Shared investment
For a shared investment, in most cases the cost estimate should be known in advance with a fair degree of accuracy. Parties must in particular agree to a cost distribution key, coupled to a user right or a procedure to share the capacity of an investment, for instance when four road construction companies jointly operate an asphalt plant.
A distinction can be made here between payment according to availability and payment according to use. This will often be coupled to the cost structure. A warehouse will generally be calculated on the basis of availability, since this involves various fixed costs. A transportation vehicle, on the other hand, will more often be calculated based on use as being the primary source of costs.
One option is to lease the shared investment to third parties, whenever it is not utilised by the partners. This will of course require additional agreements to regulate the associated leasing efforts, but it can help reduce the effective costs for both partners.
Shell
Shell has worldwide around 1500 joint ventures for various purposes. Luc Meesters is as joint venture manager and board director involved in a number of the downstream partnerships. He explains about the financial arrangements with regard to shared investments.
“ An example is the joint development of an oil pipeline from a port city inland. The refineries of various owners can benefit from such a pipeline and it makes sense to combine the demand and to build one pipeline that serves all involved. Cost of transportation are just one part of the total product cost.
In such cases a mechanism needs to be devised to split the investments and the costs associated with the operation of the pipeline. The investment costs can be divided between the participants according to the expected use of the pipeline or interest holdings. Each will receive an equivalent share in the joint venture that will own and operate the pipeline.”
Each year the actual capacity demand of each partner is added up, and a price per unit of oil transported is calculated. This price could be based on the operational costs with a mark-up for the investments and possibly a profit element. In most cases, if 50 to 100 % of the maximum capacity is used, this method will benefit all partners because of the relatively low transportation costs.
If a company is an overshipper( volumes transported are higher than interest) than it contributes more than it proportionally would compared to its shareholding. In such a case, if profits would be a result of the companies ‟ operations, an overshipper would receive only dividends in proportion to its shareholding.
On the other hand, if only a small part of the capacity is used, the price per unit of oil transported can increase dramatically. Eventually partners may prefer another mode of transportation, e. g. by barge or by truck, leaving the pipeline unused. In that case operational costs may be cut, but there is no payback from the investment, which are sunk costs.
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