2007: Oil Production Sharing Contract for Block V in Virunga NP

Oil Production Sharing Contract for Block V awarded in December 2007 to SOCO and is adjacent to partner Dominion Petroleum’s Exploration Area 4B (EA4B) in Uganda. This production sharing agreement is available here in its original French: http://mines-rdc.cd/fr/documents/Hydro/contrat_rdc_dominion_soco_cohydro.pdf.

application/pdf iconEnglish translation of relevant section of the Production Sharing Agreement

The PRODUCTION SHARING AGREEMENT (PSA) is a complex contractual structure. In theory, the state has ultimate control over the oil, while a private company or consortium of companies extracts it under contract. In practice, however, the actions of the state are severely constrained by stipulations in the contract. In a PSA, the private company provides the capital investment, first in exploration then drilling and the construction of infrastructure.

The first proportion of oil extracted is then allocated to the company, which uses oil sales to

recoup its costs and capital investment – the oil used for this purpose is termed ‘cost oil’. There is usually a limit on what proportion of oil production in any year can count as cost oil. Once costs have been recovered, the remaining ‘profit oil’ is divided between state and company in agreed proportions.

The company is usually taxed on its profit oil. There may also be a royalty payable on all oil produced. Sometimes the state also participates as a commercial partner in the contract, operating in joint venture with foreign oil companies as part of the consortium – with either a concession or a PSA model. In this case, the state generally provides its percentage share of development investment and directly receives the same percentage share of profits.

An ingenious arrangement, PSAs shift the ownership of oil from companies to state, and invert the flow of payments between state and company. Whereas in a concession system – a model adopted in Bas-Congo by French oil producer Perenco – foreign companies have rights to the oil in the ground, and compensate host states for taking their resources (via royalties and taxes), a PSA leaves the oil legally in the hands of the state, while the foreign companies are compensated for their investment in oil production infrastructure and for the risks they have taken in doing so. When first introduced in Indonesia in the 1960s, many in the oil industry were initially suspicious of Indonesia’s move. However, they soon realised that by setting the terms the right way, a PSA could deliver the same practical outcomes as a concession, with the advantage of relieving nationalist pressures within the country. In one of the standard textbooks on petroleum fiscal systems, industry consultant Daniel Johnston comments:

“At first [PSAs] and concessionary systems appear to be quite different. They have major symbolic and philosophical differences, but these serve more of a political function than anything else. The terminology is certainly distinct, but these systems are really not that different from a financial point of view.”

So, the financial and economic implications of PSAs may be the same as concessions, but they have clear political advantages – especially when contrasted with the 1970s nationalisations in the Middle East.

Professor Thomas Wälde, an expert in oil law and policy at the University of Dundee, describes them as:

“A convenient marriage between the politically useful symbolism of the production-sharing contract (appearance of a service contract to the state company acting as master) and the material equivalence of this contract model with concession/licence regimes in all significant aspects… The government can be seen to be running the show – and the company can run it behind the camouflage of legal title symbolising the assertion of national sovereignty.”

Source: A Lake Of Oil Congo’s Contracts Escalate Conflict – Platform London