Sustainable Transportation Energy Pathways (STEPS)
Ghandi, Abbas and C.-Y. Cynthia Lin Lawell (2011) An Analysis of Risk and Rate of Return to International Oil Companies from Iran's Buy-Back Service Contracts. Institute of Transportation Studies, University of California, Davis, Working Paper UCD-ITS-WP-11-01
We model Shell Exploration's contractual and actual cash flow in its Soroosh and Nowrooz buyback service contract in Iran. Based on our models of cash flow, we also analyze the buy-back specific contributing risk factors that lead to a reduction in the rate of return (ROR) for the international oil company (IOC). Our models of actual and contractual cash flows reveal that Shell Exploration’s actual rate of return was much lower than the contractual level. Furthermore, we find that all the risk factors are capable of reducing the IOC’s rate of return. However, among them, we find that capital costs have the largest effect on ROR. Moreover, our model of risksharing cash flow suggests that there is a potential for modifying the contracts to better share the risk. By sharing the risk, the IOC could face an actual ROR closer to the contractual ROR even if the contract faces cost overrun or delay, and yet still keep the actual ROR from exceeding the maximum contractual ROR that the National Iranian Oil Company is willing to give.
Keywords: rate of return, risk analysis, Iran’s buy-back service contract