Thread by @Jarushub

Understanding Oil & Gas Industry V

Common Contract Types

Because oil & gas (esp upstream) is highly capital intensive, there are usually all manner of partnerships among oil companies to pool fund (& technical know-how) together.

Also, because petroleum resources are ...

...usually too important to be left to non-state actors, the govt get involved & this also necessitates partnerships.

The partnerships could be between govt (thru their oil company, generically called National Oil Company, NOC - NNPC in Nigeria's case) and private oil coys, or

between oil companies (especially some marginal field JVs).

Here are the most common contract types

1. PRODUCTION SHARING CONTRACT (PSC)

PSC is a contract type where the govt transfers the exploration risk to the private company, usually the International Oil Companies(IOCs)

While the exploration burden (ie finding oil) is the oil company's business, the exploration reward (ie production, crude oil output) is shared by both govt and the company, hence the name "production sharing". In other words, the oil company is given licence to go and search for

Oil in an area (usually tough areas like deep water), if they find oil, govt come in for their share (with allowance given to the oil company to recover its sole exploration cost over time), but if no oil is found, govt wave from afar and say "eeya, pele, sorry" without ..

...refunding the exploration cost. That is why a key distinguishing factor for this type of contract is: exploration risk is borne solely by the oil company, while exploration success (ie oil) is shared between the company and govt.

This contract type usually comes with some ..

...generous fiscal terms like to low to zero royalty, very low tax etc because govt know it's a risky investment and need to incentivize and encourage the IOCs to delve into it. Remember it's mostly used in tough terrains like oil exploration in deep sea; a very expensive venture

The general law guiding PSC in Nigeria is the Deep Offshore & Inland Basin Production Sharing Act (DOIBPSCA) which was controversially amended in 2019 to reduce some of the incentives. Inland Basin is also combined in this law, because it also has similar terms with deepwater

as it's also usually a very risky project - searching for oil in frontier (rarely explored) territories like Anambra Basin, Chad Basin, etc. Most of the terms in Inland Basin exploration are retained, but incentives for offshore production radically reduced.

One of the most contentious areas in PIB is the reduction in the fiscal incentives available to deep offshore production which IOCs consider anti-investment. For example, zero royalty on production at certain depth of water has been removed.

So, when next you hear PSC, that's the layman explanation.

In the next installment, we will discuss Joint Ventures.