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Lecture 27

ECON366 Lecture 27: Legal Arrangements

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University of Alberta
Dana Andersen

ECON 366 Lecture 27 Legal Arrangements Legal arrangement for exploration Lease: grants exclusive rights to the lessee to explore, develop, and produce oil and gas resources: 1) duration of lease, 2) bonus per acre (fixed payment to owner), and royalty rate (variable payment to owner based on revenue) Concession: similar to lease, but typically for longer duration and for larger area of land. Typically, confers greater autonomy and control to lessee. Production sharing: risk and rewards are shared between the host and the contracted company. There are a wide range of contracts: 1. Production sharing arrangement 2. Service contract 3. Joint ventures Analysis of legal arrangements: bonus payments Consider case of success uncertainty: B= bonus payment P+B C = E Ex. post payoff: 1. Firm: success EMV = C B +PQ failure EMV = C B 2. Government: success and failureEMV = B Analysis of legal arrangements: loyalty rate B = royalty rate EMV = C + (1 R) PQ 1. Firm: success = C + (1 R) PQ Failure=C 2. Government: success = RPQ Failure=0 Resource classification 1. Economically recoverable identified resource 2. Economically recovered undiscovered resources 3. Subeconomic but identified resources 4. Subeconomic and undiscovered resources Considerations: 1. Resource classification depends on many variables, including resource prices, extraction technologies and costs, tolerance for risk, transportation infrastructure,
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