Oil and Gas Paper Essay Example | Topics and Well Written Essays - 2000 words

Oil and Gas Paper - Essay Example This mode has both advantages and disadvantages, so apt clauses have to be incorporated into the agreement, to avoid any risks. After that, Atlantic Oil has to adopt feasible and effective funding options, and also have to carry out their operations without any negative impact on the environment. Production Sharing Agreements (PSA) – Advantages, disadvantages and Clauses A change to the dominant form of contract has occurred in the oil industry, with the previously followed concession agreement giving way to the production sharing agreement.2 Production sharing agreements (PSA) are a type of contract which is signed between the government, in this case Polenskya’s government, and the oil exploration company or Atlantic Oil, regarding the extraction process and the how the extracted oil and its profits can be shared. That is, as oil and gas deposits are usually owned by the country concerned, it is common for the country to enter into a production sharing agreement with an oil company, so the specific company can do the financial investment for the extraction process, extract the oil or gas, sell it and through it recover their initial investment, and then share the production as well as the profits with the government.3 With this agreement divided into two stages, recovery period and sharing period, the produced oil is also categorized into two categories, Cost Oil and Profit Oil. The Cost oil includes the produced oil or gas, which will be sold by the company themselves to recover their investments, while with the profit oil only the government and the contractor will share the profits.4 This PSA has both advantages and at the same time inherent disadvantages. Advantages One of the main advantages that will be garnered by Atlantic oil if they enter into a production agreement with Polenskya is the high degree of fiscal stability. That is, the tax structure which is in action during the signing of the PSA, as well as the certain tax concessions gi ven to the Atlantic Oil by the government will be ‘future proof’. Thus, any overall tax changes brought on by the government in future will have no impact on the terms of the PSA, and thereby will not negatively impact the finances of Atlantic Oil. Although, certain corporate taxes are exempt from this cover, the bottom line is PSA guarantees Atlantic Oil sizable financial stability, whatever be the changes in the external environment. â€Å"The attraction of the production sharing system is that it provides the investor with a relatively stable regime in a complex and rapidly changing legal and political environment.†5 The other advantage of PSA is, it will be politically and socially more acceptable to Polenskya and in turn to Atlantic Oil as well. In countries like Polenskya, where there will be skepticism and also resistance to foreign companies, due to the mindset among the people that foreign companies will exploit the resources for their own benefits, with out giving anything back to the local population.6 However, with PSA making the government the ‘co-owner’ of the operations, it will assure the people maximally and they will welcome and support Atlantic Oil completely without any apprehension of economic exploitation. Disadvantages At the same time, there are some disadvantages of this type of contract and the key one among them is the possibility of project or extraction