An integrated approach to state decision-making in upstream hydrocaron operations

Abstract

In the exploration, development and production of hydrocarbons the state faces conflicting challenges: maximizing its welfare while maintaining attractiveness to investors. The parameters of the production sharing contract (PSC), between the government and typically, international oil companies (IOC), must be selected before the commencement of operations and therefore without complete knowledge of the reserve level. Additionally, hydrocarbons have several potential uses (power generation, industry, export…etc.), each requiring extensive infrastructure investments for proper exploitation. Our objective is to build an optimization model that allocates the government’s share of reserves for the entire life of a production-sharing venture. Given an initial reserve volume and hydrocarbon price, the model determines both the PSC parameters and the allocation of government share into different identified uses to generate the maximum benefit to the state while providing an acceptable rate of return for the IOC. The model is applied to the case of Lebanon and solves the optimization for all possible PSC contracts throughout the range of expected volumes. Sensitivity analysis is performed on selected parameters to observe the change in strategy. This analysis provides valuable insights into both the optimal PSC structure and the ensuing strategy of hydrocarbon exploitation.