Production sharing agreement

A production sharing agreement is like sharing a cake with your friends. Imagine that you and your friends are baking a cake together. You have different jobs—someone is measuring flour, someone is cracking eggs, and someone is stirring the batter.

Now, let's say that after you bake the cake, you will sell it and make some money. A production sharing agreement is like an agreement you make with your friends about how you will share the money you make from selling the cake.

In a production sharing agreement, there are two main parties: the government and the company that is going to explore for and extract oil or gas from a particular area. The government owns the land where the oil or gas is located, but they allow the company to explore for and extract it.

Just like in our cake example, the company and the government each have different jobs. The company has to do all the work to explore for and extract the oil or gas, and the government is in charge of making sure that the company follows all the rules and regulations.

Once the company has found and extracted the oil or gas, they will sell it and make some money. But just like with the cake, everyone has to decide how to share that money.

In a production sharing agreement, the government and the company agree on a formula for sharing the money that is made from selling the oil or gas. This formula usually takes into account how much it costs to explore for and extract the oil or gas, as well as how much money the company is able to make from selling it.

So, just like with your cake, everyone gets a fair share of the money that is made from extracting and selling the oil or gas.