Production Sharing Agreements, Form Remuneration Contractor Control

¶ … 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.

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 were developed. "Over the life of the contract, the laws and regulations applicable to it may change.

Some changes may be adverse to the economics of the project. To mitigate such risk, investors (as well as project lenders) often require stabilisation clauses to be incorporated into the principal project documents. The aim of stabilisation clauses is to insulate the project from adverse changes to the legal and fiscal environment" (Freehills, Clinch & Watson 2010:1).

Stabilization clauses may take a number of different forms, but their ultimate intention is to ensure that external circumstances will not shift the result of the contract to terms fundamentally anathema to the original intentions of the agreement.

In one such example, an economic equilibrium stabiliation clause confers unto the state the right to make changes in regards to the project and both entities can "renegotiate the contract to restore the investor's economic position or the state will simply pay compensation" if substantial external or internal changes occur (Freehills, Clinch & Watson 2010:1). Approach to protect the rights of the contracting entity is known as a 'freezing' stabilization clause, which ensures that all conditions (including the laws at the time) 'freeze' when the contract is made.

This is designed to protect the involved parties between changes in economic and political regulation and preclude renegotiation of the contract (Freehills, Clinch & Watson 2010:1). Thus, there is the potential for renegotiation in some instances of a PSA, depending on the.