Production Sharing Agreement

Production Sharing Agreement

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.