Inflation and Escalations

By Dr IMS

Reference: Acknowledgement Elias Abllah

Learning Outcomes
 Differentiate between money of day (MOD) PV and real term
(RT) FV concept
 Converting RT to MOD
 Identify cost estimation using escalation factor
 Identify the significant impact of inflation to oil price and unit cost
 MOD vs RT
• Money of the Day (MOD), also known as "Current Dollar", "As Spent Dollar",
"Escalated Dollar". MOD Dollar is also used in budgeting purposes. The actual
economic calculation is carried out in MOD Dollars.

• Real Term Dollar (RT), is the "Constant Dollar” in discussing about income.
Reference year must be specified such as RT 2002, RT 2003, etc. In economic
analysis, RT Dollars is used to report profitability.
Value (MOD)
n : numbers of period

• Converting RT to MOD: I : interest per perriod

Value (MOD) t + n = Value (RT)t x ( 1+ i )n

Value (RT)
 where; i = escalation rate, n = number of years from today
 INFLATION & ESCALATIONS
Exercise
Your engineering department provided the cost estimate for a
compressor at US$ 20.0 Million (RT 2006) and it will be required in
year 2012. The cost is expected to escalate at 3% per year. What will be
the compressor costs by then?
 SUGGESTED
INFLATION & ESCALATIONS ANSWER

Your engineering department provided the cost estimate for a compressor at US$
20.0 Million (RT 2006) and it will be required in year 2012. The cost is expected
to escalate at 3% per year. What will be the compressor costs by then?

Cost (RT)2006= US$ 20.0 Million Value (MOD)

t = 2006,
n = 2012 - 2006 = 6,
i = 3%,
Cost (MOD)2012 = ? Value (RT)

Cost (MOD) t+n = Cost (RT)t * ( 1+ i )n

Cost (MOD)2011 = US$ 20.0 Million * ( 1+ 3%)6

= US$ 20.0 Million * 1.194
= US$ 23.9 Million
• Unit Finding Cost (UFC)
• Unit Development Cost (UDC)
• Unit Operating Cost (UOC)
• Unit Technical Cost (UTC)
= Exploration Capex / Total Production
= Development Capex / Total Production
= Total Opex / Total Production
= [Total Capex + Total Opex ] / Total Production
= UFC + UDC + UOC
INFLATION & ESCALATIONS
For the following data input;
1) Escalate the projected costs at 3% pa
2) Calculate the Unit Operating Cost, Unit Development Cost and
the Unit Technical Cost, both in RT and MOD units

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Total

Annual Production 15.0 12.8 10.8 9.2 7.8 6.7 62.3
RT Capex 25.0 100.0 75.0 200.0
RT Opex 10.0 10.0 10.0 10.0 10.0 10.0 60.0
Escalation factor
MOD Capex
MOD Opex

• RT Unit Development Cost (UDC) = US$ /BBL

• RT Unit Operating Cost (UOC) = US$ /BBL
• RT Unit Technical Cost (UTC) = US$ /BBL

• MOD Unit Development Cost (UDC) = US$ /BBL

• MOD Unit Operating Cost (UOC) = US$ /BBL
• MOD Unit Technical Cost (UTC) = US$ /BBL
 SUGGESTED
INFLATION & ESCALATIONS ANSWER

For the following data input;

1) Escalate the projected costs at 3% pa
2) Calculate the Unit Operating Cost, Unit Development Cost and
the Unit Technical Cost, both in RT and MOD units

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Total

Annual Product’n 15.0 12.8 10.8 9.2 7.8 6.7 62.3
RT Capex 25.0 100.0 75.0 200.0
RT Opex 10.0 10.0 10.0 10.0 10.0 10.0 60.0
Escalation factor 1.00 1.03 1.06 1.09 1.13 1.16 1.19 1.23
MOD Capex 25.0 103.0 79.6 207.6
MOD Opex 10.6 10.9 11.3 11.6 11.9 12.3 68.6

• RT Unit Development Cost (UDC) = US$ 3.21 /BBL

• RT Unit Operating Cost (UOC) = US$ 0.96 /BBL
• RT Unit Technical Cost (UTC) = US$ 4.17 /BBL

• MOD Unit Development Cost (UDC) = US$ 3.33 /BBL

• MOD Unit Operating Cost (UOC) = US$ 1.10 /BBL
• MOD Unit Technical Cost (UTC) = US$ 4.43 /BBL