The choice between technical service contracts (TSCs) and production sharing contracts (PSCs) can significantly impact the development of a country’s oil and gas industry.
Technical service contracts (TSCs) are agreements where a company provides technical expertise and services to the state-owned oil company in exchange for a fee. This model can be particularly attractive when oil prices are low, as it allows for steady revenue and foreign investment. Iraq’s experience with TSCs, particularly with companies like BP and Lukoil, demonstrates the potential of this model to boost production quickly, especially in mature fields.
Production sharing contracts (PSCs), on the other hand, involve a risk-sharing arrangement between the government and a private company. The company invests in exploration and production activities, and the profits are shared between the two parties. While PSCs can be highly lucrative for both parties when oil prices are high, they can be less attractive during periods of low oil prices.
Which model is more common?
TSCs are commonly used in the Middle East and North Africa (MENA) region, particularly in countries like Iraq, Saudi Arabia, and the United Arab Emirates.
PSCs are widely used in various regions, including the Middle East, Africa, and Southeast Asia. Countries like Saudi Arabia, Qatar, Oman, Kuwait, Iraq, and the United Arab Emirates in the Middle East; Nigeria, Angola, Algeria, Egypt, and Libya in Africa; Indonesia, Malaysia, and Vietnam in Southeast Asia; and Brazil and Colombia in Latin America commonly use PSCs.
The future of contract models
The optimal contract model depends on various factors, including oil price trends, the maturity of the oil and gas fields, and the specific goals of the host country. A well-balanced approach may involve a combination of TSCs and PSCs to maximize revenue and ensure sustainable development of the oil and gas industry.
In recent years, there’s been a trend towards more flexible and nuanced contract models. Many countries are now opting for hybrid models that combine elements of both TSCs and PSCs. These hybrid models can provide a more balanced approach, allowing governments to share in the risks and rewards of oil and gas production while also ensuring a steady stream of revenue.
It’s important to note that the specific contractual arrangements can vary significantly from country to country, and the choice of contract model is often influenced by geopolitical factors, economic conditions, and technological advancements.
ADI brings considerable experience in evaluating various contractual models to drive the development of oil & gas and other energy resources. We have also helped oil & gas operators optimize their asset portfolios by evaluating the economic, strategic, and risk factors of the mix of contractual models. Please reach out to us to learn more and how we can help optimize resource development and asset portfolios.
–Uday Turaga
ADI Analytics is a prestigious, boutique consulting firm specializing in oil & gas, energy transition, and chemicals since 2009. We bring deep, first-rate expertise in a broad range of markets including upstream oil & gas covering onshore and offshore assets, where we support Fortune 500, mid-sized and early-stage companies, government agencies, and investors with consulting services, research reports, and data and analytics, with the goal of delivering actionable outcomes to help our clients achieve tangible results.
We also host the ADI Forum, one of Houston’s distinguished industry conferences, to bring c-suite executives together for meaningful dialogue and strategic insights across the oil & gas, energy transition, and chemicals value chains. Learn more about the ADI Forum, which is chaired by Uday Turaga, Founder & CEO, ADI Analytics, at www.adi-forum.com.
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