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Production Sharing Contract

A Production Sharing Contract is a contractual arrangement between a government and an oil or gas exploration and production company. It is designed to govern the exploration, development, and production of hydrocarbon resources in a specific area. Under a PSC, the government retains ownership of the resources, and the contractor bears the exploration and production costs in exchange for a share of the production.In Kenya, a Production Sharing Contract (PSC) is a common type of agreement used in the oil and gas industry. It is a legal contract between the Kenyan government and a petroleum exploration and production company, known as the contractor, for the exploration and production of hydrocarbon resources.

Key Features of a PSC in Kenya:

1.    Exploration and Production Rights: The PSC grants the contractor exclusive rights to explore and produce hydrocarbon resources within a defined contract area in Kenya. This includes the right to conduct geological and geophysical surveys, drill wells, and undertake other exploration activities.
2.    Cost Recovery and Profit Sharing: Under the PSC, the contractor bears the exploration and production costs. These costs are recoverable from the future revenues generated by the project. After cost recovery, the profits are shared between the contractor and the government based on a predetermined formula outlined in the contract.
3.    Government Participation and Royalties: The Kenyan government usually has a participating interest in the project, which means it holds a percentage of ownership in the hydrocarbon resources. The government also receives royalties based on the production levels and prevailing market prices.
4.    Contractor's Obligations: The contractor is responsible for carrying out exploration activities, including seismic surveys, drilling wells, and conducting geological studies. They must adhere to environmental and safety standards set by the government and other regulatory bodies.
5.    Term and Work Obligations: The PSC specifies the duration of the contract, which typically consists of an exploration period and a production period. During the exploration phase, the contractor must fulfill minimum work obligations, such as conducting a certain number of seismic surveys or drilling a specific number of exploration wells.
6.    Cost Recovery Limitations: PSCs often include limitations on cost recovery, such as a cap on the percentage of annual revenue that can be recovered or a time limit for cost recovery. These limitations aim to ensure a fair balance between the contractor's financial interests and the government's revenue.
7.    Dispute Resolution: The PSC outlines the mechanisms for dispute resolution between the contractor and the government. This may involve negotiation, mediation, or arbitration, depending on the terms agreed upon in the contract.

It is important to note that the specific terms and conditions of PSCs can vary from one contract to another. The government of Kenya negotiates and enters into PSCs with different companies based on the specific project and prevailing industry practices at the time.
According to the Petroleum Act 2019, Art.18 A petroleum agreement (The PSC) may be executed between the Cabinet Secretary and a contractor after the conclusion of bidding rounds conducted in accordance with this Act. The Cabinet Secretary may also execute a petroleum agreement with a contractor after direct negotiations with that contractor on the recommendations of the Advisory Committee