The following summary information is intended to provide a general explanation of contractual arrangements for oil and gas production in the industry. The actual terms and conditions of such contracts, which are agreed upon after substantial negotiation, may vary widely from country to country and from project to project, based on a large number of factors. Accordingly, the information presented here should not be considered to describe Total’s existing contractual arrangements, nor its intended policy for future agreements.

Total conducts exploration and production operations in more than 40 countries where it holds oil and gas interests under concession, license or lease agreements or contracts. Terms and conditions concerning mining titles or rights, production levels, royalties, environmental stewardship, exports, taxes and other factors vary from country to country. The arrangements are usually either concession or production sharing contracts.

Concession contracts

• Under a concession contract, the oil company owns the assets and the facilities and receives the entire production. In return, it assumes operating risks, all costs and capital expenditure and pays the State, which owns the subsurface mineral resources, a production-based royalty, income tax and any other taxes provided for under local legislation.

Production Sharing Contracts

• As its name indicates, a production sharing contract (PSC) sets out the procedures for sharing production and stipulates the arrangements for cooperation between the company or consortium holding the license and the host country, usually represented by a national oil company. This means that the national oil company has input in operational decisions, recognition of costs and how the production sharing is calculated.
  
  The consortium conducts and finances all the exploration, development and production operations at its own risk. In return, it receives a percentage of production known as cost oil, whose sale enables it to recoup its expenses (capital  and operating expenditures).
  
  The remaining production, known as profit oil, is then shared with the host country or the national oil company according to percentages and procedures that vary by country.

Risk Service Contracts

• Total has signed risk service contracts in certain countries. They are similar to production sharing contracts, with one key difference: Total’s costs and remuneration for its services are paid on a monetary basis. Existing risk service contracts are backed by a compensation, or buyback, agreement under which Total is allocated a percentage of production equivalent to the financial value of its costs and its remuneration.

Concession agreements and production sharing contracts coexist, sometimes in the same country. Although there are other types of agreement, most of Total’s licenses are held under concession contracts. Like its industry peers, Total often only holds a working interest in oil and gas fields, with the balance held by other partners, such as other international oil companies or national oil companies. Total is often the operator, meaning that it is responsible for the technical aspects of production.

The taxes applicable to oil and gas operations are usually much higher than for other industrial activities. In some countries, the income tax rate may reach 80%.

Bonuses: Under concession and production sharing contracts, oil companies can be required to pay bonuses at various contract milestones to the State or the national oil company that granted the concession, lease or license.
They include a signing bonus when an exploration lease or license is awarded, a commercial discovery bonus when a commercial find is made, and a production bonus when specified cumulative production thresholds are reached.

Minimum work obligations: During the exploration phase, contracts can stipulate minimum obligations concerning work to be performed by the operator during a specified period, such as the number of wells to be drilled and the seismic surveys to be conducted. Some contracts stipulate that financial compensation has to be paid to the organization that granted the concession, lease or license if these obligations are not met.

	Impact of Higher Oil Prices on Production: P.S.Cs P.S.Cs stipulate that the consortium companies will be allocated a percentage of the production as reimbursement of their capital and operating expenditures (cost oil) as well as their remuneration (profit oil). As a result, when the price of oil increases, the percentage of production equivalent to this payment decreases. In other words, when oil prices are higher, fewer barrels are needed to make the initially stipulated payment, and vice versa.