These types of contracts, alongside concession, service, and hybrid agreements, are among the main upstream contractual models commonly used in the oil industry. The original idea was first introduced in Bolivia in the 1950s, but the modern form was developed in Indonesia in the 1960s. In PSC contracts, the capital and operating expenditures incurred by the contractor are recovered after production from a portion of oil known as Cost Oil, which has been previously agreed upon in the contract. The remaining oil, after deducting the cost oil, is referred to as Profit Oil and is shared between the host country and the contractor in accordance with the contract.
Within this framework, the ceiling of recoverable costs is usually defined under the concept of Cost Stop. If the contractor’s incurred costs exceed the cost stop, the contractor is entitled to recover only up to that ceiling. However, if the contractor’s recoverable costs are less than the cost stop, the remaining oil is referred to as Excess Oil. Typically, though not necessarily, excess oil is shared between the host government and the contractor under the same rules applicable to profit oil.
A PSC in which the costs have reached the maximum limit of cost oil is referred to as a Saturated Contract.
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