Production Sharing Agreements, Form Remuneration Contractor Control Essay

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Production Sharing Agreements, form remuneration contractor control operations, extent host countries renegotiate remuneration control foreign contractors? General Notes: 1- Please make cite reference Harvard Referencing, addition reference included text (: XXXX (201x pp.

Production sharing agreements (PSAs):

Negotiating and renegotiating mutually advantageous agreements

Production sharing agreements remain one of the most common legal arrangements to engage in the "exploration and development" of oil (Binderman 1991:1). PSAs take place between a state (usually a rentier state that owns the majority of oil resources) and a foreign oil company that provides "technical and financial services for exploration and development operations" (Binderman 1991:1; Acemoglu & Robinson 2013:1). PSAs are joint initiatives and there is a mutual sharing of risk and reward that is designed to be advantageous to both parties. The foreign company is given the rights to a stipulated portion of the oil it helps to render and for other services but the state remains the ultimate owner of the product located within its borders. The foreign company bears the entire risk for the operation -- if no oil is found, there is no base compensation for the foreign entity (Binderman 1991:2).

However, it could also be argued that there is considerable risk for the nation which owns the land with natural resources, given that if more oil is found than expected, the foreign company could profit far in excess than originally intended and the foreign holder might lose a substantial profit it could have gained, had it mined the resources itself.

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This may be why it has been noted that 'first mover' companies that set the terms of the contract early in on in the lifespan of the nation as an oil-producer often receive better terms. Later on, the increasingly savvy government is inclined to design a more personally advantageous tax system to profit. "This intervention may take various forms such as the establishment of an artificial exchange rate, posted prices for valuing exports, and participation in decisions regarding production level and accounting practices" (Binderman 1991:2).

Ideally, the terms of the sharing agreement should be clearly spelled out in the original contract, and it would behoove the government to have a consistent policy in terms of how such agreements are constructed with all outside firms. But it would be impossible for a single contract or government policy to anticipate all future potential scenarios that might affect the contract. This is why stabilization clauses….....

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