Politics and World Oil Economics: An Account of the International Oil Industry in Its Political Environment

By J. E. Hartshorn | Go to book overview

CHAPTER VII
Investment and Returns

R eckoned in terms of what was originally spent to bring it into being, the free world's petroleum industry, at the beginning of the sixties, may have had a gross book value of about $105 billion; written down, the 'net investment' involved in it was of the order of $60 billion, or well over twenty thousand million pounds. A comprehensive analysis of the industry's capital investment made by the Chase Manhattan Bank of New York suggested that at the end of 1960, the industry's gross investment in the United States was $57,800 million against a 'free foreign' total of $46,750 million. American oil thus represented about 55 per cent of the whole, though ever since 1955 oil investment outside the United States has grown faster than inside it, and since 1958, the amounts invested annually outside America have been larger than those inside.

A word, first, about what 'investment' means in oil. Very large amounts of money have to be spent to find and develop oil reserves: these do not always produce 'fixed assets' for the industry, nor in accounting terms are they always treated as are the sums invested in productive facilities for other industries. When an oil company surveys a fresh section of a concession area in which it already has production and income, it customarily writes off the whole cost of its preliminary search, such as geophysical work, against current income in that year, as one of its current costs: it usually does the same with the current cost of drilling operations. If the well it sinks discovers oil and this is developed into production, it takes the actual cost of the tangible assets involved -- casing in the hole, Christmas tree of valves at the top, gas separation equipment, pipe for gathering, storage tanks, and the like -- on to its books as an investment, capitalizing them and writing them down over an agreed period of depreciation like any other fixed assets. The whole cost of drilling development wells in areas after oil is discovered, by contrast, may have to be capitalized and written

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