Risk Sharing in Exploration and Production Contracts

Abstract

Abstract The increasing number of countries providing exploration opportunities are having to compete for oil company exploration budgets which are inextricably linked to oil prices. In today's climate of sub-$15 oil this competition is fierce. Companies carefully evaluate the array of available opportunities and select those which provide the best balance between risk and reward. Naturally, many of the inherent risks in E&P activities (such as the geological prospectivity) are very different from country to country and cannot be influenced by the host government. There are a number of mechanisms, however, which can be employed by governments in their contract and fiscal terms which can significantly affect the perceived risk/reward balance of the country. This paper considers various contract and fiscal terms employed across the world and considers what impact these have on the investor's risk/reward balance. Simple examples are employed throughout to illustrate the effect that altering different terms can have on the balance-showing that often the strongest impact can be made by small concessions from the government.