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Risk and benefit sharing schemes in oil exploration and production

The volatile environment of oil exploration and production sets new challenges to market players prompting them to explore new business models. In this paper, we analyze a novel type of partnering in oil and gas operations, i.e. the risk and benefit sharing schemes, that enable a field operator to bring third parties into the field development process. We develop a valuation method to assess the feasibility of the risk and benefit sharing schemes based on the real options approach and identify the optimal contract policy from the perspective of both the oil company and the contractor. We analyze two application cases where an oil company collaborates with a drilling contractor and a FPSO leasing company to share risks and benefits resulting from the oil field development. We incorporate an “exit” clause in the contract as an instrument to provide flexibility for the parties to withdraw from the partnership as uncertainty unfolds. Our results show that the risk and benefit sharing schemes with embedded flexibility have a potential to become an alternative form of contracting in oil and gas industry.