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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