal Toolkits- Concessions & PSAs
( & similar types of
Royalty agreements)
• What is Royalty?
Royalty is a traditional payment tax paid by IOC for the objective of
conducting petroleum operations.
• How to determine the amount of the Royalty?
It is usually fixed amount of money linked to contract price, or
a sliding scale royalties based on the agreed upon factors ( like: level
of production).
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Section 3: Fiscal Toolkits Service Contracts
• What is the fiscal toolkit in Service Contracts?
There is only one fiscal toolkit in Service Contract which is a monetary fees payment
since no ownership is given to IOC in Service Contracts.
• How monetary fees payment is made under the Service Contracts?
• IOC as a contractor has to follow the schedule of works as per the work orders.
• If the works are approved by the HGC, then IOC has to submit an invoice to HGC.
• HGC has to pay invoices within the time limit provided in the contract (for example
every month or bi-weekly). 20
Part 2
Economic Development
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Section 1 Local Content
• In addition to the request of a bigger share of the divisible income of any petroleum agreement
through fiscal toolkits, HGCs started to broaden their objectives and request more strategic
objectives.
• These objectives are called the (Local Content) objectives.
• Define (Local Content)?
(Local Content): are strategic objectives to HGCs in a form of more economic development targets on
a long-term plan.
• How the Local Content ( economic development) objectives can be promoted in petroleum
agreements?
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Section 1 Local Content
• How the Local Content ( economic development) objectives can be
promoted?
1. NOCs: running the petroleum industry through establishing NOCs.
2. Local Contents Clauses: including petroleum agreements obligatory
local content terms, like: use of local labor, training local labor,
purchase local goods and equipment, and transfer of technology.
So, IOCs can be forced to implement such terms by law or contract
or by both. Example: Kuwaitization Law in Kuwait forces IOCs to hire
at least 25% from local labor (Kuwaiti nationals).
3. Oil For Infrastructure: This is China experience in which a HGC give
up some traditional payments (like royalties) in exchange for
infrastructure projects (roads, railways, airports etc.) to be build by
IOC. 23
Section 2: Social Welfare
• Social Welfare usually are not included in Local Content clauses in
petroleum agreements.
• Nevertheless, petroleum agreements started to include them in other
types of clause.
• What are Social Welfare clauses?
• Clauses that address “Efforts that have to be done by the IOCs that
bring benefits to communities affected by petroleum operations”.
• Examples: Some petroleum agreements force IOC to adopt social
welfare programs like the international human rights protection
programs, ISO, and international good practice standards, whether in
environemtal protection or technical operations or human rights.
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End of Chapter 3
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