Course Petroleum Economic and Management

8/13/2019 Course Petroleum Economic and Management

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Petroleum Economic andManagement

Contents

Introduction

Economic Yardsticks

Economic Analysis Process

Cash Flow Model

Examples Of Exploration /Production Programs

Risk And Uncertainty


2/74

Petroleum Economic andManagementIntroduction

The prime objective of petroleum producing operations is not

only to supply the modern world crude oil and natural gas,

but, to make a profit while doing so.

CO2Injection Started

Withoutinfills

With 10-Ac.Infills

With 20-Ac. Infills

40-Ac. SpacingWaterflood peak

20000

16000

12000

8000

4000

0

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992

BPD


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In an any economic evaluation, the key elements are:-

Income

Expenditures

Time

Cash flow (periodic recording of Income and Expenditures)

is the most important tool for:

Evaluating investments.

Choosing among alternatives.

Introduction (contd)


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E & P INVESTMENT CYCLE

ANNU

ALINCOMEANDEXPEND

ITURES

CU

MULATIVENETCASHFLOW

YEARS

INVESTMENTS

ABANDONMENT

COST

EC.LIMIT

PV PROFIT

PV CUM. NET CASH FLOW

PROFIT

EXPENSES

CUM. NET CASH FLOW

REVENUE

NETINCOME

EXPLORATION PRODUCTION

+

-

0

+

-

0

-10 -5 0 5 10 15 20 25 30 35 40 45

Introduction (contd)


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Petroleum Economic andManagementIntroduction (contd)

The reason for doing economic evaluations is to make

investment decisions.

This process involves answering three critical questions:

What will it cost ?

What is it worth ?

Will it earn enough profit ?

The time value of money must be considered when

answering the last question.


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All companies have established various economic measures

(YARDSTICKS) for determining the attractiveness of

investments.

No single Yardstick matches the gaols of every organization.

It will be necessary for each organization to select the one orcombination of yardsticks which match their goals.

Economic Yardsticks


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Payout

The shorter the payout the

more attractive the project.

The time required for the

cumulative cash flow to reachzero.

A common rule of thumb is 2-4Years.

0

0 5 10 15 20 25 30

PROFIT

PAYOUT

TIME - YEARS

CUM

MULATIVECASHFLO

W

Economic Yardsticks (contd)


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Petroleum Economic andManagementEconomic Yardsticks (contd)

Return on investment (ROI)

ROI is independent of time which limiting its usefulness as

a single criterion for investment decisions.

The higher the ROI the better.

ROI = Cumulative IncomeTotal Investment


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Cumulative Income - Total InvestmentPIR =Total Investment

PIR =ROI1.0

It is another form for expressing the same Yardstick.


Profit to investment Ratio (PIR)


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Payout =2 Years Directlyfrom Graph

Investment $60.000

TotalProfit $ 180.000

payout

2 Years

0 2 4 6 8 10 12 14 16

200

150

100

50

0

- 50

TIME - YEARS

C

UMULATIVECASH($1,0

00)

ROI =$ 180,000

$ 60,000

ROI = 3.0

PIR =180,00060,000

60,000

PIR = 2.0


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The present value of the

entire cash flow, discounted

at a specified discount rate.

i.e how much a certain

amount of future income is

worth today.


Present Worth Net Profit (PWNP)

50

100

150

200 Present Worth

Profile

PW10

PI

-50

0

0 10 20 30 40 50

Present worthM$


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YEARS

PRESENT WORTH COMPARISONS

Discount Rate

PresentVa

lue

0 5 10 15 20 25 30

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

5 %

10 %

15 %

20 %


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PROFIT

PAYOUT

PV PAYOUT

PV PROFIT

0 5 10 15 20 25 30

TIME - YEARS

CU

MULATIVECASH

FLOW


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Discounted Cash Flow Return On Investment (DCFROI)

The max. discount rate that needs to be charged for the

investment capital to produce a break-even venture.

i.e PWNP =zero

Present Work Index (PWI)

The total discounted cash flow

The total discounted investment

The value of this parameter in the range of 0.5 to

0.75 considered favourable.



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Hurdle rate

The hurdlerate" discount factor, more properly referred

to as the "guideline discount (or interest) rate" is the

minimum acceptable rate of return on investments

The hurdle rate used is normally intended as the returnwhich the firm has been able to realize on its investments

of a similar nature in previous years.

The hurdle rate should recognize :

1.the acquisition cost of capital,2.suitable return on the investment involved

3.a compensation for Corporate risk, and

4.inflation.


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0 5 10 15 20 25 30 35 40

-20

-10

0

10

20

30

40

50

60

70

80

HURDLE RATE

15%10%

A

B

C

22% A B

C

INTERNAL RATE OF RETURN

27% 32%

DISCOUNT RATE - PERCENT

NETPRESENTV

ALUE


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Petroleum Economic andManagementEconomic Analysis Process

Set EconomicObjective

FormulateScenario

Collect Data

Make EconomicAnalysis

Make RiskAnalysis

Choose OptimumOperation

PAYOUTPWI

DCFROIPWNP

ProductionInvestmentsOperatingExpenses

Oil/Gas Price


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Today, economic analyses are being applied throughout the

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.

Economic Analysis


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Petroleum Economic andManagementEconomic Data

Data Source/Comment

Oil and gas production Reservoir and production engineers

Rates vs. time Unique to each project

Oil and gas prices Finance and economic professionals

Strategic planning interpretation

Capital investment (tangible, intangible) Facilities, operations and engineering

and operating costs professionals

Unique to each project

Royalty/production sharing Unique to each project

Discount and inflation rates Finance and economics professionals

Strategic planning interpretationState and local taxes (production, Accountants

severance, ad valorem, etc.)

Federal income taxes, depletion Accountants

and amortization schedules


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West Texas

Intermediate (WTI) 40

North Sea Brent 38

Suez Blend 32

This is a widely used term to refer to an acceptable grade ofcrude oil and used as a standard in trading.

WTRGEconomics - 2006www.wtrg.com(479) 293- 4081

Jan 4, 2005 -Jan 24, 2006

Crude Oil Spot

North Sea Brent

$/Barrel

$ 70

$ 65

$ 60

$ 55

$ 50

$ 45

$ 40

$ 351/3/05

2/2/05

3/4/054/6/05

5/5/05

6/6/05

7/6/05

8/4/05

9/2/0510/4/05

11/3/0512/5/05

1/5/06

$ 66.15

Economic Data

Benchmark Crude


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AVERAGE WORLD CRUDE OIL PRICES

1850 1870 1890 1910 1930 1950 1970 1990 2010

0

5

10

15

20

25

30

35

40

45

50

$/BARREL

NOMINAL OIL PRICE

REAL OIL PRICE 2002$

Economic Data


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Petroleum Economic andManagementCash Flow Model

Cash flow for typical Exploration and Production venture can

be determined annually or for the life of a project by the

following model :-

Cash Flow=

Annual Revenue Annual Expenditure

Net Net Net

(NCF BT)


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Petroleum Economic andManagementCash Flow Model (contd)

=Net

Annual Revenue

Gross Revenue Royalty

Where :-

Gross Revenue = Produce volume of HC x Price .

Royalty = Fraction x Cross Revenue .


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=Net

Annual Expenditure

Capital Expenditure

Operating Expense

Where :-

+

Capital Expenditure:

Investment intended to acquire or Improve properties orassets that will generate revenue over a period of time .

Cash Flow Model (contd)

l i d


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OperatingExpense

(cost of production)

Direct operating Expenses

Indirect Expenses (overhead)

Operating Taxses


P l E i d


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Direct Operating Expense

Fixed Variable periodic

Fixed Cost are independent of the production rate

such as maintenance, engineering staff, power cost.

Variable Cost are dependant on production levelsuch as chemical treating, some power, some labor.

Periodic do not occure constantly, pump changes,

hot oiling, dewaxing, stimulation.


P t l E i d


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Indirect Expense (overhead)

All costs which may be incurred at a distant location for a

number of different operations are considered indirect

operation cost or overhaed

These include a prorated portion of supervisory and

administrative expense covering the individual property

The specific method of allocating these expenses is

arbitrary


P t l E i d


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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, benefitsServices

Employee relations

Public Affairs

Insurance

Elements


Indirect Expense (overhead)

P t l E i d


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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.


INDIRECT OPERATING COST (OVERHEAD) FORECAST


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P t l E i d


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Operating Taxes

Wellhead Severance valorm


P t l E i d


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Cash flow Diagrams

Cash flow Diagram is simply a graphical sketch

representing the timing and direction of montary

transfers

Time$

CASH OUT

$CASH IN


P t l E i d


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Time$

CASH OUT

$CASH IN

Cash flow Diagrams

Petrole m Economic and


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200

150

100

50

0

-50

CumulativeM$

Cumulative

Cash Flow

0 2 4 6 8 10 12 14 16

40

20

0

-20

-40

-50

30

10

-10

-30

-60

15

5

10

0

40

20

30

0

10

Revenue andExpenditure

Rate

M$/Yr.

Revenue

Operating Costs

Investment

RateMB/Yr.

OilB/D

Petroleum Economic and


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Major Assumptions

1.Price Forecast

2.Production Forecast3.Royalties

4.Operating Costs and Future Capital Required

5.Taxes

6.Reserves

The above order is general.

Dec

reasingord

ers

o

fimportance




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Spreadsheet Format #2Forecast of Natural Gas Production, By-Products and Net Revenue (Before income Taxes).

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)

Gross

pipeline Gross Gross Gross Total Net

Gas Gas Gas Liquids Liquids Liquids Gross Operating Expense Cash cum.

Year Investment Sales Price Revenue Prod. Price Revenue Revenue Royalty Wells Plant Compr. Flow NCF

($) (MMCF) ($/MCF) ($) (bbl) ($/bbl) ($) ($) ($) ($) ($) ($) ($) ($)

Column

(5) = (3)* (4)

(8) = (6)*(7)

(9) = (5)+ (8)

(10) = (9)*(Royalty Fraction)

(14) = (9)-(10)-(11)-(12)-(13)-(2)

Petroleum industry cash flow spreadsheets



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Petroleum Economic andManagementPetroleum industry cash flow spreadsheets

Spreadsheet Format #1Forecast of Oil Production and Net Revenue (Before income Taxes).

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

Total Total

Annual Annual WI WI Share WI Share WI Share WI Share

WI Share Gross Oil Gross Share WI Net Operating Net cum. Net

Year Investment prod. Price Revenue Revenue Royalty Revenue Expenses Cash Flow Cash Flow

($) (bbls) ($/bbl) ($) ($) ($) ($) ($) ($) ($)

Column:

(2) = (Total investment)* W.I.(5) = (3)* (4)(6) = (5)*WI.(7) = (6)* (Royalty Fraction)(8) = (6) - (7)(9) = (Total Op. Exp.)* W.I.

(10) = (8) - (9)-(2)



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Procedure for economic calculation before income

tax (BIT) using spreadsheets is outlined below:

1. Calculate annual revenues using oil and gas sales from

productions and unit sales prices.

2. Calculate year-by-year total costs including capital,

drilling/ completion, operating, and production taxes.

3. Calculate annual undiscounted cash flow by subtracting

total costs from the total revenues.

4. Calculate annual discounted cash flowby multiplying the

undiscounted cash flow by the discount factor at a

specified discount rate.

Economic Analysis



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Petroleum Economic andManagementEconomic Analysis Example

(7)(6)(5)(4 )(3)(2)(I)

TotalRevenue

GasRevenue

Gas PriceGas Prod.RevenueOil PriceOil Prod

($MM)(3) + (6)

($MM)(4) x (5)

100($/MSCF)(MMSCF)

($MM)(2) x (1)

($/STB)(MSTB)Year

0.000.001.5000.0020.0001992

0.000.001.5000.0020.0001993

115.024.911.503276110.1120.005505.31994

21904817.901.5011934201.5820.0010079.11995

130.8019.811.5013208.4110.4820.005524.21996

50.758.771.505848.241.9820.002098.81997

24.864.451.502968.220.4120.00lO20.61998

26.733.051.502081.S23.6920.001184.41999

47.793.271.502178.944.2820.002211.32000

58.275.20l.508468.653.0620.002653.22001

46.677.14L504762.839.5320.001976.42002

24.495.051.503364.219.4420.009722003

15.713.331.50220.312.8820.00619.22004

6.781.631.501087.25.1520.00257.42005

766.5684.5256848.1682.0484101.9Total



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Petroleum Economic andManagementEconomic Analysis Example

(20)(14)(13)(12)(11 )(10)(9)(8)

DiscountedCash Flow

DiscountedCash Flow

DiscountFactor

UndiscountedCash Flow

Total CostProd. TaxOperating

CostCapital

Cost

@64.23%,$MM

@12%,$MM

@12%($MM)

(7)-(11)($MM)

(8)+(9)+(10)($MM)($MM)($MM)Year

-4.460-5.4000.9449-5.7155.7150.0000.0005.7151992

-30.732-54.5690.8437-64.68064.6800.0000.00064.6801993

-12.812-33.3580.7533-44.284159.30411.5023.825143.9771994

32.233123.0600.6726182.97136.51221.94810.3594.2051995

11.51564.4620.6005107.34522.95213.0309.9220.0001996

2.33519.1690.536235.75114.9975.0759.9220.0001997

0.4955.9630.478712.45612.4082.4869.9220.0001998

0.3426.0440.427414.13912.5952.6739.9220.0001999

0.48412.5260.381632.82314.6714.7499.9220.0002000

0.38214.4880.340742.51815.7495.8279.9220.0002001

0.1759.7610.304232.08314.5894.6679.9220.0002002

0.0403.2910.271612.11612.3712.4499.9220.0002003

0.0091.0240.24254.22111.4931.5719.9220.0002004

-0.011-1.8610.2165-8.59515.3740.6788.3326.3642005

-0.004164.599353.149413.4176.656111.814224.941Total



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$MM

Cost

Captital cost Operating Cost Prod. Tax Total Cost

-20

0

20

40

60

80

100

120

140

160

180

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005



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MMSCFM

STB

Revenue

-2000

0

2000

4000

6000

8000

10000

12000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-2000

0

2000

4000

6000

8000

10000

12000

14000

Oil Prod. Total Revenue Gas Prod.



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$MM

Cash Flow

-100

-50

0

50

100

150

200

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Undiscounted Cash Flow Discounted Cash Flow



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1-Payout Time= 3.43 years.2-Profit-to-Investment Ratio= 578.09/224.941 = 2.57

(PIR) is the total undiscounted cash flow withoutcapital investment divided by the total investment.

3-Present Worth Net Profit (PWNP)= $ 164.599 MM.

It is the present value of the entire cash flowdiscounted at a specified discount rate.

where:

$ 578.09 MM (353.149 + 224.941)is the total undiscountedcashflow without the total undiscounted investment of$ 224.941.

Economic Analysis Summary


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EXAMPLEEVALUATION OF EXPLORATION PROGRAMS

An exploration venture has been proceeding for five years at anannual cash outlay of $10 million per year. A commercialdiscovery has been achieved at the beginning of year 6.

DETERMINE:

Whether the following development of the field would be aprofitable undertaking.

Examples Of Exploration / Production Programs



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SOLUTION :

The summation of the net cash flows from the true beginningthrough 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 $50million 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.


EXAMPLEEVALUATION OF EXPLORATION PROGRAMS



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Petroleum Economic andManagementExamples Of Exploration / Production Programs

SOLUTION :

2019181716151413121110987654321

VentureYear

todayTrue beginning abandonment

past future

NCF, $M -10-10-10-10-10-10 -5 +5+10+20+35+25+20+15+8 +6 +5 +4 +3 +1



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ADJUSTMENT OF NET CASH FLOW FOR TIME ZERO RESET ($ millions)PV

NCFAdj.NCF

Adj.PastNCF

Effective10%

Factor*

AnnualNCF

VentureYear

NCF

Year

-15.361.536 FV(5)-101

-13.961.396 FV(4)-102

= -64.03-12.691.269 FV(3)-103

-11.541.154FV(2)-104

-10.491.049 FV(1)-105

-64.03-64.03Time Zero

-9.53-100.953 FV(1)-1061

-4.33-50.867 FV(2)-572

+3.94+50.788 FV(3)+583

+7.16+100.716 FV(4)+1094

+13.03+200.651 FV(5)+20105

+20.72+350.592 FV(6)+35116

+13.46+250.538 FV(7)+25127

+9.79+200.489 FV(8)+20138

+6.67+150.445 FV(9)+15149

+3.24+80.404 FV(10)+81510

+2.21+60.368 FV(11)+61611

+1.67+50.334 FV(12)+51712

+1.21+40.304 FV(13)+41813

+0.83+30.276 FV(14)+31914

+0.25+10.251 FV(15)+12015

92


NPV10(FULL Life)+$6.27

NPV10(Forwardfrom time zero)

$70.30


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ACCELERATION PROJECT


250

200

150

100

50

0

-50

-100

0 5 10 15 20 25 30 35 40

Base Case

ACCELRATION CASE

DIFFERENTIAL (ACC.-BASE)

DISCOUNT RATE - PERCENT

NETPRESENTVALU

E



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Since additional money is spent for acceleration than would be

required to recover the same volume of hydrocarbons, there is

no undiscounted payout for the additional expenditure.

However, because the additional expenditure accelerates future

income, the venture should exhibit a greater net present value.

This is the justification for making the added expenditure.

CONCLUSION :

Acceleration Investments




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Waterflood planning in an economic perspective


NPV (t) = N

t=1 (1+r)t

PRICE (t) x Rate (t) CAPEX (t) OPEX (t) TAX (t)oil oil

A

B

C

WFPRIMRY

TIME

WATERINJ

ECTIONRATE

A

B

C

WFPRIMRY

TIME

WATERINJ

ECTIONRATE

A

B

C

WFPRIMRY

TIME

OIL

RATE

TIMING ?



54/74


Economic yardsticks and present value are used for economic

optimization through the following :-

Reduce capital expenditures

Reduce operating costs

Reduce indirect costs (overhead)

Delay expenditures

Increase income (production rate)

Improve value of product

Accelerate income


CONCLUSION :



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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, oiland gas prices,

investment, operating costs, and inflation rate.

Risk And Uncertainties



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Types of risk

Dry holes Inflation Governmental policy

Geological Oil and gas prices Government regulationsEngineering Gambler's ruin Laws

Storm damage Interest rates Nationalization

Earthquake Environmental Environmental

Timing Timing Timing

Exchange rate Exchange rate

Financing / capital Financing / capitalSupply / demand Taxation

Operating costs Export / import

Personnel

TECHNICAL ECONOMIC POLITICAL

Risk And Uncertainties (contd)



57/74


When evaluating exploration and production venturesthere are three types of uncertainty which aremost significant. These are;

uncertainty of occurrence,

uncertainty of magnitude and

uncertainty of rate of production.




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HOW TO DEAL WITH ?

There are four fundamental approaches to coping with riskand uncertainty:-

Diversification,

Reduction of exposure,

Avoidance, and Insurance.




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EFFECTS OF TIMING RISK

REFERENCE: WILSON & PEARSON, JPT YEARS

O

ILPRODUCT

ION-

BARRELS/D

AY


3.500

3.000

2.500

1.500

1.000

500

0

2.000

1 2 3 4 5 6 7 8 9 100

PREDICTEDDATE FIRSTINJECTION ACTUAL DATE

FRIET INJECTION



60/74

et o eu co o c a dManagement

The analysis shows that DCFROI and PWNP are affected more drasticallyby both oil price and oil production than the operating costs.

DCFROI Sensitivity Analysis NPV Sensitivity Analysis


100

80

60

40

20

000

DCFROL,%

-20-30 -10 +10 +20 +30

Percent of Base Projection

-- Oil Production-- Operating Costs-- oil Price

300

250

200

150

100

50

0-30 -20 -10 00 +10 +20 +30

Net present Value. MM$

Percent of Base Projection-- Oil Production-- Operating Costs-- oil Price


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62/74



63/74

Management

Sensitivity Analysis (Conti)

TORNADO DIAGRAM

NET PRESENT VALUE -$MM

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

Apply Risk Evaluation Methods

-50 0 50 100 150

EXPECTED VALUE -$19.9MM

10%25%

50%90%

0%50%

70%30%

+25%+25%

-50%+50%

-40%+40%

-40%+40%

2 yrs.3 yrs.

87.8 MMB29.3 MMB

$ 30/Bbl$ 20/Bbl



64/74

Management

Sensitivity Analysis

Select one risk element and measure the range of equally

likely values.

Apply the range of values, with appropriately selected

intervals, to the part of the evaluation which is sensitive to that

element; i.e., how is OOIP affected by changing from 18% to

30% at 1% intervals.

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.



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Management

10% Interest Rate

PresentWorth

20% Interest Rate

PresentWorth

30% Interest Rate

PresentWorthCash Flow

Year Factor($) ($) Factor ($) Factor ($)

0 [100,000] 1.000 [100,000] 1.000 [100,000] 1.000 [100,000]

1 81,934 0.909 74,478 0.833 68,251 0.769 63,007

2 32,106 0.826 76,250 0.694 22,282 0.592 19,007

3 14,848 0.751 11,151 0.569 8,597 0.455 6,756

4 7,452 0.683 5,090 0.482 3,592 0.350 2,608

Following is a tabulation of interest rate versus total present worthcalculated from Example 7 and in the above table.

Total 36,340 17,239 2,722 [8,622 ]

Interest Rate - % Present Worth - $0 36,3406 24,212

10 17,23920 2,72230 [8,622]



67/74

Management

Year

Cash Flow$

Factor Factor

10% Interest RatePresent Worth

$

20% Interest RatePresent Worth

$

0 [175,000] 1.000 [175,000] 1.000 [175,000]

1 140,520 0.909 127,487 0.833 116,828

2 59,470 0.826 49,122 0.694 41,272

3 20,010 0.751 15,028 11,586

Total 45,000 16,639 [5,314]



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Management

0 5 10 15 20 25 30

Drill Two Wells

Drill One Well

Interest Rate Per Cent

-10

0

10

20

30

40

50

PresentWorthM$

Comparative Present Value Profiles



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Management

Function is to determine how to produce most oil and/or gas reserves in the

most efficient manner and at least cost to optimize the economic return.

Optimize bothProduction Rate

Ultimate Recovery

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 ).

The relation between benefits and cost can be measured in various

ways (Undiscounted net profit, net present value, rate of return, , etc)

In brief



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Management

DIVERSIFICATION :

Participating in the drilling of ten wells instead of putting allof one's resources in a single prospect

REDUCTION OF EXPOSURE,

Taking a lesser interest in a greater number of venture.

AVOIDANCE

If the risk is so great , it may be better to avoid theundertaking completely.

INSURANCE.

It does not reduce risk, but distributes it over time and sharesit with others in the same insurance pool.




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Management

This method essentially combines the sensitivity analysis

approach with a system of randomly selecting the values tobe used. The method is most effective in analyzing the

interrelation of a large number of variable factors. The

outcomes can be statistically analyzed for assignment of

probabilities.

MONTE CARLO ANALYSIS




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Management

Price projection depends on gravity of oil and composition

Operating costs projection depends on gravity and

composition, depth, number of wells, etc.)

Royalty and production taxes.

Required investment.

Cost of capitalIncome tax treatment.

ECONOMIC RISKS:

Define the Risk



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Management

GEOLOGIC RISKS :

Does the zone exist?

Field size?

Sufficient recoverable hydrocarbons?

Define the Risk



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Management

PERFORMANCE RISK :

Rservoir properties (Sw, , K, , etc.)

Zone thickness

Areal extent

Drive mechanism (effects on Rf ).

Decline rate

Depth

Production method needed

Well spacing required

Stimulation needed?

Define the Risk

Date post:	04-Jun-2018
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Course Petroleum Economic and Management

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