The focus of the report is on the sharing of risks and benefits between the host governments and the contracting investors. The report comprises two distinct parts: theoretical and empirical.

In the first part, Chapter 2 describes the legal and historical background to PSAs.  Chapter 3  examines the basic financial components of PSAs and provides some simulations to illustrate how the performance of an investment can vary with both oil price and contractual terms.  Chapter 4 analyses the incentives for the respective parties from the perspective of principal-agent models.  These three chapters read rather like an introductory text book on PSAs, and as such are very useful both for the beginner and for the practitioner who lacks a formal grounding.  The most original is Chapter 4 which explores the distribution of risk and reward between landlords and tenants from different perspectives, and concludes that the PSC is the petroleum industry's equivalent of sharecropping.  However, though they may be theoretically sound, the arguments sometimes lack consistency with the real world.  For example, the assertion that larger multinational oil companies should be expected to be less risk averse than smaller companies may be reasonable an assertion of expectation, but in practice it is the independents which frequently take the most outrageous risks.

The second part comprises two empirical studies.  The first, Chapter 5, provides an aggregate view of some 268 PSAs signed by 74 countries during the period 1966 to 1988.  The second, Chapter 6, examines the development of PSAs in  Indonesia, Angola, Azerbaijan, India, Iran and Peru.

Chapter 5 draws on published accounts of legal and fiscal regimes for petroleum, with a great reliance on the compilations of Gordon Barrows and Pedro van Meurs.  The report shows in graphical form how key fiscal parameters have varied over the thirty years under consideration.  Some of the best-fit trends are a little unconvincing, but the evidence shows clearly that the last fifteen years have seen a significant increase in the range of terms offered by PSAs.  The author has carried out correlations between different fiscal terms on a regional basis.  From these it appears that governments in different parts of the world behave in different ways from certain perspectives.  For example in North Africa, and Latin America a strong negative correlation exists between the level of royalty and that of profit oil.  In Asia and Central and Southern Africa, such a correlation is absent.  But the general message is that PSAs are highly variable, and that there are no regional models.  A high degree of diversity exists globally and regionally.

The case studies in Chapter 6 provide historical context to the development of PSAs in the selected countries as well as qualitative analysis of certain topical issues such as the buy-back contracts in Iran.  The account does not provide detailed quantitative analysis.

The concluding Chapter draws together some of the main themes of the report and provides a useful table summarising how PSAs respond to the risks faced by investors and host governments - a useful briefing tool for government officials and company managers.  Indeed the main conclusion is that the PSA is an efficient way to share risks, and that this explains its survival despite its inefficiency as a form of contract from the point of view of economic theory.

This report is a curious mixture of text book and research paper.  The earlier chapters provide a very useful review of important issues which should be of value to analysts, managers or officials seeking to increase their understanding of the theoretical aspects of PSAs.  The empirical chapters are original, but probably do not demonstrate as much as the author might have hoped when embarking on this project.  The real value of the report is that it is one of the few recent accounts of PSAs which are neither purely legal nor purely financial, and which place PSAs in a wider economic context.  A significant weakness is that the author appears to be unfamiliar with the "real world" of petroleum exploration.  However this report provides a good starting point for further research in order to develop some important ideas.

by Philip Andrews-Speed