1. The theory of economical appraisals of capital investment

1.1. Essence of economical appraisals of oil reserves development

Investment - temporary refusal of a company from consumption of available resources (capital) and use of these resources for increase of prosperity in the future.

Investment project - plan or program of actions connected with realization of capital investment with the purpose of their subsequent compensation and receiving of profit.

Investment process - realization of the investment project developed in time. The beginning of investment process is decision-making on investment, and the end is achievement of all purposes or compelled termination of project realization.

Investment as economic category carry out a number of the major functions without which normal development of state economy is impossible. Investment play important role both at a macrolevel, and at a microlevel. At a microlevel they are necessary first of all for achievement of the following purposes:

• Expansions and developments of production;

• exclusion of excessive moral and physical deterioration of fixed assets;

• increases of technological level of production;

• improvement of quality and maintenance of competitiveness of product;

• realization of environmental measures;

• purchases of securities and investment of means into actives of other companies;

• maintenance of normal functioning of company in the future, a stable financial condition and maximization of profit.

Thus, investment is major economic category and plays a significant role on macro and microlevel, for simple and expanded reproduction, structural transformations, maximization of profit and decision of many social problems. The technical and economic analysis is final stage and gives all necessary information for decision-making on participation in investment. The final estimation of investment expenses and also calculation of profitability is made when the direction and scale of the project is certain. Calculation and subsequent estimation of economic parameters should be made in view of all initial data and with their coordination with each other.

A task of economic efficiency analysis of oil reserves development project is calculation of basic economic parameters of projects estimation, choice the most profitable achievement of maximal economic benefit from probably maximum oil production, definition of pay back of planned investment and receiving of planned gross profit on the project. At acceptance of any geological-and-technological decision it is important to find out also dependence on influence of various factors on economic efficiency. Such situation demands the rapid analysis of the big number of variants on the basis of economic criteria. Economic appraisal should consider geological setting field-geological factor, technological and ecological features of development reserves.

For establishment of economic influence on reserves efficiency of input into development it is necessary to reflect conditions of oil selling (export, domestic market), changes of tax system (use of privileged taxation or reduction of tax rates), various factors of discounting, etc. Besides economically proved size of oil recovery factor is defined for period of profitable operation. The profitable term is period of positive values receiving of discounted cash flow. Economic-geological rational use of oil reserves should include estimation of oil volume in reserves, their structure, oil production dynamics, economic differentiation of reserves, and application of methods for increase of oil production in view of scientific and technical progress. Besides actuality of geological-economic researches is defined appreciably by a degree of reserves use and also demands rational use material and monetary resources.

Economic-geological evaluation of reserves and resources and provision by them for oil companies in dynamics on prospect, efficiency appraisal of accepted decisions is estimated by complex of settlement parameters which represent it as economic criteria.

Economic estimations should consider following factors:

• bring in balance with forthcoming charges and incomes occurring at different times to conditions of their harmony with economic value in an initial stage;

• account of inflation influencing value of used money resources;

• account of the risks connected with realization of design works;

• a substantiation of participation in realization of design decisions of the interested enterprises, banks, the Russian and foreign investors, federal and regional state bodies.

Discounting - a method of bring in balance expenses and income at different times to one moment of time, reflecting value of the future receipts (incomes) from modern positions. It is usually are guided by an average level of loan percent (interest rate) at establishment value of discounting factor. The level of discounting factor can consider also risk of carried out investment.

Criterions of economic appraisal

There are following basic parameters of geological-economic efficiency for dynamics estimation of reserves or any other geological project input into operation:

• cash flow;

• net present value;

• internal rate of return;

• profitability index;

• period of capital investment pay back;

• production cost of oil ton;

• capital of risk (or lack of means for oil development);

• budgetary efficiency of a project (or income of the state).

System of estimated parameters also includes:

• capital investment on reserve development;

• operational expenses for oil recovery;

• income of the state (taxes and the payments deducted to state budget and extra-budgetary funds).

Cash flow

Cash flow - the sum of profit on realization and depreciation charges reduced on value of capital investment:

where:

CF – cash flow in t-th year;

Pt - profit on realization in t-th year;

Dt - depreciation charges in t-th year;

It - capital investment into oil reserves development in t-th year.

T - period of an estimation

Net present value

Net present value - sum of discounted cash flows;

where,

Pt - profit on realization in t-th year;

Dt - depreciation charges in t-th year;

It - capital investment into oil development in t-th year;

Ен – rate of discounting;

T - period of an estimation;

t, tp - accordingly current and settlement year.

Profit on realization

Profit on realization - cumulative income of company reduced by operational expenses including depreciation charges and sum of the taxes. Calculation of profit is made with discounting of expenses and incomes. Discounting is carried out by division of profit value for every year on the corresponding factor of reduction:

where,

Pt - profit on oil realization;

Т - period of estimation;

Rt - revenue from realization of oil in t-th year;

Ext - expenses in t-th year;

Ен – rate of discounting;

t, tp - accordingly current and settlement year.

The revenue from oil realization pay off as multiplication oil price and volumes of sold oil:

Rt = Pr x Qs,

where,

Pr - price of oil realization;

Qs – volume of sold oil.