Suggested Citation:
Ghandi, Abbas and C.-Y. Cynthia Lin Lawell (2012) Do Iran's Buy-Back Service Contracts Lead to Optimal Production? The Case of Soroosh and Nowrooz. Energy Policy 42, 181 - 190

We model the dynamically optimal oil production on Iran’s offshore Soroosh and Nowrooz ï¬elds, 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 proï¬le that would have been optimal under the conditions of the contract. We  ï¬nd that the contract’s production proï¬le is  different from optimal production proï¬le for most discount rates, and that the NIOC’s actual behavior is inefï¬cient—its production  rates have not maximized proï¬ts. Because the NIOC’s objective is purported to be maximizing cumulative production instead of the present discounted value of the entire stream of proï¬ts, we also compare the NIOC’s behavior to the production proï¬le that would maximize cumulative production. We ï¬nd 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.

Keywords: dynamic optimal oil production, buy-back service contract, National Iranian Oil Company production, behavior