Cost Recovery limit
The report said that PSAs here limit the value of production (after royalty) that can be used to recover costs. The mission says it understands that the cost recovery limit in the Stabroek PSA is fixed at 75 percent.
“When there is a cost recovery limit and the minimum government share is greater than zero, an implicit royalty is embedded in the scheme. For example, a 75 percent cost recovery limit combined with a fixed government share of profit oil of 50 percent guarantees that the government will always receive a minimum of 12.5 percent of the total production (that is, a share of 50 percent of the 25 percent profit petroleum remaining after cost recovery). More-over… since the Stabroek PSA also includes an ad-valorem explicit royalty of 2 percent, the combination of the explicit and implicit royalties yields an effective royalty rate of 14.25 percent (That is, 2% (royalty) plus 50% of the remaining 25% after the royalty, or 2% + (98% x 25% x 50%) = 14.25%), which is more in line with international practice. The implicit royalty concept of course only applies when the cost recovery limit is in effect. Once recoverable costs fall below the cost recovery limit, the amount of profit oil to be divided between the contractor and the government increases and so does the government share of profit oil”, the report said.
