A service contract is used by the host government to hire or buy technical, financial, and commercial services from foreign oil companies. All petroleum deposits and products belong to the host country. A service contract stipulates a fixed payment for services rendered. No extra returns accrue to the company even if the undertaking is successful.
Under a production-sharing contract, the oil company is responsible for carrying on all exploration and development activities. If there is no commercial discovery, the loss is borne by the contractor. In each year, a specific percentage (40 percent in most production-sharing contracts) of crude oil produced is allotted for such reimbursement. The remaining portion of the production is to be shared in a proportion specified in the agreement.
Arrow Kenneth. ( 1970). Essays in the Theory of Risk-Bearing. Amsterdam: North-Holland.
Barrows Gordon H. ( 1983). Worldwide Concession Contracts and Petroleum Legislation. PennWell Publishing Company.
Blitzer Charles R., Donald R. Lessard, and James L. Paddock. ( 1984). "Risk-Bearing and the Choice of Contract for Oil Exploration and Development." Energy Journal 5, no. 1: 1-27.