oilfield economics
DESCRIPTION
CONCEPTOS GENERALIZADOS ACERCA DE LA EVALUACIÓN ECONÓMICA DE YACIMIENTOS DE HIDROCARBUROS.TRANSCRIPT
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
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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
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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)
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10
ORIGINAL OIL IN PLACE
DEVELOPMENT EVALUATION(MONTE CARLO SIMULATION)
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11
ORIGINAL GAS IN PLACE
DEVELOPMENT EVALUATION(MONTE CARLO SIMULATION)
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12
DEVELOPMENT EVALUATION(MONTE CARLO SIMULATION)
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13
DEVELOPMENT EVALUATION(MONTE CARLO SIMULATION)
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14
EXPLORATION RISK CAPITAL
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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!
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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
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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
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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
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19PROJECT
ECONOMICS
All oil industry projects have several economically important traits in common:
capital intensive,
long project life time,
extreme uncertainty
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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
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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
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22PROJECT
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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23 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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24 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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25PROJECT
INCOMES
Income may include the following:
oil sales,
gas sales,
pipeline tariffs,
disposal of assets.
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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.
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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%
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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%
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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 ?
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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 $100 in 5 years worth today - what is its Present Value
33INFLATION -
INTEREST IN REVERSE
V
dPV n
1
1
PV is the Present Valued is the discount rate per annumn is the number of yearsV is the Value in n years
is known as the discount factor nd1UNIVERSIDAD SURCOLOMBIANA 09/04/2023
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34 PRESENT VALUE
Year Cash Flow d.f. PV of CF$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%
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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
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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 $M
0 -25 -25.001 -27.5 -26.962 -114.95 -110.493 -130.23 -122.724 -147.56 -136.325 -167.18 -151.426 -175.38 -168.207 -189.42 -152.688 -198.71 -169.609 -225.13 -188.3810 -255.13 -209.3011 -289 -232.4312 -407.99 -321.7013 -462.25 -357.3314 -523.73 -396.9215 -593.39 -440.9016 -672.31 -489.7417 -761.73 -544.0018 -863.04 -604.2719 -977.83 -671.2120 -1107.88 -745.57
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37ABANDONMENT: 3
CASES
Year PV of CF NPV$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
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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
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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
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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 ?
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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
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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
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43WHAT HAVE WE LEFT
OUT ?
Risk and uncertainty
Taxation
Loans and Finance
Leasing
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44PROJECT INVESTMENT
VS. TIME
Exploration
Development
Discovery
Off-shore field
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45ANY SOFTWARE TO
ECONOMICS ASSESSMENTS
Merak PeepTM
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46
WE HIGHLY APPRECIATE YOUR VALUABLE COMMENT AND GUIDANCE