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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