Energy and natural resources
Production sharing contract (PSC)
A deal in which an oil company pays to find and produce oil and is repaid with a share of the output.
Facts checked against sources onWhat does Production sharing contract (PSC) mean?
Under a production sharing contract, the state keeps ownership of the oil and gas, while an oil company takes the risk and cost of exploring and developing it. If oil is found, the company first recovers its costs from a capped share of output called cost oil. The rest, profit oil, is split between the state and the company on agreed terms. Example: a field produces 100 barrels; up to 40 percent can be cost oil, so 40 barrels repay the company's costs. The other 60 barrels of profit oil are split 60 percent to the state (36) and 40 percent to the company (24), so the company takes 64 barrels, of which 40 repay its costs. PSCs are common in Asia, Africa and parts of the Middle East; the other main models are a licence (concession) with royalties and taxes, and a service contract, where the company is paid a fee per barrel.
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Related terms
- National oil company (NOC)An oil and gas company owned or controlled by a government.
- Full-cycle breakevenThe oil price a project needs to cover all its costs, including building it, and earn its required return.
- IRR (internal rate of return)The discount rate at which NPV is exactly zero.
- Barrel of oil equivalent (boe)A unit that converts gas into barrels of oil by energy content, so oil and gas can be added together.
- Lifting costThe cost of producing oil or gas from wells that already exist, per barrel.
- Fiscal breakeven oil priceThe oil price a government needs to balance its budget.
- Crack spread (refining margin)The gap between the price of crude oil and the prices of the fuels made from it.
- NetbackWhat a producer keeps per barrel after transport, royalties and production costs.
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