Projected finding & development costs and netbacks, when used as investment decision criteria in conjunction with the capital productivity index, are useful for selecting an optimal corporate investment portfolio. The capital productivity index is an excellent measure for ranking investments and for optimizing the use of capital resources. Projected finding & development costs and netbacks measure the potential competitive advantage created by an investment, and the message that will be communicated to investors regarding an oil & natural gas corporation's competitiveness.
These criteria' should be used with caution when used to compare investment prospects across different fiscal regimes. Governments collect their take through a variety of royalty, production sharing, and general corporate tax provisions, often in differing amounts and proportions. As a result, the implications of some of the terms inherent in the definitions could be different.
A useful graphical strategic planning tool can be developed by plotting calculated capital productivity indices against varying projected finding & development costs and operating costs. The tool is useful for comparing different fiscal regimes in which a company is considering operating and for screening alternative investment prospects.
This paper advocates using projected finding & development costs and netbacks together with the capital productivity index when evaluating investment prospects. In addition, it describes some of the pitfalls encountered when these parameters are utilized for evaluating international investment prospects.