Legal aspect of the gas and oil industry - Coursework Example

A country with natural resource (usually oil and gas) allows companies to explore areas for oil and gas. When the enterprise generates revenue through oil exploration it first covers the expenses such as materials, machinery, and operational costs. The rest is the profit that is usually split in 20/80 ratio. The 20% share goes to the company, and the government takes the remaining 80% share. This is still highly profitable for companies. Contractual arrangements are divided into two main categories; service contracts and production sharing contracts.

The difference between the two depends on whether or not the contract receives compensation in cash or in-kind (crude) (Johnston, 1994). Generally speaking, both contracts are referred to as production sharing contracts (PSC) or production sharing agreement (PSA) because of the commonalities. The Philippine government alternatively refers to their contractual arrangements as either a service contract (Johnston, 1994). The oil community does a similar thing but ordinarily calls it a PSC. The PSC is a risk service contract because the contractor pays a fee for conducting exploration and production operations.

The contract of the century is a term used for a PSA between 11 major oil companies and Azerbaijan for exploration of oil in this region (Ciarreta & Nasirov, 2012). This form of contract is highly feasible for developing countries. The petroleum fiscal systems in the majority of developing countries are opting for PSCs (Pongsiri, 2004). Settings of PSC are not unique or a recent invention. Upon analysing the spirit of the contract, it would seem quite similar to the agreements already in existence in places like Indonesia.

For this reason, it was much easier to implement the terms of the PSC for oil exploration in Indonesia. The country already had the concept of “crop sharing” between the farmers and the landlords that