Fixed price contract versus incentive-based contract in the oil and gas industry

Sund, Knut Arne; Hausken, Kjell

doi:10.1504/ijgei.2012.046727

Cited by 5 publications

(4 citation statements)

References 31 publications

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“…The majority of OECD countries use RTAs, while non-OECD countries mainly resort to tailor-made PSAs (Johnston 2006). The SCA is strictly a management fee arrangement and represents less than 1% of the total number of agreements for oil and gas production (Sund and Hausken 2012).…”

Section: Government Entitlement Trendsmentioning

confidence: 99%

Natural Resource Wealth Optimization: A Review of Fiscal Regimes and Equitable Agreements for Petroleum and Mineral Extraction Projects

Weijermars

2015

Nat Resour Res

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This review highlights the challenges of fiscal system optimization considering both the host government and extraction company perspectives. Countries around the world face an arduous task in determining the optimal fiscal system to maximize the capture of economic rents of natural resource extraction activities. The extraction industry is equally challenged to meet global commodity demand because the capital investments required for developing new hydrocarbon fields and ore mines are on the rise, while tax takes on extraction activities tend to rise too in many frontier jurisdictions. Normal profit must remain for the extraction companies, and returns must be large enough to replace for resource depletion. Companies use the benefits of resources produced in one country to finance capital investments for future field development in another country. One viewpoint is that profits are expatriated to the detriment of the host country and to the benefit of another country or the world supply chain as a whole. Another viewpoint is that all resource holders benefit because a foreign entity always starts in a new resource holding nation by investing in the development of an oil field or solid mineral mine using the profits from previous projects in other countries. A key question is What is a fair taxation regime for natural resource extraction in a particular geological setting and a given geographical location, taking into account subsurface uncertainty about the quality and volume of the resource, infrastructure needs and proximity to the worldÕs major markets and trade centers? Tax distortion could go both ways: either incentivize, attract and stimulate or des-incentivize, repel and deter resource development. Additional factors to consider are external uncertainties such as political and fiscal stability, sovereign risk and even local weather conditions (mostly in offshore and Arctic petroleum operations). Governments must tax the upstream rents of petroleum and mineral resources, but not to the level that suppresses extraction activities. All stakeholders want at least an equitable share of the profits. Defining what is equitable is a matter of intensive negotiations, renegotiation of prior agreements and sometimes litigation and international arbitration. Several case studies, covering both petroleum and solid mineral extraction projects, are included to highlight the key points involved in fiscal policies designed to optimize the utility of geological resource endowments. For example, the offshore tax regime employed in the US pivots the trade-offs between fiscal incentives and long-term resource supply to ensure energy security. This review concludes with a call for further research.

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Section: Government Entitlement Trendsmentioning

confidence: 99%

Natural Resource Wealth Optimization: A Review of Fiscal Regimes and Equitable Agreements for Petroleum and Mineral Extraction Projects

Weijermars

2015

Nat Resour Res

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“…Safety incentives can be effectively used to improve people's safety awareness and prevent people from performing unsafe behaviors [34]. Safety incentives have been proven effective in many process management areas, such as oil mining [35,36], manufacturing [37,38], construction [39,40], transportation [41], food [42], and vaccines [43].…”

Section: Introductionmentioning

confidence: 99%

“…Therefore, safety indicators must be reflected in the design of incentive contracts. Sund and Hausken (2012) [36] compared a fixed price contract with an incentive-based contract in the oil and gas industry; they found both the operator and the service provider preferred the incentive-based contract. Differing from the above, this study incorporates the trade-off between productivity and safety into the incentive contracts used in coal mine production.…”

Section: Introductionmentioning

confidence: 99%

“…They found that high precision can act as a substitute for highly intensive contingent payments, as government regulation based on mandatory traceability with sanctions may not necessarily lead to safer food. Sund and Hausken (2012) [36] argued that uncertainty often exists in interorganizational relationships, and information was often asymmetric between the principal and agent. However, the authors did not explicitly model the incomplete information in oil and gas contracts.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Safety Improvement of Sustainable Coal Transportation in Mines: A Contract Design Perspective

Wan

Sun

2023

Sustainability

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Considering safety management systems are composed of a coal mine enterprise and a manager, incentive contracts for coal mine production are designed to improve the safety level of coal mine production. Managers must devote costly efforts in terms of both safety and production to increase the output of mines. Based on principal–agent theory, we designed an incentive contract considering moral hazard and a menu of contracts considering moral hazard and adverse selection. The results showed that when an enterprise cannot observe the manager’s efforts, the manager’s risk aversion reduces their production and safety efforts, and the enterprise needs to share its output risk with the manager. When the enterprise cannot observe the manager’s efforts and the cost type of the safety effort, a menu of contracts can be used to screen the manager’s cost type. However, high-cost contracts fail to motivate a high-cost manager and allow the high-cost manager to reduce safety and production efforts. A low-cost manager can obtain positive information rent from an enterprise without changing safety or production efforts. We provide some suggestions and references for the safety management of coal transportation in mines.

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Oil and gas service contracts around the world: A review

Ghandi

Lin

2014

Energy Strategy Reviews

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Fixed price contract versus incentive-based contract in the oil and gas industry

Cited by 5 publications

References 31 publications

Natural Resource Wealth Optimization: A Review of Fiscal Regimes and Equitable Agreements for Petroleum and Mineral Extraction Projects

Natural Resource Wealth Optimization: A Review of Fiscal Regimes and Equitable Agreements for Petroleum and Mineral Extraction Projects

Safety Improvement of Sustainable Coal Transportation in Mines: A Contract Design Perspective

Oil and gas service contracts around the world: A review

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