Risk Sharing in First, Second and Third Generation of Buyback Development Contracts

Risk sharing between international oil companies and hosting countries is one of the most important issues in oil contracts. This paper studies the risk sharing between National Iranian Oil Company (Government) and IOCs in three generations of buy back contracts. IOCs’ Risk in buyback contracts are cost risk, delay risk, failure to achievement to production profile and declining oil price. Government’s risks are no conservative production, declining oil production, cost risk and overestimated cost risk. This paper shows cost and failure to achievement to production profile risks for IOCs and no conservative production, declining oil production risks for government have more significant effects on projects profitability. In the first generation of buyback contract, there is not suitable mechanism to manage these risks. In the third generation of buy back contracts, main risks are significantly decreased and the expected risks of parties are declined. within the decreasing the risks of IOCs in third generation of buyback contracts, IOCs reward has been increased. It seems incompatible with risk and reward sharing in contracts.