Do Iran's buy-back service contracts lead to optimal production? The case of Soroosh and Nowrooz

We model the dynamically optimal oil production on Iran's offshore Soroosh and Nowrooz fields, which have been developed by Shell Exploration through a buy-back service contract. In particular, we examine the National Iranian Oil Company's (NIOC) actual and contractual oil production behavior and compare it to the production profile that would have been optimal under the conditions of the contract. We find that the contract's production profile is different from optimal production profile for most discount rates, and that the NIOC's actual behavior is inefficient its production rates have not maximized profits. Because the NIOC's objective is purported to be maximizing cumulative production instead of the present discounted value of the entire stream of profits, we also compare the NIOC's behavior to the production profile that would maximize cumulative production. We find that even though what the contract dictates comes close to maximizing cumulative production, the NIOC has not been achieving its own objective of maximizing cumulative production. (C) 2011 Elsevier Ltd. All rights reserved.