Most of the jurisdictions posses a set of legal tools to deal with responsibilities of the oil field developer (further designated as lesee) and the owner of mineral rights (lessor), as mentioned in previous post usually a government. Agreements, as a whole called fiscal regimes for international petroleum agreements (IPAs) became synonymous with the financial “split” between the two parties over the life of the oil project. We can discern following most typical categories of international petroleum agreements:
Concession (Royalty Tax system)
With the oldest history reaching a XIX century. The lessee is guaranteed to produce and trade the oil in any way he wishes in exchange for a royalty paid to the lessor. Lessee remains liable for corporate income taxes and sometimes special oil and gas taxes. Oil company takes a title to the wellhead, provides capital for exploration, development and production. Royalty being paid by an oil company to the lessor (typically government in a given country) is usually a percent of a revenue (price for which physical oil is being traded).
Production Sharing Agreement (PSA)
Also described as production sharing contract (PSC). For the first time introduced by Indonesia in the 60’s. The difference from Royalty Tax System is that the lessor (typically government) retains partial ownership in the physical oil produced. The PSA divides oil produced to cover the costs of development and production (cost oil) first and allocates remaining residual oil (profit oil) to be split between the lessor and the lessee. These contracts tend to have a very complex structure, concentrating on covering all aspects of costs, rates of cost deduction, and et cetera that limit the compensation of the company before the lessor gets his share (so-called takes).
-company has property shares title
-leese splits exploration, production, development capital with a lessor
-oil company pays no or low royalty
-there are usually limits on amount of capital and operating cost deemed deductible per year
-company pays government CIT and special oil taxes
Risk service contract
Could be classified as transactional services agreements. In short, oil company provides development, production and transportation services to the lessor in return for an agreed upon dollar per barrel rate.
- oil company remains only a contractor with no rights and title to physical oil and provides little or no capital.
-pays no royalties
- but still pays taxes
Acquiring and managing the rights to exploration has become a business in itself. Very often, the real value lies in the information and knowledge about the given physical oil properties. Many title owners have monetized this value through exploration lease auctions.
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