Libyan National Oil Corporation (‘NOC’) introduces a new Production Sharing Agreement (‘PSA’) model and revises the fiscal terms

Tripoli, April 17, 2025 – The NOC introduced the new PSA Model during their recent roadshow, revising the fiscal terms that were used in the previous EPSA-IV model. The NOC stated that the rationale behind the revision of the fiscal arrangements were to offer flexible and competitive commercial terms to the International Oil Corporations (IOCs), with the aim of simplifying the process of recovering costs and improving their return on investment.

The previous EPSA-IV agreement outlined how the costs and the production was to be shared between the parties, whereby once the IOC’s past costs were recovered, the remaining entitled production (‘Profit Oil’) was to be shared with the NOC. The IOCs were responsible for the entire costs related to exploration, whereas capital expenditures and operational costs were divided between the IOC and NOC. The IOC’s production share was to pay for all expenditures associated with exploration, appraisal, and development. According to the NOC, the fiscal arrangements in the new PSA model will entail that the IOC bears all the costs including both capital and operational expenditures. As an incentive to the IOCs, the NOC will provide them with a more stable cost recovery mechanism and a competitive production share of Profit Oil.

Under EPSA-IV, the IOC’s share of Profit Oil (‘Profit Share’) followed a sliding scale intended to limit its withdrawal. This scale had been a function of two factors; namely the “A” Factor and the “B” Factor. The “A” Factor is based on the “R” Factor ratio, and the latter is itself calculated by dividing the IOC’s cumulative revenue by its cumulative costs. The “B” Factor is a function of the total production rate and relates to “excess petroleum” based on daily production levels. The IOC’s share of Excess Petroleum in the EPSA-IV model was determined by multiplying the Excess Petroleum by the B Factor and the A Factor.

The new fiscal arrangements introduced by the NOC have attempted to simplify the process. They have stated that under the new PSA model, as soon as production takes place and revenue is generated, the IOC will immediately be allocated a percentage of production/revenue for cost recovery. This percentage will be determined by the specific Area/Block offered in the Bid Round. The remainder of the production/revenue will be allocated for ‘Profit Share’ between the IOC and NOC.

In contrast to the EPSA-IV arrangements, the new PSA model ensures that after the beginning of production, revenue will be allocated to cost recovery and profit sharing simultaneously. Where the allocation for cost recovery exceeds the Petroleum Costs (including exploration, appraisal, capital and operational expenditures), the PSA will allow for the excess amount to be shared between the IOC and NOC. The percentage share is also to be determined by the specific Area/Block offered in the Bid Round. The NOC envisages that this new arrangement is a strong incentive for the IOCs who will receive profits as soon as revenue is generated, speeding up cost recovery and improving cash flow.

Finally, with regards to production/revenue that is to be allocated for ‘Profit Share’ between the IOC and NOC, the new PSA model removes the “B” Factor. In turn, the IOC’s profit share will be based on the “R” Factor ratio and “A” Factor. The “R” Factor ratio will continue to be calculated as before (cumulative revenue divided by cumulative costs). When the “R” Factor ratio is equal to or below 1, the new PSA model introduces a ‘maximum “A” Factor’. Whereas, when the “R” Factor ratio is equal to or above 2.5, the new PSA model introduces a ‘minimum “A” Factor’. Where the “R” Factor ratio is between 1 and 2.5, the “A” Factor will be calculated by a formula, whereby it’ll be on a sliding scale between the maximum and minimum “A” Factor. As a result, the new PSA’s fiscal arrangements simplify the calculation of the IOC’s ‘Profit Share’, whereby it is the total IOC and NOC Profit Share multiplied by the “A” Factor.

Mohamed Al-Hamali, Author