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Differentiate between production sharing

  Oct 27, 2016

Differentiate between production sharing agreements and revenue sharing agreements in oil exploration. Why is the government shifting to the latter model? Do you agree with the decision of the government?

Production sharing agreements (PSA) are a common type of contract signed between a government and a resource extraction company (or group of companies) concerning how much of the resource (usually oil) extracted from the country each will receive. In production sharing agreements the country's government awards the execution of exploration and production activities to an oil company. The oil company bears the mineral and financial risk of the initiative and explores, develops and ultimately produces oil/gas from the field . When successful, the company is permitted to use the money from produced oil to recover capital and operational expenditures. The remaining money is shaped between the government and the company.

Production sharing agreements can be beneficial to governments of countries that lack the expertise and/or capital to develop their resources and wish to attract big domestic and foreign companies to do so. They can be very profitable agreements for the oil companies involved as well. A section of experts favour the production sharing model for deep sea exploration because guarantees for the recovery of all sunk costs are important to attract oil majors with proprietary technology. The Comptroller and Auditor General of India (CAG) had criticised PSA which prevails in India on grounds that it encourages companies to inflate (gold plate) capital expenditure and  reduce and delay the government’s share.

A panel headed by former Prime Minister’s Economic Advisory Council Chairman C Rangarajan had in 2013 suggested moving to a revenue-sharing regime that requires companies to state upfront the quantum of oil or gas they will share with the government from the first day of production.In the new regime, the companies will have to indicate the quantity of oil and gas they will share with the government at different stages of production as well as at different rates. That is, not wait till the end.
In March 2016, the policy of RSC was adopted across all hydrocarbons under Hydrocarbon Exploration and Licensing Policy (HELP).