Regional Impact of Project Spending

Abstract

Published in Oil & Gas Executive, Volume 1, Number 1, 1998, pages 38-43,50. In many parts of the world, the social and economic impact of petroleum operations is as important to local officials and residents as reserve estimates, production rates, and environmental assessments are to the investor. In Russia and the remainder of the Commonwealth of Independent States, for examples, government officials want to know the full impact of projects on the economy and employment. Full-impact awareness requires determination of national and regional effects resulting from the initial investment and continued operations. Socioeconomic Analysis Socioeconomic studies of petroleum projects require the use of two types of analysis models: a financial model of the cash flow generated from the construction and operation of the project and socioeconomic "input/output" models. Socioeconomic models use the results of the cash-flow model to determine the aggregate increase in gross domestic product, gross output, government revenues, and the potential for creation of new employment. All economic activity is interrelated. The concept of this mutual interdependence is called the "circular flow of income." Each individual income flow depends on the existence of all the others; if any one flow stops, all flows stop. Fig. 1 shows the links between project spending and the aggregate economic and social impact resulting from an investment project. Investment project cost includes expenses for labor and goods and services, providing income for businesses and the people they employ (commonly called the local content of the project). The investment project also provides government income-taxes and duties, including profit share in the case of production-sharing agreements. These income streams constitute the direct impact of the project on the economy.