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On oil investment and production: A comparison of production sharing contracts and buyback contracts

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  • Feng, Zhuo
  • Zhang, Shui-Bo
  • Gao, Ying

Abstract

Production sharing contracts (PSCs) and buyback contracts are two important contract modes in the upstream oil industry. In this paper, we build a theoretical model to compare investment and production levels under these two contracts. Our model results show that PSCs lead to higher investment levels than buyback contracts. Moreover, investment level increases with international oil companies’ (IOCs') share under buyback contracts. The comparison of optimal oil production depends on IOCs' share under PSCs and the host government's marginal operating costs from oil production under buyback contracts. When IOCs' share of gross revenues or the host government's marginal operating costs are low, optimal oil production is higher under buyback contracts; otherwise, optimal oil production is higher under PSCs. Based on such a comparison, we investigate the host government's best decisions on revenue division under these two contract types. We demonstrate that optimal share ratios exist for the host government to obtain maximum oil revenues under both contract types. We also find that under both contracts the discount factor and oil price positively affect optimal investment and production levels, respectively. Our results can provide policy implications for the host government when selecting upstream oil contracts in international oil cooperation.

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  • Feng, Zhuo & Zhang, Shui-Bo & Gao, Ying, 2014. "On oil investment and production: A comparison of production sharing contracts and buyback contracts," Energy Economics, Elsevier, vol. 42(C), pages 395-402.
    • Handle: RePEc:eee:eneeco:v:42:y:2014:i:c:p:395-402
    DOI: 10.1016/j.eneco.2014.01.010
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    Keywords

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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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