Production sharing agreement
Encyclopedia
Production sharing agreements (PSAs) are a common type of contract signed between a government and a resource extraction company
(or group of companies) concerning how much of the resource
(usually oil
) extracted from the country each will receive.
Production sharing agreements were first used in Bolivia in the early 1950s, although their first implementation similar to today's was in Indonesia in the 1960s. Today they are often used in the Middle East
and Central Asia
. In production sharing agreements the country's government awards the execution of exploration and production activities to an oil company. The oil company bears the mineral and financial risk of the initiative and explores, develops and ultimately produces the field as required. When successful, the company is permitted to use the money from produced oil to recover capital and operational expenditures, known as "cost oil". The remaining money is known as "profit oil", and is split between the government and the company, typically at a rate of about 80% for the government, 20% for the company. In some production sharing agreements, changes in international oil prices or production rate can affect the company's share of production.
Production sharing agreements can be beneficial to governments of countries that lack the expertise and/or capital to develop their resources and wish to attract foreign companies to do so. They can be very profitable agreements for the oil companies involved, but often involve considerable risk.
Company
A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...
(or group of companies) concerning how much of the resource
Natural resource
Natural resources occur naturally within environments that exist relatively undisturbed by mankind, in a natural form. A natural resource is often characterized by amounts of biodiversity and geodiversity existent in various ecosystems....
(usually oil
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
) extracted from the country each will receive.
Production sharing agreements were first used in Bolivia in the early 1950s, although their first implementation similar to today's was in Indonesia in the 1960s. Today they are often used in the Middle East
Middle East
The Middle East is a region that encompasses Western Asia and Northern Africa. It is often used as a synonym for Near East, in opposition to Far East...
and Central Asia
Central Asia
Central Asia is a core region of the Asian continent from the Caspian Sea in the west, China in the east, Afghanistan in the south, and Russia in the north...
. In production sharing agreements the country's government awards the execution of exploration and production activities to an oil company. The oil company bears the mineral and financial risk of the initiative and explores, develops and ultimately produces the field as required. When successful, the company is permitted to use the money from produced oil to recover capital and operational expenditures, known as "cost oil". The remaining money is known as "profit oil", and is split between the government and the company, typically at a rate of about 80% for the government, 20% for the company. In some production sharing agreements, changes in international oil prices or production rate can affect the company's share of production.
Production sharing agreements can be beneficial to governments of countries that lack the expertise and/or capital to develop their resources and wish to attract foreign companies to do so. They can be very profitable agreements for the oil companies involved, but often involve considerable risk.