Economic Efficiency and Optimal Contractual Design of Iraq's Oil Service Contracts

Iraq’s recent service contracts with international oil companies, known as technical service contracts (TSC), exemplify the increasing reliance of oil producing countries on service contracts. In this study, we examine the economic efficiency of Iraq’s Rumaila producing field technical service contract via a dynamic optimization model of oil production and well drilling. A comparison of what our dynamic optimization model recommends as the optimal production profile with the most likely scenario to be realized suggests that the Rumaila producing field technical service contract could result in economically inefficient outcomes, with the loss in profit as high as $73 to $90 billion in 2008 dollars through the lifetime of the contract depending on the well productivity assumption. In order to assess the inefficiencies introduced by various aspects of a technical service contract and by other factors surrounding the implementation of the contract, we solve for the optimal production and well drilling under various constraints and find that economic inefficiency exists even after controlling for TSC specific elements, capital cost ceilings and other constraints. The existence of economically inefficient outcomes suggests that it may be desirable to address the potential sources of economic inefficiency through implementation of some policy reforms in Iraq’s oil sector