Costs Not Recoverable under the Sri Lankan Model Petroleum Resources Agreement

 Sri Lanka's Model Petroleum Resources Agreement (2026) (SLMPRA) is one of the recent Production Sharing Contracts (PSC) published and available. Link to the SLMPRA is provided at the end of this post. For a PSC, the length of the SLMPRA is only 95 pages. Cost recovery is one of the important provisions of a PSC. Costs allowed to be recovered and costs not allowed to be recovered form some of the crucial provisions of a PSC. This post discusses the cost items which are not recoverable.

Article 21 of the SLMPRA deals with Recovery of Cost Petroleum. Article 1 defines "Agreement Costs" as "Exploration Costs, Development Costs and Production Costs as provided for in the PRA and which are deemed to be recoverable costs in terms of Article 21 of the PRA;". Article 21.2 classifies these costs into "Production Costs", "Exploration Costs" and "Development Costs" incurred by the Contractor.

Article 21.12 pertains to costs not recoverable. It contains a whopping list of 31 items! If these costs can be classified into distinct buckets, such a classification would be as follows:

Category	Description	Clause / Item Numbers
Before SLMPRA or outside Area/ Outside Sri Lanka	Costs before Effective Date, costs related to administrative overhead outside of Sri Lanka for specific items; Income/ other tax incurred outside Sri Lanka; Costs outside measurement point	1, 4, 9, 10, 19
Specific Payments/ Costs/ obligations under MPRA	Expenditure incurred in obtaining, furnishing and maintaining the guarantees, expenses of the members of the Advisory Committees and other Committee, Environment studies protection, Abandonment fund, Training costs. Production bonus, Signature bonus, royalty,	17, 25 to 31
Excess costs/ gold plating/ negligence/ misconduct/	costs of goods and services in excess of the international market price for goods or services; charges for goods and services not in accordance with the relevant agreement with sub-contractor or supplier; Charges for goods in excess of the amount allowed by Article 21.12; Costs not reasonably required for petroleum operations; costs of materials and services in excess of the values established under the principles in Article 21.12; costs and expenditure as result of wilful misconduct or negligence of Contractor;	5, 6, 7, 8, 20, 24
Unsupported/ Unapproved Costs	costs for which original records do not exist or are not correct in any material respect; any costs not included in approved work program and budget, unless resulting from an emergency; Emergency expenditure incurred but not reported within time	3, 14, 16,
Fines/ penalties	fines and penalties imposed by any Authority	12
Non-fulfilment of contractual obligations with third parties	amounts paid with respect to non-fulfilment of a contractual obligation to a third party; Indemnities spent on Non-fulfilment of contractual obligations with third parties	17, 22
Unrelated to petroleum operations	Expenditures for securing funds for petroleum operations; donations, contributions, or public expenditure; costs involved in creation and management of any partnership/ joint venture arrangement, or costs of acquisition of an interest under the Agreement	2, 13,21
Dispute resolution	Costs of expert determination of arbitration; attorney’s fee and other costs related thereto.	11, 18
Others	costs incurred which are covered by insurance for Included Risks, are a result of failure to insure where insurance is required pursuant to the Contract, etc.	23

The items not cost recoverable have been classified into nine distinct buckets. This PSC has one of the longest list of items that are not cost recoverable. Like in any other PSC, there are bound to be disputes on individual items in this long list. 

It would be interesting to see if the recent Model PSCs disclose such a trend, given their experience and experience of other countries in dealing with cost recovery related issues. 

Sri Lanka MPRA (2026) can be downloaded from here.