A

BEAUTIFUL
SHOE
OF
AGREEMENT: WHICH LEG BEST
FITS
INTO
IT;
PRODUCTION
SHARING
OR
A
SERVICE
CONTRACT?
Amos Sofedah1

ABSTRACT: In recent years, a significant number of lower and middle-income countries

have increasingly put much effort to attract foreign investors especially in natural resources
projects. Now, many of the petroleum exporting countries have open up their upstream sector
to investments by IOCs. The purpose of this paper is to evaluate the various types of
petroleum agreement whether an appropriate model, either Service or Production Sharing
Contract will be arrived at as best fit a model to consider by taking into account the cost of
E&P by investors. In this paper, statistical data from experts in the oil and gas industry were
collated and then grouped into three sections; low, medium and high E&P cost countries.
The research found out that, a lot of factors come to play in adopting a petroleum agreement.
It was found out that many of the IOCs are not concerned about the types of agreement to
enter into with a host government but rather, the structure and the fiscal system of the
agreement. However, the RSA system was found to be more profound in countries with low
E&P cost.

The author is an MSc International Oil and Gas Management candidate at the CEPMLP with a BSc (Hons) in
Mathematics from Kwame Nkrumah University of Science and Technology, Ghana. He is also affiliated with
The Energy Institute, Society of Petroleum Engineers and Young Energy Professionals (YEP) under the Institute
for Energy Law, USA. Email: amossofedah2013@gmail.com

Table of Contents

List of abbreviations.. iii

1. Introduction 1
2. Energy Investment agreements 2
2.1 Oil and gas exploration and production 2
2.2 Production sharing contracts/agreement (PSA/PSC) 4
2.3 Overview of fiscal system. 6
2.4 The advantages of production sharing contract.. 8
2.5 The disadvantages of production sharing contract 9

3. An overview of service contract 9

3.1 Overview of risk service contract. 10
3.2 The advantages of RSA 11
3.3 The disadvantages of RSA.... 11

4. Evaluation of upstream petroleum agreements and the determination of an

appropriate petroleum contract....11

4.1The role of E&P cost on upstream petroleum agreement..11

4.2An effect of the cost of E&P in countries with varied petroleum agreement.. 14
5. Conclusion. 21

Reference List

ii

List of Abbreviations

Abbreviation

Meaning

ADNOC

Abu Dhabi National Oil Company

BP

British Petroleum

E&P

Exploration and Production

EOR

Enhanced Oil Recovery

FTA

First Tranche Petroleum Agreement

HC

Host Country

IMF

International Monetary Fund

IOC

International Oil Company

IOR

Improved Oil Recovery

JV

Joint Venture

NIOC

National Iranian Oil Company

NOC

National Oil company

OPEC

Organisation of Petroleum Exporting Countries

OSA

Operating Service Agreement

PDO

Petroleum Development of Oman

PSA

Production Sharing Agreement

PSC

Production Sharing Contract

RSA

Risk Service Agreement

R/T

Royalty Tax

UAE

United Arab Emirates

UK

United Kingdom

UNCTAD

United Nations Conference on Trade and Development

US

United States
iii

List of Figures
Figure 1- Oil Distribution under PSA
Figure 2- Classification of Petroleum Fiscal System
Figure 3- Iranian buy-back Model
Figure 4- Strategic association agreement in Venezuela

List of tables
Table 1- Some Countries upstream cost
Table 2- Profit Oil split under PSC 1993
Table 3- Profit oil split under PSC 2005

iv

1.0 Introduction
In recent years, quite a number of lower and middle-income countries have massively put in
much effort to attract foreign investors especially in natural resources projects like mining,
petroleum and other commodities like rubber.2 Economic liberation and the rapid demand for
energy have encouraged investment in the natural resource sector even parts of the world
that were previously of less interest to international investors3.
Foreign investment flow in Sub-Sahara Africa alone was about US$ 64 billion in 2008 with
natural resources sector recording the highest share (UNCTAD, 2009)4. Investment flow in
2005 was US$ 17 billion. It increased to about US $22billion in 2006 and sharply moved to
the level of over US$ 30 billion in 2007.5 Mostly, increased investments, to some extent
stimulates opportunities to promote development and improving living standards in recipient
countries through economic growth and increased government revenues.6
Many investments in the past with regards to natural resources contributed abysmally to
sustainable development and created a situation captured as resource curse 7 . Those
challenges emerged because, a lot of the investment plans then were improperly implemented
and mismanagement of government revenues was the order of the day 8 . In order for
government to achieve sustainable development especially in countries where their major
source of export happened to be natural resources, one of the key areas to consider is their
investment contracts. This is because investment contracts define the terms of an investment
project and constitute a key instrument of governance9. In addition, the determination and
distribution of risks, cost and benefits are all captured in investment contracts hence ought to
be critically examined and be understood by both parties before commencement or
implementation of any petroleum project10.

Cotula, L. (2010) Investment contracts and sustainable development: How to make contracts for fairer and
more sustainable natural resource investments, Natural Resource Issues, No. 20. IIED, London.
3
ibid
4
UNCTAD (2009), Economic development in Africa report: Strengthening regional economic integration for
Africa development
5
ibid
6
supra note 1, at p. 1
7
supra note 1, at p. 1
8
supra note 1, at p. 1
9
supra note 1, at p. 3
10
supra note 1, at p. 3

Instances whereby investors felt the host government had breached its contractual obligation
mostly results in disputes which sometimes are transferred to international arbitration for
settlement11.
However, many of the petroleum exporting countries have opened up their upstream sector to
investment by International Oil Companies (IOCs) through petroleum contracts such as
royalty tax system, production sharing and or service contracts 12. Many of the challenges that
have emerged from petroleum contracts have been as a result of inaccuracies or ambiguities
in negotiation of the petroleum contracts and failure of one party for not fulfilling its
contractual obligations.
The purpose of this article is to evaluate the various types of petroleum agreements with the
aim of finding appropriate petroleum agreement that in distinction best fits into a countys
legal frame work (on petroleum) , taking into account the cost of E&P by investors.
In this article, statistical data from experts in the oil industry were collated and then grouped
into three sections; low E&P cost countries which were countries with E&P cost of $ 4.65/b
or below, medium E&P cost countries, thus countries with E&P cost ranging between $
4.65/b and $ 8.50/b and high E&P cost countries, i.e. cost exceeding $ 8.50/b.
This paper is grouped into five respective sections. Section 2 highlights on the energy
investments agreement; section 3 provides an overview of service contract; section 4
evaluates the upstream petroleum investment to find out whether there will be a definite or
appropriate petroleum contract for a country to adopt and section 5 presents the conclusion of
the paper.
2.0 Energy investment and agreements
2.1 Oil and a Gas exploration and production
The oil and gas industry is classified into upstream and downstream sectors. The upstream
sector is into the exploration and production whereas downstream, deals with the refining and
processing of the crude and gas products, their distribution and marketing13.

11

supra note1, at p. 3
Al-Attar, A. and Alomair, O., Evaluationof upstream petroleum agreement and Exploration and production
cost, OPEC Review, Vol. 29, Issue 4, Pages 243-266, 2005
13
International and Petroleum and Policy lecture notes
12

The upstream sector of the industry heavily rely on the contractors or the investors who
provide technical services ranging from geological and geophysical surveys, drilling, etc, in
support of the operation.14
Many of the oil or gas project undergoes several stages and the following however give an
overview of the various stages;

Licensing: Mostly, it is the initial stage of the project and here; the government grants
a licence or enters into a contractual agreement with an oil company or joint
companies without transferring the ownership of the mineral resources.15

The exploration stage: The oil company or group of companies proceeds with the
exploration of the hydrocarbons after they have been granted the licence to explore at
this stage. The exploration involves geological and geophysical surveys such as
seismic surveys and core borings. Here, the data obtained from the various surveys
will determine whether the discovery is of commercial quantity or promising16.

Appraisal: At this stage, more wildcats will be drilled if hydrocarbons are however
discovered to establish the amount of recoverable oil, production mechanism and
structure type. In addition, development planning and feasibility studies are carried
out to be able to estimate the development cost of the project17.

Development stage: Once the appraisal wells prove favourable, then the next stage
of development planning begins using the geological and environmental data that had
already been obtained.18

Production: At this stage, extraction of hydrocarbons begins and then transported to

the processing site19.

14

ibid
Tordo, S., Fiscal systems for hydrocarbons, World Bank Working Paper, No. 123
16
ibid
17
ibid
18
ibid
19
ibid
15

Abandonment: At the end of successful oil and gas exploration, a decision is then
made to abandon the oil field. Here, the equipments are either left for the host
government or is totally removed by the contractor. Mostly, contractors or operators
begin planning in about one or two years before the planned date of
decommissioning20.

There are three major kinds of petroleum agreements between foreign investors and/ or
domestic investors and host states. They are production sharing, tax royalty (sometimes
called modern concession or licence) and service contract (sometimes referred to as risk
service contract).
The individual type of agreement establishes quite a distinct regime of governance
sanction by the host states.
2.2 Production Sharing Contracts/ Agreements (PSA/PSC)
In the late 1950s and 1960s, countries like Iran and Indonesia registered their displeasure
against the use of traditional concession in favour of the production sharing agreement21.
Indonesia was the first country to use PSA in the petroleum industry in the 1960s and is
the standard of comparison for all PSAs22. The model agreement was signed between the
IOC and Pertamina, the state oil company. Later, the agreement became popular in the
developing countries and is now practiced in more than fifty-five countries worldwide23.
The main driving force of the PSA was the rise of national hostility against the classic
concession granted to the IOC in the petroleum industry 24 . Production contracts are
signed between host states which sometimes are represented by their NOCs and IOC for a
specified period25.
In addition, PSAs are largely practised in countries with high reserves and medium cost
of exploration26.The contractual structure of production sharing agreement has evolved to

20

ibid
Smith, E., From concession to service contract, 27 TulsaL.493, 1991-992

21

Onaiwu, E., How do fluctuating oil prices affect government take under Nigerias PSCs? Available at
http://www.dundee.ac.uk/cepmlp/gateway/?news=30868
23
Cameron, P., International Energy Investment Law: The Pursuit of Stability, New York, Oxford University
Press, 2010.
24
See supra note 21 at p.4
25
Ahmadov, I., Artemyev, A., Aslanly,K., Rzaev,I., Shaban, I. 2012. How to scrutinise a Production Sharing
Agreement. IIED, London.
26
supra note 11at p.251
22

synchronise with the changing trend in the relationships between host states and the IOCs.
The key features that have characterised PSA are as follows;
1. The host state, mostly represented by NOC or the energy ministry, appoints the IOC as
the main contractor to engage in the exploration and development in a certain area within
a stipulated time period27.
2. Under PSA the IOC bears the sole risks in the exploration and development of the
petroleum resources but under the control of the host state28.
3. The oil produced, thus, belongs to the HC with the exception of the cost oil and that of
the profit oil29.
4. The profit oil obtained, after the deduction of cost oil from the overall production is
therefore shared between the IOC and the host state based on a predetermined percentage
which mostly is in favour of the host state30.
5. Also, under the PSA, the net income of the contractor which in this case, the IOC is
taxable unless the provision in the agreement proves otherwise31.
6. In addition, equipment for the exploration and production of the petroleum resource
however becomes the host state property after the expiration of the agreement in
accordance with the cost recovery schedules32.
7. And once the PSA is negotiated or agreed upon and signed, often becomes part of the
national legislation33. The diagram in the figure below shows the oil distribution under
PSA.

27

Duval, C., LeLeuch, H., Pertuzio, A., Weaver, J. International petroleum exploration and exploitation
agreements: legal and economic policy aspects, 2nded, New York: Barrow, 2009
28
ibid
29
ibid
30
ibid
31
ibid
32
ibid
33
ibid

Figure1. Oil distribution under PSAs

2.3 Overview of fiscal system

Exploration for natural resources especially petroleum occurs based on concessions, leases,
or contracts granted by governments34. Usually, the terms and conditions of the agreements
are well define by law or negotiated for by cases. One of the pivotal aspects of the agreement
is the fiscal terms which include royalties, bonuses, rentals, production sharing arrangement,
carried interest provisions, corporate income taxes and special taxes. Payments made to
government required under the agreement can however be termed as fiscal system 35. The
term fiscal system therefore highlights the dynamics of virtually all taxes, levies, legislative
and that of contractual aspects of petroleum operations practiced within a sovereign state36. In
other words, the fiscal system is the determinant of profit and revenue between the IOC and
the host country in the event of commercial discovery of oil.

Khelil, C., Fiscal System for Oil. The government take and competition for exploration investment, The
World Bank, No. 46, May, 1995
35
ibid
36
Johnston, D., International exploration and economics, risk, and contract analysis, Oklahoma (US), PennWell
Publication Company, 2003.
34

A countrys fiscal system establishes a mechanism by which a sovereign state massages the
economic rent to its advantage and also providing a potential return for the oil companies37.
And for an effective fiscal system to be achieved, the political, geological risks and potential
rewards ought to be taken into consideration38. There are two main classifications of fiscal
systems and they are concessionary and the contractual system39. The distinction that exists
between the categories is evident hugely in the ownership of the natural resources. Under the
concessionary system, all rights and title to the international company are not denied but
subject to all applicable taxes40.
Figure 2. Classification of Petroleum Fiscal System41

Petroleum Fiscal Agreements

Concessionary System

Contractual System

Service Contract

Pure Service Contract

Production Sharing
Contract

Risk Service Contract

Under the contractual system the host government, retains title and the ownership of the
natural resources and all production while the international company operates under the
37

ibid
ibid
39
Johnston, D., International Petroleum Fiscal Systems and Production Sharing Contracts, Oklahoma (US),
PennWell Publishing Company, 1994.
40
ibid
41
See Johnston 1994,ibid
38

control of the government42. The contractual system can further be subdivided into service
and production sharing contract. The establishment of a dichotomy between production
sharing and risk service contract will profoundly be dependent on whether contractors
compensations are either received in kind (crude) or in cash.43 But in both situations, bearing
of risks are virtually inevitable whenever exploration is unsuccessful.
2.4 The advantages of production sharing contract
In the international petroleum industry, PSA has registered more prominence as far as
petroleum agreement is concerned and as a result, its practiced in a lot of countries around
the world44.
In view of this, it is not insignificant to review the merits associated with the PSA. The
petroleum agreement holds high advantages to both parties to the contract, thus the host
government and the investor or the IOC in varied sense. And they are as follows;

Under the PSA, all financial and operational risks are borne by the IOC leaving the
host government virtually contributing nothing to the entire project45.

The agreement also provides legal security for international oil companies if it is
passed into law46.

The PSA has for the several years proved to demonstrate flexibility in the event of
volatile oil prices.47

The PSA also grants title and that of ownership of the petroleum resources to the host
government48.

The PSA appears to be subjected to less public scrutiny than the remaining petroleum
agreements49.

Its for these significant reasons that many countries have opened up for this type of
agreement.

42

ibid
supra note 26 at p.87
44
supra note 22 at p. 37
45
Jenik, R., The ABCs of Petroleum contracts: License-Concession Agreement, Joint Ventures, and Production
Sharing Agreement. In covering oil: A reports guide to Energy and Development, Open Society Institute,
New York, 2005
46
ibid
47
ibid
48
ibid
49
ibid
43

2.5 Disadvantages of Production Sharing Contracts

Mostly, the petroleum industries are characterised by knowledge intensive workers, hence
discharge of professional duties are of high standard while on the other hand, in some cases,
the host countries are inexperienced or lacked the skills and expertise in executing the oil and
gas project under the PSA thereby thwarting the primary objectives of the exploration of the
petroleum resources. Further, poorly supervised cost recovery provisions sometimes create an
expensive challenge, thus resulting in gold plating50. And also, high cost fields are sometimes
not properly accounted for by a well calibrated volumetric sliding scale51.
The PSA is less suitable a model to be considered when engaging IOCs in areas with already
high productivity and low risks. In addition, challenges have emerged under PSA with its
capacity to provide for decommissioning52.
3.0 Overview of Service Contract
Service contract is another form of petroleum contract and under this contract, the IOC agrees
for a fee or a share of production where it provides the host government and its state oil
company with services and information to assist the country explore and to develop its own
natural resources 53 . Under service contract, three basic types of arrangements have been
designed to making an effective use of the IOCs technological and managerial expertise and
that of their capital resources whereas ownership and control rest with the host government54.
Under listed are the basic types of the arrangement;

The pure service contract

The technical assistance agreement and

The risk service contract55.

Concerning pure service contract, the host government or the state oil company enter into an
agreement or contract with an IOC to undertake a specified service for an agreed fee56.

50

See supra note 22 at p.39

See supra note 22 at p.39
52
See supra note 22 at p.39
53
See supra note 20, p. 519
54
Smith, E., Dzienkowski, J., Fifty-Year Perspective on World Petroleum Agreements, 24 Tex. Intl. J. 13, 1989
55
ibid
56
ibid
51

The next agreement under discussion is the technical assistance agreement which to some
extent is seen as the complex version of the service contract57. Under this agreement, the
contractor agrees to provide technical assistance in the exploration, development and at times
in the refining of the oil. Here, the technical assistance provisions include equipment and
training of employees to handle the petroleum facilities58. On the other hand, in fulfilling the
other part of the agreement, reimbursement is therefore made by the host government to the
company for cost incurred plus a fee which is based upon the production obtained59. Lets see
an overview of Risk Service Contract is presented in the section that follows.
3.1 Overview of Risk service Contract
This is another form of agreement under service contract designed to guide the development
of petroleum resources60. In this contract, the IOC gives an affirmative response to explore a
specific area and to carefully assess its potential for discoveries. The contractor herein under
this contract is however denied property rights in the reservoir but bears all financial risks
and other expenses with no expectation for payment unless commercial production is
attained.
The major dissimilarity between the RSA and PSA is the modus operandi by which payment
of contractual services and awarding of profit share is done61. In addition, with regards to
booking of reserves, under RSA the IOCs are disallowed to book any reserves because
reimbursements and the payment of service fees are made in cash only62. But in a situation
where buy-back clause is applicable under RSA contract where payment of service fees are
made in kind ( as in contractor receives oil as payment) the IOC is however granted economic
interest which therefore entitles it to book portion of field production and the corresponding
reserves63.
The advantages and the disadvantages under this contract are heighted in the section that
follows.

57

ibid
ibid
59
ibid
60
supra note 20, at p.519
61
supra note 26, at p.87
62
supra note 26, at p.87
63
supra note 26, at p.87
58

10

3.2 The advantages of RSA

Risk Service, which is widely practiced in Latin America, has limited advantage compared to
other forms of petroleum agreement 64 . Herein, under this contract, the host government
reimburse the contractor once commercial quantity of oil results plus a compensation for
undertaking risks in the exploration and development of the petroleum resources65.
3.3 Disadvantages of RSA
One of the major challenges most IOCs face with regards to RSA is the mode of reward
allocation. Mostly, the IOCs prefer reimbursement of cost in kind (thus, crude oil) to cash
rewards by host states 66 . Secondly, countries whereby RSA is prominently practised are
unable to render payment in American dollars, the globally recognised standard by which oil
is sold67. This challenge is often experienced in situations where development cost and the
exploration cost recovered are tied to the US prime rate68.
4.0 Evaluation of upstream petroleum agreement and the determination of an
appropriate petroleum contract
4.1 The role of E&P cost of upstream petroleum agreement
The exploration and production cost of oil significantly plays a key role in designing a fiscal
system of an upstream petroleum agreement. In the case where E&P cost of oil is low, host
states grant inflexible fiscal system whilst the opposite is experienced, thus an oilfield
registering high E&P cost (i.e. flexible fiscal system).69 There are two reasons that account
for high E&P cost. One is high demand of technology such as IOR in situations where
production capacity is low owing to the maturing nature of major oilfields70. In circumstances
like this, there are always huge capital outlay thereby shooting up the E&P cost of the
oilfield. Secondly, the probability of finding huge oil reserves onshore mostly is low relative
to deep water offshore.

64

supra note 20, at p. 519

supra note 11, at p. 252
66
supra note 22, at p.42
67
supra note 20, at p. 520
68
supra note 20, at p. 520
69
supra note 11, at p. 248
70
supra note 11, at p. 248
65

11

And exploring and developing oil in deep water offshore come with a high E&P cost and
risks which therefore requires huge investment to be able to develop, sustain or to increase oil
production71.
However, governments in considering the high risk nature of the venture refuse or are
reluctant in undertaking any investment in that regard thereby opening up their upstream
petroleum sector to IOC investment with the intension of obtaining capital or oil production
and spreading of the technical risks. In iteration, E&P cost are highly considered as key
element for host states in determining the fiscal system, legal frame work for upstream
petroleum agreements and that of the type of agreement to enter with IOCs72. The Table
below provides various countries with their E&P costs and the type of petroleum agreement
they have with the IOCs.

71
72

supra note 11, at p. 249

supra note 11, at p. 249

12

Table1. Some countries upstream costs73

The table groups countries into three, in accordance with total cost of exploration and
production. Thus, low, medium and high total costs, and these are based on a statistical
approach. It is however observed from Table 1 that high E&P cost connotes a technical risk
from the investors point of view and in addition establishes that, the stage of investment in

73

Cambridge Energy Research Associates (CERA) brief, upstream costs latest data show cost rising, November,
2002.

13

the upstream sector to some extent correlates with the size of the risk borne by the IOC 74. For
instance, high risks are recorded during exploration phase and later starts to decline as it
reaches the development level75.
One other thing is that, some of the risks at the production phase tend to reduce and this
compels some of the IOCs to select a discount rate, base on a certain assigned risk factor.
Whenever discount rates are high, it reduces the uncertainties and risks involved in making
poor investment.76 Further, it has however been noticed that in cases whereby E&P cost is
low, host states seizes more control over operation and production and this development
reflects in the type of agreement negotiated for.
On the other hand, the RSA in theory grants more control to the host states over production,
operation and also management followed by the PSA and R/T systems respectively. There are
some countries, even with their low E&P cost; they have managed to enter into different
types of agreement such as PSA or R/T system but mostly with NOC equity partnership. This
equity partnership by NOCs results in host countries to having control over operation and
production. Furthermore, equity participation by host states is dependent on the level of E&P
costs and that of the countrys prospective petroleum area. This therefore means that a high
E&P cost results low NOC equity participation and vice versa.
In cases where medium costs are prominent, theres a high level of partnership and
participation by the NOCs with the IOCs. This however is more profound in UAE and
Nigeria (60%). Lets find out how the subsequent analysis will be unfolded in the section that
follows.
4.2 An effect of the E&P cost in countries with varied petroleum agreement
From Table 1, the low E&P cost countries are Kuwait, Iran and Algeria. These are countries
with exploration and production cost of $4.65/b or below. The dominant petroleum
agreement found in these countries is RSA. The reason for the adoption of this type of
agreement is to increase production from existing oilfield that calls for high technology but
with low operating cost.

74

supra note 11, at p. 249

supra note 11, at p. 251
76
supra note 11, at p. 249
75

14

However, the adoption of RSA poses some disadvantages for the host state, thus the host
state bears all the risks in the event of price fluctuations since reimbursement are mostly
made in cash77.
For instance, if prices of oil drop, the host country has no other option than to sell more oil to
compensate the IOCs for their cost. This is to state that oil price has huge impact on the
countrys revenue as far as RSA is concerned. And from financial point of view, the
practicing of RSA is accompanied by some complication than in PSA and R/T systems.
From Table 1, Kuwait recorded the second lowest E&P cost of $3.55/b. On the other hand,
Kuwait has a significant number of oilfields that have matured which however require huge
capital outlay and technology such as IOR to maximise or sustain oil production. Considering
the low cost of E&P, the kuwatians entered into an agreement with the IOC to develop the
upstream sector for duration of 20 years under OSA, a type of RSA 78 . The Kuwatian
government had a lot of control under this agreement.
Irans exploration and development cost onshore was low but its continental shelf E&P costs
were much higher owing to huge investment and high operational and maintenance costs. The
Iranian constitution however prevents the awarding of petroleum rights on a concessionary
basis or by direct equity79. But in 1987, the buy-back type of contract was adopted by the
country whose features were of no difference from RSA80. The buy-back contract is usually
between 5 years to 7 years with a fixed rate of return of 15 to 20 percent81. ConocoPhillips
was the IOC to enter a buy-pack agreement with Iran but later withdrew. The figure below
shows buy-pack agreement with National Iranian Oil Company (NIOC).

77

supra note 11, at p. 252

Supra note 11, at p. 252
79
Supra note 11, at p. 254
80
Supra note 11, at p. 254
81
Supra note 11, at p. 254
78

15

Figure 3 Iranian buy-back model 82

Venezuela, on the other hand, presently holds 24.8% of OPEC proven oil reserves as of 2011,
thus making it the highest share holder in OPEC member countries83. The countrys upstream
activity is both onshore and offshore and is one of the countries that enjoy low E&P cost.
Venezuela, in 1990 introduced RSA in its petroleum upstream sector under different names
such as OSA, risk/project sharing agreements and strategic association for extra- heavy crude.
The extra-heavy crude recorded a low E&P cost compared to other countries. In 2005,
Venezuela had four strategic association agreements for extra- heavy oilfields with the
inclusion of exploration and development and with several IOCs participation along with the
NOC as seen in figure (4).84 The strategic association agreement however had a royalty rate
between zero and one percent.

82

Supra note 11, at p. 255

www.opec.org/opec_web/en/data_graphs/330.htm (Last visited , 28th December, 2012)
84
See Supra note 11, at p. 255
83

16

Figure 4.

Strategic association agreement in Venezuela85

In addition, Venezuela had different RSA mechanisms for conventional oil exploration and
production development and the countrys conventional oil recorded the lowest cost of
$1.20/b.
Algeria, similarly, from Table 1 had a low E&P cost and as result adopted several types of
upstream petroleum agreements with the aim of increasing E&P by the IOCs. The action by
Algeria led to an upward trend in the countrys production from 673,900 b/d in 1986 to 1.33
million b/d in 2005.86 Although, Algerian Law No 86-14 and its amendments makes room for
four types of upstream contracts, thus commercial company contracts, joint ventures, PSA,
and RSA. However, the one commonly practised is the RSA87.
Furthermore, the agreements adopted by the Algerians were signed between the NOC,
Sonatrach and the IOC. And Sonatrach participation was no less than 51% at the point of
discovery irrespective of the type agreement. It was a provision found in the Algerian
petroleum legislation. But since 1989, NOC participation ranged between 25-35% under

United States Department of Energys Energy information Administration, Country analysis brief, Venezuela.
See supra note 11, at p. 256
87
See supra note 11, at p. 256
85
86

17

some PSAs88. Mostly, it is the Algerian model that determines the level of royalties and taxes
in accordance with the area and stage of production.
The countries under the medium E&P cost in Table 1 are United Emirates, Kazakhstan,
Nigeria, Oman and Indonesia. United Arab Emirate practiced the R/T system and that of the
JV agreement but has up to 60% participation of the Abu Dhabi National Oil Company
(ADNOC) and 40% participation of international oil companies, thus, Exxon Mobil, BP shell,
Total and Partex. Despite the countrys NOCs participation, royalties under R/T system are
between 12.5% and 20% whereas taxes range between 55% and 85%.89
Kazakhstan on the other hand adopted almost all the three types of petroleum agreement.
Under Kazakhstans R/T system, participation of NOC was allowed up to 50%. Early in
2004, there was amendment of law that made provisions for taxes to be increased whenever
oil prices shot up. Also, government is entitled to 85% of profit oil in Kazakhstan. In the case
of Nigeria, it however opted for the R/T system in the form of JV and that of the PSA. The
country has two fiscal systems thus, one for onshore and the other for offshore. The flat rates
under 2005 PSC mode are 20% and 10% for onshore and inland basins respectively90. See
Table 2 and Table 3

88

See supra note 11, at p. 256

Supra note 11, at p. 258
90
Supra note 21, at p. 259
89

18

Table 2. Profit Oil Split under the PSC199391

Production
Threshold

Profit Share %
Government

Contractor

0-350

20

80

351-700

35

65

701-1000

45

65

1001-1500

50

50

1501-2000

60

40

Beyond 2000

Negotiable

Negotiable

(bbls)

Table 3. Profit Oil Split under the PSC 200592

R Factor

Contractor Share

Government Share

R<1.2

P = 70%

100%-P

1.2<R<2.5

P=25 %+[( 2.5-R)/ (2.5-1.2)*(70%-25%)]

100%-P

R>2.5

P = 25%

100%-P

Oman is such another country with medium E&P cost. It similarly adopted the PSA system
and has a consortium comprising of the government (60%), Shell (34%), Total (4%) and
Partex (2%). The consortium is called Petroleum Development of Oman (PDO).

91

Chukwu, P.O., Joint Ventures & Production Sharing Contracts, at

http://www.neiti.org.ng/publications/JV%20AND%20PSC%20ARRANGEMENTS%20PRESENTATION%20
TO
%20NEITI.pps (last visited 28 December, 2012)
92
Model Production Sharing Contract For Nigeria 2005 Bid Round

19

Oman PSA fiscal system however grants government take up to 80% and sliding scale for
cost recovery between 40-50%. The royalty rate is completely absent under the PSA93.
Further, Indonesia on the other hand adopted the PSA system and has four different
modifications of the PSA, namely; First Tranche Petroleum agreement (FTA), Joint
Operating Agreement (JOA), Technical Assistance Contracts and that of EOR contract. The
fiscal system was designed such that there was not any inclusion of royalty for the FTA
agreement but allows 100% cost recovery94.
The last group is made up of countries with E&P cost exceeding $8.50/b and they are US
Gulf of Mexico and the North Sea (UK and Norway). Under this group, the main upstream
petroleum agreement that have been adopted is the R/T system. Under this agreement, all
E&P cost and risks are borne by the IOC. The advantages, here are that, the IOC has the
exclusive right to exploration and complete ownership of production.
Norway, with adoption of R/T also had in addition NOC equity participation of up to 30% at
the exploration phase. The equity participation together with R/T system grants the
Norwegian government a share up to 78% of profit oil95.

93

supra note 11, at p. 261

Supra note 11, at p. 262
95
Noreng, . (2004), Norway economic diversification and the petroleum industry ,
94

MEES, Vol. 47:45, 8 November.

20

5.0 Conclusion
It was observed that, regions where there was low recording of E&P costs, adoption of RSA
was hugely profound and those countries were Iran, Kuwait, Venezuela and Algeria.
Other countries like Kazakhstan, Oman and UAE opted for the R/T system in the form of
NOC equity participation or that of JV agreement. However, Indonesia and Nigeria decided
to settle for PSA. These countries were found to be in the medium E&P cost region. Norway
adopted the R/T system and was also observed to record high E&P cost in the given table.
The analysis in this article is that, many of the upstream petroleum agreements granted NOC
equity precipitation or partnership with the aim of allowing NOC to play a part in controlling
operations. In addition, different fiscal systems were designed to favour host governments in
terms of capturing greater share of economic rent.
It can therefore be said that, E&P cost in the petroleum industry has a significant role in
determining an upstream petroleum agreement but that alone cannot provide sufficient
grounds for International companies to appropriate a particular petroleum agreement or
contract. Many of the IOCs are not much concerned about the type of petroleum contract to
enter into but rather the structure of the agreement and the arrangement of the fiscal system
within the agreement. Thus, whether fiscal system provides fare share of profit and risks.
However, RSA will be an appropriate model to consider in regions where E&P cost is low
and with high reserves.
The study has its limitations. It was unable to examine recent data on exploration and
production cost of some of the major oil producing countries owing to the obscured nature in
accessing those information. This would surely have provided possible dimension in
determining an appropriate petroleum model, as it would have accounted for some of the
reasons that were left out in this report.

21

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