OT26690 | Capital Allowances: Production Sharing Contracts - Cost Recovery and Profit Oil

If oil is found, and production commences, part of the oil stream is made available to the contractor to reimburse the costs, both capital and operating, of exploration and production. This is commonly referred to as cost recovery oil (CRO). The PSC will dictate how much of production is Cost Recovery Oil, setting limits to spread the reimbursement over time. The CRO may, or may not, be taxed by the host government. The rest of the oil, often referred to as profit oil, is apportioned between the contractor and the host government according to the terms of the PSC. Profit oil is usually taxed by the host government. The value of the oil streams for the purpose of working out cost recovery amounts is usually fixed by reference to an open market price indicator. Revenue from both types of oil streams is trading income to be brought into account for UK tax purposes.