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Exploration Risk in Oil Production

Please read the class notes and the referenced article to help in answering the questions. Please use per reviewed articles (see attachments).

Think about who should assume the exploration risk in an oil production sharing agreement. In your discussion posting, be sure to address the following points:

How has this week's material affected your views on risk sharing between a foreign oil company and a host country?
If a host country has agreed to share some of the exploration risk, should the host country insist on the amount and/or type of G&G to be conducted? Why or why not?

Reference: Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. science, 185(4157), 1124-1131.

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My views on risk sharing between a foreign oil company and a host country the host country typically tries to maximize its revenues from its revenues, at the same time it offers sufficient incentives to the foreign oil company. Usually there is a production sharing agreement entered into between the host country and the foreign oil company. In most cases, the foreign oil company bears the full exploration costs, risk, and shares the revenue risk with the host country. This agreement is signed before exploration commences and the foreign oil company will expect rewards later in the life of the contract. When oil is produced, the physical production is divided into two where a part of the production is retained by the foreign oil company to recover its pre-production and production costs. The implication is that money invested by the foreign oil company can be recovered only if oil is produced. After the costs have been recovered, the oil production is shared between the host country and the foreign oil company in the predetermined ratio. In a normal agreement, the risk taking foreign oil company manages the project. Recently, some host countries also participate in the venture. This divides the risk between the foreign oil company and the host country in the exploration stage. The agreements also give the ownership of all plans and installations built by the foreign oil company to the host country. The ...

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This solution explains exploration risk in an oil production sharing agreement. The sources used are also included in the solution.

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