Overview of Malaysian PSC

FIELD LOCATION MALAYSIA

M’sia / Thai Development Area

PM3 Commercial Arrangement M’sia-

VietnamKangar

Georgetown

Lumut

Meru KUALA LUMPUR

Seremban

Melaka

Johore Bahru

Segamat

Kuantan

KemamanKERTIH

KualaTerengganu

Gurun

Kg. TOK ARUN

SARAWAK

SABAH

LNG PLANTS

FIELD OIL GAS

DISCOVERED 134 178

PRODUCING 47 14

OIL AND GAS FIELDS*

PENINSULARMALAYSIA

MALAYSIA EXPLORATION AND PRODUCTION BLOCKS

Sulu Sea

Celebes Sea

PulauTimbun Mata

Pulau Tawitawi

Pulau Sibutu

Pulau Malawali

Pulau Bugsuk

PALAWAN(PHI LI PPI NES)

Pulau Balabac

THAILAND Malaysia / ThailandJoint Development

Area PM3Commercial Arrangement Area

South China Sea

VI ETNAM

SI NGAPORE

Straits of Melaka

SUMATRA

KepulauanAnambas

Pulau Djemadja

Pulau Natuna

PulauSubi Besar

1°

3°

5°

7°

9°

1°

3°

5°

7°

9°98° 100° 102° 104° 106° 108° 110° 112° 114° 116° 118° 120°

98° 100° 102° 104° 106° 108° 110° 112° 114° 116° 118° 120°

PulauBanggi

SARAWAKKALI MANTAN

SABAH

PulauLangkawi

PulauPinang

PENINSULARMALAYSIA

Pulau Labuan

BRUN EI

0 200 Km

PM314

PulauBalambangan

AC

BD

SB303

E

SB302

PM321

PM322

PM303

PM308

SK301

F

SK302

SK303

SK304

SK331

SK333

SK332SK334

SB304

SB332

SB330SB305

SB331

SB306

SB301

J

SK308SK3

PM311

PM306

PM302

SK312

PM301

PM307 PM305

G

H

SK310

SK311

200m

200m

SK306

B

SK309

F

SK309

PM313

SK 307

K

SK5

SK305

PM320

L

M

PM309

PM312

Pulau Tioman

ND1ND2 ND3

ND4 ND5

ND6 ND7Pulau Sebatik

Pulau Jambongan

Development & Producing PSCs : 24

CONCEPT OF PRODUCTION SHARING CONTRACT (PSC)

GOVERNMENT

PETRONAS

CONTRACTORS

PDA

PSC

Entire ownership of Nation's petroleum resources is vested to PETRONAS.PETRONAS has exclusive rights to exploit Nation's petroleum resources.

PETRONAS, as a custodian, manages the petroleum resources of the Nation.Formulates re levant policy and guide lines.Provides necessary incentives and conducive investment environment for upstream pe troleum business.Adds value to the petroleum resources.

Converted Concession System to Production Sharing Contracts (PSC).Obligates Partners to provide all financing and insulate PETRONAS from risks.Provides a more equitable partnership.Stipulate s contractual period, management of operations, recovery of costs, division of profit, obligations of partie s.

Plans and secures long term deve lopment of Nation's pe troleum re source base .Promotes sustainable exploration, deve lopment and production of resources for the maximum benefit to the nation.Manages performance of PSC Partners.Brings in fore ign investment and technology.

EVOLUTION OF PSC INLINE WITH CHANGING ENVIRONMENT

Revenue-over-cost(R/C)

To attract new foreigninvestment through smartpartnership conceptDEEPWATER

PSC

Target for big playerswith deepwaterexperience1985 PSC

To attract other oilcompanies besidesESSO and SHELL1976 PSC

Convert existingConcession into PSCs

CONCESSIONAGREEMENT

Oil companies andState government

PSCs IN OPERATION IN MALAYSIA(As at January 2004)

5 4 4 4 5 5 6 6 6 64

11

21

27

30 30 29 2931 31

27

33

37

42 4341

4446

1976 1980 1984 1988 1992 1996 20000

10

20

30

40

501 9 7 6 P S C 1 9 8 5 P S C D E E P W A T E R

& R / C P S C

SPLIT OF THE BARREL UNDER PSC

Royalty (B)

10% of (A)

Cost Recovery (C)

Max 50% of (A)

less

less

equals

Revenue (A)

Profit Oil

(A)- (B)-(C)

Cost Recovery to Contr

Profit to Contr

Entitlement to Contr

Tax

Expenses

less

less

equalsContractor NCF

plus

equals

Contractor

Profit to NOC

Tax

Entitlement to NOCequals

less

equalsContractor NCF

National Oil Company

Royalty

Contr tax paid

NOC tax paid

GOV NCF

plus

plus

equals

Government

76 PSC

Gross Revenue

Less CostCost Oil Ceiling

20%Actual Used

Cost

Contractor’sProfit Oil

Profit Oil SplitContr : PET30% :70%

PETRONASProfit Oil

Less Royalty10%

GovernmentCash Flow

Less PITA38% Less PITA

38%

Contractor Cash Flow PETRONAS Cash Flow

85 PSC

Gross Revenue

Less CostCost Oil Ceiling

50% Oil, 60% GasActual Used

Cost

Contractor’sProfit Oil

Profit Oil SplitContr : PET

Sliding

PETRONASProfit Oil

Less Royalty10%

GovernmentCash Flow

Less PITA38% Less PITA

38%

Contractor Cash Flow PETRONAS Cash Flow

Contr PETH

First 10 kbd 50 50

Next 10 kbd 40 60

Ecxess 20 kbd 30 70

ROC (Revenue Over Cost) PSC

Gross Revenue

Less CostCost Oil Ceiling Depend on R/C

Actual UsedCost

Contractor’sProfit Oil

Profit Oil SplitContr : PET

Depend on R/C

PETRONASProfit Oil

Less Royalty10%

GovernmentCash Flow

Less PITA38% Less PITA

38%

Contractor Cash Flow PETRONAS Cash Flow

Unused Cost OilContr : PET

Contractors' Cumulative Cost Oil +Profit Oil From The Effective DateContractors' Cumulative Petroleum Costs From The Effective Date

R/C Index =

One of the "yardsticks" to gauge Contractors' profitability at any time is by the RATIO of Contractors' Cumulative REVENUE over Cumulative COSTS. We define the above yardstick as Contractors' R/C Index

R/C = 1; Represents PAYOUT (undiscounted), but true Payout (considering time value of money, tax payment, etc.) occurs when R/C is around 1.4

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28Year

Con

trac

tor's

Cum

.Cos

ts &

Cum

.Rev

Cumulative Revenue(PO+CO)

Cumulative Costs

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28Year

0.00

0.50

1.00

1.50

2.00

2.50

Con

trac

tor's

R/C

Inde

x

APPROACH : REVENUE-OVER-COST (R/C) INDEX

Outline

R/C TABLE

COST OIL

PROFIT OIL

Cost Oil

Ceiling

Unused Cost Oil

PET : Cont

Profit OilPET : Cont

0.0 < R/C <= 1.0 70% N.A. 20 : 80

1.0 < R/C <= 1.4 60% 20 : 80 30 : 70

1.4 < R/C <= 2.0 50% 30 : 70 40 : 60

2.0 < R/C <= 2.5 30% 40 : 60 50 : 50

2.5 < R/C <= 3.0 30% 50 : 50 60 : 40

R/C > 3.0 30% 60 : 40 70:30

Contractor’s R/CRatio

FISCAL IMPROVEMENT

Fiscal terms are tied to rate/volume level, NOT related to PROFITABILITY

Fixed Cost Oil/Gas is NOT sensitive to investment level especially in the early of the project life

Fiscal terms applied to Contract Area (rather than field basis)

Higher profit split benefits accrue to First field. Subsequent development does not enjoy higher profit split.

NO fiscal incentives to save costs

Any Unused Cost Oil/Gas becomes profit and share in a bigger proportion to PETRONAS

NO fiscal incentives for re-investment

Additional investment will not enjoy the same benefit as in earlier investment

COMPARISON OF PSC - OIL

Note : The 1976, 1985 and R/C PSCs are based on 40 million bbls crude oil reserve volume. The Deepwater PSC assumes a large oil discovery in excess of 1 billion bbls.

Perc

ent o

f Gro

ss R

even

ue

0

20

40

60

80

100

GOVERNMENT

COST

PSC Partner

PETRONAS

42.3

28.0

13.3

R/C

16.4

42.2

28.0

15.8

14.0

1985 PSC

38.1

23.1

28.7

10.1

1976 PSC

30.1

44.7

12.5

12.7

DEEPWATER

It allows Contractor to take more when its profitability is low and PETRONAS' take progressively increases when Contractor's profitability improves:

1. Higher Cost Tranche is given when Contractors' Profitability is low and decreases as Contractor's Profitability increases.

2. Higher Contractor's share of Profit Oil/Gas is given when Contractor's Profitability is low and decreases as Contractor's Profitability increases.

CONT

RACT

OR

'S S

HAR

EO

F PR

OFI

T O

IL/G

AS

High

Low HighContractor's Profitability (as indicated by R/C)

COST

TRA

NCHE

High

High

Contractor's Profitability (as indicated by R/C)Low

VARIABLE COST SHARING LEVELS AND PROFIT SPLITS

-30% -20% -10% Base Case 10% 20% 30%4

6

8

10

12

14

16

18

20

22

Con

trac

tor's

IRR

(%M

OD

)

Oil Price Cost

Salient Features Salient Features of ROC PSCof ROC PSC- Sensitivity of IRR on Oil Price and Cost- Sensitivity of IRR on Oil Price and Cost

Salient Features:Under the new R/C fiscal terms, Cost Reduction provides as much impact on Contractors' IRR as that caused by oil price increaseCost Reduction is fully within our control, unlike oil price. Therefore, Contractors will be enticed to reduce cost rather than to hope for oil price to improve. This leads to larger share in revenue for all parties involved.

Decrease IncreasePercent Variation

100 mmbbl

40 mmbbl 40 mmbbl

100 mmbbl

RC

IND

EX

YEAR

ANN

UAL

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

CU

MU

LATI

VE

0.0

0.5

1.0

1.5

2.0

COSTS

REVENUE

Cumulative Costs

Cumulative Revenue

1st round investment 2nd round investment

Dip in R/C Indexas a result of

additionalinvestment.

E&P BusinessECA-1 / mcprer3c/JAN 1996 EMD

PROFITABILITY BASED FISCAL REGIME : Sensitive to Re-investment

Costs, Reserves & Oil Price are estimated based on current conditions and current Technology when a Contract is negotiated and agreed.Estimates likely to change, New technologies may evolve over time.

R/C IS SELF-ADJUSTING

2 4 6 8 10 12 14 16 18 200.0

1.0

2.0

3.0

CO

NTR

AC

TOR

'S R

/C IN

DEX

0 2 4 6 8 10 12 14 16 18 200.0

1.0

2.0

3.0

CO

NTR

AC

TOR

'S R

/C IN

DEX

1 3 5 7 9 11 13 15 17 190.0

1.0

2.0

3.0C

ON

TRA

CTO

R'S

R/C

IND

EX

0 2 4 6 8 10 12 14 16 18 200.0

1.0

2.0

3.0

CO

NTR

AC

TOR

'S R

/C IN

DEX IF RESERVES & PRODUCTIVITY

TURNS OUT 50% BETTER

R/C INDEX PROFILE IF OIL PRICETURNS OUT TO BE 25% HIGHER

R/C INDEX PROFILE BASED ONESTIMATES DURING NEGOTIATIONS

IF PRICE TURNS OUT 25% HIGHER& COSTS 25% LOWER

IF NEW TECHNOLOGY IS USEDTO ENHANCE RESERVESCOST EFFECTIVELY

R/C INDEX PROFILE BASED ONESTIMATES DURING NEGOTIATIONS

R/C INDEX PROFILE BASED ONESTIMATES DURING NEGOTIATIONS

R/C INDEX PROFILE BASED ONESTIMATES DURING NEGOTIATIONS

Sliding Scale 85 PSC

ROYALTY( 10% )

PS Cont.PROFIT OIL

PETT.PROFIT OIL

COSTRECOVERYup to 50%

12 %

28 %

12 %

28 %

Above 50 MMbbls30 : 70

20 %

20 %

Below 50 MMbbls 50 : 50

20 %

20 %

Below10 kbbl/d

50 : 50

Next10 kbbl/d

40 : 60

16 %

24 %

Above20 kbbl/d

30 : 70

12 %

28 %