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Application of Game Theory in Modeling the Development of an Oil Field under a Buy-Back Contract
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Hamed Hemmati1   , Farhad Hanifi *2 , Hossein Eslami Mofid Abadi1 |
1- Department of Financial and Banking Management, CT.C., Islamic Azad University, Tehran, Iran.
2- Department of Financial and Banking Management, CT.C., Islamic Azad University, Tehran, Iran. , f.hanifi@iau.ac.ir |
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Abstract: (16 Views) |
The development of oil fields requires substantial capital, advanced technology, and long-term financial commitment, making upstream petroleum projects highly dependent on the structure and efficiency of contractual frameworks such as buy-back contracts. The performance of these contracts critically hinges on the optimal selection of contractual parameters that can both incentivize international oil companies (IOCs) to invest and simultaneously maximize the economic benefits of the National Iranian Oil Company (NIOC). In this study, the development of an oil field under a buy-back contract is modeled using game theory, and the strategic interaction between NIOC and the IOC is formulated as a Stackelberg leader–follower game.
Within the proposed model, NIOC acts as the leader and first announces key contractual parameters, including the contractor’s remuneration factor (R) and the cost recovery ceiling coefficient (α). The IOC, acting as the follower, observes these parameters and selects the optimal production rate (V) accordingly. Using a numerical simulation based on assumed values, the Stackelberg equilibrium is derived. The results indicate that maximizing the net present value of NIOC leads to the equilibrium solution in which the optimal contractual parameters are R = 2.09, α = 0.41, and the corresponding optimal production rate chosen by the IOC is V = 0.0132.
These findings imply that when NIOC offers a remuneration factor of 2.09 and sets the cost recovery ceiling at 0.41, the IOC will optimally respond by adopting a production rate of 0.0132, resulting in a contractual arrangement that simultaneously maximizes both parties’ payoffs. Therefore, the model demonstrates that applying game-theoretic principles to the design of buy-back contracts can facilitate the creation of a stable
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Article number: 13 |
| Keywords: Buy-Back Contract, Net Present Value (NPV), Stackelberg Equilibrium, Optimal Extraction Rate |
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Full-Text [PDF 726 kb]
(10 Downloads)
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Article type: Research |
Subject:
Special
Received: 2026/01/20 | Accepted: 2026/04/28 | Published: 2026/08/1
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