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The Distortionary Effect of Petroleum Production Sharing Contract: A Theoretical Assessment

In: Operations Research Proceedings 2015

Author

Listed:
  • Fazel M. Farimani

    (Center for Energy, Petroleum and Mineral Law and Policy, University of Dundee)

  • Xiaoyi Mu

    (Center for Energy, Petroleum and Mineral Law and Policy, University of Dundee)

  • Ali Taherifard

    (Imam Sadiq University)

Abstract

The distortionary effect of upstream petroleum taxation has been discussed extensively by economists. The literature however, has largly neglected the Production Sharing Contract (PSC) which is widely used by the internationl petroleum industry. We examine how a PSC can distort the optimal time path of production from an oil reservoir. To do that, we use optimal control theory and solve the problem with Hamiltonian function. We show that, regardless of the contract parameters, a PSC always distort the time path of production unless the oil price changes at the rate of interest rate.

Suggested Citation

  • Fazel M. Farimani & Xiaoyi Mu & Ali Taherifard, 2017. "The Distortionary Effect of Petroleum Production Sharing Contract: A Theoretical Assessment," Operations Research Proceedings, in: Karl Franz Dörner & Ivana Ljubic & Georg Pflug & Gernot Tragler (ed.), Operations Research Proceedings 2015, pages 555-561, Springer.
    • Handle: RePEc:spr:oprchp:978-3-319-42902-1_75
    DOI: 10.1007/978-3-319-42902-1_75
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