Project Profitability and the Economics of Sustainable Development

Abstract

Abstract In the past economic models captured economic externalities such as sustainable economic development as additional investments that increased project operational costs. There is a need to internalize investment in sustainable economic development in project profitability models. This paper develops a model that captures economic returns from oil and gas investments from the different perspectives of the four major stakeholders in oil and gas operations. These four major stakeholders are the oil companies, the shareholders, the society and the host communities. The cost of sustainable economic development has different impacts on the financial conditions of each of the stakeholders. Each stakeholder therefore has its unique economic perspective defined by its minimum rate of return and its view of project profitability. The perspective of the oil companies use the cost of borrowing capital as its absolute minimum rate of return while that of the shareholder uses the bank saving rate of return. The absolute minimum rate of return for the society captures the replacement of oil and gas as wasting assets, while that for the host communities encompass the replacement of the income generating capacity lost due to environmental pollution as well as the cost of maintaining the economic regenerative capacity of the environment. The project must be profitable from the unique point of view of each of the major stakeholders for sustainable economic development to occur. Project profitability from the perspective of the host community is the sustainable economic development test. The paper concludes that oil and gas ventures can be screened with the four perspectives profitability model to ensure that they will enhance sustainable economic development understood from the perspective of each of the major stakeholders. Screened investment opportunities that are profitable from the four perspectives can then be ranked on the basis of profitability from the perspective of the oil companies. Introduction In the last few years, the sustainable economic development of host communities have become important to oil and gas investors. This is because of the rising level of disruption of oil and gas operations by inhabitants of host communities, especially in the developing nations. These disruptions have taken the form of demonstrations, protests, blockage of access roads, sabotage, kidnapping, hostage taking and armed struggles. For example, in Myanmar, opposition by the host communities have delayed the construction of the $1.2 billion Yadana natural gas pipeline project.1 Similarly, in Bolivia, host communities have protested the construction of a $2 billion 3200 km natural gas pipeline running from Santa Cruz, Bolivia to Sao Paulo, Brazil.2 In Nigeria, oil companies have suffered flowstations takeovers, sabotage and hostage taking by youths from host communities protesting against environmental pollution and economic underdevelopment.3 Shell Petroleum Development Corporation (SPDC) reported 108 incidents in 1993, 150 in 1997 and 325 in 1998. In March 2000, the Utorogu gas plant was occupied by armed youths from the host communities. Thirty SPDC workers and 4 soldiers were taken hostage.4 The youths demanded for sustainable economic development projects. The increasing capacity of the host communities to disrupt oil and gas operations and change the economics of oil and gas ventures forced the oil companies to evaluate its relationships with other major stakeholders.