Optimization of Risk-sharing in Buyback Contracts Based on the Application of Agency Theory

Pricing and risk sharing in oil and gas service contracts such as buyback has always been the most important challenges in the contracting design. Asymmetric information leads to agency costs such as moral hazard and adverse selection and the process of contracting is complicated. In this paper, by using of agency theory, the process of buy-back contracts is modeled between the National Oil Company (NOC) and International Oil Company (IOC) with regard to moral hazard in case of risk averse and risk-neutral contractor. Finally, Mathematical modeling techniques are used to provide analysis of agency costs, and then optimal contract is extracted. An optimal contract is a contract in which the contractor will bear part of the increased costs. The results show that there is not corner solution for offering a contract, but the equilibrium relationship can be created between moral hazard, competition in the bidding and sharing the risk.