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Optimal concession contracts for oil exploitation

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  • Cerqueti, Roy
  • Ventura, Marco

Abstract

This paper studies the relationship between a government and private companies for the exploitation of an oilfield by means of concession-like contracts, i.e. concessions and Production Sharing Agreements. At this aim, we develop and solve a dynamic stochastic optimization problem in a real option framework. The model takes into account crucial as well as actual features of the real world, such as: the twofold goal of governments who must mediate between social interests and revenue maximization from concessions; the incentive for the private party to ”over exploit” natural resources and uncertainty over future payoffs. The results obtained can help policy makers in pursuing the delicate task of setting the ”right” terms of concession-like contracts, meaning that policy makers can have at least a benchmark to start interacting with private parties. This phase is particularly difficult for a number of reasons, such as the need to trade contrasting interests off, high risk of corruption and the fact that negotiations are made difficult by the high level of uncertainty due to incomplete or even faulty information.

Suggested Citation

  • Cerqueti, Roy & Ventura, Marco, 2020. "Optimal concession contracts for oil exploitation," Energy Policy, Elsevier, vol. 147(C).
    • Handle: RePEc:eee:enepol:v:147:y:2020:i:c:s0301421520306133
    DOI: 10.1016/j.enpol.2020.111900
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    3. Fedorov, Semyon & Lavrutich, Maria & Hagspiel, Verena & Lerdahl, Thomas, 2022. "Risk and benefit sharing schemes in oil exploration and production," Energy Economics, Elsevier, vol. 116(C).

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