Art,
You asked for it! A "concession" in the O&G world has a lot of history and many details; in fact the document I provide the link for below gives not only the origin of )&G concessions, but also analyzes PNG's concession evolution and incorporates the Oil & Gas Act currently used in PNG and gives specific examples of how each PDL granted is usually different. When one takes the time to read this it becomes clear why things take so long; each PDL has its own "concessions" as to who the government participant will be, how expenses of development will be accounted for, taxes, even whether EWTs are necessary (Yes, believe it or not the government usually decides whether EWTs will be required and that's why the language of "production" is contained in each license stage (PPL, PRL, PDL, etc)). Sorry shorty "Where are the EWTs?" fans, but this is why your aruments over EWTs are very hollow. A few excerpts from the paper (which was written in 2003):
"Concessions
The history of petroleum agreements begins with the granting of an oil concession by the Persian Government to William D’Arcy in 1901.[1] The original 1901 D’Arcy concession was granted over the
whole of the Persian Empire with the exception of 5 provinces, covering 480,000 square miles. Concessions granted by the rulers of Abu Dhabi and Kuwait covered their entire countries.[1] The concessions were granted for very long periods3 and on modest fiscal terms.[2] Professor Charles Lipton summarised the traditional concession arrangement as follows:
"It was a long term agreement. 99 years was not untypical. It created enclave and give rise to exception to the general law application. Management ‘prerogative’ were left to the operating company. There was no government participation in the basic decisions such as the rate of operation or marketing. The investor provided all capital typically, and was entitled to all profits, originally paying the government a per ton royalty."
Under Section "B" is where the specific discussion of PNG's licensing and concessions is covered. Again, a few excerpts:
"(a) Exploration Licence
The PNG’s petroleum exploration and development licensing system is primarily a two-tier system. A Petroleum Prospecting Licence (PPL) is an exploration licence issued to an oil company pursuant to which the oil company undertakes petroleum exploration.[1] The Petroleum Development Licence (PDL) is a production licence[2] issued to the holder of a PPL upon commercial discovery of petroleum, to produce and deal with the petroleum produced within the acreage.
A PPL confers on the licensee the exclusive right to explore for petroleum, to carry out appraisal work in respect of the petroleum discovery, and to undertake such task as are necessary to otherwise explore for, produce and sell or otherwise disposed of petroleum produced. The legislation provides the scope of a PPL as follows:
"A petroleum prospecting licence, while it remains in force, confers on the licensee, subject to this Act, and to the conditions specified in the licence, the exclusive right to explore for petroleum, and to carry out appraisal of a petroleum discovery, and to carry on such operations and execute such works as are necessary for those purposes, in the licence area, including the construction and operations of water lines, tests for appraisal of a petroleum pool (including the construction in accordance with the authorization and disposal), and the recovery and sale or other disposal of all petroleum so produced."[1]
As noted, the legislation gives sufficient scope and rights, in exclusivity, to the holder of an exploration licence to explore for, produce and sell or dispose of petroleum produced within the exploration acreage. The scope of a PPL is therefore as wide as a PDL. The case on point is the Moran Petroleum Project.[2] In September 1996, oil was discovered in Moran IX sidetrack well in PDL 2.[3] In early 1997, the State approved the PDL 2 (Kutubu Joint Venture) to carry out an Extended Well Test Program (EWT)[4] within PDL 2 pursuant to which the PDL 2 licensee produced oil within the block under the EWT program
[4] The Extended Well Test Program is conducted for the purpose of gaining technical data for the purpose of technically appraising an oil field. Upon invitation, Mr. Gerard Mangal, the Chairman of the Society of Petroleum Engineers – PNG Section, described EWT as follows:
“Extended well testing (EWT) is a methodology for conducting prolonged production test with the primary objective of estimating hydrocarbon volumes and assessing the nature and strength of the drive mechanism before committing to full-scale development. EWTs are normally conducted in offshore areas for weeks to months in remote offshore locations where well locations/pads are very expensive to build. Any productions from these tests are used to offset against sunk costs.
There are basically two types of well tests.
The first of these is the development well test and these are conducted to gain the following data.
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Pressure within a drainage area,
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Skin factor, and
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Formation properties.
The second is appraisal well testing, where the following data are gained in new fields.
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Oil production rate,
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Skin factor,
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Fluid samples,
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Formation characteristics,
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Boundary conditions, and
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Determination of initial reservoir pressure.
In PNG the EWT as a technique has been used with the added justifications of our fields being remotely located and therefore give rise to high drilling costs. Reservoir compartmentalization has also been an argument in favour of EWT being used.”
So because of how the production during any EWT program required by the government is accounted for in the "concessions" for the project, it's their call as to whether EWTs are necessary/required.
"Moreover the State proceeded to approve the license holders of PPL 138 to EWT program using Moran 4 well and the PPL 138 licensees produced oil within the exploration license area from Moran 4 exploration well under a EWT program. Hence, oil was produces at PPL 138 under the EWT program prior to carving out the area and grant of PDL. The production of petroleum at Moran 4 well within Moran PPl 138 is a case on point to demonstrate that the scope of a PPL- and exploration license, includes exclusive rights not only to explore for, but also to produce and sell or dispose of petroleum produced within exploration acreage. A PPL could also contain incidental features as are necessaryto undertake and facilitate production of oil within the PPL, including construction of flow-lines and gathering lines, roads and bridges and other infrastructure. Technical justifications can be advanced to justify oil production within the exploration acreage under an EWT program but consideration of the same is not within the scope of this paper. The fact that petroleum production is undertaken within the exploration acreage is, for the purposes of this paper, sufficient endorsement of the view that petroleum production can be undertake under an exploration license (ie PPL) in the PNG's petroleum arrangement."
The paper has more discussion on PDLs and then get into "Petroleum Agreements"
"The PNG petroleum agreements deal with matters, which include State equity participation, foreign currency management, local business development and procurement of local goods and services. For the purpose of this paper, particular consideration is given to those provisions dealing with State equity participation.
The State takes its share of the revenue from production and sale of petroleum, primarily from petroleum taxation computed and collectedunder the Income Tax Act,[1] petroleum royalty and from direct equity participation in the project. In computing the State’s share of the petroleum produced or the revenue derived from sale of petroleum produced within the acreage, and the oil companies’ share of the petroleum produced, the amount taken up by the State pursuant to the exercise of its rights to take equity participation in the petroleum project within a license area is regarded and treated by oil companies as the State’s share of the oil or revenue. Accordingly, the State equity participation policy regime is an important element of the State’s petroleum policy regime, and that which forms the core of the petroleum agreement.
The terms under which the State may take equity participation in the petroleum project are set out in the petroleum agreements entered into in respect of each PPL. The petroleum agreements are entered into pursuant to the petroleum legislation.[2] The respective petroleum agreements, as a matter of policy, are entered into prior to discovery of petroleum. Therefore the subsequent PDL incorporates provisions of both the negotiated agreement and legislation, which form the conditions of the PDL.[3] Both instruments are therefore needed to undertake petroleum development.
The detailed features of State equity participation in a petroleum project are not covered by the legislation[4] but are set out in the respective petroleum agreements. This is a major feature of the PNG’s petroleum arrangement that can be termed as the heart of the petroleum agreement. It is therefore the fiscal arrangement and the arrangement for the State’s equity participation in the projects that distinguish the PNG’s petroleum agreement from other recognised forms of petroleum agreements."
"Concessions" not only apply to granting of licenses, but also are specific to each PDL and this is why these things take so long to complete. The government and all partners must be on the same page because things like tax treatments of exploration costs, etc have to be good for all of the participants. Here's an example: "The treatment of petroleum exploration and production titles in the petroleum legislation and the petroleum agreements is followed through in the taxation regime. Under the taxation regime, a petroleum project is "re-fenced" for taxation purposes and taxed on a project basis. That is each oil company as a taxpayer is assessed in relation to eacj project as if the assessable income of the taxpayer from petroleum operations attributable to the petroleum project was the only assessable income derived by that taxpayer, and coversely, all allowable deductions are deducted against future income from the petroleum project. For petroleum tax purposes, the pre-PDL exploration expenditures incurred by the taxpayer within the relevant exploration license area in relation to a petroleum project are carried forward and accumulated for 20 years. Upon commencement of petroleum production, the exploration expenditure is deducted from the income derived by the taxpayer from the sale of petroleum produced from the petroleum operations conducted in the PDL area. The exploration expenditure incurred in the relevant year of income; and secondly, any excess amount is applied to reduce the exploration expenditure incurred within the 20 years period to the year of income, until the amount is fully recovered. This has the effect of accelerating the recovery of exploration expenditures by applying all the available income derived from sale of petroleum produced from the petroleum project." The paper concludes with, "As observed in this paper, there is little doubt that the PNG's petroleum licensing regime is "concession" based. .................. "The introduction of retention license to the licensing regime underlines the concession nature of the licensing regime. Upon petroleum discovery, the holder of the exploration license is guaranteed a production license."
http://www.paclii.org/journals/MLJ/2003/2003_MLJ_6.rtf
The point of all of this is that "concessions" flow all through the licensing in PNG (and many countries). And a huge part of that comes in the granting of a PDL as well as the Gas Agreement. The paper discusses how many options there are in this process and why it takes quite a while for all of it to come together. The good thing is that we have heard that most of this is done at this point. I still believe that a "biggie" for the government is whether they are dismantling Petromin in favor of NPCP being the State designee for Gulf LNG. Also, this paper answers a lot of the question around the EWT process. Since it can affect so many things, the State is the one who determines the necessity and extent because it invloves costs and actually producing "petroleum", and that plays a part in concessions in the "carry", taxation, etc. This paper also details how the "carry" process worksincluding how it creates a legal obligation of the State and that interest is applied at "market" rates. Lots of meat in this.
PNG Promises to welcome Thai Energy Investment
