PSA’s: Explainer
OPINION
Understanding the Mechanics of Oil Production-Sharing Contracts
Article by Arno Saffran, Monday 02 March, 2025Under a production-sharing contract (PSC), an oil company—or consortium known as the Contractor—gains the right to explore a designated area for hydrocarbons and, if successful, to develop and extract the resources. The Contractor assumes the upfront financial risk of exploration and production, while the host government retains ownership of the resources.
If oil or gas is found, the Contractor recovers its investment through a portion of the revenue, known as cost oil, after paying royalties to the government. The remaining revenue, called *profit oil*, is then divided between the government and the Contractor. The split can shift based on factors like oil prices or production levels, depending on the contract terms.
PSCs typically include distinct phases: an Exploration Period with set timelines and work commitments, followed by a Development Period that can span 20 years or more, often with extensions. If a discovery proves commercially viable, the Contractor moves into long-term production. However, undeveloped acreage may need to be relinquished at predetermined rates—sometimes as much as 100%—over time.
Revenue distribution is complex, factoring in royalties, cost recovery, profit splits, and sometimes an R Factor—a ratio comparing cumulative revenues to costs that adjusts the government’s take. Additional payments, such as production-based bonuses, may also apply.
