Oilfield Economics

FACULTAD DE INGENIERA PROGRAMA DE PETRLEOS NEIVA, 2011
FACULTAD DE INGENIERA PROGRAMA DE PETRLEOS NEIVA, 2011
Seismic Image of Anticline

1000
Milliseconds
2000
3000
1 km
JMA
R EAL O PTIONS P ROCESS Oil/Gas Success Probability = p Expected Volume of Reserves = B Revised Volume = B
IN
E X P L O R AT I O N & P R O D U C T I O N
Concession: Option to Drill the Wildcat Exploratory (wildcat) Investment
Undelineated Field: Option to Appraise Appraisal Investment
Delineated Undeveloped Reserves: Options to Invest in Additional Information and to Develop Development Investment
Developed Reserves: Options to Expand, to Abandon.

UNIVERSIDAD SURCOLOMBIANA
to Stop Temporally, and

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H ISTORY OF RESERVES
DEFINITIONS
Year
1983
Organisation
World Petroleum Congresses (WPC)* SPE + WPC
Comments Comments
Issued expanded definitions for reserves and resources
1987
Published independent definitions for 1P, 2P & 3P reserves Jointly adopt 1P, 2P & 3P reserve definitions deterministic & probabilistic Issue full petroleum resource framework definitions Issue evaluation guidelines for reserves & resources Combined & updated definitions & guideline for reserve & resources - PRMS
1997
SPE/WPC
2000
SPE/WPC
2001
SPE/WPC
2007
SPE/WPC
*World Petroleum Congresses has subsequently been renamed "World Petroleum Council"
R ESERVES
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DEFINITION
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DISCOVERED INITIALLY IN-PLACE
TOTAL PETROLEUM INITIALLY IN PLACE
COMMERCIAL
Production
1P PROVED 2P PROVED + PROBABLE 3P PROVED + PROBABLE + POSSIBLE
Reserves BOOKING Contingent Resources
SUB-COMMERCIAL
1C
2C
3C
Unrecoverable
LOW ESTIMATE (P90) BEST ESTIMATE (P50) HIGH ESTIMATE (P10)
UNDISCOVERED INITIALLY IN-PLACE
Prospective Resources
Unrecoverable
Range of Uncertainty
DEVELOPMENT 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.
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The simulation comprises four challenges in a cycle. A cycle represents the typical steps in an offshore hydrocarbon field development
INPUTS
RESERVOIR DATA
ECONOMIC DATA SITE DATA EXISTING INSTALLATIONS ETC.
CHALLENGE 1 RESERVOIR EVALUATION CHALLENGE 2 DESIGN BASIS
RESULTS
NET PRESENT VALUE
KNOWLEDGE POINTS
CHALLENGE 3 FACILITIES AND CONCEPT SOLUTION
CHALLENGE 4 PROJECT EXECUTION PLAN
S IMULATION C ONCEPT
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O R I G I NAL O I L I N P LAC E
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O R I G I NAL G A S I N P LAC E
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E XPLORATION RISK CAPITAL
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R ISK
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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!
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R ISK
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AND UNCERTAINTY
Consistent 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 volumes if the project does go ahead? recoverable
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P ROJECT

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
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P ROJECT

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
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P ROJECT

ECONOMICS
All oil industry projects have several economically important traits in common:
capital intensive, long project life time, extreme uncertainty
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P ROJECT

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
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P ROJECT

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
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P ROJECT

ECONOMICS
The main elements required for a cash flow analysis are: expenditure estimates,

capital expenditure (CAPEX) operational expenditure (OPEX),
income estimates
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CAPEX
Capital expenditure may include the following:

pipelines, offshore structures, well drilling programmes, data collection programmes, primary process facilities, onshore processing facilities, ...
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OPEX

Operational expenditure may include the following:

staff costs, daily energy requirements, transportation tariffs, in-fill drilling programmes, data acquisition, maintenance, facility upgrades,
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P ROJECT

INCOMES
Income may include the following:
oil sales, gas sales, pipeline tariffs, disposal of assets.
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A BANDONMENT

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.
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I NFLATION

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
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S IMPLE COMPOUND
INFLATION
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Inflation index 100.00 110.00 121.00 133.10 146.41 161.05 177.16 194.87 214.36 235.79 259.37 285.31 313.84 345.23 379.75 417.72 459.50 505.45 555.99 611.59 672.75
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I ! 100 R 1
I is the inflation index R is the inflation rate per annum n is the number of years
Inflation rate R = 10%

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C ASH
Sales 0.00 0.00 137.36 258.84 260.14 261.44 262.75 235.89 179.57 136.91 105.43 79.02 60.46 47.16 37.37 29.31 23.02 18.50 15.81 13.08 11.27 Capex 200 100 72 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Opex 0 0 5.36 8.84 7.63 6.41 5.17 4.07 5.17 6.51 7.63 5.66 5.45 5.9 6.42 6.1 5.6 5.44 6.01 5.73 5.76 0.00 0.00 8.00 15.00 15.00 15.00 15.00 13.40 10.15 7.70 5.90 4.40 3.35 2.60 2.05 1.60 1.25 1.00 0.85 0.70 0.60 17 17.09 17.17 17.26 17.34 17.43 17.52 17.60 17.69 17.78 17.87 17.96 18.05 18.14 18.23 18.32 18.41 18.50 18.60 18.69 18.78
FLOW EXAMPLE
16.00 14.00 Production MM bbl 12.00 10.00 8.00 6.00 4.00 2.00 0.00 0 5 10 Years 15 20 25
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Production Oil price
Cash Flow -200.00 -100.00 60.00 250.00 252.51 255.03 257.58 231.82 174.40 130.40 97.80 73.36 55.01 41.26 30.95 23.21 17.42 13.06 9.80 7.35 5.51
300.00 200.00 Cash Flow $M 100.00 0.00 -100.00 -200.00 -300.00 0 5 10 Years 15 20 25
Oil price rate = 0.5%

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W HAT 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)
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A SSET
VALUATION
Asset valuation is about determining the worth today of a project that yields profits in the future
What is an asset ?
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D ISCOUNT
RATES
D ISCOUNT
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
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I NFLATION - I NTEREST
IN
REVERSE
1 PV ! V n 1 d
PV is the Present Value d is the discount rate per annum n is the number of years V is the Value in n years n 1 d is known as the discount factor
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P RESENT VALUE
Cash Flow $M -200.00 -100.00 60.00 250.00 252.51 255.03 257.58 231.82 174.40 130.40 97.80 73.36 55.01 41.26 30.95 23.21 17.42 13.06 9.80 7.35 5.51 d.f. 2% 1.00 1.02 1.04 1.06 1.08 1.10 1.13 1.15 1.17 1.20 1.22 1.24 1.27 1.29 1.32 1.35 1.37 1.40 1.43 1.46 1.49 PV of CF $M -200.00 -98.04 57.67 235.58 233.28 230.99 228.72 201.82 148.85 109.11 80.23 59.00 43.38 31.90 23.46 17.25 12.69 9.33 6.86 5.05 3.71
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
1 PV ! V n 1 d
300.00 250.00 200.00 150.00 100.00 50.00 0.00 -50.00 -100.00 -150.00 -200.00 -250.00 0 5 10 Years 15 20 25
Discount rate = 2%UNIVERSIDAD SURCOLOMBIANA
PV $M
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N ET

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
1600.00 1400.00 1200.00 1000.00 800.00 600.00 400.00 200.00 0.00 -200.00 -400.00 0 5 10 Years 15 20 25
NPV ! PVi
i !0
NPV $M
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A BANDONMENT
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Abandonment PV of Aban. $M $M -25 -25.00 -27.5 -26.96 -114.95 -110.49 -130.23 -122.72 -147.56 -136.32 -167.18 -151.42 -175.38 -168.20 -189.42 -152.68 -198.71 -169.60 -225.13 -188.38 -255.13 -209.30 -289 -232.43 -407.99 -321.70 -462.25 -357.33 -523.73 -396.92 -593.39 -440.90 -672.31 -489.74 -761.73 -544.00 -863.04 -604.27 -977.83 -671.21 -1107.88 UNIVERSIDAD SURCOLOMBIANA -745.57
0 Abandonment $M -200 -400 -600 -800 -1000 -1200 0 5 10 Years
COSTS
Year
15
20
25
0.00 -100.00 -200.00 PV $M -300.00 -400.00 -500.00 -600.00 -700.00 -800.00 0 5 10 Years 15 20
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A BANDONMENT: 3 CASES
Year 0 1 2 3 4 5 6 7 8 9 10 11 12
PV of CF $M -200.00 -90.91 49.59 187.83 172.47 158.35 145.40 118.96 81.36 55.30 37.71 25.71 17.53
NPV $M -200.00 -290.91 -241.32 -53.49 118.98 277.33 422.73 541.69 623.05 678.35 716.06 741.77 629.30
1600.00 1400.00 1200.00 1000.00 NPV $M 800.00 600.00 400.00 200.00 0.00 -200.00 0 -400.00 Years 5 10 15 7 years 12 years 15 years
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O PTIMUM
ABANDONMENT YEAR
The abandonment year is selected by finding the year that maximise the NPV
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
1200.00 1000.00 800.00 NPV $M 600.00 400.00 200.00 0.00 -200.00 -400.00 -600.00 0 5 10 Years
Optimum
15
20
25
Cum. PV PV of Aban. $M $M -200.00 -25.00 -298.04 -26.96 -240.37 -110.49 -4.78 -122.72 228.50 -136.32 459.49 -151.42 688.21 -168.20 890.02 -152.68 1038.87 -169.60 1147.99 -188.38 1228.22 -209.30 1287.22 -232.43 1330.59 -321.70 1362.49 -357.33 1385.95 -396.92 1403.19 -440.90 1415.88 -489.74 1425.21 -544.00 1432.07 -604.27 1437.12 -671.21 1440.82 -745.57
NPV $M -225.00 -325.00 -350.85 -127.50 92.17 308.06 520.01 737.34 869.28 959.61 1018.92 1054.78 1008.90 1005.15 989.02 962.30 926.14 881.21 827.80 765.90 695.25
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A IMS 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
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A IMS 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 ?
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C HOICE OF DISCOUNT RATE
Risk free interest rate (7%)
Cost of capital rate (10%)
Depending on company

Return on capital rate (8% - 15%)
Venture capital rate (20% - 25%)

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O THER 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
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W HAT HAVE WE LEFT OUT ?
Risk and uncertainty Taxation Loans and Finance Leasing
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P ROJECT INVESTMENT VS . TIME

Off-shore field Discovery
Development Exploration
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A NY SOFTWARE TO
ECONOMICS ASSESSMENTS
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20/01/2012

Oilfield Economics

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FACULTAD DE INGENIERA PROGRAMA DE PETRLEOS NEIVA, 2011

FACULTAD DE INGENIERA PROGRAMA DE PETRLEOS NEIVA, 2011

Seismic Image of Anticline

Concession: Option to Drill the Wildcat Exploratory (wildcat) Investment

Undelineated Field: Option to Appraise Appraisal Investment

Developed Reserves: Options to Expand, to Abandon.

to Stop Temporally, and

DISCOVERED INITIALLY IN-PLACE

TOTAL PETROLEUM INITIALLY IN PLACE

Reserves BOOKING Contingent Resources

UNDISCOVERED INITIALLY IN-PLACE

DEVELOPMENT EVALUATION ( MONTE CARLO SIMULATION )

DEVELOPMENT EVALUATION ( MONTE CARLO SIMULATION )

CHALLENGE 4 PROJECT EXECUTION PLAN

DEVELOPMENT EVALUATION ( MONTE CARLO SIMULATION )

DEVELOPMENT EVALUATION ( MONTE CARLO SIMULATION )

DEVELOPMENT EVALUATION ( MONTE CARLO SIMULATION )

DEVELOPMENT EVALUATION ( MONTE CARLO SIMULATION )

E XPLORATION RISK CAPITAL

capital intensive, long project life time, extreme uncertainty

Economic analysis is a decision making tool which provides:

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

capital expenditure (CAPEX) operational expenditure (OPEX),

Operational expenditure may include the following:

Income may include the following:

oil sales, gas sales, pipeline tariffs, disposal of assets.

Abandonment costs may include:

Inflation rate R = 10%

Production Oil price

Oil price rate = 0.5%

W HAT IS TIME VALUE OF MONEY ?

Discount rate = 2%UNIVERSIDAD SURCOLOMBIANA

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

In practice it can be quite difficult to do this

C HOICE OF DISCOUNT RATE

Risk free interest rate (7%)

Cost of capital rate (10%)

Return on capital rate (8% - 15%)

Venture capital rate (20% - 25%)

O THER ECONOMIC MEASURES

W HAT HAVE WE LEFT OUT ?

Risk and uncertainty Taxation Loans and Finance Leasing

P ROJECT INVESTMENT VS . TIME

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