Publications

The commonly used fixed-price contract in the oil and gas industry is experiencing lots of problems because of high expenditures and low productivity. This paper conducts a comparative study of the uncommon incentive-based contract and the common fixed-price contract. The contracts are modelled with 20 parameters composed of fixed-price contract parameters and additionally time correction parameters and production rate parameters for the incentive-based contract. A Monte Carlo Simulation is conducted to expand the limited production data into 1000 cases with several baseline parameters. The preference for the two contracts will be illustrated with analytical equations and graphical illustrations. The study’s findings show that the operator and service provider prefer the incentive-based contract to the fixed-price contract, as the latter contract brings greater profit to both parties. Hence, the main practical challenges of high expenditures, such as monitoring, coordination, moral hazard, and adverse selection, can be minimized by applying this solution.