Economic Evaluation

Ir. Tutuka Ariadji, M.Sc., Ph.D.

Economic Analysis
Parameter
NPV
Rate of Return
Profitability Index
Pay Out Time

METHODES OF MEASURING PROFITABILITY

INDICATORS
INVESTMENT is based on profit that maybe gain.
Profitability Indicators have :
1. Parameters have to be accurate in giving comparison and classification of
resposibility to produce profitability from opportunities of investments.
2. Parameters should be able to show time value of invesment from
companies, and should become a realistic input for fiscal kebijakan
including future investment
3. Parameters should able to show profit eventhough insignificantly amount.
4. Parameters should cover quantitative risk
5. Parameters should describe other related factors such combination of
risk and property of a company

Profitability Indicator
Parameter

NPV
Internal Rate of Return
Profitability Index
Pay Out Time
B/C (Benefit to Cost Ratio)

PW =

XO

X1
X2
XN

........
2
1 i 1 i
1 i N

PW
: Present Worth
XN : Cashflow at year N, i = discount rate
NPV = PW with i = MARR
MARR : Minimum Attractive Rate of Return
IRR : i that cause PW = 0 atau
PW Revenue = PW Cost.
B/C
: NPV Revenue/Investment
POT : Pay back period : Time needed to accumulate net revenue equal
to investment

Best Practices in Determining the Profitability

Indicators
MARR
MARR : Minimum Attractive Rate of Return, a level of desired
minimum return, depends on purchasing invesment, environment, types
of activity, objective, and organization policy, degree of risk from each
project
NPV
Consider time value of money, and could consider risk, it is calculated
using discount rate equal to MARR.
IRR
A trial & error method, consider time value of money, not
depend on an absolute cash flow, could be multiple, cannot be
calculated if all flow + all flow , or the investment has not paid
back, and the initial cash flow is dominant.
B/C : benefit of a dollar investment
POT : it has weakness of not considering benefit from investment

Factors Influencing MARR :

a. If the company is operated using invesment loan, the MARR
interest should be greater than then interest of the loan.
b. If the investment comes from many resources, determination of
average investment is used for MARR basis estimation.
c. Dont for get, the objective of a company is growth of total aseet
with a pre-determined growth rate.
d. For a given probabilistic of failure risk (Expected Monetary Value), the
risk is not included in MARR (for successful projectl), on the other hand,
for a deterministic calculation, the risk is included in risked MARR. For
example, exploration and exploitaion activites have higher MARR (1520 5) then processing acivities (12%).
e. More bonafide companies usually have higher MARR since they

have to pay divident more and bigger profit margin eventhough

they get lower loan interest due to more trustworthy.

How to determine MARR

1.

Based on total cost

MARR = Capital Cost + profit margin + risk premium
Profit margin is be higher for a bonafide company,
whereas risk premium is lower for a high risk project.
2. Basen on opportunity cost
Determined from intersection of Supply and Demand
investment curves. The more investment, the more money.
So that marginal profit will be lower, and the marginal cost
will more expensive.

MARR
Risk Premium

Profit Margin

Investment Cost

Premium Risk of Each Investment (Pertamina, 2002)

No
1

Investment Type

RP*)

Oil and Gas Exploration

- P10

8%

- P50

7%

- P90

6%

Oil and Gas Production

- P3

6%

- P2

5%

- P1

4%

Geothermal
- Exploration

7%

- Production

5%

E & P Services

2%

Piping and Transmission

2%

Premium Risk of Each Investment (Pertamina, 2002)

No

Jenis Investasi

RP*)

Shipping Services

2%

Harbour & Maritime Services

2%

Storage/logistic provider/terminal

2%

Fuel oil plant

3%

10

Petrochemical plant

5%

11

Gas Plant

3%

12

Lube oil blending plant

2%

13

Power & utilities plant

3%

14

Filling plant

2%

15

Retail / Depo / Terminal / Instalation

2%

16

Fabrication

2%

17

Property

2%

18

Others Facilities

2%

Country Risk
Premium Risk should be adapted of each
country due to different Risk.
Rating
Class A
Class B
Class C
Class D

Penyesuaian
- 30% x Premium Risk
- 15% x Premium Risk
- 0% x Premium Risk
- 15% x Premium Risk

PSC SCHEME
Ir. Tutuka Ariadji, M.Sc., Ph.D.

PRODUCTION SHARING CONTRACT SCHEME

BY Law 22/2001
Revenue
FTP

Cost Recovery
Equity to be
Split

All Cost
Contractor
Share

Government
Share
DMO

Operation cost
SKK Migas

Tax
Contractor Cashflow

Government Cash in

Example
Calculation Model
Economic calculation model of POFD in this field use
Pertaminas PSC. Variabel that used as calculation basic
are:
Government Share : Contractor Share (60:40)
Government Tax 41%
FTP 5%
DMO 25%
DMO Fee 100%
Maximum Cost Recovery is 100%

Another Variabels
Oil Price : US$ 85/bbl
Operating Cost : US$ 25/bbl
Project Life : 22 years
Discount Factor : 10%
Drilling Cost : US$ 2,500,000/well
Workover Cost : US$ 500,000/well
Depreciation calculation uses Double Decline Balance for

5 years
Economic indicators that used in this evaluation are NPV,
ROR, and POT.

Assumptions

Economic Evaluation

Spreadsheet Calculation for PSC Scheme Below

1st Input All Basic Assumptions

2nd Input amount of wells and all parameters cost

3rd Input Investment cost in Investment Sheet

4th Input incremental Np/year for each case in Input Np Sheet

5th Result can be seen in Summary sheet

6th Economic Evaluation can be seen in Economic Indicators sheet

Spider Diagram

1st Link the best case economically to this ta

2nd Do the sensitivity from this table

3rd After do the sensitivity from 2nd step the economic indicators will change in
the table at 1st step and put them manually to this table below.

4th The result of sensitivity

Thank You