What's a Production Sharing Agreement?

A Production Sharing Agreement (PSA) is a commercial contract between the investor and the state, which allows the investor to undertake large scale, long term and high-risk investments. The purpose of the PSA is to define the terms and conditions for the exploration and development of resources by replacing existing tax and license regimes with a contract based arrangement that exists for the life of the project.

	Under the PSA the Russian Federation government retains its rights and ownership of the oil and gas resources. The company invests all the capital needed to develop the fields and pays bonuses to the Russian Federation at key milestones during the project development.
	Sakhalin Energy pays a royalty of six percent of the oil and gas produced to the Russian government throughout the lifetime of the project. The balance of revenues, less operating expenses from production sales in the early years, is used to repay our capital investment. The remaining production, after payback of investments, is shared between the Russian Federation, the Sakhalin Oblast (regional government) and our organisation.
	The Russian Federation government will receive an increasing proportion of revenues from production as the project progresses. If profitability exceeds certain specified levels then the Russian Federation government receives an increasingly bigger share of the extra revenues, which can be as high as 70 percent. In addition, we pay tax on any profit that our company makes.