Johnny, I have more work for you: I'm curious to see a follow up piece combining this ratio with your earlier piece about the financial returns from African countries raising their government take by 1 percent--to see what that 1 percent would mean for oil companies. 

Interesting article Johnny.  Isn't this a compelling argument for governments in need of further market entrants to invest in more detailed geological surveying, in order to reduce the initial development risk?  Isn't it also an argument for NOCs whose governments have the foreign reserves (a small percentage of a sovereign wealth fund for eg) to avoid relying on the market for investment?

Jeremey: Yes, it absolutely does in my opinion. We've already started talking about it as the booksprinters gather since a lot of the features of Oil Classic - soaring expectations unmet, runaway profits, turbulence - are a product of the uncertainty inherent in bidding on the unknown. The issue is how do you find the magical argument or presentation that would allow any politician in pretty much any system to act like a VC or high risk investor. Kobina, that is definitely worth following up - the answer in large part depends on the loading issue... would the extra government take be towards the front of the project life cycle or towards the back, given that company financials are based on internal rates of return where concepts like net present value are key. I'm going to chew on it - u got any particular countries or contexts in mind?

@Johnny: Ghana would be my preference, only if it's relevant and you have the time. 

I appreciate the whole idea of asking how much money, how much profit do oil (or gas or mining) companies need to make a project worthwhile. My concern with this entry is twofold. First and importantly, the book cited by Mr. Johnson is almost 20 years old and out of date. The oil business and the science and technology have changed almost completely since and the ideas of a 50 fold return, of exploration, of an industry run by the private sector do not necessarily represent the oil business as usual today. Independents of any size work in many different capacities now, sometimes even as contractors to other private companies or to national companies. Sometimes they will work on very small margins if they are juniors or wildcatters; sometimes they hope to sell out, sometimes to make it big (think of Tullow Oil). Some supermajors will take very small percentages --- look at the auctions in Iraq. Then again, the issue of upstream and downstream risks and cost has changed dramatically since then, not only from just getting the stuff out and to market, but with a number of externalities, many of which are important and desirable, such as environmental protection, local beneficiation, etc.

Extractive companies are commercial enterprises. They will not be better than they are asked to be, if it harms their profits. But an important question is how to think of resource nationalization -- is it better for a government to take a lower percentage and keep the mines and investment open during an economic downturn or a higher percentage to make as much money as possible for a poor country and risk occasional closure? How do we balance that?

Revenue Watch also has very good material on contracts and the oil business, but it is somewhat more recent.