Risk : reward sharing contracts in the oil industry: the effects of bonus : penalty schemes

Partnering and alliancing among oil companies and their contractors have be come common in the oil industry in recent years. The risk: reward mechanism s established very often incorporate bonus/penalty schemes in relation to a greed base values. This paper examines the efficiency requirements of such schemes. The effects of project cost and completion risks on the risk: rewa rd positions of field investors and contractors with and without bonus/pena lty schemes are examined with the aid of Monte Carlo simulation analysis. T he schemes increase the total risk for contractors and have consequence for their cost of capital and optimal risk-bearing arrangements within the ind ustry. (C) 1999 Elsevier Science Ltd. All rights reserved.