1

Economic Modeling

Dr. Alfred KjemperudThe Bridge Group AS

22

Investment Decisions• Petroleum investments are

– capital intensive – irreversible – high risk/uncertainty

• Investment decisions today are only unfolded in the uncertain future for both company and government

33

Modeling = Predicting

• Petroleum project modelling is based on – knowledge of fundamental elements in

technology and economics– empiric data– and a bit of artistry

44

Warning• All modeling is imperfect.

– It is always a simplification of reality– Depends on quality of input

• The challenge is to assess the weaknesses and discover flaws

55

Activities and cash flow

Income

Time

Government

Pre-license Exploration Development Production AbandonmentProduction

Rehab.

Con

trac

t aw

ard

PDO

Costs

Lead Time

66

Modeling

• Production curve• Oil/gas price• Capex• Opex• Fiscal regime• Discount rate

77

Production curve

Build-up

Plateau

DeclineVolume

CutoffTime

88

Factors determining production

• No of wells• Plateau factor (%)• Production rate per well• Plateau production rate• Remaining oil/gas at start decline• Decline rate (%)• Cut off rate

99

Oil ProductionOil Production

0.0

50.0

100.0

150.0

200.0

250.0

300.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Year

Thou

sand

bbl

/yea

r

Oil [Thousand bbl/d]Assoc. Gas [Thousand o.e./d]

1010

Gas ProductionGas Production

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Year

Gas

(Mill

ion

scf/d

ay)

Con

dens

ate

(Tho

usan

d bb

l/d)

Non Assoc. Gas [Million scf/d]Condensate [Thousand bbl/d

1111

Statfjord Oil - NorwayOil Production - Statfjord, Norway560 million Sm3 (3520 Million bbl)

23 %

66 %

0

5

10

15

20

25

30

35

40

200220012000199919981997199619951994199319921991199019891988198719861985198419831982198119801979

Years

Mill

ion

Sm3

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

Oil Production

P/R percentage

1212

Ula oil - NorwayOil Production - Ula, Norway

80 million Sm3 (503 Million bbl)

53.7 %

35.1 %

0

1

2

3

4

5

6

7

8

20022001200019991998199719961995199419931992199119901989198819871986

Years

Mill

ion

Sm3

0.0 %

10.0 %

20.0 %

30.0 %

40.0 %

50.0 %

60.0 %

70.0 %

80.0 %

90.0 %

Oil Production

P/R percentage

1313

Oseberg Oil - NorwayOil Production - Oseberg Field, Norway

350 million Sm3 (2200 million bbl)

39.2 %

70.5 %

0

5

10

15

20

25

30

35

2001200019991998199719961995199419931992199119901989198819871986

Years

Mill

ion

Sm3

0.0 %

10.0 %

20.0 %

30.0 %

40.0 %

50.0 %

60.0 %

70.0 %

80.0 %

90.0 %

100.0 %

Oil Production

P/R percentage

1414

Frigg Gas - NorwayGas Production - Frigg Field, Norway

116 billion Sm3 (4.1 TCF)

63.9 %

29.8 %

0

2

4

6

8

10

12

20022001200019991998199719961995199419931992199119901989198819871986198519841983198219811980197919781977

Years

Mill

ion

Sm3

0

0.2

0.4

0.6

0.8

1

1.2

Gasl Production

P/R percentage

1515

Expenditures = Cost• Capital expenditure

– Wells– Constructions - Facilities– Pipelines

• Operating expenditures– The cost of running the operations

• Fixed Opex• Variable Opex

1616

Capex and OpexCapex and Opex

0

50

100

150

200

250

300

350

400

450

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Years

Mill

ion

USD

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

TOTAL CAPEX [Million USD, inflated]Varible OpexTOTAL OPEX [Million USD, inflated]

1717

Well cost - Asia

bbl Sm3Expl.

Well cost Test

Appraisal no. of wells Well cost

Duration (years)

Averages, Capex

(USD/bbl)Capex

(USD/Sm3)First

oilYearsField life (years)

Averages, Opex

(USD/bbl)Opex

(USD/Sm3)10 1.6 6.9 1.14 1 6.7 1.8 5.16 32.46 3.8 6.4 6.72 42.325 4.0 7.43 1.31 1.43 7.29 1.83 4.34 27.27 4.17 6.86 5.30 33.3450 7.9 7.43 1.31 2.14 7.29 2.17 3.68 23.13 5.17 9.00 4.93 30.99

125 19.9 7.43 1.31 2.29 7.29 2.83 2.93 18.43 6.33 13.00 4.41 27.76250 39.7 7.43 1.31 3.14 7.29 3.67 2.51 15.79 7.67 16.86 3.89 24.47500 79.5 7.43 1.31 3.86 7.29 4.17 2.09 13.17 8.33 19.57 3.47 21.84

160.00 25.44 7.34 1.29 2.31 7.19 2.74 3.45 21.71 5.91 11.95 4.79 30.12

AveragesField size Exploration Appraisal Development/operation

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Basic assumptions• Start Year• Oil Price

– Starting value– Escalation– Model

• Inflation• Discount rate and year• Depreciation rules

1919

Oil prices through time

?

2020

Model check• Several check points must be built into any

model– Royalty % per year– Profit share % per year– R-factor calculation– Production plot– Capex and Opex plot– Depreciation plot

2121

Checklist 2• BASIC ASSUMPTIONS Rule of Thumb• Capex/bbl 3-5 usd• Capex as % of Gross Revenue 10-20%• Opex/bbl 3-5 usd• Opex/peak year as % of total Capex 4-8%

Economic ModelingInvestment DecisionsModeling = PredictingWarningModelingProduction curveFactors determining productionOil ProductionGas ProductionStatfjord Oil - NorwayUla oil - NorwayOseberg Oil - NorwayFrigg Gas - NorwayExpenditures = CostCapex and OpexWell cost - AsiaBasic assumptionsOil prices through timeModel checkChecklist 2