RE: Zoom...8 Jan 2024 18:20
Yes it is worth a read and you should really read it again. If I were you I would focus on, in the first instance, the table of page 14 and compare the structure of the contract with the PSC under which GKP operates. The fact that the Kurdistan contracts are Production Sharing Contracts entitling the contractor to a share of production at the well-head rather than a share of revenue is nothing more than a technical difference with no practical distinction in operation and easily conceded by the current contractors. (Historically and currently, GKP has not sold its share of production independently of the rest of production.) Far more important are the terms which dictate what that share is.
The first notable difference is the level of royalty. At 25% this is significantly greater than the 10% in the current PSC.
Second, note that there is still a mechanism for Cost Recovery. Under the round 5 contracts:
"Begins when commercial production begins; from a maximum share of revenues after royalty, from 30% if oil price is $21.5/bbl or below, to 70% if oil price is $50 per barrel or above."
(One can comfortably assume this the maximum that can be recovery in any billing is the amount based on the formula above and the balance in the cost recovery pool ie a contractor can't recover more costs than it has incurred. Just as with our PSC.)
In GKP's PSC the limit is a flat 40%, well below the percentage when "the oil price" is above $50 but slightly above the limit when the oil price is below $21.50. Below a price of $30 GKP doesn't cover its current period costs so that scenario is a horrible one regardless of cost recovery. Furthermore, looking forward, GKP is very close to having recovered its full historical costs (assuming payment of the arrears). I estimate that (post payment of arrears) GKP's share of the cost recovery pool as of end of 23 as being only $52 million. More importantly, a production base of just, say, 55k and a Brent price above, say, $65 - even with a royalty of 25% - provides a level of headroom for cost recovery of about $197 million per annum. That's way above what is needed and means the contractor together with SOMO can manage field development well within even a 30% limit on cost recovery. GKP should never again agree to invest beyond its ability to recover its costs. $0% provides more headroom for greater upfront field investment than 30% but even 30% provides a lot. Let alone 70%!
Revenue share. 4.55% to 19.99% of revenue (field sales) post royalty. The last month of production GKP/MOL were paid for was September 2022. For that month, the contractor Profit Oil was $8.9 million. That was about 13% of revenue (field sales) post royalty. About bang in the middle of the round 5 range. The big difference here is that the article describes Revenue Share as a percentage of field sales post royalty whereas under the KRG contracts revenue share aka profit oil is a percentage of field sales post royalty post th
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