Overview of Malaysian PSC - CCOP

Overview of Malaysian PSC

FIELD LOCATION MALAYSIAKangarM’sia / ThaiDevelopment AreaPM3 CommercialArrangement M’sia-VietnamGeorgetownGurunKualaTerengganuSABAHLumutKg. TOK ARUNKemamanKERTIHMeruKuantanKUALA LUMPURSerembanSegamatMelakaJohore BahruPENINSULARMALAYSIASARAWAKLNG PLANTSOIL AND GAS FIELDS*FIELD OIL GASDISCOVERED 134 178PRODUCING 47 14

MALAYSIA EXPLORATION AND PRODUCTIONBLOCKS9°7°5°3°98° 100° 102° 104° 106° 108° 110° 112° 114° 116° 118° 120°PM320THAILANDPulauLangkawiPM321PulauPinangStraits of MelakaPM322Malaysia / ThailandJoint DevelopmentAreaPM301PENINSULARMALAYSIAVI ETNAMPM3Commercial ArrangementAreaPM302PM311PM303PM313PM306PM314PM307PM308PulauTiomanPM312PM305PM309PulauDjemadjaKepulauanAnambasSouth ChinaSea200mPulauNatunaPulauSubiBesarSK331BRUN EIPALAWAN(PHILIPPINES)PulauBugsukPulauBalabacPulauBalambanganPulauND5ND4BanggiH SB303 Pulau SB304MalawaliK SB302PulauND2 ND3JambonganND1GSB330Sulu SeaCSB305F ALSB301B D MSABAHBEPulauSB331TawitawiJ Pulau LabuanSK301 SK312SB332SK3SK 307PulauSK308Pulau SibutuSK310Timbun MataSK302 SK306SB306SK333PulauSK311SebatikND6SK334ND7SK303 SK5SK332SK305SK309SK309200m9°7°5°3°1°SUMATRASI NGAPORE0 200KmSK304SARAWAKKALI MANTANCelebesSea1°98° 100° 102° 104° 106° 108° 110° 112° 114° 116° 118° 120°Development & Producing PSCs : 24

CONCEPT OF PRODUCTION SHARINGCONTRACT (PSC)GOVERNMENTPDAPETRONASPSCCONTRACTORSEntire owne rship of Nation'spetroleum resources isvested to PETRONAS.PETRONAS has exclusiverig hts to e xploit Nation'spetroleum resources.Conve rte d Conce ssionSystem to Production SharingContracts (PSC).Oblig ate s Partne rs to provideall financing and insulatePETRONAS from risks.Provides a more equitablepartnership.Stipulates contractual period,management of ope rations,recovery of costs, division ofprofit, obligations of parties.PETRONAS, as a custodian,manag e s the pe trole umre sources of the Nation.Formulate s re le vant policy andguideline s.Provide s ne ce ssary incentivesand conducive investme ntenvironment for upstreampetroleum business.Adds value to the petrole umre sources.Plans and secures long termdevelopment of Nation'spetroleum resource base.Promotes sustainableexploration, development andproduction of resources for themaximum be ne fit to the nation.Manages performance of PSCPartne rs.Brings in fore ign investme nt andte chnolog y.

EVOLUTION OF PSC INLINE WITH CHANGINGENVIRONMENTRevenue-over-cost(R/C)DEEPWATERPSCTo attract new foreigninvestment through smartpartnership concept1985 PSCTarget for big playerswith deepwaterexperience1976 PSCTo attract other oilcompanies besidesESSO and SHELLCONCESSIONAGREEMENTConvert existingConcession into PSCsOil companies andState government

PSCs IN OPERATION IN MALAYSIA(As at January 2004)50401976 PSC 1985 PSCD E E P W A T E R& R /C P S C434241374446302730 3029 2931 3127332021101154 4 45 56 6 6 6401976 1980 1984 1988 1992 1996 2000

SPLIT OF THE BARREL UNDER PSClessRevenue (A)Royalty (B)10% of (A)RoyaltylessCost Recovery (C)Max 50% of (A)Cost Recovery to ContrequalsProfit Oil(A)- (B)-(C)plusProfit to ContrequalsEntitlement to ContrProfit to NOCequalsEntitlement to NOClesslessTaxExpenseslessTaxplusContr tax paidplusNOC tax paidequalsContractor NCFequalsContractor NCFequalsGOV NCFContractorNational Oil CompanyGovernment

76 PSCGovernmentCash FlowLess Royalty10%Actual UsedCostGross RevenueLess CostCost Oil Ceiling20%Contractor’sProfit OilProfit Oil SplitContr : PET30% :70%PETRONASProfit OilLess PITA38% Less PITA38%Contractor Cash FlowPETRONAS Cash Flow

85 PSCGovernmentCash FlowLess Royalty10%Actual UsedCostGross RevenueLess CostCost Oil Ceiling50% Oil, 60% GasContractor’sProfit OilProfit Oil SplitContr : PETSlidingContrPETHPETRONASProfit OilLess PITA First 10 kbd 50 5038%Next 10 kbd 40 60Less PITA38%Ecxess 20 kbd 30 70Contractor Cash FlowPETRONAS Cash Flow

ROC (Revenue Over Cost) PSCGovernmentCash FlowLess Royalty10%Gross RevenueActual UsedCostLess CostCost Oil CeilingDepend on R/CUnused Cost OilContr : PETContractor’sProfit OilProfit Oil SplitContr : PETDepend on R/CPETRONASProfit OilLess PITA38% Less PITA38%Contractor Cash FlowPETRONAS Cash Flow

APPROACH : REVENUE-OVER-COST (R/C) INDEXOne of the "yardsticks" to gauge Contractors' profitability at any time is bythe RATIO of Contractors' Cumulative REVENUE over Cumulative COSTS.We define the above yardstick as Contractors' R/C IndexR/C Index =Contractors' Cumulative Cost Oil +Profit Oil From The Effective DateContractors' Cumulative Petroleum Costs From The Effective DateContractor's Cum.Costs & Cum.RevCumulative Revenue(PO+CO)0 2 4 6 8 10 12 14 16 18 20 22 24 26 28YearCumulative CostsContractor's R/C Index2.502.001.501.000.500.000 2 4 6 8 10 12 14 16 18 20 22 24 26 28YearR/C = 1; Represents PAYOUT (undiscounted), but true Payout (consideringtime value of money, tax payment, etc.) occurs when R/C is around 1.4Outline

R/C TABLEContractor’s R/CRatioCOSTOILPROFIT OILCostOilCeilingUnused CostOilPET : ContProfit OilPET : Cont0.0 < R/C

FISCAL IMPROVEMENTFiscal terms are tied to rate/volume level, NOT related to PROFITABILITYFixed Cost Oil/Gas is NOT sensitive to investment level especially in theearly of the project lifeFiscal terms applied to Contract Area (rather than field basis)Higher profit split benefits accrue to First field. Subsequent developmentdoes not enjoy higher profit split.NO fiscal incentives to save costsAny Unused Cost Oil/Gas becomes profit and share in a bigger proportionto PETRONASNO fiscal incentives for re-investmentAdditional investment will not enjoy the same benefit as in earlierinvestment

COMPARISON OF PSC - OIL100PSC Partner10.114.016.412.7Percent of Gross Revenue806040PETRONASGOVERNMENT28.738.115.842.213.342.312.530.120COST23.128.028.044.701976 PSC 1985R/C DEEPWATERPSCNote : The 1976, 1985 and R/C PSCs are based on 40 million bbls crude oil reserve volume. The Deepwater PSC assumes alarge oil discovery in excess of 1 billion bbls.

VARIABLE COST SHARING LEVELS AND PROFIT SPLITSIt allows Contractor to take more when its profitability is low and PETRONAS' takeprogressively increases when Contractor's profitability improves:1. Higher Cost Tranche is given when Contractors' Profitability is low anddecreases as Contractor's Profitability increases.HighCOST TRANCHELowContractor's Profitability (as indicated by R/C)2. Higher Contractor's share of Profit Oil/Gas is given when Contractor'sHighProfitability is low and decreases as Contractor's Profitability increases.CONTRACTOR'S SHAREOF PROFIT OIL/GASHighLowContractor's Profitability (as indicated by R/C)High

Salient Features of ROC PSC- Sensitivity of IRR on Oil Price and Cost222018100 mmbblOil PriceCost100 mmbblContractor's IRR (%MOD)1614121086440 mmbbl 40 mmbblSalient Features:Under the new R/C fiscal terms, Cost Reduction provides as much impact onContractors' IRR as that caused by oil price increaseCost Reduction is fully within our control, unlike oil price. Therefore, Contractorswill be enticed to reduce cost rather than to hope for oil price to improve. Thisleads to larger share in revenue for all parties involved.-30% -20% -10% Base Case 10% 20% 30%DecreasePercent VariationIncrease

PROFITABILITY BASED FISCAL REGIME :Sensitive to Re-investmentREVENUECUMULATIVEANNUALCOSTS2.01st round investment2nd round investmentCumulative RevenueCumulative Costs1.5RCINDEX1.00.50.0ECA-1 / mcprer3c/JAN 1996 EMDDip in R/C Indexas a result ofadditionalinvestment.0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20YEARE&P Business

R/C IS SELF-ADJUSTINGCosts, Reserves & Oil Price are estimated based on current conditions andcurrent Technology when a Contract is negotiated and agreed.Estimates likely to change, New technologies may evolve over time.CONTRACTOR'S R/C INDEX3.02.01.00.0R/C INDEX PROFILE IF OIL PRICETURNS OUT TO BE 25% HIGHERR/C INDEX PROFILE BASED ONESTIMATES DURING NEGOTIATIONS2 4 6 8 10 12 14 16 18 20CONTRACTOR'S R/C INDEX3.02.01.0IF PRICE TURNS OUT 25% HIGHER& COSTS 25% LOWERR/C INDEX PROFILE BASED ONESTIMATES DURING NEGOTIATIONS0.00 2 4 6 8 10 12 14 16 18 20CONTRACTOR'S R/C INDEX3.02.01.0IF RESERVES & PRODUCTIVITYTURNS OUT 50% BETTERR/C INDEX PROFILE BASED ONESTIMATES DURING NEGOTIATIONS0.00 2 4 6 8 10 12 14 16 18 20CONTRACTOR'S R/C INDEX3.02.01.0IF NEW TECHNOLOGY IS USEDTO ENHANCE RESERVESCOST EFFECTIVELYR/C INDEX PROFILE BASED ONESTIMATES DURING NEGOTIATIONS0.01 3 5 7 9 11 13 15 17 19

Sliding Scale 85 PSCROYALTY( 10% )COSTRECOVERYup to 50%Below10 kbbl/d50 : 50Below 50 MMbbls 50 : 50Next10 kbbl/d40 : 60Above20 kbbl/d30 : 70Above 50MMbbls30 : 70PS Cont.PROFIT OIL20 %16 %12 %12 %PETT.PROFIT OIL20 %24 %28 %28 %