Oilfield Economics

ECONOMIC EVALUATION OF AN OIL FIELD DEVELOPMENT

PROJECT

MARIA ELVIRA CALDERONJOHN HARRY RAMIREZ

FACULTAD DE INGENIERÍAPROGRAMA DE PETRÓLEOS

NEIVA, 2011

Presented to:JAIRO ANTONIO SEPULVEDA GAONA

Subject:INGENIERIA DE YACIMIENTOS

FACULTAD DE INGENIERÍAPROGRAMA DE PETRÓLEOS

NEIVA, 2011

ECONOMIC EVALUATION OF AN OIL FIELD DEVELOPMENT

PROJECT

JMAJMA

Seismic Image of AnticlineSeismic Image of Anticline

10001000

20002000

30003000

Mill

isec

onds

Mill

isec

onds

1 km1 km

EXPLORATION PRODUCTION

Upstream

DRILLING

BUSINESS NETWORKBUSINESS NETWORK

09/04/2023

Þ Undelineated Field: Option to Appraise

Appraisal Investment

RevisedVolume = B’

Þ Developed Reserves: Options to Expand, to Stop Temporally, and to Abandon.

REAL OPTIONS PROCESS IN EXPLORATION & PRODUCTION

Þ Concession: Option to Drill the Wildcat

Exploratory (wildcat) Investment

Oil/Gas SuccessProbability = pExpected Volumeof Reserves = B

Þ Delineated Undeveloped Reserves: Options to Invest in Additional Information and to Develop

Development Investment

UNIVERSIDAD SURCOLOMBIANA

09/04/2023UNIVERSIDAD SURCOLOMBIANA

6RESERVES DEFINITION

DIS

CO

VE

RE

D I

NIT

IAL

LY

IN

-PL

AC

EProduction

TO

TA

L P

ET

RO

LE

UM

IN

ITIA

LLY

IN

PL

AC

E

SU

B-C

OM

ME

RC

IAL

CO

MM

ER

CIA

L

2C1C 3C

Unrecoverable

2PPROVED

+ PROBABLE

1PPROVED

3PPROVED

+ PROBABLE

+POSSIBLE

ReservesReserves

LOWESTIMATE

(P90)

HIGHESTIMATE

(P10)

BESTESTIMATE

(P50)

Contingent Resources

Contingent Resources

Prospective Resources

Prospective Resources

UN

DIS

CO

VE

RE

DIN

ITIA

LLY

IN-P

LA

CE

Range of Uncertainty

Unrecoverable

BOOKINGBOOKING

1PPROVED


8DEVELOPMENT EVALUATION

(MONTE CARLO SIMULATION)

Monte Carlo simulation was used to volumetrically estimate the potential oil-in-place and recoverable oil volumes.

Monte Carlo technique consider entire ranges of the variables of Original Oil in Place (OOIP) formula rather than deterministic figures.

SIMULATION CONCEPT

The simulation comprises four challenges in a cycle.

A cycle represents the typical steps in an offshore hydrocarbon field development

CHALLENGE 1RESERVOIR

EVALUATION

CHALLENGE 1RESERVOIR

EVALUATIONINPUTS• RESERVOIR DATA• ECONOMIC DATA• SITE DATA• EXISTING INSTALLATIONS• ETC.

INPUTS• RESERVOIR DATA• ECONOMIC DATA• SITE DATA• EXISTING INSTALLATIONS• ETC.

CHALLENGE 2DESIGN BASIS

CHALLENGE 2DESIGN BASIS

CHALLENGE 4PROJECT

EXECUTION PLAN

CHALLENGE 4PROJECT

EXECUTION PLAN

CHALLENGE 3FACILITIES AND

CONCEPT SOLUTION

CHALLENGE 3FACILITIES AND

CONCEPT SOLUTION

RESULTS• NET PRESENT VALUE• KNOWLEDGE POINTS

RESULTS• NET PRESENT VALUE• KNOWLEDGE POINTS

DEVELOPMENT EVALUATION(MONTE CARLO SIMULATION)


10

ORIGINAL OIL IN PLACE



11

ORIGINAL GAS IN PLACE



12



13



14

EXPLORATION RISK CAPITAL


15

RISK AND UNCERTAINTYRISK AND UNCERTAINTY

There is a RISK that I am

going to fall off this cliff.

I am UNCERTAIN how far

it is to the bottom!

There is a RISK that I am

going to fall off this cliff.

I am UNCERTAIN how far

it is to the bottom!


16

Consistent approach to assessment of risk and uncertainty for all assetsConsistent approach to assessment of risk and uncertainty for all assets

RISK … project maturity

Will the project go ahead?

UNCERTAINTY…

What is the range of estimated recoverable volumes if the project

does go ahead?

RISK AND UNCERTAINTYRISK AND UNCERTAINTY


17PROJECT

ECONOMICS

A company invests in commercial projects so as to increase the value of the company to its (share) owners

Projects economics is concerned with providing an economic assessment that can be compared with other projects


18PROJECT

ECONOMICS

Large projects will be accepte/rejected at the corporate financial level, by people who have little (no ?) understanding of the technical issues.

Reservoir projects will be in competition with each other, and other company projects, for finite capital funds.

A project that is economically attractive top a reservoir engineer, may be unacceptable to a banker


19PROJECT

ECONOMICS

All oil industry projects have several economically important traits in common:

capital intensive,

long project life time,

extreme uncertainty


20PROJECT

ECONOMICS

Economic analysis is a decision making tool which provides:

an estimate of future cash flows,

assessment of profit or loss,

valuation of assess

assessment of investiment risk


21PROJECT

ECONOMICS

What do we need to know to make an economic assessment of a project ?

Prediction of future cash flows

prediction of abandonment costs

time value of money


22PROJECT

ECONOMICS

The main elements required for a cash flow analysis are:

expenditure estimates, capital expenditure (CAPEX)

operational expenditure (OPEX),

income estimates


23 CAPEX

Capital expenditure may include the following:

pipelines,

offshore structures,

well drilling programmes,

data collection programmes,

primary process facilities,

onshore processing facilities,

...


24 OPEX

Operational expenditure may include the following:

staff costs,

daily energy requirements,

transportation tariffs,

in-fill drilling programmes,

data acquisition,

maintenance,

facility upgrades,


25PROJECT

INCOMES

Income may include the following:

oil sales,

gas sales,

pipeline tariffs,

disposal of assets.


26ABANDONMENT

COSTS

Abandonment costs may include:

removal of topsides,

disposal of radioactive waste,

isolation of wells,

de-commisioning and removal of pipelines,

removal of seabed structures.


27 INFLATION

How prices are changing with respect to time ?

normally quoted as an annual percentage rate

different types of items have different inflation rates

positive rates imply rising prices

negative rates imply falling prices

28SIMPLE COMPOUND

INFLATION

nRI 1100

I is the inflation indexR is the inflation rate per annumn is the number of years

Year Inflation index0 100.001 110.002 121.003 133.104 146.415 161.056 177.167 194.878 214.369 235.7910 259.3711 285.3112 313.8413 345.2314 379.7515 417.7216 459.5017 505.4518 555.9919 611.5920 672.75

Inflation rate R = 10%

UNIVERSIDAD SURCOLOMBIANA 09/04/2023


29CASH FLOW

EXAMPLE

Year Production Oil price Sales Capex Opex Cash Flow

0 0.00 17 0.00 200 0 -200.001 0.00 17.09 0.00 100 0 -100.002 8.00 17.17 137.36 72 5.36 60.003 15.00 17.26 258.84 0 8.84 250.004 15.00 17.34 260.14 0 7.63 252.515 15.00 17.43 261.44 0 6.41 255.036 15.00 17.52 262.75 0 5.17 257.587 13.40 17.60 235.89 0 4.07 231.828 10.15 17.69 179.57 0 5.17 174.409 7.70 17.78 136.91 0 6.51 130.4010 5.90 17.87 105.43 0 7.63 97.8011 4.40 17.96 79.02 0 5.66 73.3612 3.35 18.05 60.46 0 5.45 55.0113 2.60 18.14 47.16 0 5.9 41.2614 2.05 18.23 37.37 0 6.42 30.9515 1.60 18.32 29.31 0 6.1 23.2116 1.25 18.41 23.02 0 5.6 17.4217 1.00 18.50 18.50 0 5.44 13.0618 0.85 18.60 15.81 0 6.01 9.8019 0.70 18.69 13.08 0 5.73 7.3520 0.60 18.78 11.27 0 5.76 5.51

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

0 5 10 15 20 25

Years

Pro

du

ctio

n M

M b

bl

-300.00

-200.00

-100.00

0.00

100.00

200.00

300.00

0 5 10 15 20 25

Years

Cas

h F

low

$M

Oil price rate = 0.5%


30 WHAT IS TIME VALUE OF MONEY ?

$100 will buy more today than in one year time due to inflation

If I invest $100 in a bank today, with an interest rate of 10%, then in one year time it will be $110

So $100 today is worth more than $100 in one year time (if inflation rate is positive)

31ASSET

VALUATION

Asset valuation is about determining the worth today of a project that yields profits in the future

What is an asset ?

UNIVERSIDAD SURCOLOMBIANA 09/04/2023


32DISCOUNT RATES ÷

DISCOUNT FACTORS

If you promise to pay me $100 in 5 years time, how much should I lend to you ?

How much is $100 in 5 years worth today - what is its Present Value

33INFLATION -

INTEREST IN REVERSE

V

dPV n

1

1

PV is the Present Valued is the discount rate per annumn is the number of yearsV is the Value in n years

is known as the discount factor nd1UNIVERSIDAD SURCOLOMBIANA 09/04/2023


34 PRESENT VALUE

Year Cash Flow d.f. PV of CF$M 2% $M

0 -200.00 1.00 -200.001 -100.00 1.02 -98.042 60.00 1.04 57.673 250.00 1.06 235.584 252.51 1.08 233.285 255.03 1.10 230.996 257.58 1.13 228.727 231.82 1.15 201.828 174.40 1.17 148.859 130.40 1.20 109.1110 97.80 1.22 80.2311 73.36 1.24 59.0012 55.01 1.27 43.3813 41.26 1.29 31.9014 30.95 1.32 23.4615 23.21 1.35 17.2516 17.42 1.37 12.6917 13.06 1.40 9.3318 9.80 1.43 6.8619 7.35 1.46 5.0520 5.51 1.49 3.71

-250.00-200.00-150.00-100.00-50.00

0.0050.00

100.00150.00200.00250.00300.00

0 5 10 15 20 25

Years

PV

$M

V

dPV n

1

1

Discount rate = 2%


35NET PRESENT

VALUE

The NPV is the most commonly used method to assign a present worth, in todays money, for a project that will yield profits (and losses) in future years

-400.00-200.00

0.00200.00400.00600.00800.00

1000.001200.001400.001600.00

0 5 10 15 20 25

Years

NP

V $

M

m

iiPVNPV

0


36

-1200

-1000

-800

-600

-400

-200

0

0 5 10 15 20 25

Years

Ab

and

on

men

t $M

ABANDONMENT COSTS

-800.00

-700.00

-600.00

-500.00

-400.00

-300.00

-200.00

-100.00

0.00

0 5 10 15 20 25

Years

PV

$M

Year Abandonment PV of Aban.$M $M

0 -25 -25.001 -27.5 -26.962 -114.95 -110.493 -130.23 -122.724 -147.56 -136.325 -167.18 -151.426 -175.38 -168.207 -189.42 -152.688 -198.71 -169.609 -225.13 -188.3810 -255.13 -209.3011 -289 -232.4312 -407.99 -321.7013 -462.25 -357.3314 -523.73 -396.9215 -593.39 -440.9016 -672.31 -489.7417 -761.73 -544.0018 -863.04 -604.2719 -977.83 -671.2120 -1107.88 -745.57


37ABANDONMENT: 3

CASES

Year PV of CF NPV$M $M

0 -200.00 -200.001 -90.91 -290.912 49.59 -241.323 187.83 -53.494 172.47 118.985 158.35 277.336 145.40 422.737 118.96 541.698 81.36 623.059 55.30 678.3510 37.71 716.0611 25.71 741.7712 17.53 629.30

-400.00

-200.00

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

1400.00

1600.00

0 5 10 15

Years

NP

V $

M 7 years

12 years

15 years


38OPTIMUM

ABANDONMENT YEAR

-600.00

-400.00

-200.00

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

0 5 10 15 20 25

Years

NP

V $

M

Year Cum. PV PV of Aban. NPV$M $M $M

0 -200.00 -25.00 -225.001 -298.04 -26.96 -325.002 -240.37 -110.49 -350.853 -4.78 -122.72 -127.504 228.50 -136.32 92.175 459.49 -151.42 308.066 688.21 -168.20 520.017 890.02 -152.68 737.348 1038.87 -169.60 869.289 1147.99 -188.38 959.6110 1228.22 -209.30 1018.9211 1287.22 -232.43 1054.7812 1330.59 -321.70 1008.9013 1362.49 -357.33 1005.1514 1385.95 -396.92 989.0215 1403.19 -440.90 962.3016 1415.88 -489.74 926.1417 1425.21 -544.00 881.2118 1432.07 -604.27 827.8019 1437.12 -671.21 765.9020 1440.82 -745.57 695.25

The abandonment year is selected by finding the year that maximise the NPV

Optimum


39AIMS OF ECONOMIC

ANALYSIS

The aim of economic analysis of petroleum engineering projects is to maximise the value of the project to the owners

The value of a project, today, is given by its NPV


40AIMS OF ECONOMIC

ANALYSIS

So any decision we make should, in theory, attempt to maximise the NPV

i.e. we select projects and options for projects by refering to the effect on NPV

In practice it can be quite difficult to do this

e.g. how does the cost of taking core data impact on the final project NPV ?


41CHOICE OF DISCOUNT

RATE

Risk free interest rate (7%)

Cost of capital rate (10%)

Return on capital rate (8% - 15%)

Venture capital rate (20% - 25%)

Depending on company


42OTHER ECONOMIC

MEASURES

Net Value

Pay Back Time

Accounting rate of return

Profit investiment ratio

Present value profit ratio

Growth rate of return

Internal rate of return


43WHAT HAVE WE LEFT

OUT ?

Risk and uncertainty

Taxation

Loans and Finance

Leasing


44PROJECT INVESTMENT

VS. TIME

Exploration

Development

Discovery

Off-shore field


45ANY SOFTWARE TO

ECONOMICS ASSESSMENTS

Merak PeepTM


46

WE HIGHLY APPRECIATE YOUR VALUABLE COMMENT AND GUIDANCE

Oilfield Economics

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