On oil investment and production: A comparison of production sharing contracts and buyback contracts
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.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kamran Azadi, A. & Yarmohammad, Mohammad H., 2011. "Analysis of Iran's crude oil export future capacity," Energy Policy, Elsevier, vol. 39(6), pages 3316-3326, June.
- Eva I. Hoppe & David J. Kusterer & Patrick W. Schmitz, 2011.
"Public-private partnerships versus traditional procurement: An experimental investigation,"
Cologne Graduate School Working Paper Series
02-02, Cologne Graduate School in Management, Economics and Social Sciences.
- Hoppe, Eva I. & Kusterer, David J. & Schmitz, Patrick W., 2013. "Public–private partnerships versus traditional procurement: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 145-166.
- Hoppe, Eva I & Kusterer, David J & Schmitz, Patrick W, 2010. "Public-private partnerships versus traditional procurement: An experimental investigation," CEPR Discussion Papers 8167, C.E.P.R. Discussion Papers.
- Hamdi, Helmi & Sbia, Rashid, 2013.
"Dynamic relationships between oil revenues, government spending and economic growth in an oil-dependent economy,"
Elsevier, vol. 35(C), pages 118-125.
- Sbia, Rashid & Hamdi, Helmi, 2013. "Dynamic relationships between oil revenues, government spending and economic growth in an oil-dependent economy," MPRA Paper 64150, University Library of Munich, Germany, revised 2013.
- Toft, Peter & Duero, Arash, 2011. "Reliable in the long run? Petroleum policy and long-term oil supplier reliability," Energy Policy, Elsevier, vol. 39(10), pages 6583-6594, October.
- David Martimort & Jérôme Pouyet, 2008.
"To build or not to build: Normative and positive theories of public-private partnerships,"
- Martimort, David & Pouyet, Jerome, 2008. "To build or not to build: Normative and positive theories of public-private partnerships," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 393-411, March.
- Abdulaziz Al-Attar & Osamah Alomair, 2005. "Evaluation of upstream petroleum agreements and exploration and production costs," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 29(4), pages 243-266, December.
- 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.
- Oliver Hart, 2002.
"Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships,"
The Centre for Market and Public Organisation
02/061, Department of Economics, University of Bristol, UK.
- Oliver Hart, 2003. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships," Economic Journal, Royal Economic Society, vol. 113(486), pages C69-C76, March.
- Horn, Manfred, 2004. "OPEC's optimal crude oil price," Energy Policy, Elsevier, vol. 32(2), pages 269-280, January.
- Chakravorty, Ujjayant & Roumasset, James & Tse, Kinping, 1997. "Endogenous Substitution among Energy Resources and Global Warming," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1201-34, December.
- Kirsten Bindemann, 2000. "The Response of Oil Contracts to Extreme Price Movements," Economics Series Working Papers 29, University of Oxford, Department of Economics.
- Sari, Ramazan & Soytas, Ugur, 2009. "Are global warming and economic growth compatible? Evidence from five OPEC countries?," Applied Energy, Elsevier, vol. 86(10), pages 1887-1893, October.
- Qiu, Larry D. & Wang, Susheng, 2011. "BOT projects: Incentives and efficiency," Journal of Development Economics, Elsevier, vol. 94(1), pages 127-138, January.
- Ali Taheri Fard, 2011. "Evaluation of influential factors on market values of five major international oil companies, using the method of panel data with two‐way error components and its application in oil and gas industries," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 35(3), pages 220-226, 09.
- Blake, Andon J. & Roberts, Mark C., 2006. "Comparing petroleum fiscal regimes under oil price uncertainty," Resources Policy, Elsevier, vol. 31(2), pages 95-105, June.
- Bindemann, K., 2000. "The Response of Oil Contracts to Extreme Price Movoments," Economics Series Working Papers 9929, University of Oxford, Department of Economics.
- Zhao, Xu & Luo, Dongkun & Xia, Liangyu, 2012. "Modelling optimal production rate with contract effects for international oil development projects," Energy, Elsevier, vol. 45(1), pages 662-668.
- Farzanegan, Mohammad Reza, 2011. "Oil revenue shocks and government spending behavior in Iran," Energy Economics, Elsevier, vol. 33(6), pages 1055-1069.
When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:42:y:2014:i:c:p:395-402. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If references are entirely missing, you can add them using this form.