Wednesday, February 22, 2006

Books Worth Reading: THE K.R.G. PRODUCTION SHARING CONTRACT (MODEL) by the KURDISTAN REGIONAL GOVERNMENT

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One of the most widely used agreements in the oil and gas business is the Production Sharing Contract (P.S.C.) — the other two most important contract types are the "concession" and the "service contract". The P.S.C. contract type was created in Indonesia in the 1960s and modeled after that country's longstanding agricultural agreements. Indonesian Law 44, enacted in 1960, restricted oil and gas recovery to state companies, but it allowed foreign companies to operate as contractors to state companies.

A good example of a modern P.S.C. is the P.S.C. model developed by the Kurdistan Regional Government (K.R.G.) in 2007. In this regard, the Ministry of Natural Resources (M.N.R.) of the K.R.G. has made available on its website all the P.S.C.s that it has signed with exploration and production companies.

Under a P.S.C. the contractor makes risk investments and provides technical and management services in return for a share of production to recover its costs (“Cost Oil”) and a share of the remaining oil (“Profit Oil”) as its profit. The contractor has the right to market its share of oil and "book" the reserves. In the production phase, however, the government of the hosting country may take a direct stake in the project. In general, the extent of the government's participation varies from less than 30 percent to as much as 70 percent. As a consequence, the government shares "rewards and technical, price, and operating cost risks with the I.O.C. in proportion to its share in the project" (Maurer - Tarontsi, 2009). In addition, the government collects taxes and royalty payments.      


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Source: The Ministry of Natural Resources of the K.R.G.




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