Exploration Production Sharing Agreement

April 9th, 2021| Posted by admin
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The PSA debate in India is not the first and will not be the last of its kind. Historically, it is quite common for the state to remove a greater share of the pie as soon as resource or field uncertainties have been resolved favourably and/or when the state receives lower-than-expected production revenues. In such circumstances, the consequences of reputation, which turn out to be unreliable counterparties, will appear to be relatively less important for the host Member State. For example, the first wave of PSA in Indonesia, after the 1973 oil shock, was revised in favour of the state, because the Indonesian government recognized that IOCs were making higher profits than expected under existing EPIs. The rules developed for state-TO-IOC relations can generally be considered licenses, concessions, production-sharing agreements (“EPI”) and service contracts. The schemes are similar in that they all require the IOC to bear the costs and risks of exploration. They differ in the definition of ownership of hydrocarbons and production, as well as related assets and tax regimes: licences and concessions provide a tax regime based on tax/licensing obligation, while EPIs and service contracts follow a system of cost and profit/royalty recovery. The most important element of the PSA is the sharing of hydrocarbons produced which, in their most fundamental form, have two components: cost coverage and interest. The cost recovery mechanism in the PSA allows the IOC to recover its accrued costs, provided a commercial discovery has been made, from the gross revenues generated by the sale of hydrocarbons. After the end of the cost recovery phase or at the same time as the cost recovery process (as agreed in the PSA), the IOC and the State share the proceeds of the sale of hydrocarbons based on the agreed profit shares. While each commercial enterprise poses a certain risk, the oil and gas sector is distinguished by the significant investments required for hydrocarbon exploration and production and by the often high uncertainty about the ability to benefit from such investments. Before attempting to extract hydrocarbons from the subsoil, seismic exploration and exploration drilling must be conducted to determine the existence of sufficient resources to commercially make the project profitable.

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