Cost recovery in oil projects

Sunday, January 7, 2007

An op-ed piece in today's JP criticizing a government's plan in amending regulations affecting cost recovery in oil projects:
Before signing the PSC (or KKS as it is now called), the investor built an economic model, calculating his return on investment using several scenarios. He negotiated a contract expecting a certain minimum net result. If this expected net result no longer holds true because the deal was unilaterally changed, or if he is, for example, subject to sudden spurious tax levies at the central and local levels, he will demand that his economic expectations under the agreed contract be restored. If he does not get that, he may pack his bags and leave, and/or resort to arbitration.

Admittedly, there will always be a need for some degree of regulation, especially in the event of what economists call market failures. But the government should step in only when it needs to fix something. As the saying goes, if it ain't broke, don't fix it. That is the prevailing management theory and a fundamental credo of microeconomics.
Some official thinks that oil companies takes too much from cost recovery, oil company says there are not so much to be taken. I haven't look at the draft regulation so I can't say anything.