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Contents
Introduction
Economic Yardsticks Economic Analysis Process Cash Flow Model Examples Of Exploration /Production Programs Risk And Uncertainty
12000
8000
4000
Without infills
1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992
1970
EXPENSES
+
NET INCOME PV CUM. NET CASH FLOW PV PROFIT
-10 -5
INVESTMENTS
45
10
15
20
25
30
35
40
YEARS
It will be necessary for each organization to select the one or combination of yardsticks which match their goals.
Payout
PROFIT CUMMULATIVE CASH FLOW
The time required for the cumulative cash flow to reach zero.
PAYOUT 0
10
15
20
25
30
TIME - YEARS
PIR =
100
50 0 - 50
ROI ROI
= =
$ 180,000 $ 60,000
3.0
Investment $60.000
PIR =
180,000 60,000
60,000
10 12 14 16
PIR
2.0
TIME - YEARS
50
PI
0
-50 0 10 20 30 40 50
0.90
0.80
Present Value
Discount Rate
5%
0.40
0.30 0.20 0.10 0.00 0 5 10
10 %
15 % 20 %
15
YEARS
20
25
30
PV PROFIT PAYOUT
PV PAYOUT
0 5 10 15 20 25 30
TIME - YEARS
50 40
A B
C
30
20 10 0 -10
32% A
35
-20
40
reservoir-development processes.
Sensitivity to various parameters [e.g. Original oil in place (OOIP), reserves and production rate forecasts, capital investment, and operating expense] and other data affecting these parameters on the project /reservoir performance can be determined by performing economic analyses with variations in those parameters, thereby covering a reasonable range of
uncertainty.
Source/Comment
Reservoir and production engineers Unique to each project Finance and economic professionals Strategic planning interpretation Facilities, operations and engineering professionals Unique to each project Unique to each project Finance and economics professionals Strategic planning interpretation Accountants Accountants
Benchmark Crude
This is a widely used term to refer to an acceptable grade of crude oil and used as a standard in trading.
West Texas
Intermediate (WTI) 40
$ / Barrel Crude Oil Spot North Sea Brent
$ 70 $ 65 $ 60 $ 55 $ 50 $ 45 $ 40
$ 66.15
$ 35
1/3/05 3/4/05 5/5/05 7/6/05
6/6/05
9/2/05
11/3/05
1/5/06
2/2/05
4/6/05
8/4/05
10/4/05
12/5/05
50 45 40 35
$/BARREL
Royalty
Where :Gross Revenue Royalty = Produce volume of HC x Price . = Fraction x Cross Revenue .
+
Operating Expense
Where :Capital Expenditure: Investment intended to acquire or Improve properties or assets that will generate revenue over a period of time .
Operating Taxses
Fixed
Variable
periodic
Fixed Cost are independent of the production rate such as maintenance, engineering staff, power cost. Variable Cost are dependant on production level such as chemical treating, some power, some labor. Periodic do not occure constantly, pump changes,
administrative expense covering the individual property The specific method of allocating these expenses is arbitrary
Elements
Office expenses, including rent and utilities Lease supervision wages, benefits Engineering salaries, benefits Clerical, accounting wages, benefits Toolroom, warehouse, shop wages, benefits Motor pool expense, not recovered as direct charge, Management salaries, benefits
Services
Employee relations Public Affairs Insurance
Overhead can be estimated as a fraction of capital expenditures plus a fraction of direct operating costs. A recent study determined that the appropriate fractions would be 9% of capital and 11 % of DOC.
5
6 7 8 9 10
$100,000
$100,000 $100,000 $100,000 $100,000 $100,000
$11,000
$11,000 $11,000 $11,000 $11,000 $11,000
$11,000
$11,000 $11,000 $11,000 $11,000 $11,000
TOTAL
$1,250,000
$1.000,000
$112,500
$110,000
$222.500
Wellhead
Severance
Cash flow Diagram is simply a graphical sketch representing the timing and direction of montary transfers
Time
$ CASH IN
Time
$ CASH OUT
Oil B/D
40 30 20 10 0
15 10
Cumulative M$
200
150 100 50 0
20
10 0 -10 -20 -30 -40 -50 -60
Investment
-50 0 2 4 6 8 10 12 14 16
1.Price Forecast 2.Production Forecast 3.Royalties 4.Operating Costs and Future Capital Required 5.Taxes 6.Reserves The above order is general.
Revenue Revenue Royalty Wells Plant Compr. Flow NCF ($) ($) ($) ($) ($) ($) ($) ($)
(MMCF) ($/MCF)
($/bbl)
Column
(5) = (3)* (4) (8) = (6)*(7) (9) = (5)+ (8) (10) = (9)*(Royalty Fraction) (14) = (9)-(10)-(11)-(12)-(13)-(2)
Revenue Royalty Revenue Expenses Cash Flow Cash Flow ($) = = = = = = = ($) ($) ($) ($) ($)
Column:
(2) (5) (6) (7) (8) (9) (10) (Total investment)* W.I. (3)* (4) (5)*WI. (6)* (Royalty Fraction) (6) - (7) (Total Op. Exp.)* W.I. (8) - (9)-(2)
2000
2001 2002 2003 2004 2005 Total
2211.3
2653.2 1976.4 972 619.2 257.4 84101.9
20.00
20.00 20.00 20.00 20.00 20.00
44.28
53.06 39.53 19.44 12.88 5.15 682.04
2178.9
8468.6 4762.8 3364.2 220.3 1087.2 56848.1
1.50
l.50 L50 1.50 1.50 1.50
3.27
5.20 7.14 5.05 3.33 1.63 84.52
47.79
58.27 46.67 24.49 15.71 6.78 766.56
Year
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
($MM)
5.715 64.680 143.977 4.205 0.000 0.000 0.000 0.000 0.000 0.000 0.000
($MM)
0.000 0.000 3.825 10.359 9.922 9.922 9.922 9.922 9.922 9.922 9.922
($MM)
0.000 0.000 11.502 21.948 13.030 5.075 2.486 2.673 4.749 5.827 4.667
@12%
0.9449 0.8437 0.7533 0.6726 0.6005 0.5362 0.4787 0.4274 0.3816 0.3407 0.3042
2003
2004 2005 Total
0.000
0.000 6.364 224.941
9.922
9.922 8.332 111.814
2.449
1.571 0.678 76.656
12.371
11.493 15.374 413.41
12.116
4.221 -8.595 353.149
0.2716
0.2425 0.2165
3.291
1.024 -1.861 164.599
0.040
0.009 -0.011 -0.004
$MM
120 100 80 60 40 20 0 -20 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Captital cost Operating Cost Prod. Tax Total Cost
10000
8000
12000
10000
MSTB
8000
MMSCF
6000
6000
4000
4000
2000 0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
2000
2000
2000 -
Oil Prod.
Total Revenue
Gas Prod.
150
100
$MM
50 0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
$ 578.09 MM (353.149 + 224.941) is the total undiscounted cash flow without the total undiscounted investment of $ 224.941.
(PIR) is the total undiscounted cash flow without capital investment divided by the total investment. 3- Present Worth Net Profit (PWNP) = $ 164.599 MM. It is the present value of the entire cash flow discounted at a specified discount rate.
The summation of the net cash flows from the true beginning through abandonment in year 20 is +$92 million. From discovery forward it is +$142 million.
To answer the basic question as to whether the development would be economic, the past would be ignored as "sunk costs," and year 6 would be treated as though it were year 1. The $50 million of sunk costs would not enter into the decision. It is well to keep in mind, however, that the venture appears better than it actually is in its entirety.
Venture Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
NCF, $M -10-10-10-10-10-10 -5 +5+10+20+35+25+20+15+8 +6 +5 +4 +3 +1
True beginning
today future
abandonment
past
Base Case
150
100
50 0 -50 -100 0 5 10
15
20
25
30
35
40
t=1
oil oil PRICE (t) x Rate (t) CAPEX (t) OPEX (t) TAX (t) (1+r)t
TIMING ?
WATER INJECTION RATE
A
OIL RATE
A B C
B C
PRIMRY
A B C
PRIMRY
WF
TIME
PRIMRY
WF
TIME
WF
TIME
Delay expenditures
Increase income (production rate) Improve value of product Accelerate income
The nature of economic evaluation entails risk taking and uncertainties involving technical, economic, and political conditions. The results of the analysis are subjected to many restrictive assumptions in forecasting recoveries, oil and gas prices, investment, operating costs, and inflation rate.
ECONOMIC
Inflation Oil and gas prices Gambler's ruin Interest rates Environmental Timing Exchange rate Financing / capital Supply / demand Operating costs
POLITICAL
Governmental policy Government regulations Laws Nationalization Environmental Timing Exchange rate Financing / capital Taxation Export / import Personnel
uncertainty of occurrence,
There are four fundamental approaches to coping with risk and uncertainty :-
2.000
1.500 1.000 500
10
YEARS
00
0 -30
-20
-10
00
The analysis shows that DCFROI and PWNP are affected more drastically by both oil price and oil production than the operating costs.
PARAMETER (EV)
NOC SHARE (80%) HURDLE RATE (15%) EXP.ULT.REC. (58.2 MMB) OIL PRICE ($24/Bbl) TAXES (0%) FROB. SUCCESS (50%) DEVELOPMENT COSTS EXPLORATION COSTS VARIABLE OP. COSTS EXPLORATION PERIOD FIXED OP. COSTS DOUBLE TRIANGULAR DISTRIBUTION
50%
0%
70% +25% -50% -40% 2 yrs.
+40% -40%
Combine compatible risk elements to determine if the elements offset or enhance each other. Determine a range of outcomes and analyze statistically to determine the most likely outcome and range of probabilities.
0 1 2
3
4
14,848
7,452
0.751
0.683
11,151
5,090
0.569
0.482
8,597
3,592
0.455
0.350
6,756
2,608
Total
36,340
17,239
2,722
[8,622 ]
Following is a tabulation of interest rate versus total present worth calculated from Example 7 and in the above table.
Interest Rate - %
0 6 10 20 30
Present Worth - $
36,340 24,212 17,239 2,722 [8,622]
Year
0 1 2 3
Cash Flow $
[175,000] 140,520 59,470 20,010
Total
45,000
16,639
[5,314]
Present Worth M$
30
20
10
0 -10
10
15
20
25
30
Optimize both
Since there is little or no control over oil price, minimize production cost and investment is needed. The decision should consider :- The economic costs ( new capital investment ), - And benefits ( increase in oil rate or reserves ).
Price projection depends on gravity of oil and composition Operating costs projection depends on gravity and
Cost of capital
Income tax treatment.
Field size?
Sufficient recoverable hydrocarbons?
Rservoir properties (Sw, , K, , etc.) Zone thickness Areal extent Drive mechanism (effects on Rf ). Decline rate Depth Production method needed