Disadvantages of Production Sharing Agreement

September 16, 2023

Production sharing agreements (PSAs) are contracts between a government and petroleum companies, where the company is given the right to explore and produce oil and gas resources in a given area. While these agreements have many benefits, such as investment opportunities and revenue generation for the government, they also have their fair share of disadvantages. In this article, we will discuss some of the most significant disadvantages of production sharing agreements.

1. Lack of control over natural resources

One of the major disadvantages of PSAs is that the government has little control over the natural resources being extracted by the petroleum companies. Under the agreement, the company has the right to extract oil and gas, and the government is only entitled to the predetermined share of profits. Therefore, the government has no control over the amount of natural resources being extracted or how they are being utilized.

2. Limited knowledge of petroleum industry

In most cases, governments lack the technical and managerial expertise required to oversee the petroleum industry. This limits their ability to monitor the activities of petroleum companies and ensure that they are operating ethically and in compliance with regulations. This can lead to environmental damage, health risks for local communities, and other negative impacts.

3. High political risk

PSAs are often associated with high political risk, as they are subject to changes in political leadership and policies. The government may impose new regulations or taxes that significantly affect the profitability of the petroleum company, and this can lead to conflicts and disputes between the parties.

4. Insufficient revenue for the government

Under PSAs, the government receives a share of the profits generated by the petroleum company. However, this share may not always be sufficient to meet the government`s economic needs or developmental goals. The government may also have limited bargaining power when negotiating the terms of the agreement, leading to an unfavorable deal for the country.

5. Limited benefits for local communities

While petroleum companies may create job opportunities and bring in investment, the benefits may not be felt by the local communities. The majority of the workforce may be imported from other countries, and the local communities may not receive adequate compensation for the use of their land.

In conclusion, production sharing agreements have their advantages and disadvantages. While they offer investment opportunities and revenue generation for the government, they also come with risks and drawbacks, such as limited control over natural resources, high political risk, insufficient revenue for the government, and limited benefits for local communities. Therefore, before entering into a production sharing agreement, it is important to carefully consider these factors and negotiate favorable terms for all parties involved.

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