Market Failure in Achieving the Conservation in Production of Oil in the Context of Contract Theory

According to Iranian Constitution, Oil and Gas are classified under Anfal. Conservation in production of oil is the most important criterion in exploitation of oil resources which affects all phases of exploration, appraisal, and development and production of oil from a reservoir. Despite the passage of more than hundred years of oil production in Iran, there have been no rules, regulation or any regulation for conservation in production of oil other than its definition in the amendment to the Oil Law of the year 1366. Studies show that variety of reasons including the complexity of technical and economic calculations, heavy investment volume, achievement of results in the long term, serious uncertainties with regard to the results of EOR programs, and asymmetry and conflict of interest between contracting parties cause the factors which lead to market failure, such as huge economies of scale, asymmetric information and its resulting problems, i.e. moral hazards and adverse selection, and externalities, clearly affect the conservation programs to exploit the oil reserves and several evidences resulting from contracts to develop Iranian oil and gas fields confirm these facts. Therefore, it is necessary to deal with such issues and decision making should occur in at sovereignty position of the government other than the company level.