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Licences, concessions,

production sharing agreements


and service contracts
Jubilee Easo
Ashurst LLP

1.

Introduction
All hydrocarbon resources in the soil and the subsoil, in interior waters and in the
territorial sea, on the continental shelf and in the exclusive economic zone are
typically the province of the state. However, it is often the case that states with
significant hydrocarbon resources do not have easy access to risk capital and lack the
technical expertise to explore and develop the hydrocarbon resources located in their
territory. In these cases, the task of finding and extracting oil and gas is delegated to
an international (and in some cases domestic) oil company (IOC) which possesses
the expertise and financial resources to undertake the task. The relationship between
the state and the IOC must then be regulated by some type of legal instrument or
contractual framework which specifies the rights and obligations of each party. This
chapter discusses the four most important regimes developed to govern such a
relationship: the licence, the concession, the production sharing agreement (PSA)
and the service contract.
At the heart of each of these regimes is the desire to address the tensions inherent
in the relationship between the state and the IOC. Broadly speaking, these tensions
can be divided into two categories: the allocation of risk between the parties and the
provision of incentives to the IOC to accomplish the states objectives.
The upstream petroleum sector is faced with physical, commercial and political
risks at every stage of the exploration and production process. While those risks are
no different in nature to those that arise in other economic spheres, the oil and gas
sector is distinctive in terms of the significant investment required for the
exploration and production of oil and gas and the large uncertainty often
surrounding the ability to profit from such investment. Prior to attempting to extract
hydrocarbons from the subsoil, seismic exploration and exploratory drilling must be
carried out, and sufficient reserves must be found to make the project commercially
viable. Unfortunately, more often than not, a commercial discovery will not occur,
in which case it will not be possible to recover the exploration costs. Even if a
commercial discovery is declared, significant uncertainty affects the actual cost at
which the hydrocarbons can be extracted, developed and produced. History is
witness to the dramatic fluctuations in the international price of hydrocarbons. The
high cost of extraction and production and the fluctuations in the price of
hydrocarbons together translate into risk with respect to the profitability of the
venture.

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