1. 1
Are Production Sharing Contracts Modern Concession Agreements by
Another Name? Valentine Ataka*
*Valentine Ataka is an Advocate of the High Court of Kenya, a commentator on Law and Policy
on Energy. He is an LLM Candidate in Oil and Gas Law (RGU-2013)

2. 2
Are Production Sharing Contracts Modern Concession Agreements by
Another Name?
Introduction
Production Sharing Contracts (PSCs) have become more of a fad in Oil and Gas
contracting since their emergence in the late 1960s1
. They have gradually replaced
the classical Concessions which were seen to be unduly skewed in favour of IOCs.
On the other hand there are a number of countries that have continued to use
Concession Agreements albeit in a modified form- what I describe here as Modern
Concessions.
As it turns out, on a measure of government control, benefit drawn by the IOC and
division of obligations, modern Concessions are very similar to PSCs. There are
however some menial differences which are discussed below. The discussion relies
on available models from Brazil2
, Angola3
, Kenya4
, Kurdistan5
and Egypt6
.
1
First recorded use was in Indonesia in 1966
2
Brazilian Ministry of Mines and Energy ‘Model Concession Agreement for Exploration,
Development and Production of Oil and Natural (Clause 2.4)’
http://www.eisourcebook.org/cms/Brazil,%20Model%20Concession%20Agreement,%20ANP
%2010th%20Rnd,%202008.pdf accessed 12th
April 2013
3
EI Source Book ‘Model Angolan Production Sharing Contract’
http://www.eisourcebook.org/cms//files/attachments/policy-legal-contractual-
regulatory/Angola%20-%20Model%20of%20PSA%202008.pdf accessed 12th
April 2013
4
EI Source Book ‘Republic of Kenya Model production Sharing Contract’
http://www.eisourcebook.org/cms/Kenya%20Model%20Production%20Sharing%20Contract
.pdf accessed 12th
April 2013
5
EI source Book ‘Model Production Sharing Contract for Exploration and Production in
Kurdistan’
‘http://www.eisourcebook.org/cms/Iraqi%20Kurdistan%20draft%20Model%20Production%
20Sharing%20Contract.pdf accessed 12th
April 2013
6
Egyptian Gas Holding Company ‘Concession Agreement FOR Gas and Crude Oil Exploration
and Exploitation’ (2005 Model)
http://www.egas.com.eg/BidRound2012/MODEL_AGREEMENT_2012_new.pdf accessed 23rd
March 2013

3. 3
Similarities in the Development aspects of the Concession and the PSA
Parties
In a concession as well as a PSC, the IOC enters into the contract with an NOC
acting on behalf of the government. For example in Brazillian Concessions, the ANP
is the opposite party while in the Angola PSCs the government is represented in the
contract by SONANGOL. An interesting variation is the Kenyan PSC where the
Ministry in charge of energy signs the Contract and the National Oil Corporation has
no role defined under the contract.
Security for performance
In both forms of contracting the concessionaire or the contractor is required to
provide some form of security to guarantee the performance of the development
work under the contract. The Angolan model PSA requires the IOC to provide a
financial guarantee not later than 30 days before execution of the agreement.
Clause 15 of the Brazilian Concession requires the lodging of security in the form of
irrevocable letters of credit, guarantee insurance or Oil pledge Agreement.
Reversal of ownership of installations
Under both regimes, once the contract expires, the ownership of the installation
(i.e. infrastructures, equipment and all wells) reverts freely to the HG. However
the Concessionaire/contractor may also be required to decommission the
installations at its own costs. Under the Norwegian Concession regime, installations
are to revert only if they are in good and safe working condition, failing which the
IOC would be liable to pay compensation to the state. Similarly under the Angolan
PSC, within 60 days of expiry of the contract the contractor is to hand over to the
NOC all the installations

4. 4
Relinquishment
In both systems the IOC is obliged to progressively either relinquish or reduce
the contract area held by it for purposes of exploration. This is a government
mechanism used to ensure progressive and optimal development of the granted
fields. Article 3 of the Kenyan Model PSC provides for progressive surrender of the
contract area. A similarly progressive relinquishment model is in the Egyptian
Concession (Article V).
Oversight over Development Process
Under both regimes, the government is usually not directly involved in the
development processes. The NOC and the IOC usually constitute an E&P oversight
body to report to the respective parties. For instance under Article IV of the
Egyptian Concession, a Joint Exploration Advisory Committee is to be established to
review and give such advice as it deems appropriate with respect to the proposed
Exploration work program and budget while under Article 31 of the Angolan PSC, a
Joint Operating Committee is established.
Differences in Development aspects
Ownership of Oil resources
Under Concession agreements the resources belong to the government only to the
extent that it is still in the reservoir. Once oil is extracted, for example under the
Brazilian concession, the title transfers wholly to the concessionaire7
. On the
other hand under a PSC the ownership of the resources at all times remains
with the government. Article 2.1 of the Kurdistan Model PSC is categorical that
the government is the sole owner of the petroleum.
7
See Clause 2.4 of the Brazilian Concession model

5. 5
Similarities in the fiscal aspects
Bonuses
In both cases, the contractor/concessionaire is expected to pay a signature bonus
and/or a production bonus. The signature bonus is paid o the government
before the contract is signed. The production bonus kicks in when a predetermined
threshold in production is met. The nature of the bonus and its status for the
purposes of tax or costs deductions may vary.
For example Article XI of the Egyptian Model Concession provides for development
lease, development lease extension, training and assignment bonuses in addition to
signature and production bonuses. The Kurdistan Region Model PSA provides for
both signature and production bonuses at Article 6 and 32 respectively.
Under the Egyptian concession model the bonuses are not deductible for tax
purposes. Similarly under the Angolan PSC the contractor cannot recover bonuses
paid as costs.
Royalties
The concept of royalty payment was originally intended under concessions to
deliver compensation in kind to the ultimate owner of the resources i.e. the
state8
. This is why it is predominantly used in Concessions. However some PSCs,
for example Article 24 of the Kurdistan Model, require the payment of Royalties.
The Royalty is usually worked out on the basis of a percentage of the oil and gas
produced. For example, under Annex V of the Brazilian Model Concession the IOC is
to pay in the amount of 10% of Oil and Natural Gas produced in each Field within
the Concession Area from the respective Production Start-up dates.
8
M.R Oliveira, ‘The Overhaul of the Brazilian Oil and Gas Regime: Does the Adoption of a
Production Sharing Agreement Bring Any Advantage Over the Current Modern Concession
System’ (OGEL, Vol 8 issue 3, 2010)

6. 6
Since royalties are by nature payments irrespective of tax, they are generally not
deductible for the purposes of tax or calculation of recoverable costs in either form
of contracting.
Minimum Work Obligation
Both under a Concession and a PSC, the IOC is expected to submit and comply with
a program indicating work to be accomplished under each phase. The Kurdistan
PSC for instance provides for the obligation under Clause 9.2 of while the Brazillian
Concession Agreement provides for the same at Clause 15.
Differences in Fiscal aspects
Cost Recovery
This is only known to the PSC regime whereby the contractor has the right to
recover its costs by taking a proportion (known as cost oil), not exceeding a certain
percentage (cost recovery limit), of the annual production within the contract area.
The limit is fixed at a minimum of 55% and a maximum of 70% in the Kurdistan
Model PSC depending on the quality (gravity) of oil produced.
Concessions regimes have their own systems of cost relief. For instance the cost
recovery mechanism under the Brazilian concession regime is represented by
depreciation, amortisation and deduction of capital and operating cost against
taxable income and special participation fee.9
Sharing of Profit Oil
This is only found in PSCs. It is the portion of the production that is left once the
cost oil has been deducted and is shared between the government and the IOC on
the basis of a predetermined formula. A number of countries now have production
sharing mechanisms, based on the rate of return (or other assessment of
9
Oliveira Ibid

7. 7
profitability) to the contractor on a given date. Examples of such countries are
Liberia, Libya, Equatorial Guinea Tunisia, India, and Azerbaijan.
Income Generally
Under the PSC the government draws financial benefit mainly through a share in
the production and not profits as the case is with the Concession. Under a
Concession regime the host government seeks its share of the rent through
taxation, bonuses and royalties only.
Income tax is chargeable in both regimes. However as pointed out by Oliveira, its
weight in a Concession regime is much greater than in the PSA regime as it is the
main source of revenues to the government. On the other hand, in a PSA the role of
income tax is outweighed by the government profit oil.
Venn diagram comparison of Concessions and PSCs (by Author)
CONCESSION PSC
Exploitation of Early Concessions by Oil Companies
Concessions in their classical form have in the past dues to their lopsided nature
used by IOCs to great advantage especially in the Middle East.
-HG share in profit
-IOC owns oil
HG share in production-
-HG owns oil
-cost oil
-profit oil
- Similar parties
- Bonus& Royalty
payment
- Relinquishment
of fields
-Minimum work
Obligation
-Income tax
- Performance
guarantee
-Assets revert to
HG

8. 8
An example is the 1901 D'Arcy Concession obtained by William D’Arcy from the
Shah of Persia to explore 500,000 sqm of land for duration of 60 years10
. In return
the company had to pay a US$ 100,000 bonus, a 16 percent royalty, and give the
government a share worth US$ l00, 000 in the company. Similarly, the 1933
contract between the King of Saudi Arabia and Standard Oil of California specified
that the foreign contractor had to pay 50,000 pounds of gold to the King in return
for a concession covering 500,000 sqm for a 66 year period. The Abu Dhabi
concession of 1939 granted a consortium of five major oil companies the right to
explore the entire country for 75 years.
However beginning 1950s onwards the classical Concessions have either been
renegotiated or abandoned altogether with governments realizing their lopsided
nature. For example under an original concession between Saudi Arabia and
ARAMCO the HG was to receive 21% per barrel at a time when the barrel sold for
over US$2. The Saudi government forced a renegotiation requiring profits to be
shared fifty-fifty, and requiring payment of royalty. The Iran and Iraq concessions
underwent similar changes. Also introduced were changes in taxation. In addition
OPEC, after its foundation in 1960, sought to readdress control over production and
prices by changing the balance of bargaining power in favour of the producing
countries and away from the majors11
.
Which of the two offers Economic leverage to an IOC?
The modern Concession has evolved to such nature that beyond the ownership and
level of control, it is no better or worse than a PSC. Both regimes contemplate
royalties, taxes, bonuses, etc. and some form of cost recovery. Even though in a
10
Paul Lunde, A king and a Concession, Saudi ARAMCO World, Vol 35 No 3 1984
http://www.saudiaramcoworld.com/issue/198403/a.king.and.a.concession.htm accessed
15th April 2013
11
Daniel Yergin, The Prize: The Quest for Oil, Money & Power (Simon& Schurster, 2008)
p126

9. 9
concession the IOC has exclusive rights to develop and owns the extracted oil, the
payment of royalty, bonuses and taxes the rates of which the government may
adjust at will negates the chance of any economic advantage to the IOC. Therefore
from an IOCs point of view, whichever system is used, it should decide to make
investment only if at the negotiation it foresees a profitable outcome taking into
account its own particular economic standards and methods of calculation of
payments which are specific to contracts and cannot be generalised as a matter of
form12
.
12
Johnston, Daniel, International Petroleum Fiscal Systems And Production Sharing
Contracts (Tulsa, Okla. : PennWell Books, 1994), pp. 39.