Wolff defined the national economic value of a deposit as the sum of the private company's profit, the earnings by the government, and the consumer's surplus. Today, many oil-producing states are evolving so many combinations of components of mining legislation in order to maximize their national economic values of their petroleum deposits. Cash flow analysis not only gives a fair prediction of this optimum income, but also is a good yardstick for performance control.
Crude oil today is one of the primary energy production bases and contributes more than 60% of production bases and contributes more than 60% of the world energy consumption. Despite the strategic importance of this mineral to the world economy, it is the fastest depleting major energy source. Though a wasting asset, little effort is being made as to how best this scarce resource can be managed to maximize its contribution to the ever-increasing world energy demand. Alternative energy sources, cheaper and perhaps more portable than oil, may be discovered; the search for improved management of oil resources after all may not be a useless exercise. This paper, however, is intended to examine the economics of government participation in big, medium, and small oil exploration and production companies. It then is necessary to production companies. It then is necessary to examine whether a producer nation could enhance its revenue accrued from oil by either participation in oil companies or restricting its interest on royalty, corporate-income tax, bonuses, and other revenue measures. It is pertinent to point out at this stage that in certain regions oil is not looked upon primarily as a revenue earner, but as a political primarily as a revenue earner, but as a political weapon whereby the quest to improve on revenue from oil is of secondary consideration. This paper deals strictly with economic analysis and does not consider government policy or politics; therefore, it does not evaluate indirect interests or values. The paper, therefore, will examine, with different models of financial outlay of three hypothetical companies, C1, C2, and C3, the economic behavior of government participation and the trend it may take if it restricts its interest on royalty and corporate income tax only. I also will examine at what point any alternative is preferred to the other. Reference to any country that recently has nationalized or acquired some interest of any kind in an oil company or companies is absolutely casual.
Profitability ratios could be defined as a measure of financial effectiveness or efficiency. These ratios do not serve as good investment measures for screening the two proposals because of the following factors.
In case of participation, the government invests some capital and may or may not be involved in the dispensation and utility of the fund. Where there is no government involvement, the oil company is the operator.
Where government does not participate, it physically does not invest capital of any form to physically does not invest capital of any form to realize income.
For ease of reference and correlation, Case 1 is referred to as Project A, and Case 2 as Project B. The fact that government physically does not invest any money in Project B to realize income makes it impossible to apply any of the usual profitability ratios as an adequate criterion for screening it with A. This is because most of the ratios involved investment (expenditures). Consequently, Project B on profitability ratios bases such as annual net profit/
Rate of return = capital invested.
Financial efficiency = dollars income/dollars spent.
Cumulative unit cash out = cumulative cash out over the period/ cumulative production during the same period.
Payout period = Invested capital/Net annual cash flow.
appears more acceptable than Project A.