Petroleum Profitability: Comparison of the financial structure of oil con-tracts and determination of the appropriate contract

Abooshahab, Laleh; Hamidian, Mohsen; Jafari, S. Mahboubeh; Emamverdi, Ghodratollah

doi:10.22050/pbr.2024.459019.1335

Petroleum Profitability: Comparison of the financial structure of oil con-tracts and determination of the appropriate contract "IPC, PSC, BUYBACK"

Document Type : Original Article

Authors

Laleh Abooshahab ¹

Mohsen Hamidian ²

S. Mahboubeh Jafari ¹

Ghodratollah Emamverdi ³

¹ Department of Management and Accounting, South Tehran Branch, Islamic Azad University, Tehran, Iran

² Department of Economics, Tehran Central Branch, Islamic Azad University, Tehran, Iran

³ Assistant Professor., Department of Theoretical Economics, Tehran Central Branch, Islamic Azad University, Tehran, Iran

https://doi.org/10.22050/pbr.2024.459019.1335

Abstract

The choice of financial regime in oil-rich countries depends on proven reserves, exploration and production costs, geological characteristics, political risks, and oil market conditions. In this article, contractual components of three contracts IPC, BUYBACK, and PSC are introduced using Visual Basic programming language, and a model structure for a 42-season period scenar-io with oil prices is created. Also, modeling based on the parameters of the Shadegan oil field is another innovation of this work. The aim of this research is to investigate the effective indica-tors in the oil and gas industry contracts based on oil price scenarios. The results of this study show that many of the constraints of the reservoir owner country have been modified in the direction of protecting oil fields and effectively controlling contractor's fees in modified mutual agreement and production sharing contracts, and the financial system of the new oil contracts is more efficient in case of an oil price increase and in the final years of production compared to production sharing and buyback contracts. In this study, comparing indicators such as internal rate of return, payback period, profitability index, and the share of both parties in the contract based on real and simulated data showed that entering into new oil contracts in Iran, especially IPC in the Shadegan oil field, can protect the oil field, prevent uncontrolled oil extraction, and control contractor's revenues, leading to lower costs and higher revenues compared to buyback and production sharing contracts for the host country (Iran).

Highlights

The effects of fiscal regimes on investment choices in the oil and gas sector were analyzed by focusing on
comparing mutual buyback, Iran petroleum contract (IPC), and production sharing contract (PSC) in the
Shadegan field.
• Mutual buyback arrangements responded minimally to oil price changes due to their inherent fixed costs and
preset expenses before production.
• In scenarios of climbing oil prices, the profitability for contractors under the production sharing contract
notably increased.
• Superior returns were noted under the Iran petroleum contract, with every dollar invested yielding $1.3,
alongside the most rapid investment recovery compared to other contracts.
• The study suggests that newer contract models like the IPC should be more financially effective and
responsive to market variations, providing stakeholders with critical insights for selecting advantageous

Keywords

Fiscal Regime

Modern Petroleum Contract

Production Sharing Contract

Buyback Contract

Subjects

Oil and Gas Economics and Management

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