Exploration Economics - CCOP · Exploration Economics... A petroleum exploration project ... An...
Transcript of Exploration Economics - CCOP · Exploration Economics... A petroleum exploration project ... An...
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August 2004 3rd PPM Philippines Case Study Workshop 1
Exploration Economicsby Mari Kvaal
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Exploration Economics
Major gamble.Discovery of an unexpectedly large fieldOr no oil or gas at all
Sequential decisions.Exploration investments are relatively small considered to further investment in case of success.Investments without further commitments if failure
…characteristics
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DISCOVERY
PDO
DEVELOPM. DRILLING
PROD. STARTLICENSING
Flexibility
UncertaintyInformation
(reservoir, resources)
Exploration Economics…characteristics – options and sequential decisions
Time
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Information is revealed over time – options and sequential decisionsDecision trees focus on critical uncertainties and decisions that reveal uncertainties
Exploration Economics…characteristics – decision tree
appraisal
development
too small
dry well
explorationdrilling
20%
80%
50%
50%
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Start with the decision node to the right.For every outcome - calculate the expected valueFor every decision node - choose the branch with highest expected value
…Decision TreeExploration Economics
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Exploration and Appraisal costs
Drill a wildcat
Yes
No
Developthe field Net cash flow
of a fielddevelpment
Explorationcosts
Success
Failure
0,09
0,91
0,80
0,20
Yes
No
100 MM US$
2,8 MM US$
2,4 MM US$
Exploration Economics
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Exploration Economics...
A petroleum exploration project
A field development decisionCash flow elements and uncertaintyDecision criteria: Net present value (NPV)
An exploration decisionNew cash flow elements and uncertaintiesDecision criteria: Expected Monetary Value (EMV)
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Field development decision
Cash flow elements and uncertainty
Production strategy
?
??
time
Oil price
Development conseptCapexOpex
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0
5
10
15
20
25
30
35
40
Balder Varg Jotun OsebergSør
OsebergØst
Visund Åsgard
Bill
ion
NO
K
60%23% 20%
10%8%
15%
22%
Source: MIE
Profitability and the riskTechnological uncertainty
…costs overruns in Norwegian Projects 1998
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…to calculate the NPV
...where:
Vt - the net income in year t r - discount rate
N - total numbers of years (project duration)
V1
(1 + r)1
V2
(1 + r)2
VN
(1 + r)N= + + ...... +V0 +
Vt
(1 + r)t( )∑t = 0
N
NPV =
Cash inflow (revenue)
Cash outflow (expenditures)
Field development decision
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Drill a wildcat
Yes
No
Developthe field Net cash flow
of a fielddevelpment
Exploration and Appraisal costs
Explorationcosts
Success
Failure
0,09
0,91
0,80
0,20
Yes
No
100 MM US$
- 2,8 MM US$
2,4 MM US$
Field development decision
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Evaluation of petroleum projects Decision making method
Base case Inflows and outflowsNPV and IRR
Sensitivity analysisSpider diagram”What if” - analysis
Scenario analysisProbabilistic analysis
Decision tree
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Evaluation of petroleum projects Decision making method
Sensitivity analysis
Petroleum pricesAlternative production profilesInvestment estimatesProduction start-up
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NPV
$/bbl 8 10 15 20
0 137 270 410
NPVMM $
$/bbl5 15 200
150
300
450
Evaluation of petroleum projects Decision making method
Sensitivity analysis – an example
By calculating the NPV with different price assumptions you can make this graph. The graph also shows the price that gives NPV equal to zero –the break-even price
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NPV(MM $)
OpexMM $
8 16 240
150
300
450
Evaluation of petroleum projects Decision making method
Sensitivity analysis – an example
This operation can be done for every assumption. These graphs gives us important information of the project
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However, it is not so easy to get an impression of what factors that are most important for the projects profitability.Using spider plot can sum up all the other graphs in one single graph.
Evaluation of petroleum projects Decision making method
Sensitivity analysis – Spider plot
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NPV (mill $)
% change from base case0 30- 10- 25
Oil-price
Production profile
Opex
Start of production
Evaluation of petroleum projects Decision making method
Sensitivity analysis – Spider plot
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A falling curve - the profitability reduces (increased opex and postponed start of production)A rising curve - the profitability improves (higher oil price and higher production)The steeper the curve the more sensitive is the profitability of the project to changes. As you can see the oil price is the factor that is most critical for the profitability, while changes in opex will influence less.
Evaluation of petroleum projects Decision making method
Sensitivity analysis – Spider plot
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Evaluation of petroleum projects Decision making method
What-if analysis – assessments of changes in inputMost used techniqueEasily interpretedEasily to visualizeEasily understood
MethodOne factor at a time approachSpider plots
These analysis don’t take into account the probability of the different changes
Sensitivity analysis
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Evaluation of petroleum projects Decision making method
Scenario analysis
The effect on NPV due to changes in input variables and parameters.The main difference to sensitivity analysis is that in scenario analysis a combination of changes in input variables and parameters is considered.Restricted to those combinations that are regarded as being realistic (plausible and consistence).
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Evaluation of petroleum projects Decision making method
Scenario analysis – an example Scenario Factor value Results (NPV)Base case Oil price 18$
5 years lead time from start investment to start production
600 millions US$
Optimistic Oil price, production, OPEX increase by 10%4,5 years lead time from start investment to start production
920 millions US$
Pessimistic Oil price, production decrease 15%OPEX decrease by 10%6 years lead time from start investment to start production
-230 millions US$
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Scenario analysis and sensitivity analysis illustrates the effect of the ”worst case”. How robust is the project to ”worst case”?Could we improve any assumptions?How can we build in any flexibility to make the project more robust to the ”worst case”?
None of these methods consider the possibilities of different outcomes of the input variables and parameters.
Evaluation of petroleum projects Decision making method
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It is not necessary and not profitable to decide everything at time zero. In many projects, where the uncertainty is revealed over time, the decisions can be taken in sequence over time.
DISCOVERY
PDO
DEVELOPM. DRILLING
PROD. STARTLICENSING
Flexibility
UncertaintyInformation
(reservoir, resources)
Evaluation of petroleum projects Decision making method
…sequential decisions
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Take into account the probability of different outcomes of the input variables and parametersTake into account the dynamic process involved in investment selection and management.
Evaluation of petroleum projects Decision making method
Probabilistic methods and Decision trees
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Field development decision
Sensitivity analysisScenario analysisProbabilistic analysisDecision criteria – NPV
NPV > 0
Go ahead with the investment
…a summary
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Exploration Economics
New cash flow elements:Exploration costs
Seismic acquisitionWild-cat wellAppraisal wells
More uncertainty:Success vs failureThe resource size if success
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Exploration Economics
Field development NPV has to include the exploration costsThe development NPV must be discounted to the date for the exploration decisionConsequently the NPV is sensitive to the lead time from discovery to development
…to calculate the NPV
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Profitability and the riskUncertainty in time profile
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…to calculate the NPV
….exploration costs and lead time - effect on NPV Assume 320 mill $ in exploration costs
Pre Development Pre explorationLead time 5 years
Pre explorationLead time 10 years
NPV (7%) 2.131 billion $ 1.120 billion $ 713 billion $
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Exploration Economics
New cash flow elements:Exploration costs
Seismic acquisitionWild-cat wellAppraisal wells
More uncertainty:Success vs failureThe resource size if success
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EMV = (Reward x P) - (Risk Capital x (1-P))
DRILL
Yes
No
Find
No
Yes
(1-P)
P
Risk Capital(Exploration costs)
RewardNPV (field dev. minusexploration & appraisalcosts)
Exploration Economics…dicision criteria – Expected Monetary Value
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Exploration Economics…probability of success
The Risk Assessment estimates the probability of success
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Resource size
Probability
Exploration Economics…resource assessment
p90
p10
MEDIAN (p50)MODE (Most likely)
MEAN (average – ”centre of gravity”)
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EMV = (Reward x P) - (Risk Capital x (1-P))
DRILL
Yes
No
Find
No
Yes
(1-P)
P
Risk Capital(Exploration costs)
RewardNPV (field dev. minusexploration & appraisalcosts)
Exploration Economics…dicision criteria – Expected Monetary Value
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Two different approaches to calculate the EMV:
Expected resource sizeResource distribution
…Expected Monetary Value
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Resource size
Probability
…resource assessment
p90
p10
MEDIAN (p50)MODE (Most likely)
MEAN (average – ”centre of gravity”)
…Expected Monetary Value
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In the simplest model we use E(R) to represent the full range of possible discovery volumesIf oil is present, the mean recoverable amount is 48 million bbl.
…expected resource size - an example
…Expected Monetary Value
E(R)= 48 million bbls
Resource size
Probability
E(R)
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DRILL
Yes
No
Find
No
Yes
0.25
0.756 MM US$
- 12 MM US$
EMV = (0.75 * 6) - (0.25 *12) = 1.5 MM US$
…Expected Monetary Value
…expected resource size - an example
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The minimum economic resource (MER)- a minimum size below which a discovery
would not be worth developing at all.
Assume a linear relationship between the size of a discovery and the NPV of development.
…Expected Monetary Value
…expected resource size
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-40
0
40
80
120
160
0 50 100 150 200
Discovery size, MMbbl
NP
V M
M U
S$ MER = 25 MMbbl
…Expected Monetary Value
…minimum economic reserve
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…Expected Monetary Value
Resource size
Probability
E(R)=48 MM bblMER
Resource size
Probability
E(R*)=69 MM bbl
The minimum economic resource (MER) is 25 MM bbl.
If oil is present the probability to find resource outcome higher than MER is 63% (the probability of commerciality).If commerciality the mean resource outcome is 69 MM bbl.
…minimum economic reserve
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DRILL
Yes
No
Find
No
Yes
0,25
0,75
(34-12) MM US$
- 12 MM US$
EMV = 0,75*(0,63*22-0,37*12) - (0.25 *12) = 4 MM US$
…Expected Monetary Value
…minimum economic reserve
Yes0,63
No0,37- 12 MM US$
Develop
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The increase represents the value of not being obliged to develop non-economic discoveries.
…Expected Monetary Value
…minimum economic reserve
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We improve the analysis by considering the whole resource distribution.
Minimum economic reserveEconomy of scale
…Expected Monetary Value…resource distribution
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Three-point distributionMonte Carlo simulation
…Expected Monetary Value
…economy of scale
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Drill
Success
Failure
415
83
16
0,47
0,53
0,3
0,4
0,3
40 MM US$
40 MM US$
30 MM US$-12 MM US$
…Expected Monetary Value
…economy of scale - three-points distribution
EMV = 0.47(0,3*40+0,4*40+0,3*30) - (0.53 *12) = 11 MM US$
Develop
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…Expected Monetary Value
…Monte Carlo Simulation
Reserve distributions
Production forecast
Costs
Economics
Geoscientist
Reservoir engineers
Engineers
Economists
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…Expected Monetary Value
…Monte Carlo Simulation
It takes into account the probability distribution of the values for the input variablesPresence of uncertainty in many variables at the same timeThe parameters can be estimated from historical dataIt takes into account correlation between variables
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Exploration Economics
Major gambleSequential decisionsNew cash flow elementsDecision criteria – EMVEMV>0Go ahead with the investment!
…a summary