Production Sharing Agreement Cost Recoveryadmin
Therefore, oil and gas exploration, as it is natural resources, involves the implementation of agreements between oil companies and local governments. This example, which relates to changes in production costs, assumes that world oil prices and total production remain constant at USD 60/barrels and 300,000 barrels per year, respectively. In the 1960s, concession agreements were characterized by stricter provisions and a general increase in the level of taxation. Subsequently, the national oil companies of the producing countries were put in contact with the oil companies, which led to a sharing of production and profit. In the 1970s, production-sharing agreements were developed, which conceptually replaced previous models. Through this type of contract, oil companies are protected from nationalization because they do not own assets, but they acquire legal rights because of their activity. Once the production phase has been reached, the fundamental elements of the agreement, i.e. cost-recovery oil and profit oil, generate an economic return for the oil company. Production sharing (EPI) or production distribution (PSC) agreements are a type of joint contract signed between a government and a company (or group of companies) that represents the amount of (usually oil) lines extracted from the country. Production sharing contracts (PSCs) under the NELP are based on the principle of „profit sharing.“ When a contractor discovers oil or gas, it is expected that he or she will share with the government the benefit of his project, based on the percentage indicated in his offer. As long as no profit is made, no share is granted to the government, except royalties and licence fees. Performance-based agreements, such as rsc berantai, focus more on production and valuation rates compared to production-sharing contracts, which are favoured by oil companies. The focus on optimizing production capacity in outlying areas can be extended to contracts for the recovery of major oil deposits in a rapidly comprehensive resource industry.
Currently, Petronas` recovery factor for major oil deposits is about 26%, which can still be improved through the optimization of production techniques and the exchange of knowledge.  In practice, it remains to be seen whether the Indonesian government will continue to focus on new gross CSP splitting revenues over new cost-covering-based CSPs. At least this recent regulatory change gives MEMR and investors the flexibility to consider these different forms of CSPs per project. Table 3 shows the impact of changes in world oil prices on the overall outcome of the transaction. In this example, we assume that other variables, such as annual production and operating costs, remain constant: 300,000 barrels per year and $600,000. Essentially, the CSP framework allows the government to allow contractors to bear the full risk of the exploration phase. The exploration phase is the phase where the risk of failure is highest. The failure rate at this stage is reported up to 50%. Committed contractors must account for all exploration expenses with no guarantee of success to find profitable economic reserves.
The framework will also allow the government to maintain the ability to manage the fields in partnership with contractors, as well as the ownership of the ores to the point of delivery. The other issue in this context is the concept of „cost recovery“ that the government will cost contractors once a profitable economic reserve has been discovered.