What is a Production Sharing Agreement (PSA)?

A Production Sharing Agreement (PSA), also called a Production Sharing Contract (PSC), is a legal arrangement between a host country's government (typically through its national oil company) and an international oil company (IOC) for the exploration and production of oil and gas. Under a PSA, the IOC bears the exploration and development risk and costs; in return, the IOC is allowed to recover its costs from a share of production ('cost oil') and then share the remaining 'profit oil' with the government/national oil company according to a negotiated split. The government retains ownership of the hydrocarbon resources throughout. PSAs are the most common upstream oil contract structure in Africa, Southeast Asia, and former Soviet republics.

How does cost oil and profit oil work in a PSA?

In a production sharing agreement: (1) Cost oil: a portion of gross production is allocated to the IOC to recover its capital and operating expenditures. Typically capped at 30–60% of gross production per period ('cost recovery ceiling'). Unrecovered costs carry forward. (2) Profit oil: the remaining production after cost oil allocation is 'profit oil', split between the government/NOC and the IOC according to a negotiated ratio — often variable (a 'sliding scale') based on production rates or R-factor (ratio of cumulative revenue to cumulative cost). Example: at low production rates, IOC gets 60% profit oil; at high rates (once costs recovered), IOC gets 30% profit oil. Government taxes may apply additionally. The overall government take (profit oil share + taxes + royalties if any) typically ranges from 60–85% of total project economics.

Where are production sharing agreements used?

PSAs are the dominant upstream contract structure in: (1) Africa — Nigeria (NNPC/IOC PSCs offshore), Angola (Sonangol/IOC blocks), Libya (historically), Tanzania, Mozambique (gas); (2) Southeast Asia — Indonesia (Pertamina/IOC; PSCs have been used since the 1960s), Malaysia (Petronas/IOC), Vietnam, Myanmar; (3) Former Soviet states — Azerbaijan (AIOC PSA, the first large post-Soviet PSA, signed 1994 for Azeri-Chirag-Gunashli field), Kazakhstan (some blocks), Russia (Sakhalin-1 and Sakhalin-2 PSAs, though Russia later forced renegotiation); (4) Middle East — some blocks in Iraq, Oman, UAE (service contracts, related structure). PSAs are less common where strong national oil companies prefer concession agreements (Saudi Arabia, Kuwait) or where governments have full state control (most OPEC Gulf producers).

Production Sharing Agreement (PSA)

The most common upstream oil contract model outside Western concession systems — a legal arrangement where an IOC bears exploration and development costs, then recovers them from 'cost oil' before sharing remaining 'profit oil' with the host government, which retains resource ownership throughout.

Definition

A Production Sharing Agreement (PSA) or Production Sharing Contract (PSC) is a legal framework governing the relationship between a host country government and an International Oil Company (IOC) for upstream oil and gas exploration and development. The defining feature is that:

The government retains ownership of underground resources at all times
The IOC bears exploration and development risk and costs
The IOC recovers costs from a portion of production (cost oil), then shares the remaining production (profit oil) with the government

PSAs emerged in the 1960s (Indonesia was the pioneer) as an alternative to traditional concession agreements, which gave IOCs direct ownership of reserves. Newly independent nations and resource nationalists preferred PSAs' structure where the state visibly remains owner of its resources.

For the broader OPEC+ geopolitics context, see our OPEC+ glossary entry. For upstream/downstream industry context, see our upstream-downstream glossary entry. For lifting cost and breakeven economics, see our lifting cost glossary entry.

PSA structure: cost oil and profit oil

Component	What it is	Typical terms
Gross production	Total barrels of oil produced per period	100% basis
Royalty (if applicable)	First deduction; some PSAs include a royalty payable to government before cost recovery	0–15% of gross production
Cost oil	Portion allocated to IOC for cost recovery; limited by cost recovery ceiling	30–60% of production per period ceiling
Unrecovered costs	Excess costs above ceiling carry forward to future periods	Carried at negotiated interest rate or nominal
Profit oil	Remaining production after royalty and cost oil; split between IOC and government/NOC	Sliding scale: IOC 20–60%; Government/NOC 40–80%
Corporate tax (if additional)	Some PSAs apply corporate income tax on IOC's profit oil share	25–50% depending on jurisdiction

The combination of cost oil recovery, profit oil split, and taxes determines the total government take — the percentage of project economics received by the state. Competitive PSA terms (attractive to IOCs) offer government takes of 60–70%; less competitive terms (resource nationalist or high-risk aversion) may target 80–90%+, reducing IOC incentive to invest.

Major PSA jurisdictions and examples

Country / Block	Structure	Notable PSA
Nigeria (offshore)	NNPC-NOC + IOC PSCs	Shell/TotalEnergies/ENI/Chevron deepwater blocks
Angola	Sonangol-NOC + IOC PSCs	Cabinda (Chevron), Block 0; deepwater Blocks 15–18, 31, 32
Indonesia	Pertamina + IOC Kontrak Bagi Hasil (KBH)	Pioneer PSC model since 1966 (Chevron Caltex, CNOOC)
Azerbaijan	SOCAR + IOC	AIOC PSA (1994): BP, AzCo, SOCAR for Azeri-Chirag-Gunashli; pioneering post-Soviet PSA
Iraq	Hybrid: service contracts + some PSC elements	BP/CNPC (Rumaila), Lukoil (West Qurna), TotalEnergies (Halfaya)
Mozambique	ENH-NOC + IOC	TotalEnergies Mozambique LNG (Area 1); ENI Coral FLNG (Area 4)

Russia's Sakhalin PSA disputes
Russia signed two major PSAs in the 1990s — Sakhalin-1 (ExxonMobil, Rosneft, ONGC, SODECO) and Sakhalin-2 (Shell, Gazprom, Mitsui, Mitsubishi) — as exceptions to Russia's normal concession/tax regime. By the 2000s, Russia pressured operators to renegotiate on more favourable terms, using environmental enforcement as leverage. After Russia's 2022 Ukraine invasion, Western companies were forced to exit Sakhalin PSAs with minimal compensation. This illustrates a key PSA risk: political renegotiation or nationalisation in resource nationalist or unstable environments, regardless of contractual terms.

PSA economics and oil production impact

PSA terms significantly affect whether IOCs invest in a country's upstream sector and how much production results:

Overly restrictive PSA terms (high government take, low cost recovery ceiling, punitive sliding scales) deter IOC investment, reducing exploration and development activity
In high-cost environments (deepwater, Arctic, challenging reservoirs), more IOC-friendly terms are needed to attract investment at all
Lower oil prices reduce PSA profitability faster for IOCs than for governments (cost oil recovery takes longer at lower revenue), making PSAs less attractive to IOCs in bear markets
At high oil prices, governments often feel PSAs give IOCs windfall profits and push for renegotiation — creating political risk for long-term investments

For crude oil benchmark pricing that underpins PSA economics, see our crude oil benchmarks guide and our Brent crude glossary entry.

Frequently asked questions

What is a Production Sharing Agreement (PSA)? A PSA (Production Sharing Agreement/Contract) governs IOC upstream oil investment in a host country: the IOC bears exploration/development risk and costs; recovers costs from 'cost oil'; then shares 'profit oil' with the government/NOC. Crucially, the government retains resource ownership throughout. PSAs dominate in Africa, Southeast Asia, and former Soviet states.: A PSA (Production Sharing Agreement/Contract) governs IOC upstream oil investment in a host country: the IOC bears exploration/development risk and costs; recovers costs from 'cost oil'; then shares 'profit oil' with the government/NOC. Crucially, the government retains resource ownership throughout. PSAs dominate in Africa, Southeast Asia, and former Soviet states.
How does cost oil and profit oil work in a PSA? Cost oil (typically 30–60% of production ceiling) reimburses the IOC for capital and operating costs. Remaining production is 'profit oil', split between IOC and government via a negotiated sliding scale (e.g., IOC 60% at low production rates, 30% at high rates). Total government take including profit oil + taxes typically = 60–85% of project economics. Cost recovery ceiling and profit oil split are the primary negotiating variables.: Cost oil (typically 30–60% of production ceiling) reimburses the IOC for capital and operating costs. Remaining production is 'profit oil', split between IOC and government via a negotiated sliding scale (e.g., IOC 60% at low production rates, 30% at high rates). Total government take including profit oil + taxes typically = 60–85% of project economics. Cost recovery ceiling and profit oil split are the primary negotiating variables.
Where are production sharing agreements used? PSAs dominate in: Africa (Nigeria offshore, Angola, Mozambique LNG), Southeast Asia (Indonesia — the pioneer since 1966, Malaysia, Vietnam), former Soviet states (Azerbaijan AIOC PSA 1994, Russia Sakhalin-1/2). Less common in Gulf OPEC producers (Saudi Arabia, Kuwait) which use concession agreements or full state ownership. PSAs are rare in the USA, Canada, UK, and Norway which use taxation/royalty concession frameworks.: PSAs dominate in: Africa (Nigeria offshore, Angola, Mozambique LNG), Southeast Asia (Indonesia — the pioneer since 1966, Malaysia, Vietnam), former Soviet states (Azerbaijan AIOC PSA 1994, Russia Sakhalin-1/2). Less common in Gulf OPEC producers (Saudi Arabia, Kuwait) which use concession agreements or full state ownership. PSAs are rare in the USA, Canada, UK, and Norway which use taxation/royalty concession frameworks.