Technical Service Contract, or TSC, refers to an oil and gas exploration and production contract awarded by a producing country to the International Oil Company (IOC) bidding with the lowest remuneration fees per barrel (RFB) produced as reward of its capital and operational expenditures.
Most of the exploration and production contracts in the world are based on concessions or production sharing contracts (PSCs).
In the case of concessions, the producing countries and IOCs share revenues in a way or another depending on the form of the contract.
With the PSCs, they share revenues and operating costs.
In both cases, the IOCs must support all the capital expenditure and risks.
The Technical Service Contract introduces a different approach where the IOCs must bear, as in the other contracts, all the capital expenditure and risks, but in addition all the operating costs only compensated by a Remuneration Fee per Barrel (RFB)
All the revenues except this Remuneration Fee per Barrel (RFB) go back to the producing country.
In addition this Remuneration Fee may be paid only if the production exceeds a minimum level.
For the IOCs, the TSC means that all the profitability of the capital and operating expenditures required for the development of an oil and gas field is depending on the amount of this Remuneration Fee per Barrel (RFB).
The TSCs were widely used in Iraq to award the exploration and production rights of the oil and gas fields in the south of Iraq to IOCs.
The Iraq Government awarded these TSC per field in following a fierce bidding competition between all IOCs to offer the lowest RFB, meaning leaving the maximum profit to the Government.
For the winning IOC the challenge is then to recover its total costs, capital expenditure plus operating costs, with the agreed RFB.
In most of the cases, the TSC were signed with IOC promissing RFB around or even below $2 per barrel.
Considering that these TSC are signed for a period of 20 or 25 years, the winning IOC must feel confident in technology and expertise to minimize its capital and operating expenditure while delivering the targeted oil and gas volume of production.
In the example of the West Qurna 1 field awarded to ExxonMobil and Shell in November 2009 the key figures of the challenges must be summarized to:
– $25 billion Operating costs over the TSC duration period of 20 years
– $1.9 Remuneration Fee per Barrel
With such figures the TSC may only apply to giant oil fields able to provide large and sustainable volume of production in the best conditions so that the IOC can minimize risks and expenditure.
For the producing country the TSC offers only advantages with additional bonus when oil price starts to fly above the $100 per barrel.