There are four major stakeholders in the oil and gas production process. These are the oil companies, the shareholders, the society and the host communities. The cost of protecting and reclaiming the environment has different impacts on the financial conditions of each of these stakeholders. Each stakeholder therefore has its unique economic perspective defined by its minimum rate of return and its view of project profitability. For a win-win situation for all stakeholders, the project must be profitable from the unique point of view of each of the stakeholders.
In the past, emphasis was placed only on the perspectives of the oil companies and the shareholders. Economic models captured environmental costs as economic externalities that increased project operational and salvage costs, thus decreasing company profitability and shareholders’ dividend payments. But, the devastating impact of environmental pollution of the finances of the inhabitants of the host communities is now being recognized. The host communities need the regenerative capacity of the environment to maintain basic farming and fishing activities needed for their survival. The society, represented by the national government, suffer revenue loss in the face of oil pollution.
This paper develops a model that captures project profitability from the four perspectives. The perspective of the oil companies uses the cost of borrowing capital as its absolute minimum rate for determining profitability while that of the shareholder uses the bank (saving) rate of return as an absolute minimum. For the society, the absolute minimum rate of return must capture the replacement of oil and gas as wasting assets. In the case of the host communities, this absolute minimum rate must encompass the replacement of income generating capacity lost due to environmental pollution as well as the cost of maintaining the economic regenerative capacity of the environment. The paper concludes that for a project to be profitable, it must meet the profitability criteria from these four perspectives. The profitability of projects from the perspectives of the society and host communities is the critical test for environmentally friendly oil and gas operations.