Abstract
Ringfencing is a common clause in the Production Sharing Contract (PSC) which implies that all costs and expenses related to the development and operation of a single reservoir, field or block, should be assigned and deducted from the revenues generated solely by that resource unit.
When certain costs are ringfenced, the probability of profitability of investments in frontier areas becomes slimmer.
Allowing exploration costs to cross a ringfence will impact more on the economic profitability of investment and promote further spending in the upstream business. This will act more as a stimulant for investors to explore such opportunities with the assurance that some successful play can compensate for losses during exploration.
The purpose of this paper is to evaluate the impact of ringfencing on profitability of an E&P asset and to show that allowing costs to cross a ringfence will be a strong incentive for the oil industry operators and would give some level of confidence that development of marginal fields would be economically viable. Such incentive proved to work in the UK in the early 1980s and 1990s. Allowing this incentive will show that the Host Government is willing to share E&P risk, reduce the degree of economic outcome uncertainty and creates an investment friendly environment for the operators.
