In production-sharing agreements, the country`s government entrusts the production and exploration activities to an oil company. The oil group supports the mineral and financial risk of the initiative and explores, develops and produces the field as needed. During the successful year, the company can use the money from the oil produced to recover capital and operating expenses known as „cost oil.” The rest of the money is called „profit oil” and is shared between the government and the company. In most production allocation agreements, changes in international oil prices or the rate of production affect the company`s share of production. However, the revenue-sharing model has several drawbacks. The IOC is extremely vulnerable to changes in market prices that affect revenues and recovery, and at a time when prices are low, the IOC may be inclined to stop producing hydrocarbons and expect higher prices. The revenue-sharing model does not encourage IOCs to invest in higher costs or peripheral areas. Much of the criticism of the Rangarajan Committee`s recommendations has focused on the fact that a revenue-sharing mechanism is not suitable for India, as the country`s sedimentary basins are poorly studied and their prospects remain uncertain. Under a revenue-sharing model, IOCs bidding to participate would likely make very few offers (i.e., high IOC participation and low state participation). GoI`s total share in the profits from cost coverage is currently about 70%. With less attractive sedimentary basins than those in the Gulf (which use a revenue-sharing model), it would be almost impossible to obtain this acquisition for the GoIs. PPE grants certain rights, such as exploration and production, from the host government to an international oil company to explore and develop resources.
The PSA debate in India is not the first and will not be the last of its kind. Historically, it is quite common for the state to remove a greater share of the pie as soon as resource or field uncertainties have been resolved favourably and/or when the state receives lower-than-expected production revenues. In such circumstances, the consequences of reputation, which turn out to be unreliable counterparties, will appear to be relatively less important for the host Member State. For example, the first wave of PSA in Indonesia, after the 1973 oil shock, was revised in favour of the state, because the Indonesian government recognized that IOCs were making higher profits than expected under existing EPIs. Criticism of the Indian EPI (and other cost recovery PPE) is often unaware of the reality that IOCs are in a country to generate profits and not just recover their costs. This is not to say that IOCs never become lazy or pay their expenses. As the Kelkar Committee suggested, the solution for India (and countries in a similar situation) is not a transfer to a revenue-sharing mechanism, but better management of PPE and prudent management of its rights under PSA by the state. However, as this edition was printed, the Indian government announced its new licensing regime, the open acreage licensing policy, which we know will abandon the current PSA in a controversial way in favour of revenue sharing. Joint Ventures (Operating) AgreementThis grouping of two or more companies, private or public companies or a combination of private and public companies, can be described as a joint venture („JV”). Typically, a joint venture consists of contractors and a national oil company (NOC).