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25 Nat. Resources J. 415 (1985)
The Drilling Gap in Non-OPEC Developing Countries: The Role of Contractual and Fiscal Arrangements

handle is hein.journals/narj25 and id is 429 raw text is: HARRY G. BROADMAN* and JOY DUNKERLEY** The Drilling Gap in Non-OPEC Developing Countries: The Role of Contractual and Fiscal Arrangements- INTRODUCTION Despite the tremendous increase in the real price of oil over the past decade, exploration and development activity in many non-OPEC de- veloping 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 in- vestment in NODCs.2 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. ECONOMIC RISK IN PETROLEUM EXPLORATION AND DEVELOPMENT Investment in petroleum exploration and development is a risky eco- nomic activity. There is considerable uncertainty about the relationship between funds expended and output, and uncertainty about costs and future prices. Drilling expenditures may produce dry holes or only small discoveries. Indeed, uncertainty pervades the complex relationships be- tween the different investment decisions and outcomes which occur throughout the various stages of the petroleum supply process. Moreover, *Assistant Director, Center for Energy Policy Research, Resources for the Future, and Professorial Lecturer in International Economics, School of Advanced International Studies, Johns Hopkins University. **Senior Fellow, Center for Energy Policy Research, Resources for the Future. tFunding for this article was provided by the U.S. Departments of Energy and State. Opinions expressed herein are solely those of the authors. 1. NATIONAL PEmOtEuM CouNcIL, Tum WORLD PETRoLEUM DEVELOPMENT 8 (1982). 2. For an analysis of the relative importance of contractual and fiscal arrangements, resource potential, political risk, and infrastructure development as determinants of exploration activity in NODCs, see Broadman, Incentives and Constraints on Exploratory Drilling in Developing Countries, 10 ANN. REV. ENERGY (1985).

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