A Production Sharing Agreement (PSA) – also named Production Sharing Contract (PSC) – is a contractual framework commonly used in industries such as oil, gas and mining to regulate the relationship between a host government and foreign investors. Unlike the traditional licensing and concession regimes, in which the government as regulator is free to change the rules of the game after substantial investments have been made by the investor, a PSA allows an increased legal and fiscal stability for contractors with the host government being bound by the PSA. Often, projects only become attractive to investors because of a PSA regime being offered by the host government. For many countries, PSAs have opened up the opportunity to realise large scale projects, which without the system in place would never attract investors and therefore never have been realized. PSAs attract expertise, technology, and capital to extract these resources to the benefit of the host country and its people. In many cases, national oil companies (NOC) benefit from a participation as a minority investor in PSA projects or as party to the agreement on behalf of the host government in building up skills in large-scale projects.


The Role and Advantages of a Production Sharing Agreement (PSA)

Key Features and Benefits of PSAs

1. Investor Stability: PSAs offer more stability to investors than a licence regime, as they clearly define the financial terms and operational responsibilities from the outset. This stability comes from the stabilisation clauses often included, which protect investors from sudden regulatory changes, tax increases, or shifts in local laws that could negatively affect the project’s profitability. By ensuring predictability and reducing political risk, PSAs encourage long-term foreign investment in key sectors such as oil, gas, and mining.

2. Taxation and Royalties: Under a PSA, the foreign investor and the government share the production as defined in the PSA. This structure aligns the interests of the host country and the investor, ensuring the government benefits directly from resource extraction through taxation, royalties, and production sharing agreements, while the investor gains a clear return on investment. The transparency of the taxation system under a PSA provides confidence to both the government and the investor, fostering a cooperative relationship.

3. Independence from Jurisdiction: PSAs are structured as private contracts and are often independent from the jurisdiction of local laws. This means that any disputes arising under the agreement are typically resolved through alternative dispute resolution methods, for example arbitration, providing a neutral and reliable framework for resolving conflicts. This neutrality can be particularly attractive for foreign investors, who may be concerned about potential biases in the local legal system.

4. Long-term National Benefit: By retaining ownership of the natural resources, the host country ensures that its wealth remains within national borders, while still attracting much-needed foreign investment. PSAs allow the government to maintain control over resource management and strategic decision-making, while the investor assumes the financial risk and operational responsibility for extraction.


Why PSAs are an Attractive Option?

In contrast to licensing regimes, where governments often relinquish control over resource development, PSAs provide a balanced solution that promotes economic stability, sovereignty, and long-term resource benefits for the host country. They are particularly beneficial in resource-rich nations seeking to capitalize on their oil, gas, and mining sectors while minimizing the risks to investors and promoting sustainable development.

With the right mechanisms and processes in place, PSAs offer both the host country and investors a clear pathway to mutually beneficial economic growth.


See also:

1. Bindemann, K., "Production-Sharing Agreements: An Economic Analysis", Oxford: Oxford Institute for Energy Studies, 1999 – 93 pages – ISBN 978-1-901-79515-8
URL: https://www.oxfordenergy.org/wpcms/wp-content/uploads/2010/11/WPM25-ProductionSharingAgreementsAnEconomicAnalysis-KBindemann-1999.pdf

2. Rath, J.; "Production-Sharing Agreements in the Russian Federation", OGEL 1 (2005), www.ogel.org
URL: www.ogel.org/article.asp?key=1738

3. Rath, J., Das Recht der Production-Sharing Agreements in der Russischen Föderation, Münster: Cuvillier Verlag, 2006 – 316 Seiten – ISBN 978-3-865-37946-7
URL: https://cuvillier.de/en/shop/publications/2120-das-recht-der-production-sharing-agreements-in-der-russischen-foderation

4. Рат Й., Соглашения о разделе продукции: анализ правового регулирования отношений в сфере реализации в Российской Федерации, М.: Волтерс Клувер, 2008. — 288 с. – ISBN 978-5-466-00336-9