Cost Recovery & High Oil Price

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  • Topic: Petroleum, Petroleum industry, OPEC
  • Pages : 21 (6190 words )
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  • Published : December 21, 2011
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COST RECOVERY AND HIGH OIL PRICE: HOW CAN HOST GOVERNMENTS CAPTURE ADEQUATE REVENUE? A CASE STUDY OF NIGERIA

Omolade A. Akinwumi



ABSTRACT: Cost recovery is about the most attractive element of a Petroleum Sharing Contract to the International Oil Companies (Contractors) as it provides an avenue for recouping sunk cost which is not a consideration in a concessionary system. Host Governments were comfortable with the concept as limits were placed on the amount of cost that can be recouped from every production. Notwithstanding, due to the recent sky rocketing oil price, Host Governments have become more concerned about how to benefit from the high oil price. This paper will highlight the impact of high oil price on cost recovery; it will consider production sharing agreements generally, its constituent parts focusing mainly on cost recovery. The paper looks at Nigeria as a case study and concludes with recommendations for host governments on how to benefit from high oil prices.



The author holds an LLB from University of Ibadan, and is admitted to the Nigerian Bar. She recently completed an LLM degree in Petroleum Taxation and Finance from the CEPMLP, University of Dundee. A student member of the Institute of Chartered Secretaries and Administrators of UK. She has a background in civil and commercial litigation. E-Mail: mollyjayy@yahoo.com

TABLE OF CONTENTS LIST OF ABBREVATIONS ................................................................................................ iii 1. INTRODUCTION............................................................................................................. 1 2. AN OVERVIEW OF PRODUCTION SHARING CONTRACTS .................................. 3 2.1 2.2 2.2.1 2.2.2 2.2.3 2.2.4 3. Definition of a PSC................................................................................................ 4 Constituent parts of a PSC ..................................................................................... 5 Royalty .............................................................................................................. 6 Cost Recovery Oil .............................................................................................. 6 Profit Oil Split ................................................................................................... 6 Income Tax ........................................................................................................ 6

COST RECOVERY OIL AND ITS ROLE IN A PSC .................................................... 7 3.1. Cost Recovery Oil Definition and Evolution ............................................................... 7 3.1.1. Definition of Cost Recovery Oil.......................................................................... 8 3.1.2. Evolution of Cost Recovery oil ........................................................................... 8 3.2. 3.3. Cost Recovery Oil in PSCs-Nigeria’s Experience .................................................. 9 Merits and Demerits of Cost Recovery Oil........................................................... 10

3.3.1. Merits................................................................................................................. 10 3.3.2 Demerits.............................................................................................................. 10 4. IMPACT OF HIGH OIL PRICE ON COST RECOVERY OIL .................................... 11 4.1. General Impact ......................................................................................................... 12 4.2. The Nigerian Case .................................................................................................... 13 5. CONCLUSION............................................................................................................ 14

BIBLIOGRAPHY ............................................................................................................... 15

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