Cost recovery is common in oil business. It is used in the oil exploration contract sharing between oil companies and the host country, like Indonesia. It is essentially an incentive given by host country to investors like Exxon Mobil so that it can claim all expenses during oil exploration. It is also a buffer to mitigate against any failure from the costly exploration business.
However, often times, oil companies also charged all kind of expenses to this account, including anything that are NOT related to exploration. Such as golf club membership, housing for the staff, and other non-exploration expenses incurred during the exploration stage.
It is however no longer exclusive to exploration or pre-operational stage. At any other stages of oil business, cost recovery is relevant.
Take the case of British Petroleum oil spills in the US, for instance. BP has to spend some $40 billions in the coming years to repair the damage of the spills, economic-wise and environmental. This is a lot of money, even for giant like BP. Although recently it announced that is has returned to profitability in second half of 2010 as reported here.
What interesting to see (years from now) is how will BP ‘recover’ this cost. I suspect, as the case of oil exploration above tells us, BP may spread this $40 billions (or more) over the next decade or so and charge them piece-meal into our future purchases of BP products. Yes, consumer may have to pay the cost recovery.
Lucky for the powerful US government. Because of its power, BP does not dare to charge it with any cost recovery. If the spills was in Indonesia, the case will be different. BP will probably be better off by more than $40 billions now and may even book larger profits in 2010. Less headache too.***
Originally published on luqyantamanni.wordpress.com, November 10, 2010: view original.
