Contract types



To explore for oil a permit is required. This specifies the contract between the permit holders and the Government. For production a production licence is required. There are four main types of contracts:

  1. Concession
  2. Production Sharing Contract (c.q. Agreement) (PSC or PSA)
  3. Joint Venture
  4. Technical Service Contract/Agreement (TSA)
  5. Unitisation agreements

I can recommend the overview article by Michael Likosky (2009).

Concession

A government can give a concession to a prospector. In the concession agreement a number of things are stipulated. For instance the conditions for exploration and the rules governing the production agreement in the case of success. Long ago, a concession meant that the prospector became the owner of the resources within the concession area (UK North Sea) and for a period of sometimes up to 75 years. Over the years, concessions were less frequently offered, making place for Production Sharing Agreements, etc.
The government wishes to obtain revenue right from the start of exploration. Payments to the government include sometimes a bonus payment upon conclusion of the contract. It may be some standard bonus, but there are also bidding rounds, where the highest bidder obtains the contract. A more regular, but smaller income is from the concession rentals, a fee per acre, or square kilometer. As some companies may get a concession, but do not intend to explore, but rather re-sell the concession, a government can impose expenditure obligations in the form of a minimum amount geophysical expenditure and a minimum number of exploration wells to be drilled. Also, a company cannot indefinitely hold on to the original concession area, because there are obligatory relinquishments of part of it.
In a successful case a production licence is obtained for the discovery. Other rentals to be paid and sometimes a large bonus, if a stipulated production level is reached. It may also be that the host government can participate in the venture. It could in rare cases retro-actively pay their share of the exploration costs.

Production Sharing Agreement/Contract

A PSA is an agreement between the parties to a well and a host country regarding the percentage of production each party will receive after the participating parties have recovered a specified amount of costs and expenses. It is particularly common in the Middle East and Asia. Although earlier schemes could be termed a PSA, the PSA became popular after the introduction in Indonesia in 1960. A PSC/PSA is either negotiated between a multinational and the host country, or by bidding. The host country remains the owner of the resource. Part of the oil produced is termed "cost oil" and can be sold by the oil company to recover its costs. The rest is "profit oil" the proceeds of which are shared by Govt. and Company (could well be in a ratio of 80 - 20%!). Usually there are expenditure obligations and royalties.
One of the best explanations I have found:
Production-Sharing Agreements: An Economic Analysis by Kirsten Bindemann, 1999.

Joint Venture

A joint venture between a foreign oil company and a national oil company of the host country. For a government a JV is an opportunity for technology transfer that may eventually lead to independence for the national oil company. There is a wide variety of such JV's, a recent example is the joint venture between Shell and a Russian state-controlled company for the Sachalin project.

Technical Service Agreement

In a TSA a company can do a well-defined job for a host country's national oil company. The duration is often fixed and the company does not receive any of the oil it produces, but gets a fixed fee per barrel, above reimbursement of the costs it incurs. At a few dollar per barrel, such a contract is much less attractive than most of the concession agreements or PSA's. TSA agreements were operating in Venezuela, Iraq, Kuwait, etc.

Unitisation agreements

Concession blocks are not nessarily outlined with knowledge about the extent of prospects. Therefore it may occur that an oilfield straddles the concession boundary. This may be limited to concessions within one country, but sometimes the accumulation straddles international borders. This rather common problem is solved by negotiating a "unitisation agreement" with the owners of the other part. Interesting examples are the Schoonebeek oil field, a large accumulation in the East of the Netherlands, with part of it situated in Germany.
It stands to reason that an optimum development and production plan must comprise the whole accumulation. The different stake holders must then agree on the technical issues in such agreement. If there is no agreement it might be that the owners of one part of the field suck the oil from underneath their neighbours' acreage. Famous examples are from the past in the East Texas field. There operators were quite busy with deviated wells, and not always honestly. In the sixties there was a rock-and-roll song with the words "See you later alligator" In Texas that soon became "See you later deviator". One notorious operator got the nickname "Whipstock Bill".

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