A new progressive and efficient production sharing Contract for upstream oil and gas industry

Abstract

After the pandemic, the structure of the upstream petroleum business changed. Exploration and production (E&P) companies no longer base their investment decisions on the geological prospectivity of the offered blocks but rather on how the fiscal systems adopted by host governments behave under such uncontrolled and unexpected events. Many E&P companies couldn't survive during the pandemic. This is because many governments adopt regressive and front-end-loaded systems that are not designed to accommodate such periods of low oil prices. This research, therefore, presents a new methodology to design the main fiscal elements of production sharing contracts (PSCs). These elements are: royalty, cost recovery limit, production sharing, and income tax. The performance of the proposed PSC model under different oil prices, production rates, and development costs is investigated using deterministic sensitivity analysis. Our results showed that the proposed PSC model is a progressive and win-win fiscal system. The performance of the proposed PSC model is compared with Ghana's fiscal system and the new Nigeria's Petroleum Industry Act (PIA 2021) under a wide range of oil prices, production rates, development, and operating costs. The comparative study proved that the proposed PSC model enhances the survival and sustainability of E&P companies during periods of falling oil prices. The comparative study proved that, unlike the proposed PSC model, Ghana's fiscal system and PIA 2021 are regressive. Furthermore, the contracting parties are not in a win-win situation.