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On the rate of return and risk factors to international oil companies in Iran's buy-back service contracts

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  • Ghandi, Abbas
  • Lin Lawell, C.-Y. Cynthia

Abstract

We analyze the rate of return (ROR) and risk factors faced by Shell Exploration, an international oil company (IOC), in its Soroosh and Nowrooz buy-back service contract in Iran. In particular, based on our models of cash flow, we analyze the buy-back contract specific risk factors that can contribute to a reduction in the rate of return for the international oil company. Our cash flow models resemble the cash flow of buy-back service contracts before the Iranian government changed the way it determined the capital cost ceiling and pre-defined the oil price in these contracts in 2008–2009. Our actual and contractual cash flow models reveal that Shell Exploration's actual ROR was much lower than the contractual level. Furthermore, we find that among the risk factors that we considered, a capital cost overrun has the greatest negative effect on the IOC's ROR. Moreover, we show that there is a potential for modifying the contracts in order for the IOC to face an actual ROR closer to the contractual ROR even if the contract faces cost overrun or delay, without exceeding the maximum contractual ROR that the National Iranian Oil Company is willing to give.

Suggested Citation

  • Ghandi, Abbas & Lin Lawell, C.-Y. Cynthia, 2017. "On the rate of return and risk factors to international oil companies in Iran's buy-back service contracts," Energy Policy, Elsevier, vol. 103(C), pages 16-29.
    • Handle: RePEc:eee:enepol:v:103:y:2017:i:c:p:16-29
    DOI: 10.1016/j.enpol.2017.01.003
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    References listed on IDEAS

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    1. Weiyu Gao & Peter Hartley & Robin Sickles, 2009. "Optimal dynamic production from a large oil field in Saudi Arabia," Empirical Economics, Springer, vol. 37(1), pages 153-184, September.
    2. van Groenendaal, Willem J.H. & Mazraati, Mohammad, 2006. "A critical review of Iran's buyback contracts," Energy Policy, Elsevier, vol. 34(18), pages 3709-3718, December.
    3. Ghandi, Abbas & Lin, C.-Y. Cynthia, 2012. "Do Iran’s buy-back service contracts lead to optimal production? The case of Soroosh and Nowrooz," Energy Policy, Elsevier, vol. 42(C), pages 181-190.
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    Cited by:

    1. Dudlák, Tamás, 2018. "After the sanctions: Policy challenges in transition to a new political economy of the Iranian oil and gas sectors," Energy Policy, Elsevier, vol. 121(C), pages 464-475.

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    More about this item

    Keywords

    Rate of return; Risk factors; Iran's buy-back service contract;
    All these keywords.

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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