Inter-bank rates in production sharing agreements

For the purpose of indexing investors' costs in production sharing agreements, interbank rates such as LIBOR, AMERIBOR, and EULIBOR are agreed to be used.

However, the inclusion of any interbank rate in the content of a production sharing agreement creates institutional dissonance, since the subject of a production sharing agreement is hydrocarbon production, not a cash transaction and corporatization.

In addition, the extracted hydrocarbon raw materials are not yet a full-fledged asset, since they are not recorded on the balance sheet and are not profited by the investor.

The distribution of hydrocarbon products has its point of no apply, namely the steps of the state to recognize it before distribution.

Until the hydrocarbon feedstock is distributed, the "natural resource in the form of a mineral" is considered a rock of biological material for geological study.

Let's analyze the principle of applying inter-bank rates.

Inter-bank rates were created when as a benchmark rate of interest for transactions denominated in values.

They were devised by the Banking Federations, a trade association representing national banking associations in countries of the Regional Unions and the Free Trade Associations, representing the interests of participants in global financial markets.

Currently, Inter-bank offered rates administering by trade associations and banks.

If a bank’s treasury wanted to borrow money in the inter-bank market just before 11 am one day and was committed to borrowing a particular amount in a particular currency and tenor, and if the bank received several offers from other banks of equal credit standing to lend that sum, it would be rational for the bank to accept the cheapest offer. 

A benchmark rate is a rate, intended to reflect the current cost of borrowing in a market, which can be used as a reference point for setting other variable rates of interest. 

For example, the rate at which interest is payable on a loan may be fixed by reference to a benchmark rate, such as a rate fixed at 2% above LIBOR for six-month deposits.

As well as being widely used in commercial and consumer lending, interbank's rates were commonly used as a benchmark rate in financial derivatives, such as forward contracts and interest rate swaps. 

A financial derivative is an instrument which derives its value from an underlying financial risk – such as movements in an interest rate or the exchange rate for a currency or a share price or the price of a commodity. It is an instrument which can itself be traded.

An interest rate swap is a contract under which the parties agree to exchange interest payments on a notional principal amount on specified dates. (The principal amount is notional because it is never itself payable by one party to the other.) 

In the simplest type of interest rate swap, sometimes called a “plain vanilla” swap, Party A agrees to make periodic payments to Party B calculated at a fixed rate of interest and Party B agrees to make payments to Party A on the same dates calculated at a floating rate of interest. 

On each settlement date the payments due from each party to the other are netted off, and the difference is payable. 

Which party pays money to the other depends on whether, on the settlement date, the floating rate of interest is higher or lower than the fixed rate of interest. 

Movements in interest rates will also affect the price at which the swap can itself be traded. In broad terms the price of the swap will depend on the length of the contract and the present value of the future fixed and floating rate payment.

In many such interest rate swaps and other derivatives linked to interest rates which were traded in global financial markets at the relevant time (2006-2010), the floating rate of interest was defined by reference to LIBOR.

So, production sharing agreements are not, by their nature, similar to swap contracts, and therefore the monetary cost measurement tool of the interbank rate cannot be applied.

To avoid speculation, production sharing agreements should agree on a fixed indexation coefficient, rather than a floating bank rate from the financial market.