What are Risk Service Contracts (RSCs)?

Generally under Risk Service Contracts (RSC) an IOC supplies services and know-how (i.e. technical, financial, managerial or commercial services) to the state from exploration through production (and possibly sometimes marketing) phases for the government in exchange for an agreed-on fixed fee or some other form of compensation. In risk service contracts, the IOC bears all the exploration costs.

In return, if exploration efforts are successful, the government allows the contractor to recover costs through sale of the oil or gas and pays the contractor a fee based on a percentage of the remaining revenues. The fee is often subject to taxes.

The contractor bears all the risks, especially exploration risks, and is compensated when a commercial discovery is made. The contractor is also entitled to a share of the profits and not a share of the production.

The state remains the owner of the oil produced i.e. ownership of the petroleum and major installations (except where leased) remain with the state. In some cases the IOC may negotiate an option to buy oil back at world prices. In RSC contracts payments to the IOC are usually made in oil.

The likes of RSCs make good business sense, providing “predictable cash-flow business”, said a well-known integrated service provider. The one big drawback is that, “there is too much emphasis on minimising capital upfront, which leads to expensive problems in operations that are largely avoidable”.

IRR is a primary measure for investment decision for oil and gas companies, where cost of capital is typically used as a decision basis. The attractive feature of Petronas’ RSC Framework is an expected higher than industry average IRR on investment.