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Risk-Bearing and the Choice of Contract Forms for Oil Exploration and Development

Charles R. Blitzer, Donald R. Lessard, and James L. Paddock

Year: 1984
Volume: Volume 5
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No1-1
View Abstract

Abstract:
The structure of taxes and fiscal contracts between host countries and foreign companies has major implications for the success of oil development projects. This is because of several key characteristics of such projects: large investment outlays, long lead times to project completion, and long periods of project output and payout. These characteristics usually are coupled with an incomplete sharing of information and technology, and significant differences in the ability of the various parties to bear the risks involved. These characteristics often lead to unstable contracts and, in many cases, to the failure to develop projects that are economically attractive in aggregate terms but unattractive to one or both parties because of uncertainties over sharing project risks and returns.



The Value of Australia's Natural Gas Resource - A Linear Programing Analysis

K. J. Stocks and A. R. de L. Musgrove

Year: 1986
Volume: Volume 7
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol7-No2-7
View Abstract

Abstract:
Natural gas prices in Australia have evolved from long-term contracts negotiated when energy prices were considerably lower than they are today.' Following the increases in the world price of oil and the Australian government's policy to price new indigenous oil supplies at the world parity price, it seemed that natural gas was being undervalued. A vigorous debate ensued. One side maintained that gas should also be priced on the domestic market to reflect the value of LNG in the world market. A similar view asserted that gas ought to be priced at the energy-equivalent value of crude oil.



Long-Term Contracts for Crude Oil imports into Costa Rica: A General Equilibrium Analysis

Christian Dufournaud, Carlos Raul Gutierrez, Lodetrijk Berlage, and Peter P. Rogerst

Year: 1989
Volume: Volume 10
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol10-No1-10
View Abstract

Abstract:
Energy is critical for all human activity. Many countries import a major proportion of essential energy resources such as oil, for which the ability to substitute alternative inputs is difficult in both the short and long run. A possible response to the prospect that energy prices can fluctuate is for governments to negotiate long-term contracts with suppliers to mitigate sudden price shocks. This strategy is, however, not cost-free. It is equally rational for suppliers to negotiate high prices which protect them from the prospect of having to supply their oil at a lower price than they could anticipate in the future. A country seeking long-term protection from unstable oil prices via long-term contracts, therefore, faces higher current prices.



The Efficient Design of Contracts To Purchase Cogenerated Powers

Edward C Hall and John E. Parsons

Year: 1990
Volume: Volume 11
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol11-No2-6
View Abstract

Abstract:
This paper analyzes long-term power purchase contracts between an electric utility and a cogenerating facility and suggests ways to improve them. It discusses the best way to construct the contract payment structure in light of the given avoided cost structure; analyzing in detail the harmful incentives to low maintenance and how to avoid them. The paper concludes that the method it describes can be used to aid in the better design of contract provisions that will remedy the problem of incentives to low maintenance.



The Value of Commodity Purchase Contracts With Limited Price Risk

Elizabeth Olmsted Teisberg and Thomas J. Teisberg

Year: 1991
Volume: Volume 12
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No3-8
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Abstract:
This paper describes and demonstrates the equilibrium market valuation of commodity purchase contracts with price ceilings or price floors or both. These contracts, which we call "limited price risk" contracts, are significantly easier for buyers and sellers to agree upon than fixed price contracts when price uncertainty is high and buyers and sellers have inconsistent price expectations. Analysis of an actual natural gas contract as well as the existence of many brokers promoting limited price risk gas contracts, suggest that these contracts may be priced inefficiently in practice. Our example application should help managers to make use of modem financial techniques in assessing the value of these types of contracts.



Coordination of Non-Utility Generation Through Priority Purchase Contracts

Joseph A. Doucet

Year: 1994
Volume: Volume15
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol15-No1-11
View Abstract

Abstract:
This paper proposes the use of priority purchase contracts as a means to coordinate utility purchases from non-utility generators. It is shown that differentiated contracts should have the potential for attracting more diverse, NUG proposals (in terms of technical and economic characteristics). It is also argued that differentiated contracts should permit better integration and coordination of NUG capacity since they come closer to mimicking the utility's resource allocation problem. Several areas for future research are suggested.



Rethinking Contracts for Purchasing Power: The Economic Advantages of Dispatchability

Gary W. Dorris and Timothy Mount

Year: 1994
Volume: Volume15
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol15-No4-8
View Abstract

Abstract:
The purpose of this article is to evaluate and compare the incremental cost of purchased power from non-utility generators (NUG) versus utility built generation considering a variety of contracts for energy purchases. Four types of contracts are evaluated: (1) Flat Rate Produce and Pay, (2) On-Peak/Off-Peak, (3) Basic Dispatchable, and 4) Actual Cycle Energy Dispatch. An analysis conducted for a representative utility calculates the effects of NUG power purchases on a utility's energy production costs and the cost of new debt issuances. Dispatchable energy contracts are shown to provide significant economic and operating advantages over Flat Rate and On-Peak/Off-Peak energy contracts. The analysis also shows that NUG purchases based on the actual costs of dispatch cost less than utility built generation financed at the utility's weighted average cost of capital. NUG contracts for a utility which already has significant risk exposure are shown to parallel a capital lease. Under these conditions, additional payment obligations to NUGs increase the cost of new debt issuances making an equity issuance for utility built capacity a more attractive option.



The "Regulatory Compact" and Implicit Contracts: Should Stranded Costs be Recoverable?

James Boyd

Year: 1998
Volume: Volume19
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No3-4
View Abstract

Abstract:
Progress toward electricity market deregulation has brought controversy over whether or not utilities are entitled to compensation for "stranded costs", i.e., costs utilities will not be able to recover due to the advent of competition in their markets. This paper uses a legal and economic analysis of contracts to address the desirability of utility cost recovery. First, underlying principles of law are reviewed to determine whether or not there is a legal presumption of recovery. Then, the analysis considers whether or not an implicit "regulatory compact" between utilities and regulators follows from principles in the economic analysis of law, particularly theories of efficient breach and implicit contracts. The paper concludes that recovery should occur in only a proscribed set of circumstances and that, when called for, compensation should be partial, rather than full.



Bilateral Forward Contracts and Spot Prices

Nodir Adilov

Year: 2010
Volume: Volume 31
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No3-4
View Abstract

Abstract:
Allaz and Vila (1993) have shown that forward markets could mitigate market power and improve efficiency. This paper shows that efficiency-improving effect of forward markets is sensitive to the assumption that market participants behave like rational expectations agents when forecasting prices. The existence of forward contracts could increase spot prices and hurt efficiency if buyers engage in bilateral forward contracts and forward rates are influenced by historic prices. These findings have important policy implications for the electricity industry.



The Future of Long-term LNG Contracts

Peter R. Hartley

Year: 2015
Volume: Volume 36
Number: Number 3
DOI: 10.5547/01956574.36.3.phar
View Abstract

Abstract:
Long-term contracts have long dominated the international market for LNG. Since 2000, however, the proportion of LNG-traded spot or under short-term contracts has grown substantially, while long-term contracts have become more flexible. While long-term contracts increase the debt capacity of large, long-lived, capital investments by reducing cash flow variability, they also may limit the ability of the contracting parties to take advantage of profitable ephemeral trading opportunities. After developing a model that illustrates these trade-offs, we argue that increased LNG market liquidity resulting from a number of exogenous changes is likely to encourage much greater volume and destination flexibility in contracts and increased reliance on short-term and spot market trades. These changes would, in turn, reinforce the initial increase in market liquidity.




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