Drilling gap in non-OPEC developing countries: the role of contractual and fiscal arrangements

Despite the tremendous increase in the real price of oil over the past decade, exploration and development activity in many non-OPEC developing countries (NODCs) has languished relative to other areas of the world. Factors responsible for this skewed pattern might include poor geologic prospects, excessive political risk, and lack of infrastructure development. Poorly designed contractual and fiscal arrangements, which result in an unsatisfactory sharing of risks and rewards between the host government and foreign investors, might also constrain petroleum investment in NODCs. This article analyzes the sources of risk in oil exploration and development activity, and how insights from economic theory can be used to analyze the efficiency of risk-sharing in contractual and fiscal arrangements. 54 references, 1 figure.