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The government, as a principal, may seek to induce a private investor, as an agent, to build and operate an unconventional-oil production plant to promote early production experience with such plants. Given this goal, facing significant uncertainty about the future, the government wants to limit the cost to the public treasury of doing this. This report offers an analytic way to design and assess packages of policy instruments that the government can use to achieve its goal. It starts with general principles of the economic theories of contracting and agency. Looking across many alternative futures helps the authors design incentive packages that are robust from a private perspective and limit costs to the government. As these principles would predict, cash-flow analysis demonstrates the cost-effectiveness of using investment incentives rather operating incentives and the powerful effect that a higher debt share has on the private rate of return. Cash-flow analysis also reveals specific opportunities that the government has to change course among policy alternatives as it seeks the lowest-cost way to increase the private rate of return associated with a project.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Designing an Effective Long-Term Public-Private Relationship

  • Chapter Three

    Assessing Financial Effects Under Uncertainty

  • Chapter Four

    Policy Effects with 100-Percent Equity Financing

  • Chapter Five

    Policy Effects with Debt Financing

  • Chapter Six

    Implications for Robust Financial-Incentive Packages

  • Chapter Seven

    Can Formal Source Selection Help the Government Create an Integrated Policy?

  • Chapter Eight

    Conclusions

  • Appendix A

    Structure of the Spreadsheet Analysis That Implements the Cash-Flow Model

  • Appendix B

    How Debt and Loan Guarantees Affect Investors and the Government

Research conducted by

The research described in this report was sponsored by the United States Air Force. It was also supported by the National Energy Technology Laboratory, United States Department of Energy, and was conducted under the auspices of the Environment, Energy, and Economic Development Program within RAND Infrastructure, Safety, and Environment.

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