Yeah, I’m trying to figure out exactly what the nature of these contracts are. On one hand, the fact that they’re getting a flat fee rather than any direct exploitation or profit-sharing rights suggests that it’s an oil services contract, which would be more in line with Halliburton’s business than ExxonMobil’s, and Halliburton doesn’t appear to have been involved in the bidding. On the other hand, the fact that the fee is per barrel suggests that the contractor is actually operating the oil field, which seems like much more than simple “development” as the article characterized the contracts.
I think I have some more brushing up to do on the oil business.
Hey, rrrod! You’re an oil man. What do you make of this?
What I have seen is this:
An oil company bids, competitively, for an oil concession that gives them the right to develop a field and operate it over, say, a twenty year period.
The host government gets some payment up front, the oil company puts up the whole investment cost. The oil company is allowed to recoup their costs, and then receive x dollars per barrel. The host government in turn gets y dollars per barrel, as agreed in the competitive bid. In some cases it may be a percentage split rather than a fixed price per barrel. But the winner of the concession is the company that is willing to give the largest fee to the host government and the smallest fee for itself.
In tough cases, where the development has big challenges, obviously the numbers will tip toward the oil company because the risk is greater. They will have to invent some new technology in order to make it pay, or simply the risk of failure is greater, or the risk of political trouble is greater. So they’ll need a bigger cut in order to take the risk.
They always run a risk that, once their field has been developed, the new technology invented, millions in infrastructure built and in operation, the host government may just come back and unilaterally change the contract. It happens, and there is little the oil companies can do about it. Its a risky business. Their only protection is the fact that the host government will need them tomorrow and so will hopefully be fair today. But unilateral rewriting of the contracts happens all the time. So its not a game for the weak-kneed.