Real options valuation of a production sharing agreement – conflicting strategies between government and IOCs?

While real options valuation captures flexibility and uncertainty in oil projects, most studies on Production Sharing Agreements (PSAs) still use discounted cash flow methods. This study applies binomial lattices to evaluate Uganda’s PSA using data from two oil fields. A robustness check using the two-factor Gibson–Schwartz model with stochastic convenience yield shows that incentive differences persist under richer price dynamics. We analyze the contract from both the International Oil Companies’ (IOCs’) and the government’s perspectives, examining how optimal strategies vary with project parameters and oil price scenarios. The findings reveal potential conflicts, particularly due to the cost oil function and expected prices, highlighting the importance of contract design in aligning incentives for project realization.