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Oil resources — who gets what how?
Engineering and Process Economics 4 (1979) 63-65 o Elsevier Scientific Publishing Company, Amsterdam
63 - Printed in The Netherlands
BOOK REVIEWS
The Economics of Capital Budgeting by Michael Bromwich, published Books, England, 395 pages.
by Penguin
This book is a review of the literature published during the last decade on the theories on the way the firm allocates investment funds, that is: what total finance the firm employs, which specific investment projects should it undertake and how should it fund these projects. The subject matter covered is extensive but summarized well in a direct and readable way. The commonly used techniques for assessing the relative merits of projects are described in the first few chapters followed by a clear explanation of the relative advantages and disadvantages of using Internal Rate of Return compared with Net Present Value. Principles are illuminated with both graphical and numerical examples but the latter are easier to follow. Later chapters deal with how projects should be funded and what total finance the firm employs. The theories described have been developed to explain the past financial move-
ments of businesses as seen by outside investors. They assume that the experience and judgement of decision makers can be quantified and then subsequently analysed mathematically to arrive at a rational decision. Because such subjective factors are not easily nor reliably quantifiable these techniques are not, as yet, widely used. As with many books of this type, investment analysis is seen largely as a financial problem because it is quantifiable and hence subject to mathematical analysis. Whereas in fact other considerations such as market position, government, securing raw material supplies or outlets etc. may be the prime reason for investment. The book has an extensive bibliography of recent publications. It also includes 36 pages of Specimen Interest Tables which are readily available from other sources. The book is likely to be of most interest to the teacher and the more advanced student. Current theories on capital investment are well covered. Practitioners will find it a useful reference book and a good lead into a more detailed study of those investment appraisal techniques in common use. LG. Watson/J.
Oil Resources - who gets what how? by Kenneth W. Dam, published by University Chicago, 193 pages, price $ 1 1.95.
of
It does not fall to the lot of many of us to negotiate on the behalf of governments or of multinational corporations for the exploitation rights of a resource upon which a country or government has been persuaded that its future
Kruithof
may depend. Whether Kenneth W. Dam has written his book as a guide for those who find themselves in this position in the future or, more generally, as an historical record of recent experiences in the North Sea, his closely researched and thorough work must be considered a valuable contribution. I As a reference work the book will be of considerable interest both to those who become in-
64 volved in the allocation and licensing of government owned resources and to the student of international law. It is also, however, a book of general interest and can be recommended to the concerned layman, if not as light reading, then, at least, as a clearly written and well explained definition of terms and as a fairly easily followed path through the recent history of the North Sea. Dam has examined the experiences of the Norwegian and United Kingdom governments and their nationalised corporations in their negotiations with and licensing of private companies to exploit the North Sea gas and oil resources. The negotiations proved to be difficult as the arguments were bound to be confused by the conflicting interests and influences on the negotiating parties. Dam’s analysis is detailed and critical and he has used it to great effect to compare the relative benefits of the licensing systems available to the producer governments and then to trace the economic consequences of the choices made. The choices broadly lie between the auction system, as widely adopted in the United States, and the various forms of discretionary system. He makes throughout a strong case for the auction system and against the discretionary systems. His argument is based both upon theoretical considerations and upon the practical consequences of the imple-
mentation of each system. Dam proposes that the experience of the U.K. in North Sea negotiations in particular, strongly supports the case against the discretionary system. He is particularly critical of the four types of method available to recapture the economic rent that would otherwise be lost through the discretionary allocation. Of the four, monopoly purchasing, royalties, participation and taxation, he proposes taxation as the best method though he notes that it is difficult to implement in a manner that does not result in disincentives to the development of the resource. In such complex negotiations as Dam has detailed it is common to find the final outcome is not based on any consistent theory but on a compromise arrived at through hard bargaining in the light of, perhaps, incompatible interests. Dam, however, is certain that only someone who has never participated in complex negotiations will believe that what is said by the negotiators is without influence on the outcome. His hope must be that sufficient of these negotiators are persuaded by the arguments of this thorough work to promote the benefits of the auction system of license allocation and to be aware of the consequences of the discretionary approach.
The economic analysis of industrial projects Lynn E. Bussey, published by Prentice-Hall Inc., 1978.
is designed for advanced undergraduate and graduate students in engineering and calls for background knowledge in economics for its proper study. The book contains a large number of worked-out examples and so can be used as a teaching text for students and in graduate courses, but it would also aquaint those working in industry with the more recent developments in the area of resource allocation. The book is divided into three major parts. Part 1, consisting of six chapters, deals with fundamental topics, including the function of interest, depreciation models, corporate income
by
This book is the latest in a series on Industrial and Systems Engineering published by Prentice-Hall International. It is wholly concerned with the allocation of the money resource within a firm in order to improve the ultimate value of the shareholders holdings. It deals in great detail with the economic analysis and comparison of capital investment projects with this end in view. The level of presentation
M. Wilson
63 - Printed in The Netherlands
BOOK REVIEWS
The Economics of Capital Budgeting by Michael Bromwich, published Books, England, 395 pages.
by Penguin
This book is a review of the literature published during the last decade on the theories on the way the firm allocates investment funds, that is: what total finance the firm employs, which specific investment projects should it undertake and how should it fund these projects. The subject matter covered is extensive but summarized well in a direct and readable way. The commonly used techniques for assessing the relative merits of projects are described in the first few chapters followed by a clear explanation of the relative advantages and disadvantages of using Internal Rate of Return compared with Net Present Value. Principles are illuminated with both graphical and numerical examples but the latter are easier to follow. Later chapters deal with how projects should be funded and what total finance the firm employs. The theories described have been developed to explain the past financial move-
ments of businesses as seen by outside investors. They assume that the experience and judgement of decision makers can be quantified and then subsequently analysed mathematically to arrive at a rational decision. Because such subjective factors are not easily nor reliably quantifiable these techniques are not, as yet, widely used. As with many books of this type, investment analysis is seen largely as a financial problem because it is quantifiable and hence subject to mathematical analysis. Whereas in fact other considerations such as market position, government, securing raw material supplies or outlets etc. may be the prime reason for investment. The book has an extensive bibliography of recent publications. It also includes 36 pages of Specimen Interest Tables which are readily available from other sources. The book is likely to be of most interest to the teacher and the more advanced student. Current theories on capital investment are well covered. Practitioners will find it a useful reference book and a good lead into a more detailed study of those investment appraisal techniques in common use. LG. Watson/J.
Oil Resources - who gets what how? by Kenneth W. Dam, published by University Chicago, 193 pages, price $ 1 1.95.
of
It does not fall to the lot of many of us to negotiate on the behalf of governments or of multinational corporations for the exploitation rights of a resource upon which a country or government has been persuaded that its future
Kruithof
may depend. Whether Kenneth W. Dam has written his book as a guide for those who find themselves in this position in the future or, more generally, as an historical record of recent experiences in the North Sea, his closely researched and thorough work must be considered a valuable contribution. I As a reference work the book will be of considerable interest both to those who become in-
64 volved in the allocation and licensing of government owned resources and to the student of international law. It is also, however, a book of general interest and can be recommended to the concerned layman, if not as light reading, then, at least, as a clearly written and well explained definition of terms and as a fairly easily followed path through the recent history of the North Sea. Dam has examined the experiences of the Norwegian and United Kingdom governments and their nationalised corporations in their negotiations with and licensing of private companies to exploit the North Sea gas and oil resources. The negotiations proved to be difficult as the arguments were bound to be confused by the conflicting interests and influences on the negotiating parties. Dam’s analysis is detailed and critical and he has used it to great effect to compare the relative benefits of the licensing systems available to the producer governments and then to trace the economic consequences of the choices made. The choices broadly lie between the auction system, as widely adopted in the United States, and the various forms of discretionary system. He makes throughout a strong case for the auction system and against the discretionary systems. His argument is based both upon theoretical considerations and upon the practical consequences of the imple-
mentation of each system. Dam proposes that the experience of the U.K. in North Sea negotiations in particular, strongly supports the case against the discretionary system. He is particularly critical of the four types of method available to recapture the economic rent that would otherwise be lost through the discretionary allocation. Of the four, monopoly purchasing, royalties, participation and taxation, he proposes taxation as the best method though he notes that it is difficult to implement in a manner that does not result in disincentives to the development of the resource. In such complex negotiations as Dam has detailed it is common to find the final outcome is not based on any consistent theory but on a compromise arrived at through hard bargaining in the light of, perhaps, incompatible interests. Dam, however, is certain that only someone who has never participated in complex negotiations will believe that what is said by the negotiators is without influence on the outcome. His hope must be that sufficient of these negotiators are persuaded by the arguments of this thorough work to promote the benefits of the auction system of license allocation and to be aware of the consequences of the discretionary approach.
The economic analysis of industrial projects Lynn E. Bussey, published by Prentice-Hall Inc., 1978.
is designed for advanced undergraduate and graduate students in engineering and calls for background knowledge in economics for its proper study. The book contains a large number of worked-out examples and so can be used as a teaching text for students and in graduate courses, but it would also aquaint those working in industry with the more recent developments in the area of resource allocation. The book is divided into three major parts. Part 1, consisting of six chapters, deals with fundamental topics, including the function of interest, depreciation models, corporate income
by
This book is the latest in a series on Industrial and Systems Engineering published by Prentice-Hall International. It is wholly concerned with the allocation of the money resource within a firm in order to improve the ultimate value of the shareholders holdings. It deals in great detail with the economic analysis and comparison of capital investment projects with this end in view. The level of presentation
M. Wilson