(MENAFN- Trend News Agency) Production Sharing Agreement (PSA) is one of the tools for
establishing legal relationship between host governments and
International Oil Companies (IOC) for exploration, development and
production of natural resources.
Roots of the PSAs goes back to 1960s and was first introduced in
Indonesia. Before existence of the PSAs, the concession systems
were in place which allowed IOCs to explore and extract
hydrocarbons, and in return, required them to pay royalties and
taxes to the host governments.
The concession agreements used to be concluded for extremely
long terms (50-99 years as a rule) and for huge areas, vested
property rights in the unproduced hydrocarbons to the IOCs and
provided them with full discretion and control on the fields. All
these features were clearly against the interests of host countries
and as such concession agreements were scrutinized at different
levels. Evolution of principle of permanent sovereignty over
natural resources and specifically, adoption of United Nations
General Assembly Resolution 1803 (XVII) dated 14 December 1962 –
also regarded as the“landmark Resolution” – allowed the countries
to abandon concession arrangement in favor of the PSAs.
PSAs, opening a door for IOCs to bring capital and expertise to
the country, offers a number of fiscal and non-fiscal benefits for
the host countries, not the least the followings:
The state's share of the petroleum upon production Certainty on division of production in a pre-determined
manner Income from petroleum taxation, including profit tax and
royalties Numerous bonus mechanisms paid to the state, such as signature
bonus, production bonus, annual acreage fee Low risk for the host country and the ability to learn from the
IOC's expertise on technology and strategic decisions Holding title for the unproduced oil and gas Development of infrastructure Domestic oil and gas supply, etc.
Considering the lengthy time period required for exploration,
development and subsequent production of the fields, oil and gas
investments are categorized as long-term investments, and that is
why PSAs are in general concluded for 25-30 years. The Agreement on
Joint Development and Production Sharing for the Azeri and Chirag
fields and the Deep Water portion of the Gunashli field in the
Azerbaijan sector of the Caspian Sea signed in 1994 for 30 years
and subsequently, extended until 2049 serves as a vivid example of
the PSA from the local perspective.
While PSA is almost the most common form of upstream oil and gas
deals, it is not the only available instrument in this area. The
Risk Service Agreements (RSA) are gaining popularity and practical
use, also in our country. The main difference between these
contractual concepts is related to IOCs' remuneration. As the PSA's
title suggests, the produced hydrocarbons are owned by the host
country, but it is shared with the IOCs. On the other hand, under
RSA framework, IOCs conduct petroleum operations in consideration
of certain compensation payable to them. Although, in general, this
compensation is meant to be in cash, in certain cases it can be
agreed in kind in quantities of oil as well and hence, making these
contractual regimes less distinct. In practice, the choice between
PSA and RSA also depends on the maturity of the field. Nonetheless,
the title of the agreement does not suffice for its interpretation,
as its main contents can provide different regulation.
The local legislation for oil and gas operations is also of
great importance. While some countries have dedicated petroleum
laws, others set the regulation via different legislative acts. In
Azerbaijan, the core regulations are combined mainly in the Law on
Subsurface and the Energy Law. The former regulates the relations
on exploration, efficient use and protection of the subsurface,
ensures protection of interests of the state, subsurface users and
citizens in such use. The latter in its turn, combines the most
general legal bases of state regulation in oil & gas, as well as
electricity spheres. Nevertheless, to ensure applicability and
effectiveness of oil and gas deals, they are given a full force of
law in Azerbaijan. Hence, the local legislation regulates those
matters that are related to such contract, but not addressed
therein.
It is also worth to mention that PSAs are not only applied in
the oil and gas sector, but also used in a wider mining industry,
including in exploration, development and production of gold mining
areas. To make an example of this from Azerbaijan's practice, we
can refer to the Agreement on Exploration, Development and
Production Sharing for the Prospective Gold Mining Areas: Kedabak,
Gosha, Ordubad Group, Soutely, Kyzlbulag and Vejnaly Deposits.
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