Assessment of Iranian Petroleum Contracts Effectiveness: A Comparative Risk Analysis Approach Using Monte Carlo Simulation

Background of petroleum contracts in Iran unveils different evolutions of arrangements, from Darcy to buy-backs and, more recently, new models called the Iranian Petroleum Contract (IPC). One of the prominent features of petroleum contracts is balancing risk and return between parties. We evaluate the effectiveness of IPC versus buy-back using a comparative risk simulation analysis approach. To this end, five key factors, including capital expenditures' volatility, operating expenditures' variations, deviation from the level of production specified in the contract, crude oil price changes, and alterations in finance cost, were identified as a risk and net present value (NPV) as reward variables. We simulate associations between variables under two buy-back and IPC contractual arrangements and apply the model to one of green oilfield development projects in Iran, as a case study. The distribution forms of project NPV reveal more flexible connectivity between risk-return under IPCs, from the contractor's viewpoint. Corresponding NPVs under IPC's fiscal regime are higher than buy-backs. We conclude that IPCs are more attractive to contractors and more effective in the development of upstream projects in the Iranian petroleum industry.