Types of Oil and Gas Contracts: A Complete Overview

8 Major Types of Oil and Gas Contracts

Different contracts are designed to address specific commercial, operational, and regulatory requirements throughout the oil and gas lifecycle. The table below summarizes the most common contract types, the level of commercial risk they involve, and where they are typically used.

Concessions and Leases

Concession and lease agreements grant an oil and gas company the exclusive right to explore, develop, and produce hydrocarbons within a defined geographic area for a specified period. In exchange, the operator typically pays royalties, taxes, lease fees, and other fiscal obligations established by the host government.

These agreements are common in mature regulatory environments such as the United States, Canada, and the United Kingdom, where legal frameworks provide long-term investment certainty. Because operators generally exercise significant operational control, concession agreements offer flexibility but also place substantial exploration, financial, and operational risk on the company.

Project economics under concession models depend heavily on factors such as royalty rates, taxation, production volumes, commodity prices, and the duration of exploration and production rights.

Production Sharing Contracts (PSCs or PSAs)

A Production Sharing Contract (PSC)—also referred to as a Production Sharing Agreement (PSA)—is a contractual arrangement in which the government retains ownership of petroleum resources while granting a contractor the right to explore and produce oil or gas.

The contractor finances exploration, drilling, and field development using its own capital. Once production begins, eligible costs are recovered through cost oil, after which the remaining production (profit oil) is shared between the contractor and the government according to pre-agreed contractual terms.

PSCs are widely used in resource-rich developing countries because they attract foreign investment while preserving national resource sovereignty. Their commercial success depends on carefully negotiated fiscal terms, production-sharing formulas, and cost recovery provisions that balance investor returns with government revenue.

Risk Service Contracts

Risk service contracts allow governments to retain complete ownership of oil and gas resources while engaging private companies to perform exploration, development, or production activities.

Unlike production sharing models, contractors do not receive a share of hydrocarbon production. Instead, they are compensated through predetermined service fees or performance-based payments for successfully completing agreed operational activities.

This structure enables governments to maintain greater strategic control over petroleum resources while leveraging the technical expertise and operational capabilities of experienced energy companies. Risk service contracts are particularly attractive in countries seeking operational support without transferring commercial ownership of production.

Joint Operating Agreements (JOAs)

A Joint Operating Agreement (JOA) governs how multiple companies collaborate to develop and operate a shared oil and gas asset. Rather than one company bearing the entire financial and operational burden, participating organizations contribute capital, technical expertise, and resources according to their ownership interests.

JOAs establish the governance framework for the project by defining the responsibilities of the designated operator, voting procedures, budget approvals, cost-sharing arrangements, liability allocation, and decision-making processes.

These agreements are commonly used for offshore developments, deep-water exploration, and other capital-intensive projects where sharing investment and operational risk improves commercial feasibility.

Farm-in and Farm-out Agreements

Farm-in and farm-out agreements enable companies to transfer all or part of their working interest in an exploration or production asset to another organization.

Under a farm-in arrangement, the incoming company acquires an ownership interest by funding exploration, drilling, or development activities. Conversely, the existing operator reduces its financial exposure while retaining a portion of the asset.

These agreements provide flexibility for portfolio management, allowing companies to optimize capital allocation, diversify exploration risk, access specialized expertise, or accelerate project development without completely exiting valuable assets.

Gas Processing & Marketing Agreements

Gas processing and marketing agreements govern how natural gas is processed, treated, transported, priced, and ultimately sold to downstream customers.

These contracts establish responsibilities for processing raw gas, removing impurities, determining product specifications, allocating processing costs, and defining pricing mechanisms. They also specify custody transfer points, delivery obligations, and market access arrangements that influence how revenue is generated.

Because natural gas often passes through multiple processing and transportation stages before reaching end users, these agreements play a critical role in ensuring commercial certainty across the midstream value chain.

Drilling & Service Contracts

Drilling and service contracts define the commercial relationship between oil and gas operators and specialized contractors responsible for drilling wells or providing field services.

Depending on project requirements, these agreements may cover drilling operations, well completion, hydraulic fracturing, directional drilling, equipment rental, maintenance, inspection, or engineering services.

Commercial structures vary widely and may include day-rate pricing, lump-sum contracts, performance-based incentives, or integrated service agreements. Clearly defined performance metrics and service levels help ensure projects remain on schedule, within budget, and compliant with operational standards.

Transportation & Storage Agreements

Transportation and storage agreements govern access to pipelines, terminals, storage facilities, and other infrastructure required to move hydrocarbons from production sites to refineries, export terminals, or end markets.

These agreements define transportation capacity, scheduling priorities, tariff structures, storage rights, delivery obligations, quality specifications, and operational responsibilities between infrastructure operators and shippers.

Reliable transportation and storage contracts are essential for maintaining supply chain efficiency, preventing production bottlenecks, and ensuring hydrocarbons reach commercial markets safely and economically.