The Economics of Oil and Gas Management

ECONOMICS 1
Oil and Gas Management
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ECONOMICS 2
Question 1: Conventional list price plus an incentivisation bonus
Compensations and incentive bonuses are one of attributors of high profits to the
companies and contractors in the business. Research and design as well as capital equipments in
oil and gas are likely to add value on Tier 1 Company for various years in operation. However,
the short run earnings are important among the companies in operations and also spending
capital. Beside, the fixed price contracts help the businesses to manage prevailing costs within or
outside Tier 1 Company. It is evident that Tier 1 Company and the companies in contract to sign
before the total value of agreement are decided. Particularly, the value of money attached to
contracts is not always distributed in accordance to types of escalators.
In other words, Tier1 has got various disadvantages in the operation of oil and gas, these
include; the nature of oil which is non-renewable after completion. Also, Tier 1 faces a problem
of emission of carbon dioxide gas, which is reduced after burning fossils (Ioan & Amelitta,
2015). Most important is that much of the oil produced has to be exported, with this, a lot of
reserves are required which in turn seems to be expensive. Besides, there are increased costs that
arise from various types of hydrocarbon. Tier 1 Company is most cases challenged by the
reduction of ratios about reserves replacement in the prevailing oil fields. However, the reserves
that are new are possibly found in the environments that are challenging such as those areas in
geology especially Arctic and deep waters (Stevens et al. 2013). With such challenging areas, the
costs of oil recovery increases
Most of the oil companies are meant to reduce the transaction costs especially through
disseminating and sharing information. Some of the examples include approaches to alter
consumer to producer dialogue which collides with international energy Forum. However, most
of the consumers and producers often disagree on the levels of prices which in turn focus on

ECONOMICS 3
promoting transparency as a primary role of the forums. This is because a lot of transparency,
this will lower uncertainty levels to adjust the costs in international markets for producers and
consumers.
b) Gainshare based on a target operating cost for the year
One of the features of gainshare based on targeted annual operating costs is that it acts as the
funding model for the industry in a competition (Handfield, 2016). In addition, each member
within the industry should contribute a portion of the share towards the industry costs.
Gainshare that arises from the predicted annual operating cost of oil and gas industries acts as
additional revenue since part of the shareholders’ and employees’ savings are returned back in
business to produce more income. Gainsharing is seemingly relevant to the oil and gas industry
in such a way that most of the companies under this industry are able to raise more profits and
these stimulate the operations of the industry. In addition, gain share that comes from the annual
operating costs of an oil and gas industry helps in motivating and increasing the industry’s
production capacity and its rate of competitiveness within the current world (OGJ editors, 2020).
Gainshare is employed as a tool by the company to stimulate its performance and increase
efficient customer service. However, sharing of savings in the oil and gas industry including all
employees leads to income inequality. This comes about when the ones who earn less are also
included in this call. In addition, the industry may fail to raise the targeted profits within a year.
Furthermore, the annual operating costs of the oil company either operating in the field or having
a Tier 1 contractor may be more that the gainshare and thus the revenue become insufficient to
meet the costs.
c) 10% equity stake in the field

ECONOMICS 4
The key characteristic of daily operations pricing and contractor of 10 percent equity stake in the
industry is that the prominent stakeholder contributes more shares that others may not raise. The
daily pricing of oil and gas products for continuous operations and contractors with a 10 percent
equity level in the industry enables a company to raise its rate of cooperation with its employees.
Since all the employees or stakeholders in the oil and business company may lack the ability of
contributing a similar amount to the development of the company, it’s relevant to have an equity
stage. The advantage of this concept is that more shares are collected by the company and these
accumulate so fast. The company is able to compete with other oil and gas companies across the
world (Hassan, 2013). The disadvantage is that one individual or stakeholder carries the biggest
burden of the shares. This may be impossible in companies especially corporations and
partnership businesses. Furthermore, a company may require much capital and the cost price
contributed by one stakeholder in the gas and oil industry may be insufficient to operate the
company.
Question 2: Petroleum economics and taxation Regimes
(a)There are many concepts of regimes or contracts used around the global governments
to give permission to Oil companies. The International Oil companies are given permission from
the governments in order to explore oil drills, commercial discovery, production, and
development operations. The governments of the countries determine which kind of contracts to
be signed between contractors and the countries. However, PSC or licensing regimes depend on
the bargaining strengths and policies in relation to the global petroleum situations in the market.
In this case, production Sharing Contract or agreement is the most used arrangements for the
countries starting the exploration of petroleum (Saidu, 2014). It is evident that contracts differ