Advantages and disadvantages to host governments

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Advantages and Disadvantages to Host Governments Unless non-economic reasons (to increase the sense of ownership, to facilitate transfer of tech- nology, to increase the control over field development decisions) motivate a host government to participate directly in a project, it is not at all demonstrated that direct government participation provides benefits not otherwise available from conventional taxes. 85 Besides the cost and risks associated with equity participation, as well as other considerations related to the allocation of a country’s resources, there may be a conflict of interest between the government as equity holder and its role as regulator overseeing the environmental and social impact of a project. As government participation represents a cost to investors, the higher the percentage participation, the lower other fiscal terms. Effect on Investment Decisions Government participation on concessional terms reduces the cash flow and increases the risk profile of the investment. In case the cash calls 86 on governments are paid out of production, the investors are left with the burden of raising the entire financing. In some cases government direct participation in development activities may lead to suboptimal investment levels. Many investors regard the government participating option as a deterrent. 87 82 The working-interest owner bears the costs of exploration, development, and operation of an oil and gas asset and, in return, is entitled to a share of the production of that asset. Royalty rights, net profit interest rights, rights in production payments, and the like do not constitute working interests because they are not burdened with the responsibility to bear exploration, development and operating expenses. Likewise, contract rights to extract or share in oil and gas, or in the profits from extraction, without liability to share in the costs of production, do not constitute working interests. 83 In the majority of cases, the contractor bears the costs and risks of exploration. If a discovery is made, the host government/NOC has the option to “back-in” for, or up to, a set percentage participating interest. Normally, the government participating interest is a working interest carried through the exploration phase. 84 For example, exploration costs may or may not be reimbursed by the government; if reimbursed, interest that takes into account the time value of money/risk factor may or may not be applied. 85 In some cases the risks and costs of direct participation are such that the host government would be better off solely taxing and regulating the project. 86 To cover operating and investment costs the operator issues cash calls to each joint venture participant. 87 Operating and technical committees’ decision making processes may become less efficient. In addition, government participation reduces the percentage of reserves that can be booked by the international oil companies.
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Table 17. Cost Recovery Limit 88 How do they work?
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