Abstract

Concessions were predominantly used up until the late 1960s, when Production Sharing Agreements- or also called Production Sharing Contracts (PSA or PSC) - came into existence. They provide an alternative to concessionary systems for those foreign countries, whose constitutions stipulate that all mineral rights lie with the state, but who do not wish to exploit their hydrocarbon resource base on their own. Regulations, which govern the external oil and gas reserves reporting, give a high degree of latitude as to how a company interprets and applies those rules to reserve bookings. From a financial point of view, PSAs and concessions are quite similar; they are distinctly different though from a philosophical point of view. The concession owner holds title to the hydrocarbons in place, whereas in the PSAs the entitlement is not transferred to the contracting party. But it is the entitlement to reserves, which ultimately provides the right to book reserves. For concessions, the reserve booking procedure is very clear, since the concession owner owns the mineral rights, whereas in case of PSAs the situation gets much more complicated. This paper explores different types of such agreements. It further discusses the question, whether reserve bookings for internal and external reporting purposes are permissible under certain kinds of arrangements and what, if any, volumes can be booked. Two methods are applied: The working interest method and the economic interest method. The hazard in using the working interest method, lies in the fact, that the government production entitlement would be treated as a tax expense from the contractor's point of view. But the host government or their representing oil institution will book their share of profit oil/gas as well, leading to reported gross reserves exceeding those ultimately produced. It would be preferable if oil companies strive to apply the economic method uniformly. The economic interest represents the actual barrel entitlement and thus is comparable to reserve numbers from concessions or leases.

As the investment community places great significance on reported volumes to gauge the company's financial strength and future growth potential, it would be desirable to achieve a higher degree of consistency in reserve booking industry-wide. Internally the company will profit by improving benchmarking in portfolio management decisions.

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