Production Sharing Agreement

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Production Sharing Agreement (PSA) is a type of contract for oil and gas concessions in which one or more oil companies and the host country share the oil or gas production according to a specified key.

A distinction is made between cost oil and profit oil . Cost-Oil is the portion of the production oil, the yield of which is due to the oil company to cover the investments and the running costs. Profit-Oil is the share of production that goes beyond this and is divided according to a fixed key ( primary split ).

To ensure that 100% of the oil produced does not reach the production company as cost oil during the amortization period, a cost oil limit is usually agreed, which defines a maximum of the produced amount as cost oil. After the amortization period of the investments has expired , almost only profit oil will be promoted.

The purpose of the contract is that the production company can cover the costs of exploration ( sounding ) and technical facilities for the first few years , while the host country does not have to forego a profit during this time.

The following example: Company XY invests in exploration (prospecting) and opening up an amount that corresponds to, for example, 120,000 BOE (Barrels Oil Equivalent), then the company would like to get at least this amount plus profit out again. Assuming the field promotes 100,000 BOE per year, the expenses could be covered in full within the first 2 years. However, since the corresponding countries would not have a profit during this period, a distinction is made between cost oil and profit oil .

The cost oil is intended to cover the company's expenses. However, a cost oil limit is set (e.g. 40%). In the example that would be 40,000 BOE per year. The expenses would simply be covered after 3 years.

The remaining delivery rate corresponds to the Profit Oil , which according to a best. Amount split between the country and the company. This division is also called "primary split", with each partner receiving a share of the remaining 60,000 BOE.

As soon as the costs are covered, there is only profit oil , so there is no longer any cost oil (note: this is a very simplified example, as certain costs will also arise during the future years). The Profit-Oil is divided according to the same key, but the base in the example is no longer 60,000, but 100,000.

PSA effect: Oil companies that produce oil or gas under PSAs relate their reserve figures to the cost oil they are entitled to . If the crude oil or gas prices rise , the cost oil share, measured in BOE , falls and the company's reserve figures will consequently fall. When prices fall, the opposite effect is noticeable.