Oil Concession Agreement Definition

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This concession fee depends on the price of a barrel at the time of the concession` signing, but also on the quantity and quality of the oil and gas produced, as estimated during the exploration phase. The production allocation agreement (“PSA”) is a form of agreement under which the state retains ownership of the resources, but allows foreign companies to manage and exploit the development of the oil field, which is to negotiate an incentive system. In an PPE, an oil company presents most of the financial risks associated with exploration and development, with the state also facing some risk. Often, the national oil company joins the consortium as a shareholder of PSA and brings part of its profits as equity capital to the consortium that develops the territory granted under PSA. Often, the host government has “supported” the cost of its initial contribution by other companies. These incurred costs will be returned to companies on the future profits of the host government under PSA. If the government refuses to contribute to social capital, oil companies try to negotiate a larger share. The exact division is the result of bitter negotiations, because there are no scientific determinants as to what should be a reasonable division. The financial conditions of the EPI are similar to those of the licensing agreement, although the different structures may yield different commercial results. The host government often deserves a signing bonus, although it is regularly waived or negotiated for a greater share of future profits. The oil company is first entitled to cover costs for both day-to-day operating expenses, expenses for the year in which they were acquired, materials consumed or consumed, and investments – expenses for assets such as buildings, equipment and computers that have a longer lifespan. Coverage of the costs of current expenses occurs directly during the year in which expenditures are made and coverage of capital investment costs is spread over several years.

There are areas of uncertainty in which accountants can reasonably reach different conclusions as to whether certain items, such as books and tools, should represent operating expenses or the cost of capital.

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