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

Zhuo Feng, Shui-Bo Zhang and Ying Gao

Energy Economics, 2014, vol. 42, issue C, 395-402

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.

Keywords: Upstream oil investment; Oil production; Oil contracts (search for similar items in EconPapers)
JEL-codes: C72 D82 D86 Q38 Q41 Q48 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:42:y:2014:i:c:p:395-402

DOI: 10.1016/j.eneco.2014.01.010

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