The question of who captures the value generated by oil extraction in the Global South is not settled by the nationality of the producer. A barrel of crude extracted by a Nigerian state oil company and sold at the international benchmark price does not automatically deliver its full value to the Nigerian state, Nigerian citizens or the Nigerian communities from whose land and waters it was taken. Between the wellhead and the government treasury lies a chain of deductions, commissions, transfer prices, debt service payments, infrastructure cost recoveries and contractual adjustments that systematically reduces the share of the oil rent that remains in the producing country. Understanding this chain, who operates it, what legal and contractual instruments sustain it, and why it has proven so resistant to reform, is essential to understanding the political economy of oil in the Global South.

The starting point for this analysis is the production sharing agreement, the contractual framework through which most oil-producing countries in Africa, Asia and Latin America grant international oil companies access to their reserves. A production sharing agreement divides the oil produced from a given field between the state and the international oil company according to a formula that typically begins by deducting the company's operating costs from total production to give what is called profit oil, and then divides the profit oil between the state and the company in proportions that vary by contract, by price level and by production volume. The state's share of profit oil is typically supplemented by a royalty on gross production and by taxes on the company's profits.

The cost recovery mechanism in production sharing agreements is the primary vehicle through which the share of oil revenues accruing to producing states is reduced below what the nominal profit-sharing terms would suggest. Before profit oil is calculated, the international oil company is entitled to recover its costs from a specified share of total production, the cost oil. The definition of recoverable costs, the rate at which they can be recovered, and the accounting standards applied to the cost base are matters of contractual negotiation and, in the event of dispute, of arbitration under the terms of the agreement.

In practice, the management of costs under production sharing agreements has been a persistent source of concern in producing states. International oil companies have every incentive to maximise the costs they book against a particular field, since higher costs translate directly into more cost oil recovered before the state's share is calculated. The costs recoverable under most agreements include not only the direct operating and capital costs of the field but also a share of the company's corporate overhead, exploration costs across its broader portfolio, and financing costs related to the capital employed. These upstream cost allocations are based on methodologies developed by the company's own accountants and audited by its own auditors, and the capacity of most producing country governments to independently verify them is limited by the gap in technical and financial expertise between the state and the company.

Angola provides a well-documented example of the scale of this problem. Studies by the Natural Resource Governance Institute and other bodies have established that cost overruns on deepwater Angolan production have consistently exceeded the benchmarks established in the original production sharing agreements, with the cumulative effect of substantially reducing the Angolan state's share of production relative to what the contractual terms nominally provided. The Angolan national oil company, Sonangol, which serves as both the state's commercial oil company and its regulatory body for the upstream sector, has struggled to exercise effective oversight of its international partners' cost management partly because of capacity constraints and partly because of conflicts of interest inherent in its dual commercial and regulatory role.

The oil-backed loan, described in this edition's article on the trading houses of Geneva, represents a second major mechanism through which value is extracted from oil-producing states in the Global South. The structure is straightforward: a national oil company or its government guarantor receives a loan from a trading house or a bank, and repays that loan through the delivery of crude oil at a contractually agreed price over the repayment period. The lender receives a secured claim on future oil production, the interest rate implicit in the arrangement is typically higher than what the sovereign borrower could obtain in international capital markets, and the crude price terms embedded in the offtake agreement may be set at a discount to the benchmark that further reduces the effective return to the producing state.

Angola, Congo-Brazzaville, Chad, Equatorial Guinea and Ghana have all used oil-backed loan structures to raise capital against their future oil revenues. In Angola, oil-backed loans from Chinese state banks, facilitated by Chinese national oil companies and structured through a variety of contractual arrangements, have been estimated to have absorbed a significant fraction of the country's oil revenues over the past two decades in debt service payments. The precise figures are difficult to establish because the terms of many oil-backed loan agreements are not publicly disclosed, a lack of transparency that itself reflects the power asymmetry between the lender and the borrower.

The development economics literature on oil-backed loans is divided on their net welfare effects. Proponents argue that they provide capital to countries that might otherwise be unable to borrow at all, enabling infrastructure investment and public services that would not otherwise be funded. Critics argue that the terms systematically disadvantage borrowing states, that the capital raised is often deployed inefficiently or corruptly rather than productively, and that the debt service obligations created by these arrangements absorb future oil revenues that would otherwise be available for public investment. Both positions contain elements of truth, and the welfare consequences of any particular arrangement depend heavily on the terms of the specific contract and the quality of the investment decisions made with the borrowed capital.

The environmental costs of oil extraction in the Global South are a third major dimension of the who-profits-who-pays question, and one that is systematically underweighted in standard analyses of the economics of oil production. The extraction of crude oil involves risks of spills, well blowouts, pipeline leaks and gas flaring that impose costs on surrounding communities and ecosystems. These costs are external to the commercial transaction between the oil company and the state: they are not captured in the price of crude oil and they are not borne by the parties to the production sharing agreement unless specific legal requirements force them to be.

The Niger Delta provides the most extensively documented case of environmental cost externalisation in the global oil industry. Decades of oil production in the Delta, primarily by Shell through its Nigerian subsidiary Shell Petroleum Development Company, have resulted in thousands of oil spills, significant gas flaring, and contamination of soil and water resources across a region that supports a large population dependent on fishing, farming and the Delta ecosystem for their livelihoods. The health consequences for Delta communities have been severe, with elevated rates of respiratory disease, skin conditions and other ailments attributed to hydrocarbon contamination documented in multiple studies. The economic consequences for fishing and farming communities have been equally severe: contaminated water and degraded farmland have reduced the productive capacity of communities that have derived no benefit from the oil extracted beneath their feet and every cost from its extraction.

The legal battles over compensation for Niger Delta oil spills have extended over decades and across multiple jurisdictions, including courts in the Netherlands where Shell is headquartered. In a landmark ruling in 2021 a Dutch court held Shell's parent company liable for spills caused by its Nigerian subsidiary, establishing a principle of parental liability for environmental damage caused by subsidiaries in producing countries that has significant implications for the ability of affected communities to seek compensation in home-country courts. The ruling was limited in its scope but represented a meaningful advance in the ability of producing country communities to hold international oil companies accountable for the environmental costs their operations impose.

Beyond the production sharing agreement and the oil-backed loan, the financial architecture through which value is extracted from oil-producing states in the Global South includes a range of mechanisms that are individually technical but collectively consequential. Tax avoidance through transfer pricing, discussed in this edition's article on the integrated oil major, shifts profits from high-tax producing jurisdictions to low-tax trading hubs. The use of thin capitalisation, in which subsidiaries in producing countries are financed primarily through intercompany loans rather than equity, creates large interest deductions that reduce taxable profits in the country of production. The allocation of exploration costs across portfolio companies reduces the tax base in successful producing countries by charging against their profits the costs of unsuccessful exploration elsewhere.

The cumulative effect of these mechanisms has been estimated by researchers at the International Monetary Fund and by organisations including the Tax Justice Network to amount to billions of dollars of annual tax revenue foregone by oil-producing countries in the Global South relative to what they would collect if international oil company profits were taxed on an arm's length basis in the jurisdictions where production occurs. These estimates are contested and methodologically complex, but the direction of the effect is not seriously disputed: the financial sophistication of international oil companies and their advisers systematically reduces the share of oil revenues that remains in producing countries relative to what nominal tax rates would imply.

For the countries of the Global South that host international oil production, the combined effect of cost recovery manipulation, oil-backed loan terms, environmental cost externalisation and financial tax avoidance is a systematic reduction in the development dividend from their oil resources. They bear the environmental and social costs of extraction. They provide the geological endowment on which the entire value chain rests. And they receive, after the full chain of deductions has been applied, a share of the revenues that consistently falls short of what their ownership of the resource and their bearing of the associated costs would justify.

The international community has not been entirely passive in the face of this systematic extraction. The Extractive Industries Transparency Initiative, launched in 2002, has established a framework under which participating countries commit to publishing payments made by oil and mining companies to governments and the revenues received by governments from those companies, creating at least the basic transparency conditions for independent scrutiny of the fiscal relationship between extractive industries and producing states. The OECD's Base Erosion and Profit Shifting project has produced a framework for international corporate tax reform that, if fully implemented, would limit some of the transfer pricing and thin capitalisation strategies through which oil company profits are shifted from high-tax producing countries to low-tax jurisdictions.

These initiatives represent genuine progress but operate within limits set by the power dynamics of the international system. The Extractive Industries Transparency Initiative depends on voluntary participation and has limited enforcement mechanisms when disclosed figures do not match. The Base Erosion and Profit Shifting framework requires implementation through domestic legislation in each jurisdiction, and the largest producing countries in the Global South lack the technical capacity and sometimes the political will to implement it comprehensively. The fundamental power asymmetry between international oil companies and the producing state governments with which they negotiate remains unchanged by transparency initiatives whose primary effect is to illuminate rather than to correct the imbalance they reveal.

The most effective reforms have typically been those negotiated directly between producing states with strong bargaining positions and their oil company partners. Norway's success in capturing a large share of its petroleum rents was built on a combination of strong institutions, sophisticated technical capacity within the state oil company and regulatory bodies, and a political consensus that the oil wealth belonged to the Norwegian people rather than to the companies that extracted it. These conditions are not easily replicated in states where institutions are weaker, capacity is more limited and the political economy of oil revenues is more contested. But they demonstrate that the relationship between oil extraction and development is not predetermined: it is a political and institutional outcome that can, under the right conditions, be shaped in ways that serve the interests of producing communities rather than extracting value from them.