The production sharing contract (PSC) remains the dominant model for upstream petroleum across much of Africa and Eurasia. Under a PSC, the state retains ownership of resources while a contractor bears exploration risk in exchange for a share of production. The detail of how that share is calculated, and how disputes are resolved, varies widely between jurisdictions.
Cost recovery and profit oil
At the heart of every PSC is the split between cost recovery and profit oil. The ceiling on recoverable costs, the categories of recoverable expenditure, and the sliding scales that govern profit-oil allocation are heavily negotiated and decisive for project economics.
Stabilisation and fiscal terms
Because upstream projects span decades, contractors seek stabilisation provisions to protect against adverse changes in tax and regulation. The strength and enforceability of these clauses differ across basins, and they are a frequent subject of renegotiation as host governments revisit fiscal terms.
The economics of a PSC live in its definitions, what counts as a recoverable cost can matter more than the headline profit-oil split.
Dispute resolution
International arbitration remains the preferred forum for PSC disputes, but the choice of seat, rules and governing law shapes outcomes. Local-content requirements, environmental obligations and decommissioning liabilities increasingly feature alongside the classic fiscal questions.
