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Do Iran’s buy-back service contracts lead to optimal production? The case of Soroosh and Nowrooz

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  • Ghandi, Abbas
  • Lin, C.-Y. Cynthia

Abstract

We model the dynamically optimal oil production on Iran’s offshore Soroosh and Nowrooz fields, which have been developed by Shell Exploration through a buy-back service contract. In particular, we examine the National Iranian Oil Company’s (NIOC) actual and contractual oil production behavior and compare it to the production profile that would have been optimal under the conditions of the contract. We find that the contract’s production profile is different from optimal production profile for most discount rates, and that the NIOC’s actual behavior is inefficient—its production rates have not maximized profits. Because the NIOC’s objective is purported to be maximizing cumulative production instead of the present discounted value of the entire stream of profits, we also compare the NIOC’s behavior to the production profile that would maximize cumulative production. We find that even though what the contract dictates comes close to maximizing cumulative production, the NIOC has not been achieving its own objective of maximizing cumulative production.

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  • 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.
    • Handle: RePEc:eee:enepol:v:42:y:2012:i:c:p:181-190
    DOI: 10.1016/j.enpol.2011.11.070
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    Cited by:

    1. Roohollah Kohan Hoosh Nejad & Davood Manzoor & Masoud Amani, 2018. "Economic Evaluation of Fiscal Regime of Buy-Back Contracts in Comparison with Production Sharing Contracts (Case Study: Azadegan Oil Field)," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 22(2), pages 579-598, Spring.
    2. Ghandi, Abbas & Lin Lawell, C.-Y. Cynthia, 2017. "On the rate of return and risk factors to international oil companies in Iran's buy-back service contracts," Energy Policy, Elsevier, vol. 103(C), pages 16-29.
    3. Simone Tagliapietra,, 2014. "Iran after the (Potential) Nuclear Deal: What’s Next for the Country’s Natural Gas Market?," Working Papers 2014.31, Fondazione Eni Enrico Mattei.
    4. 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.
    5. 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.
    6. Hendalianpour, Ayad & Liu, Peide & Amirghodsi, Sirous & Hamzehlou, Mohammad, 2022. "Designing a System Dynamics model to simulate criteria affecting oil and gas development contracts," Resources Policy, Elsevier, vol. 78(C).
    7. Kheiravar, Khaled H, 2019. "Economic and Econometric Analyses of the World Petroleum Industry, Energy Subsidies, and Air Pollution," Institute of Transportation Studies, Working Paper Series qt3gj151w9, Institute of Transportation Studies, UC Davis.

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