Production sharing contract
An oil and gas company (contractor) entered into a PSC that includes the following terms:
- the oil and gas company pays for all exploration costs;
- the government is entitled to:
- 15% royalty on the production;
- severance tax of USD 2.50 per barrel;
- USD 5 million production bonus when average production first exceeds 25,000 barrels per day; and
- 10% of the profit oil;
- operating expenses are recoverable before exploration costs;
- development costs are recoverable after exploration costs;
- cost recovery oil is capped at 45% of the annual production; and
- the national oil company (NOC) and the contractor have a 51% and 49% working interest, respectively.
How should the production be allocated between parties, assuming the following for 2013?
- annual production in 2013 is 10 million barrels;
- recoverable operating costs in 2013 are USD 25 million;
- the average oil price in 2013 is USD 100/barrel;
- during 2013 average production exceeded 25,000 barrels per day for the first time;
- unrecovered exploration costs at the beginning of 2013 were USD 180 million; and
- unrecovered development costs at the beginning of 2013 were USD 275 million.