In this structure, which focuses primarily and explicitly on upstream cost recovery, entrepreneurs do not have the incentives to keep costs low. The Ashok Chawla Committee on Natural Resource Allocation[1] also noted that the multi-based profit-sharing formula system with cost recovery “incentivizes (an operator) to increase its investment or follow its work plan to deal with the fact that the threshold at which government profit-taking is increasing rapidly is not reached.” The report clearly highlights the risks associated with this structure, in particular with a sharp increase in profit sharing from one base to another. Therefore, this mechanism requires close, constant and micro-monitored monitoring by the government to protect its ingestion. This is perceived by entrepreneurs as interference in business decision-making, while the government and its auditor – the Comptroller and Auditor General of India (CAG) – see it as legitimate and necessary. Since decisions are made in a joint committee, called a management committee (GC), with representatives of the government and the private party, decisions are delayed and the execution of the contract is hindered, which leads to arbitration, which has a detrimental effect on the rapid exploratory work. All the same problems are still there – the complexity of the deal and the disputes over the money. In some states, there is not even agreement on whether the drilling of allocated wells is allowed by a lease. In any case, there is a lot of money at stake. If you decide to take a PSA, talk to a competent lawyer. Production-sharing agreements were first used in Bolivia in the early 1950s, although their first implementation was similar to that of today`s Indonesia in the 1960s.

[1] Today, they are often used in the Middle East and Central Asia. Production Sharing Agreements (PSAs) are among the most common types of contractual arrangements for crude oil exploration and development. Under a PSA, the state, as the owner of mineral resources, hires a foreign oil company (FOC) as an entrepreneur to provide technical and financial services to exploration and development operations. The state is traditionally represented by the government or one of its agencies such as the National Oil Company (NOC). .

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