Managing Contractual Risks of Capital Applicant in Oil and Gas Upstream Development Contracts Within the Framework of Moral Hazard Model

Document Type : Research Article

Authors

1 PhD in International Oil and Gas Contracts Management, Department of Private and Economic Law, Faculty of Law and Political Science, Allameh Tabataba’i University, Tehran, Iran

2 Assistant Professor, Department of Private and Economic Law, Faculty of Law and Political Science, Allameh Tabataba’i University, Tehran, Iran

3 Professor, Department of Private and Economic Law, Faculty of Law and Political Science, Allameh Tabataba’i University, Tehran, Iran

Abstract

Information asymmetry between the National Iranian Oil Company and International Oil Companies, may causes adverse selection (while contractor selection) and moral hazard (while execution of the contract) in the development contracts of oil and gas fields. Identifying the roots of moral hazards is the prelude to finding solutions to deal with distortion in contracts. in order to prevent inconsistencies in contracts, efforts should be made to align the interests and incentives of the parties to the contract, as well as reducing information asymmetries through monitoring and performance appraisal tools. In this study, using descriptive-analytical method, the findings of economics in the field of contract theory have been used to formulate a more complete contract in order to manage the moral hazard caused by information asymmetry in financing contracts for the development of oil and gas fields. To this end, the application of legal conditions capacity to reduce the client risks relevant to moral hazards caused by information asymmetry has been examined. The most important areas of information asymmetry in the contracts are technical features including basic and detail design of the project, determining the capital cost ceiling and financial resources of the project, the program of financing required funds and the program of repayment of financial resources. In many studies on the subject of comparing different contract forms in aspect of the revenue of National Iranian Oil Company, only the interests of the National Oil Company have been considered in the calculations, which has three objections. First, not paying attention to the interests of the other party in the contracts, because it would be too likely that the oil company will not accept such a contract. The second problem is that even assuming the acceptance of the National Oil Company desired contract by International Oil Company, the existence of information asymmetry between the parties will create the opportunity for the oil company to achieve the expected results of the contract. The third one is that the type of contract itself does not determine the amount of interest earned by the parties to the contract, but the terms




Applied Economics Studies, Iran (AESI)                                                                  146
 
Volume 10, Number 40, Winter 2022                                    








Applied Economics Studies, Iran (AESI)                                                             146
 
Volume 10, Number 40, Winter 2022                                    




of the contract determine the share of the parties to the field revenue. In other words, using the terms of the contract, the same financial results can be achieved from all types of contracts. Considering the above considerations, researchers should focus on the effective use of contract terms in order to manage the risks of information asymmetry in contracts and provide more benefits to the National Iranian Oil Company. In this situation, regardless of which model is chosen for the contract, the inclusion of the desired legal conditions can lead to satisfactory results of the contract. Purposeful and effective application of contract terms in order to reduce conflicts of interest and harmonize the interests of the parties, determine the desired performance indicators in the contract, provide efficient tools to control and monitor the performance of the contractor and defer payment in compensation are the main risk management strategies of the National Iranian Oil Company. At the same time, upgrading the technical and managerial capacity of the National Iranian Oil Company and using the advice of reputable oil companies can reduce information asymmetry in oil and gas development financing contracts in the country and consequently reduce the resulting risks.

Keywords

References

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Journal of Applied Economics Studies in Iran
Volume 10, Issue 40
December 2022
Pages 111-146

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