Production-sharing contracts and decision-making in oil production

Abstract

In Indonesia, a foreign oil-producing firm must follow a production-sharing contract with the government. The purpose of this paper is to incorporate sharing contract arrangements into a decision-making model of oil production in Indonesia. The model is constructed to determine the expected monetary value of the project. We then evaluate the possible values of the parameters in the model. Three different cases are set up. The first two are either optimistic or pessimistic about the profitability of the project. In the third case, we specify a probability distribution for some of the crucial parameters in the model. Lastly, we demonstrate that the complex production model can be implemented easily on an electronic spreadsheet software program. We also calculate Indonesia's share of economic rent from petroleum production. Some concluding remarks are given at the end of the paper.